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Chapter 3

The Double-Entry Framework

Learning Objectives

  • LO1    Define the parts of a T account.
  • LO2    Foot and balance a T account.
  • LO3    Describe the effects of debits and credits on specific types of accounts.
  • LO4    Use T accounts to analyze transactions.
  • LO5    Prepare a trial balance and explain the purpose and link with the financial statements.

LO4

  1. Steps in Transaction Analysis (See Figure 3-4)
  2. It is important to go through the three steps when analyzing transactions. The transaction must be fully understood before it can be accounted for correctly. Transactions in this chapter are easy to understand, but transactions in business can become quite complex, making this first step very important. Ultimately, you should strive to fully understand the transaction to determine its effects on the accounts, accounting equation and, finally, the financial statements.
  3. Also, as a problem-solving point that you should ensure that the total of the debits equals the total of the credits for the transaction you are working on before you go on to the next transaction.
  4. Steps in Transaction Analysis
    1. What happened?
    2. Which accounts are affected?
      1. Identify the accounts.
      2. Classify the accounts.
      3. Locate the accounts in the expanded accounting equation—left or right.
    3. How is the accounting equation affected?
      1. Determine whether the accounts have increased or decreased.
      2. Determine whether the accounts should be debited or credited.
      3. Make certain the accounting equation remains in balance after the transaction has been entered.
  5. The same transactions are used in both Chapter 2 and chapter 3 in the chapter content. This allows you to focus on the new learning objectives: the double-entry framework.
  6. Debits and Credits: Asset, Liability, and Owner’s Equity Accounts
    1. Transaction (a): Investment by owner (See Figure 3-5)
      1. a) An increase in cash is entered as a debit.
      2. b) An increase in Jessica Jane, Capital is entered as a credit.
    2. Transaction (b): Purchase of an asset for cash (See Figure 3-6)
      1. a) An increase in an asset (Delivery Equipment) is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
    3. Transaction (c): Purchase of an asset on account (See Figure 3-7)
      1. a) An increase in an asset (delivery Equipment) is entered as a debit.
      2. b) An increase in Accounts Payable is entered as a credit.
  7. The asset purchased by the loan is in the past—that transaction is completed—payment on the loan is our concern now. The business decreased the loan amount by making the cash payment.
    1. Transaction (d): Payment on account  (See Figure 3-8)
      1. a) A decrease in Accounts Payable is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
  8. Recall that expenses are debited because increases in expenses decrease owner’s equity.
  9. Debits and Credits: Including Revenues, Expenses, and Drawing–The Expanded Accounting Equation (See Figure 3-9)
    1. Transaction (e): Delivery revenues earned in cash (See Figure 3-10)
      1. a) An increase in Cash is entered as a debit.
      2. b) An increase in Delivery Fees is entered as a credit.
    2. Transaction (f): Paid rent for month (See Figure 3-11)
      1. (a)An increase in Rent Expense is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
    3. Transaction (g): Paid telephone bill (See Figure 3-12)
      1. a) An increase in Telephone Expense is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
    4. Transaction (h): Delivery revenues earned on account (See Figure 3-13)
      1. a) An increase in Accounts Receivable is entered as a debit.
      2. b) An increase in Delivery Fees is entered as a credit.
    5. Transaction (i): Purchase of supplies (See Figure 3-14)
      1. a) Supplies will last several months; therefore, they are treated as an asset.
      2. b) An increase in Supplies is entered as a debit.
      3. c) A decrease in Cash is entered as a credit.
    6. Transaction (j): Payment of insurance premium (See Figure 3-15)
      1. a) Since insurance is paid in advance and will provide future benefits, it is treated as an asset.
      2. b) An increase in Prepaid Insurance is entered as a debit.
      3. c) A decrease in Cash is entered as a credit.
  10. The sale transaction is complete. Now the customer is reducing his debt owed to the business by making a cash payment.
    1. Transaction (k): Cash receipts from prior sales on account (See Figure 3-16)
      1. a) An increase in Cash is entered as a debit.
      2. b) A decrease in Accounts Receivable is entered as a credit.
    2. Transaction (l): Purchase of an asset on credit making a partial payment (See Figure 3-17)
      1. a) An increase in an asset (Delivery Equipment) is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
      3. c) An increase in Accounts Payable is entered as a credit.
      4. d) Total of debits equals total of credits for this transaction.
    3. Transaction (m): Payment of wages (See Figure 3-18)
      1. a) An increase in Wages Expense is entered as a debit.
      2. b) A decrease in Cash is entered as a credit.
    4. Transaction (n): Deliveries made for cash and credit (See Figure 3-19)
      1. a) An increase in Cash is entered as a debit.
      2. b) An increase in Accounts Receivable is entered as a debit.
      3. c) An increase in Delivery Fees in recorded as a credit.
      4. d) Total debits equals total credits.
    5. Transaction (o): Withdrawal of cash from business (See Figure 3-20)
      1. a) An increase in Jessica Jane, Drawing is entered as a debit.
      2. A decrease in Cash is entered as a credit.
  11. WATCH THIS VIDEO, THEN READ AND DO THE FOLLOWING:
  12. YOU WILL HAVE NEXT CLASS TO FINISH THIS:
  13. In-Class Exercise: Complete Exercise E3-3A, E3-3B (5–10 minutes each)–SHOW ME WHEN YOU ARE DONE
  14. In-Class Exercise: Complete Exercise E3-5A, E3-5B (5–10 minutes each)–SHOW ME WHEN YOU ARE DONE
  15. In-Class Exercise: Complete Exercise E3-6A, E3-6B (5 minutes each)–SHOW ME WHEN YOU ARE DONE
  16. Summary of Transactions (a) Through (o) (See Figure 3-21)
    1. Total each side of every individual T Account.
    2. Write the totals (footings) in small numbers on each side of the T account.
    3. The balance is shown on the side with the larger footing.
    4. The footing serves as the balance for the accounts with entries on only one side of the account.
    5. If an account has only a single entry, it is not necessary to enter a footing or balance.
  17. In-Class Exercise: Complete Exercise E3-7A, E3-7B (10 minutes each)–SHOW ME WHEN YOU ARE DONE–KEEP THIS!!