basic accounting for practice

8/8/2019 Basic Accounting for Practice

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Dr. Amit Shrivastava_NMIMS_2010-2011

1

2010

PTMBA :Section A & B

FinancialAccounting


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Financial Accounting PTMBA_ NMIMS_ Section A & B_2010-2011

BASIC ACCOUNTING

Module BA

Apply Basic Accounting Principles

OBJECTIVE Given transaction descriptions, labeled T accounts, and accessto course materials, correctly identify the type of account,determine which account to debit and which to credit, andenter the correct debit and credit amounts. Nineteen of 24debit/credit entries must be correct.

SAMPLE Using transaction descriptions and labeled T accounts, identifyCRITERION the accounts as either asset, expense, liability or income andTEST ITEM enter the correct debit and credit amounts.

1. A golf course Pro Shop purchased 300 golf balls at $1.00each for resale to customers and placed them in a CentralStoreroom. The golf-ball vendor will be paid next month.

Central Storeroom Inventory Accounts Payable

Debit Credit Debit Credit

a. What kind of account is Central Storeroom Inventory?

b. What kind of account is Accounts Payable?

BA - 2 Basic Accounting


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Module BA - Basic Accounting Principles

SIGNOFF Nineteen of 24 debit/credit entries must be made correctly forREQUIREMENT signoff on this module.

A debit/credit entry consists of the correct amount entered inthe appropriate T account correctly as either a debit or credit.

You have just been introduced to the basic duty of fundbookkeeper - to report transaction information to SAP AIMS.For many of you who have on-the-job experience, this modulewill serve to review some basic accounting ideas and practices.For you newcomers to the field, it will provide the necessaryknowledge upon which you will build skills.

In this module, we will cover the following accounting basics:

The Balance Sheet Accounts

- Assets- Liabilities- Net Worth

The Accounting Equation

The Operating Statement Accounts

- Income- Expense

Recording transaction effects on accounts

- Debits and Credits

By the end of this module, you will be able to enter simpletransaction data in proper format and follow the basicaccounting principles.

Basic Accounting BA - 3


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THEBALANCE Every business (including NAFIs) needs to have a means ofSHEET keeping track of what it owns and what it owes to others.ACCOUNTS From the bookkeepers point of view, the most efficient means

of keeping track is by assigning accounts to all things ownedand owed that can be expressed in monetary value. TheBalance Sheet Accounts are three basic account categoriesused to record this information. They are called Balance SheetAccounts because they appear on a business Balance Sheet -its basic financial statement of what is owned and owed. Thethree basic categories are:

Assets - what the business owns.

Liabilities - what the business owes to others. Net Worth - the owners share of assets and earnings.

Before we look at each of the above categories, answer thefollowing questions.

1. What are the uses for accounts? Check all that apply.

a. Keep track of what is owed

b. Record specific accounting data.

c. Keep track of what is owned.

2. Check the categories of balance sheet accounts.

a. Liabilities

b. Assets

c. Receivables

d. Net Worth

3. Define the categories you checked in question 2.

Term Definition

Check your answers on page BA-4



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THE BALANCE SHEET ACCOUNTS - Answers:

1. You should have checked a, b and c.

2. a, b and d (c - receivable - is a type of asset you will learn about later).

3. You should have listed/defined:

Assets - what the business owns

Liabilities - what the business owes others

Net Worth - the owners share of assets and earnings



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ASSETS We have broadly described assets as what a business/NAFIowns. To further define assets, we can say that assets must beof measurable value that can be expressed in a dollar amount.

What are some of the most obvious things of value a businessowns?

Perhaps the most obvious asset of a business is cash. Thisincludes any money on deposit at banks and money held on-site in cash registers or safes. It is easy to list cash at value:

ASSETS

Cash $ 22,000

Then there is the land a business owns and operates on. Youcould list its value as:

ASSETS

LandCash

$2,500,000$ 22,000

NOTE: The dollar value of land is always the initialcost of the land, not the market value.

Assets can be classed as current or fixed. Cash is a currentasset. Current assets are either cash or things that can easily beconverted to cash, such as retail inventories and receivables(money owed the business by its customers). Land is considereda fixed asset. Fixed assets are of permanent nature, which thebusiness intends to use over an extended period of time.



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ASSETS Below are some examples of current and fixed assets.(cont.)

ASSETS

CurrentCash $ 22,000ReceivablesInventories

FixedLand $2,500,000Buildings

Equipment

Again, all values are expressed in dollar amounts and allassets except cash and receivables are listed at cost.

Now answer the questions on page BA-7.



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ASSETS - Questions:

1. Indicate whether the assets below are current or fixed assets.

Current Fixed

a. Buildings

b. Land

c. Receivables

d. Equipment

e. Cash

f. Retail Inventories

2. Choose the true statement.

a. Fixed assets are held for quick conversion into cash.

b. Fixed assets are held for use by the business for anextended period of time.

3. A Recreation Arts/Crafts/Hobbies Activity, has bought $62.50 (cost) worth of yarnto sell in their shop. When all the yarn is sold, they will gross $68.75 (retail value).

Which figure would you use for your inventory?

4. Sandy McGuire started a candy business. She bought the building for $75,000.Right now she has $2,000 on deposit in the company bank account and $500 in cashat the store. She paid $1,700 to stock the store with various jellybeans, chocolatebunnies, lollipops, and the like. She hopes to make at least $5,000 from that stock.Using the information above, list the candy stores assets.

5. Write a definition of assets.

Check your answers on page BA-8.



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ASSETS - Answers:

1. a. fixed

b. fixed

c. current

d. fixed

e. current

f. current

2. b

3. $62.50 (Remember, assets are listed at cost).

4. The candy stores asset listing should look like this:

ASSETS

Cash $ 2,500 (bank account and cash on hand)Inventories $ 1,700 (cost value)Building $ 75,000

(Later you will learn how to show the candy stores $75,000 bank loan to buy thestore).

5. Assets are things of monetary value owned by a company (or words to that effect).



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LIABILITIES Liabilities are the funds a business/NAFI owes to others. Thisdebt can be incurred in a number of ways. For example, abusiness could borrow money from a bank. The businesswould then be liable to the bank for the funds loaned. A bankloan liability can be expressed:

LIABILITIES

Bank Loan $ 3,000

A business can also incur liabilities in everyday transactions.For example, if a business purchased office supplies from avendor and received the supplies before paying for them (it is

common business practice to purchase goods and receive the billlater), the business would be liable to the vendor for the amountof the goods purchased. This kind of liability is an AccountsPayable - account payable to a vendor - and is expressed as such.

LIABILITIES

Accounts PayableBank Loan

$ 250$ 3,000

Accounts payable to a vendor and bank loans illustrate two

types of liability accounts. Accounts Payable is a currentliability. Current liabilities include all amounts due within oneyear, such as vendor accounts, wages due employees, and taxesdue the government. A bank loan (if it is longer than one year)is an example of a long-term liability. Below are someexamples of current and long-term liabilities:

LIABILITIES

CurrentAccounts Payable $ 250

Wages PayableTaxes Payable

Long-TermBank Loan $ 3,000




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LIABILITIES - Questions:

1. The F&FRP Non-Appropriated Fund (NAF) pays social security taxes once everythree months. These social security taxes are:

a. Long-term liabilities.

b. Current liabilities.

2. Lets think about Sandy McGuires candy store again. We said she bought thebuilding for $75,000. Now lets assume she got the money with a Small Business

Administration loan, payable over 25 years. Of the $1,700 worth of candy thebusiness bought, $1,000 was paid on delivery to the Joyous Jellybean Company; $700is still owed to Chocolate Unlimited.

Using the information above, list the candy stores liabilities.

3. Write a definition of liabilities.




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LIABILITIES - Answers:

1. Taxes paid every 3 months would be (b), current liabilities, during the time theyremain unpaid. Remember, long-term liabilities are payable over a period longer thanone year.

2.LIABILITIES

CurrentAccounts Payable $ 700

(The amount owed to anoutside vendor. $1,000 wasalready paid so it is no longer aliability).Long-Term

SBA Loan $ 75,000

NOTE: You will learn how to show when liabilities are paid in a later section.

3. Expressed in your own words: Liabilities are what the business owes to others(or words to that effect).



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REVIEW - Questions:

As a review, classify the following accounts into the proper category.

ASSET LIABILITY

Current Fixed Current Long-term

a. Retail inventories

b. Bank Loan

c. Accounts Receivable

d. Taxes Payable

e. Accounts Payable

f. Cash

Check answers on page BA-14.



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REVIEW - Answers:

a. Current asset.

b. Long-term liability.

c. Current asset.

d. Current liability.

e. Current liability.

f. Current asset.



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NET WORTH Net worth is the owners share of assets and earning. Networth is sometimes also called owners equity. To a Navybookkeeper, owners equity will be of little concern since theowner of all the Messes and Recs is the U. S. Navy, and theNavy does not engage in many of the typical owneractivities of a private business.

The account categories that do appear in the Net Worth sectionof your Balance Sheet are earnings and profits - whatever is leftafter liabilities have been paid, or stated another way, thedifference between total assets and liabilities for a year. Theseaccounts show the Navys share of earnings and profits.

NET WORTH

Net Profit $ 3,750

Unlike private business, the Navy does not keep profits butuses them to fund operations. These distributions of profit areshown in the Profit Distribution accounts. You will not beusing the Net Worth Accounts, but they will appear on yourFunds Balance Sheet as profits that have been distributed toyour Fund.

Answer the questions on page BA-17.



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NET WORTH - Questions:

1. What do Net Worth Accounts show?

a. What a business owes to outside vendors.

b. Accounts Receivable from customers.

c. Owners share of assets and earnings.

d. Loans payable within one year.

2. In the Commander, Navy Installations Command (CNIC) system, profits are:

a. kept by the owner.

b. distributed to funds for use in operations.

c. returned to the appropriate fund pool.

3. Here we are at Sandy McGuires candy store. After three months of operation, thebusiness has made $5,000 in sales, $3,300 of that becoming profits.

Using the information above, list the candy stores net worth.

4. Write a definition of net worth.

Answers on page BA-18.



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NET WORTH - Answers:

1. c. Owners share of assets and earnings.

2. In the CNIC system, profits are distributed to funds for use in operations, b.

3.NET WORTH

Net Profit $ 3,300

4. Net worth is the owners share of assets and earnings after liabilities are paid.



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BALANCE In the next section, we will cover the relationship of the threeSHEET Balance Sheet account categories in the accounting equation.REVIEW But first, lets review the Balance Sheet accounts.

Answer the following questions, referring to any portion of theBalance Sheet section as necessary:

1. What are the three main categories of Balance Sheetaccounts?

2. Using A for assets, L for liabilities, and NW for networth, indicate the correct category for each of thefollowing:

a. Accounts Payable

b. Inventory

c. Cash

d. Profit




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BALANCE SHEET - Answers:

1. Assets

Liabilities

Net Worth

2. a. L

b. A

c. A

d. NW



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THE You know that assets are what the business owns, liabilities areACCOUNTING what the business owes, and net worth is what is left afterEQUATION liabilities are paid (profits). You have seen how each account

category is individually listed; now lets look at how they arelisted in relation to each other on the Balance Sheet.

ASSETS LIABILITIES

Current CurrentFixed Long-term

NET WORTH

Profits

Total Total

Total Assets equal total Liabilities plus Net Worth. This iswhere the term Balance Sheet comes from - the left (Assets)and right (Liabilities + Net Worth) columns are equal - theybalance. This relationship is known as the accountingequation.



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ASSETS = Lets examine this relationship more closely. Lets start withLIABILITIES + an illustration of the balance that must always exist betweenNET WORTH Assets and Liabilities.

If a business makes a purchase from a vendor, a debt isincurred. As you know, this is reflected in the Liabilityaccount, Accounts Payable.

LIABILITY

Accounts Payable $ 250

You can see how that purchase has increased the liability of the

business to the vendor. This liability will not be decreaseduntil the business pays the vendor.

Now think a minute - what other account category couldpossibly be affected by a purchase of goods?

If the business has received goods through the purchase, thebusiness has increased its assets - Inventory account.

ASSETS LIABILITIES

Inventory $ 250 Accounts Payable $ 250

(Remember, assets are listed at their cost value).

This is a simplified illustration of the way the left and rightsides of the Balance Sheet equal each other, and the way everytransaction affects at least two accounts: the double-entrysystem.

For every liability incurred, some increase in assets must

result. In the illustration above, the increase in AccountsPayable led to an increase in Inventories. An increase in long-term liability - bank loan, for example -would lead to anincrease in assets - cash or a fixed asset such as land. Againyou can see the double-entry system at work. Two accountsare always affected.



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ASSETS = Now lets consider the full accounting equation again.LIABILITIES +

NET WORTH In the CNIC system, the Net Worth accounts are used(cont.) primarily for recording profits. You may ask, If you record

all your profits in net worth, how will the equation balance?Wont liabilities and net worth be greater than assets? Thiswould be true if it were not for the double-entry systemmentioned earlier. When a business makes a sale, the fundsreceived go into one of two assets accounts - cash or AccountsReceivable. For example, the cost of goods sold was $100; theretail price was $150, for a profit of $50. Any profit over thecost increases the Asset account by the amount of profit. So to

balance out the increase in the Asset account caused by theprofit from the sale of goods, the Net Worth account lists theprofit.

ASSETS LIABILITIES

Cash $150 Current $ 100Accounts Receivable Long-term

NET WORTH

Profits $ 50

Total $150 Total $ 150




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ASSETS = LIABILITIES + NET WORTH - Questions:

1. The double-entry system calls for:

a. transactions to be equal.

b. transaction profits to equal assets.

c. transactions to affect two or more accounts.

d. transactions to have two entries.

2. Consider the following transactions.

a. A lamp store buys one dozen lighting fixtures from a vendor. The vendor willbill the lamp store for the purchase. How many accounts in the lamp store areaffected by this transaction? (Write the number.)

b. What are the account categories affected?




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3. Set up the following transaction data on the balance sheet below.

Fancy Foot Shoe Store operates out of a building bought for $59,000. All of the moneyused to buy the building came from a bank loan, none of which has been paid off.

Fancy Foot has 400 pairs of shoes in stock. The store paid $30 a pair for 200 pairs.Fancy Foot owes Sulton Shoe Importers of Italy $40 a pair for the other 200 pairs.Fancy Foot also owes the government $2,300 in taxes.

Fancy Foot has a total of $300 in cash in the stores cash register. At the end of thedays operations, the manager made a deposit at the local bank bringing the totalfunds on deposit to $5,000. There was also $500 worth of charge sales today.

The manager figures that Fancy Foot should be showing $9,500 in profits at this time.

BALANCE SHEET

ASSETS LIABILITIES

Current CurrentCash $ Accounts Payable $

Receivable $ Taxes Payable $

Inventories $ Long-TermBank Loan $Fixed

Building $TOTAL $

NET WORTH

Profit $

TOTAL $ TOTAL $

4. From memory, write the Accounting Equation.




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ASSETS = LIABILITIES + NET WORTH - Answers:

1. c

2. a. Two accounts are affected by this transaction.

b. The Current Asset Inventory account is affected by the increase in inventory; theCurrent Liability Accounts Payable is affected because the business now owesthe vendor for the lighting fixtures purchased.

3.

BALANCE SHEET

ASSETS LIABILITIES

Current CurrentCash $ 5,300 Accounts Payable $ 8,000

Receivable $ 500 Taxes Payable $ 2,300

Inventories $ 14,000 Long-Term

Bank Loan $ 59,000Fixed

Building $ 59,000TOTAL $ 69,300

NET WORTH

Profit $ 9,500

TOTAL $ 78,800 TOTAL $ 78,800

4. Assets = Liabilities + Net Worth



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THE OPERATING You learned earlier that the Balance Sheet shows what aSTATEMENT business/NAFI owns, owes, and its earnings or profits. AACCOUNTS: Balance Sheet does not provide a clear breakdown of actualINCOME AND sales activity. For tracking sales activity, businesses use aEXPENSE different document called an Operating Statement.

The Operating Statement is composed of two accountcategories: Income and Expense. Income accounts show thesales-related gross revenue. Expense accounts show all costsassociated with the sales, such as cost of goods sold andpersonnel costs. These two operating statement categories,added to the three balance sheet categories, are the main

categories of accounts.

Lets begin with two basic principles that apply to both of theoperating statement account categories.

1. Operating Statements cover a period of time.

2. Income and Expenses are always recorded separately.

Both categories are used to record gross amounts - gross

income or gross expense. Profit or loss is not a considerationin the individual entries; it is determined after all entries aremade.

All Income or Expense data is recorded when earned orincurred. This is sometimes called accrual accounting. Thismeans that a business records the revenue for a sale in theIncome account at the time of the sale, regardless of whenthe customer pays. A business records an expense when it isincurred - that is when the inventory or service is used. For

example, if a business purchased 500 baseballs for $1 each inMarch but does not sell any until June, and then sells only200, the baseball expense for March, April, and May will be$0.00 - because no revenue could be associated in thesemonths with the sale of baseballs. However, in June thebaseball expense would be $200 - the value of the 200baseballs sold.



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THE OPERATING

STATEMENTACCOUNTS:INCOME ANDEXPENSE(cont.)

NOTE: You can see that Income and Expenserecording is not the same as Asset and Liabilityrecording. For example, the purchase ofbaseballs would have affected the Asset andLiability accounts as soon as the purchase wasmade: either a decrease in cash or increase inAccounts Payable to show if the baseballswere paid for in cash or that funds were due tothe vendor. Then the Inventory account wouldbe increased to show the receipt of the

baseballs. Try to keep the function of theBalance Sheet Accounts and the OperatingStatement Accounts clear in your mind.



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INCOME AND EXPENSE - Questions:

Now answer the following questions.

1. Income accounts are used to record:

a. Profits.

b. The cost of goods sold.

c. Gross revenue.

d. Revenue after expenses.

2. Expense accounts are used to record:

a. Gross expenses related to the income of the period.

b. Accounts Payable.

c. Long-Term Liabilities.

d. Value of inventory.

3. The Operating Statement covers:

a. A companys assets and liabilities at one moment in time.

b. Transaction information over a period of time.

4. Income is recorded when:

a. The sale is made.

b. The customer pays the bill.

5. Expense is recorded:

a. In the same period as the revenue it is associated with is earned.

b. In the period when the vendor is paid.




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INCOME AND EXPENSE - Answers:

1. c

2. a

3. b

4. a

5. a



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REVIEW THE You have now been introduced to the five main categories ofFIVE accounts. Next you will learn how to enter transactionCATEGORIES information to these accounts to indicate increases andOF ACCOUNTS decreases, using the double-entry principle. Before we go on,

answer the following questions, which review the fivecategories of accounts and the basic principles you havelearned this far.

What are the five main categories of accounts? Check thecolumn indicating the financial documents they appear on.

Category Balance Sheet Operating Statement




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REVIEW THE FIVE CATEGORIES OF ACCOUNTS - Answers:

AssetsLiabilitiesNet Worth

You should have checked Balance Sheet.

IncomeExpense

You should have checked Operating Statement.

NOTE: Answers may be listed in any order.



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RECORDING You have learned that businesses use the five basic accountsTRANSACTION that appear on the Balance Sheet and the Operating StatementEFFECTS ON to keep track of what is owned and owed, and the flow ofACCOUNTS: income and expenses resulting from business activity. YouDEBITS AND have also learned that transactions affect at least two accountsCREDITS (the double-entry system). Now you are ready to learn how to

record the entries that show the effects of a transaction on theaccounts.

The accounting terms for showing increases and decreases toaccounts are debits and credits. Each of the five accountcategories has its own pattern for increasing and decreasing.

You will learn about that after we go over the basic concept ofdebiting and crediting an account.

On the Balance Sheet, all accounts are listed with a headingand the contents:

ASSETS

CurrentCash $ 5,000Receivables $ 2,000

FixedLand $ 48,000Vehicles $ 20,000

In the day-to-day operation of a business, it would be verydifficult to prepare a listing like the one above and constantlyerase and alter the amounts for each type of asset whenever,for example, the amount of cash changed. It is more logical tokeep a running tally of the increases and decreases to each of

the accounts as they are affected by the days transactions - forexample, sales that increases cash, and bill paying thatdecreases cash.



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RECORDING Lets take a look at the setup of an account that allows forTRANSACTION logical recording of increases and decreases: the TEFFECTS ON account.ACCOUNTS:

(cont.)

Cash The T account (left) allows for recording increases on one side anddecreases on the other. The left side isalways a debit and the right side is acredit.

Debit Credit

Lets look at a transaction. A restaurant buys two dozentowels to use in the kitchen at $14 a dozen, and pays cash.

We know from the double-entry system that at least twoaccounts are affected by this transaction. The current assetaccount Supplies should be increased to show the receiptof the towels. The current asset account Cash will bedecreased to show the restaurants expenditure of funds toobtain the towels. Now, how would we record this on theT account?

SUPPLIES CASH

(increase) (decrease) (increase) (decrease)

$28.00 $28.00

You can see that we have recorded the relevant information inmonetary value, and have fulfilled the requirements of thedouble-entry system.

Now lets try applying the terms debit and credit to theabove transaction. All asset accounts are increased with

debits and decreased with credits; we debited Supplies $28.00and credited Cash $28.00.



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RECORDING Now you try one:TRANSACTION

EFFECTS ON A business buys a riding lawnmower and pays $15,000 byACCOUNTS: check. Enter this transaction in the T accounts below.DEBITS ANDCREDITS(cont.)

VEHICLES CHECKING ACCOUNT


What specific kind of account is Vehicles?

What specific kind of account is Checking Account?




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Answers:

VEHICLES CHECKING ACCOUNTDebit Credit Debit Credit

$15,000 $15,000

Vehicles is a fixed asset account.

Checking Account is a current asset account.

We debited Vehicles to show the increase in the account caused by the purchase of theriding lawnmower. We credited Checking Account to show the decrease in funds in theaccount caused by writing the check to pay for the mower. Total debits equal total credits.



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DEBITING AND You learned above that asset accounts are increased withCREDITING debits and decreased with credits. When you consult the TTHE FIVE accounts below, youll see that expense accounts are alsoCATEGORIES increased with debits and decreased with credits. But liability,

net worth, and income accounts are decreased with debits andincreased with credits.

Study these T accounts. They are set up the way a balancesheet is set up.

NOTE 1. We use the standard Latin abbreviation

Dr for debit and Cr for credit, and

2. Accounting usage of the terms debit andcredit is different from everyday usage.The chart below will help you sort it allout. Use it throughout the module...andthe test (we wont tell).

BALANCE SHEET ACCOUNTS

ASSETS LIABILITIESDr Cr Dr Cr

increase decrease decrease increase

NET WORTH

Dr Cr decrease increase

OPERATING STATEMENT ACCOUNTS

INCOME EXPENSE

Dr Cr Dr Cr decrease increase increase decrease



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DEBITING AND Another way of deciding what type of entry to make is:CREDITING

THE FIVECATEGORIES(cont.)

MAKING AN ACCOUNT ENTRY

IF ACCOUNT ENTRY ISIN THIS CATEGORY

AND THEN

INCOMELIABILITY

NET WORTH

You need to increase theaccount total Use the Credit side (right).

You need to decrease theaccount total

Use the Debit side (left).

ASSETSEXPENSES

You need to increase theaccount total

Use the Debit side (left).

You need to decrease theaccount total

Use the Credit side (right).



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Questions:

Now, using the Making an Account Entry decision table and the Balance SheetAccounts chart respond to each statement by checking the appropriate block.

Debit Credit

1. You received a $10 cash payment to be entered in yourcash account.

2. Your NAFI owes $500 to Hook-Wink, Inc.(Accts. Payable).

3. The Officers Club income this month is $12,365(Income account).

4. Bills paid by check today totaled $730(Cash account).




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Answers:

1. Dr

2. Cr

3. Cr

4. Cr



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TOTAL DEBITS A basic principles of debits and credits will help you learn toEQUAL TOTAL record transaction data:CREDITS

Total Debits = Total Credits

This may be as simple as our example of the purchase oftowels where only two accounts were affected. In other cases,it may take more than two account entries to get the debits andcredits to balance.

For example, a business sells two hammers for $5 each. Thebusiness paid $4.50 for each hammer. The account entries

recording this transaction would be:

CASH INCOME

Debit Credit Debit Credit$10.00 $10.00

Inventory (hammers) Cost of Goods Sold Expense


$9.00 $9.00

(Remember, inventory is valued at cost to the business, $4.50each.)

Total Debits = Total Credits $19.00 = $19.00

This may seem complicated now, but you will learn moreabout this and get more practice in Module CC.



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Questions:

Now answer the following questions. You will need to indicate what Debits or Credits arenecessary for each transaction. Feel free to refer to the Balance Sheet Accounts chartand Making an Account Entry decision table.

Circle Debit or Credit as appropriate.

1. A business has a salary expense of $2,500. You would Debit/Credit the expenseaccount.

2. A deposit is made to the business bank account. Debit/Credit the bank account.

3. Income is received for the sale of retail items. Debit/Credit the retail incomeaccount.

4. A sale is made and the business agrees to bill the customer at the beginning of nextmonth. Debit/Credit accounts receivable.

Check your answers on page 46.



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Answers:

1. Debit will show the increase in the expense account.

2. Debit will show the increase in the bank account.

3. Credit will show an increase in income.

4. Debit will show increase in accounts receivable.



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Questions:

Now try some entries in the T Account below, and answer the questions.

1. A business buys $500 worth of supplies and will pay for them when the bill arrivesin two weeks.

SUPPLIES ACCOUNTS PAYABLE


a. What specific kind of account is Supplies?

b. What specific kind of account is Accounts Payable?

2. A sale brings in $67 in cash income.

CASH INCOME


a. What specific kind of account is Cash?

b. What specific kind of account is Income?

3. The government informs a business that it owes $353 in taxes. The business paysby check.

CHECKING ACCOUNT TAX EXPENSEDebit Credit Debit Credit

a. What specific kind of account is Checking Account?

b. What specific kind of account is Tax Expense?



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4. A business makes $750 monthly payment on a bank loan. It pays by check.

CHECKING ACCOUNT LONG-TERM LOANS PAYABLE


a. What specific kind of account is Checking Account?

b. What specific kind of account is Long-Term Loans Payable?

Check your answers on page BA-51 and BA-52.



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Answers:

1.SUPPLIES ACCOUNTS PAYABLE


a. Current Asset Account. (Debit Supplies to show increase in supplies caused bypurchase.)

b. Current Liability Account. (Credit Accounts Payable to show increase in fundsdue outside vendors.)

NOTE: Even though both accounts are being increased, a debit and credit stillresult because of the different methods of showing increases betweenasset and liability accounts.

2.Cash Income


$67.00 $67.00

a. Current Asset Account. (Debit Cash to show increase in cash from the sale.)

b. Income Account. (Credit Income to show increase in income caused by thesale.)

3.CHECKING ACCOUNT TAX EXPENSE


a. Current Asset Account. (Credit Checking Account to show decrease in fundscaused by writing the check.)

b. Expense Account. (Debit Tax Expense to show increase in tax expense.)



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4.CHECKING ACCOUNT LONG-TERM LOANS PAYABLE


a. Current Asset Account. (Credit Checking Account to show decrease in fundscaused by writing the check.)

b. Long-Term Liability Account. (Debit Long-Term Loans Payable to showdecrease in outstanding loan still due the bank.)

Note that in each of these transactions debits equal credits.



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REVIEW In this module you have learned about accounts andaccounting principles. Check off each of the points below asyou review it.

Balance Sheet Accounts

Assets - recorded at cost-what a business owns

Liabilities - what a business owes

Net Worth - owners share of profits (Assets-Liabilities)

Accounting Equation

Assets = Liabilities + Net Worth

Double-entry system transaction affects at least twoaccounts

Operating Statement Accounts: Income and Expense

Income and Expense recorded independently of eachother

Income and Expense data recorded as earned orincurred

Recording Transaction Effect on Accounts: Debits andCredits

Debits and Credits in the five account categories

Debits = Credits

If you feel ready to take the Criterion Test, do so.



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basic accounting for practice

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