The Accounting Equation:

Assets = Liabilities + Owners' Equity

Assets = Something that the business owns that provide a future benefit
Liabilities = Things that are owed. Claims against the business
Owner's Equity = Net Assets of the Business.

Debit means to FALSE

increase an account.

Any Account
Left-Side Right-Side
Debit Credit

Rules of Debits and Credits

Assets = Liabilities + Owners' Equity
Left-Side Right-Side Left-Side Right-Side Left-Side Right-Side
Debit Credit Debit Credit Debit Credit
Increase Decrease Decrease Increase
Impact:
Owner's Drawings 2 Increases:
Left-Side Right-Side Owner's Capital
Debit Credit Revenues
Increase Decrease
2 Decreases:
Expenses Owner's Drawings
Left-Side Right-Side Expenses
Debit Credit
Increase Decrease

Assets = + Liabilities + Owner's Capital + Revenues

Left-Side Right-Side Left-Side Right-Side
Debit Credit Debit Credit
Decrease Increase DecreaseIncrease

- Owner's Drawings - Expenses

Normal Balance of an account??

Side of the account that you record increases.

When preparing journal entries, the following 3 statements must be true:

1) You must have at least TWO Accounts.
2) You must have at least one Debit and at least one Credit
3) Total debits in dollars equal total credit in dollars
 Problem #1 - Analysis of each Business Transaction
During the month of September 2020, Madison Service Company had the following transactions:
Sept. 3 The owner, W. Madison, invested cash of $35,000 and repair equipment of $15,000 into the
business.
Cash Asset Increasing Debit 35,000 50,000
Repair Equipment Asset Increasing Debit 15,000
W. Madison, Capital Capital Increasing Credit 50,000

5 Purchased office supplies for cash, $3,900.

Office Supplies Asset Increasing Debit 3,900
Cash Asset Decreasing Credit 3,900

8 Purchased a one-year insurance policy in advance, $7,200.

Cash Asset Decreasing Credit 7,200
Prepaid Insurance Asset Increasing Debit 7,200

10 Purchased repair equipment on credit, $5,000.

Repair Equipment Asset Increasing Debit 5,000
Accounts Payable Liability Increasing Credit 5,000

12 Performed repair service and received cash from clients, $10,800.

Cash Asset Increasing Debit 10,800
Repair Service Revenue Revenue Increasing Credit 10,800

15 The business made a partial payment for the repair equipment purchased on Sept. 10, $2,500.
Accounts Payable Liability Decreasing Debit 2,500
Cash Asset Decreasing Credit 2,500

17 Billed clients for repair service performed on credit, $9,200.

Accounts Receivable Asset Increasing Debit 9,200
Repair Service Revenue Revenue Increasing Credit 9,200

19 Paid for advertisement, $4,600.

Cash Asset Decreasing Credit 4,600
Advertising Expense Expense Increasing Debit 4,600
 23 Paid utility bills for the month, $800.
Cash Asset Decreasing Credit 800
Utilities Expense Expense Increasing Debit 800

25 Received cash from clients that were billed previously on September 17, $5,200.
Cash Asset Increasing Debit 5,200
Accounts Receivable Asset Decreasing Credit 5,200

28 Paid the employee wages, $6,700.

Cash Asset Decreasing Credit 6,700
Wages Expense Expense Increasing Debit 6,700

28 W. Madison withdrew cash for personal use, $2,800.

Cash Asset Decreasing Credit 2,800
W. Madison, Drawings Drawings Increasing Debit 2,800
Problem #1 - Requirement #2
General Journal
Date Account Name/Explanation P.R Debit Credit
2020
Sept. 3 Cash x 35,000
Repair Equipment x 15,000
W. Madison, Capital x 50,000

5 Office Supplies x 3,900

Cash x 3,900

8 Prepaid Insurance x 7,200

Cash x 7,200

10 Repair Equipment x 5,000

Accounts Payable x 5,000

12 Cash x 10,800
Repair Service Revenue x 10,800

15 Accounts Payable x 2,500

Cash x 2,500

17 Accounts Receivable x 9,200

Repair Service Revenue x 9,200

19 Advertising Expense x 4,600

Cash x 4,600

23 Utilities Expense x 800

Cash x 800

25 Cash x 5,200
Accounts Receivable x 5,200

28 Wages Expense x 6,700

Cash x 6,700

28 W. Madison, Drawings x 2,800

Cash x 2,800
Problem #1 - Requirement #1 and #3 -
Cash Unearned Service Revenue
8/31/20 68,000 9/5/20 3,900 8/31/20 12,500
9/3/20 35,000 9/8/20 7,200
9/12/20 10,800 9/15/20 2,500
9/25/20 5,200 9/19/20 4,600
119,000 9/23/20 800
9/28/20 6,700
Bal. 90,500 9/28/20 2,800
28,500

Accounts Receivable W. Madison, Capital

8/31/20 4,300 9/25/20 5,200 8/31/20 84,400
9/17/20 9,200 9/3/20 50,000
13,500 Bal. 134,400
Bal. 8,300

Prepaid Insurance W. Madison, Drawings

8/31/20 2,000 8/31/20 3,400
9/8/20 7,200 9/28/20 2,800
Bal. 6,200
Bal. 9,200

Prepaid Rent Repair Service Revenue

8/31/20 7,000 8/31/20 53,800
9/12/20 10,800
9/17/20 9,200
Bal. 73,800

Office Supplies Wages Expense

8/31/20 2,200 8/31/20 18,200
9/5/20 3,900 9/28/20 6,700
Bal. 24,900
Bal. 6,100

Repair Equipment Advertising Expense

8/31/20 42,000 8/31/20 15,000
9/3/20 15,000 9/19/20 4,600
9/10/20 5,000 Bal. 19,600
Bal. 62,000

Accumulated Depreciation, Repair Equipment Rent Expense

8/31/20 12,000 8/31/20 11,500

Accounts Payable Utilities Expense

9/15/20 2,500 8/31/20 16,300 8/31/20 5,400
9/10/20 5,000 9/23/20 800
21,300 Bal. 6,200

Bal. 18,800

5
The Trial Balance
Purpose: The Trial Balance is prepared to check if total debits equal to total credits.

How are accounts listed on the Trial Balance?

Assets Liquidity
Liabilities When they are due
Owner's Capital
Owner's Drawings
Revenues
Expenses
Problem #1 - Requirement #3

Madison Service Company

Unadjusted Trial Balance
September 30, 2020
Account Names Debits Credits
Cash $90,500
Accounts Receivable 8,300
Prepaid Insurance 9,200
Prepaid Rent 7,000
Office Supplies 6,100
Repair Equipment 62,000
Accumulated Depreciation, Repair Equipment $12,000
Accounts Payable 18,800
Unearned Service Revenue 12,500
W. Madison, Capital 134,400
W. Madison, Drawings 6,200
Repair Service Revenue 73,800
Wages Expense 24,900
Advertising Expense 19,600
Rent Expense 11,500
Utilities Expense 6,200
Totals $ 251,500 $ 251,500
Problem #2 Notes
Financial Statements
Income Statement
Revenues
Less: Total Expenses
Net Income or Net Loss

Statement of Owner's Equity - It captures the change(s) in the Owner's Capital Account

Beginning Capital
Add:
Investment made by the Owner
Net Income
Subtotal
Less: OR
Owner's Drawings
Net Loss
Ending Capital

Balance Sheet
Assets

Liabilities

Owners' Equity
Problem #1 - Preparing the Financial Statements
(For the Income Statement) 1 2
Nicholas Jay Company
Income Statement
For the Month Ended September 30, 2020
Revenues:
Service Fees Revenue $ 126,000
Expenses:
Wages Expense $ 19,200
Utilities Expense 5,000
Rent Expense 31,000
Insurance Expense 2,500
Advertising Expense 4,000
Total Expenses (61,700)
Net Income $ 64,300

(For the Owners' Equity Statement)

Nicholas Jay Company
Statement of Owners' Equity
For the Month Ended September 30, 2020
Nicholas Jay, Capital, Beginning $150,000
Add:
Investment made by Owner $ 32,000
Net Income 64,300 96,300
Subtotal $ 246,300
Less:
Nicholas Jay, Drawings (7,000)
Nicholas Jay, Capital, Ending $ 239,300
(For the Balance Sheet)
Nicholas Jay Company
Balance Sheet
September 30, 2020
Assets:
Cash $190,000
Notes Receivable 12,000
Accounts Receivable 25,000
Store Supplies 7,500
Prepaid Rent 4,000
Store Equipment 6,000
Building 102,000
Total Assets $ 346,500
Liabilities and Owners' Equity
Liabilities:
Accounts Payable $ 45,200
Mortgage Payable 62,000
Total Liabilities $ 107,200
Owners' Equity:
Nicholas Jay, Capital 239,300
Total Liabilities and Owners' Equity $ 346,500
Problem #3 Notes
Adjusting Entries:

Three categories of adjusting entries:

1) Prepaid Expenses and Unearned Revenues

Prepaid Asset/Expenses:
Dr: _______ Expense
Cr: Prepaid Asset Incurred/Expired/Used

Unearned Revenues:
Dr: Unearned Revenues
Cr: Revenue Account Amount Earned

2) Accrued Expenses and Accrued Revenues

Accrued Expenses:
Dr: _______ Expense
Cr: _______ Payable Incurred (taken place)

Accrued Revenues:
Dr: _______ Receivable
Cr: Revenue Account Amount Earned

3) Estimated Items
Dr: Depreciation Expenses, Name of Asset Amount Given
Cr: Accumulated Depreciation, Name of Asset

Bad Debts - We will cover this later in the semester.

Problem #3 - Preparing Adjusting Entries
General Journal
Date Account Name/Explanation P.R Debit Credit
2020
Aug. 31 Office Supplies Expense 900
Office Supplies 900
($1,500 - $600 = $900)

31 Depreciation Expense, Office Equipment 1,000

Accumulated Depreciation, Office Equipment 1,000

31 Insurance Expense 2,400

Prepaid Insurance 2,400

31 Unearned Rental Revenue 9,000

Rental Revenue 9,000

31 Salaries Expense 4,500

Salaries Payable 4,500

31 Accounts Receivable 3,200

Rental Revenue 3,200

31 Rent Expense 5,000

Prepaid Rent 5,000
($9,200 - $4,200 = $5,000)

31 Interest Receivable 800

Interest Revenue 800

31 Interest Expense 500

Interest Payable 500