Chapter 2
Debits and Credits: Analyzing and Recording Business Transactions
Chapter Overview
This chapter transitions from analyzing transactions and listing each account in a potentially long
accounting equation to double entry accounting. There are five steps used to analyze a transaction: 1)
determining which accounts are affected; 2) determining which categories the accounts belong to (assets,
liabilities, capital, withdrawals, revenue, or expenses); 3) determining whether the accounts increase or
decrease; 4) using the debit and credit rules to determine if the result of steps 2 and 3 results in a journal
Learning Objectives
After studying Chapter 2, your students should gain proficiency in the following:
2. Use a Chart of Accounts to Record Transactions in T Accounts According to the Rules of Debits and
Credits.
Chapter 2 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Define ledger 1 5 Easy
11 Trial Balance 3 5 Medium
Concept Checks
1 The T account 1 5 Easy
2 Transaction Analysis 2 5 Easy
2B-1 Chart of accounts 2 10 Easy
2B-2 Transaction analysis 2 5 Easy
2B-3 Transaction analysis 2 5 Easy
2B-4 Account analysis 2 20 Medium
2B-5 Financial Statements 3 20 Medium
2B-4 Financial Statements 3 40 Hard
2B-5 Transactions, Trial Balance, & Financial Prep 2, 3 60 Hard
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Financial Report Problem
Reading Amazon’s Annual Report 2 5 Easy
Learning Unit 2-1: The T Account and How to Foot and Balance
Summary: The T account is a tool to demonstrate the increases and decreases in each account. The T
account is a skeleton version of a standard account. A standard account form is the formal structure
required for each account. All T accounts have three parts: account title, debit (left) and credit (right). The
Key Concepts: account, standard account, ledger, T account, debit, credit, footings, ending balance
Lecture Outline:
1) Each transaction is recorded in the accounting equation under specific accounts: assets, liabilities,
capital, withdrawals, revenue, expenses, and so on.
2) Accounts are used to record increases and decreases of business transactions relating to individual
elements of the accounting equation:
a) assets,
b) liabilities,
c) capital,
d) withdrawals,
e) revenue,
f) and expenses.
3) The subdivisions or account categories (account classification) are:
a) asset accounts,
b) liability accounts,
c) owner’s equity accounts,
d) revenue accounts,
e) and expense accounts.
4) The standard account form includes:
a) columns for date,
b) explanation,
c) posting reference,
d) debit,
e) credit,
f) and total columns.
5) The ledger has all the individual accounts, and all transactions affecting an account are recorded on the
form.
a) A ledger is a book of accounts that records data from business transactions.
b) Prepared manually in a traditional accounting format.
c) Ledger accounts in a computerized system are updated automatically by software.
6) For simplicity sake, use the T account form for demonstration purposes. T account simple form
includes:
a) the title, which expresses the name of the account
b) debit (left) side or Dr.
c) credit (right) side or Cr.
7) Footing: (the totals for each column)
a) process of adding all items on the debit side,
b) adding all items on the credit side
c) calculate the T account ending balance.
d) Balance the difference between the amounts on each side of the T account.
i) Total the debits (Dr.)
ii) Total the credits (Cr.)
iii) Subtract the debits and credits
iv) The ending balance will be on the side that has the greater number.
Teaching Tips/Strategy: Use the “Success Coach” LU 2-1 to assess the understanding of the following
concepts: T account, rules of debit and credit, and the account normal balance. Explain the basic accounting
equation elements (Assets = Liabilities + Equity) and how the debit and credits are presented. For example:
items to the left of the equal sign are assets. Normally the assets will increase by the left or debit. Items to
Learning Unit 2-2: The Chart of Accounts: Recording Transactions
in T Accounts According to Rules of Debits and Credits.
Summary: The accounting recording process starts with a business transaction, an exchange between two
or more parties, sharing items of equal value. The double-entry analysis of transactions presents two or
more accounts that are affected and the total of debits and credits that are equal. This double-entry system
helps in checking the recording of business transactions. All business transactions are recorded in accounts.
The debit and credit rules are: all assets increase by debit side (left) and decrease by credit side (right),
liabilities increase by credit side (right) and decrease by debit side (left), and equity accounts increase by
credit side (right) and decrease by debit side (left). The equity subdivisions or categories will use the debit
and credit rules to present the effect on the organization’s equity. The equity subdivision rules are:
1. Revenues increase the organization’s equity in the business. Revenue accounts increase by credit
and decrease by debit (same as the equity).
2. The expenses decrease the organization’s equity. Therefore, all expense accounts will increase by
Key Concepts: normal balance of an account, chart of accounts, compound entry, double-entry
bookkeeping
Lecture Outline:
1) Refer to Table 2.1 for the rules of debit and credit using T accounts affecting the accounting equation.
a) For assets increases are on the debit (left) side.
b) For liabilities increases are on the credit (right) side.
c) For capital increases are on the credit (right) side.
d) For revenue increases are on the credit side which is the same as for capital.
e) For withdrawals and expenses increases are on the debit side which is the opposite of how capital
increases are.
f) A normal balance of an account is the side that increases by the rules of debit and credit.
g) The accounting equation balance must be maintained when transactions occur.
2) A chart of accounts is a numbered list of all of a business’s accounts.
a) Assets use 100s (as an example).
b) Liabilities use 200s.
c) Owner’s Equity uses 300s.
d) Revenues use 400s.
e) Expenses use 500s.
3) Transaction analysis: five steps:
a) Determine which accounts are affected.
b) Determine which categories the accounts belong to: assets, liabilities, capital, withdrawals, revenue,
or expenses.
c) Determine whether the accounts increase or decrease.
d) What do the rules of debit and credit say?
e) What does the T account look like?
4) Compound entry is a transaction involving more than one debit or credit.
5) Double-entry bookkeeping refers to an accounting system in which the recording of each transaction
affects two or more accounts, and the total of the debits is equal to the total of credits.
Teaching Tips/Strategy: Use the “Success Coach” LU 2-2 (end of the chapter) to review the debit and
credit rules. After reviewing the concepts, complete the Concept Checks #2 and #3 to check the debit and
credit rules. Exercises 2A-1, 2A-2, 2A-3, and 2A-4 are excellent classroom practice to reinforce the
objective #2 concepts.
Use the “Ten–Minute Quiz” questions #1 – #5 to reinforce the Learning Objective #2.
Learning Unit 2-3: The Trial Balance and Preparation of Financial
Statements
Summary: The trial balance is a list of all accounts with their balances in the same order as they appear in
the chart of accounts. A trial balance is not a financial statement although it is used to prepare financial
statements. A trial balance is a listing of each account with each account balance listed in its proper debit or
credit column. Balances on the trial balance are taken directly from footings and ending balances on the T
accounts. The total of the debit column should equal the total of the credit column.
The financial statements include: income statement, statement of owner’s equity, and the balance sheet. All
Key Concepts: Trial balance
Lecture Outline:
2) The trial balance:
a) is a list of all accounts with their balances,
b) the order of accounts is the same as they appear in the chart of accounts,
c) is not a financial statement but is a tool used to prepare financial statements,
d) is a list of ending balances from the ledger,
e) and the total of the debit column should equal the total of the credit column.
6) Preparing financial statements:
a) All financial statements are related:
i) the net income or net loss from the income statement flows to the statements of owner’s equity,
ii) the ending balance of capital on the owner’s equity statement flows to the balance sheet.
b) The dollar sign or currency sign is used at the top of each column and on the final total amounts.
c) One underline represents a list to subtotal
d) Two underlines represent the end of the statement or the final “bottom line” number.
7) The Income Statement: (is generally prepared first)
f) includes revenues and expenses
g) includes gains or losses
h) Net Income – revenues are greater than expenses. (Revenues – Expenses)
i) Net Loss – expenses are greater than revenues. (Expenses – Revenues)
j) The net income or net loss is carried to the statement of owner’s equity.
8) The Statement of Owner’s Equity:
a) Start with the capital balance as of the beginning of the period
b) Add: Net income (from the income statement)
c) Add: additional investments from the owners
d) Deduct: Net Loss (from the income statement)
e) Deduct: any withdrawals
f) Calculate the new ending balance for the capital account or owner’s equity.
g) The new balance for owner’s equity is carried to the Balance Sheet.
9) The Balance Sheet:
a) Lists all assets, liabilities and the new equity or capital account balance.
b) The total of assets = total of liabilities and equity.
Teaching Tips/Strategy: Use the “Success Coach” LU 2-3 to review trial balance and financial statement
concepts. After reviewing the concepts, complete the Concept Checks #4 to illustrate the process needed to
build a trial balance.
Teaching Tips/Strategy: Each chapter contains a Try It! at the end of each Learning Unit. The Try its! are
Name Date Section
CHAPTER 2
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Although debits increase assets, they also
a. increase revenues
b. increase expenses
c. increase owner’s equity
d. increase liabilities
2. The right side of a T account is the
a. increase side
b. decrease side
c. credit side
d. debit side
3. A compound entry is
a. an entry involving more than one debit or credit
b. an entry involving multiple transactions
c. an entry involving more than one date
d. an entry increasing and decreasing the same account
4. Which of the following accounts has a normal debit balance?
a. Mia Wong, Capital
b. Cash
c. Accounts Payable
d. Fees Earned
5. Which of the following accounts has a normal credit balance?
a. Office Equipment
b. Salaries Expense
c. Accounts Receivable
d. Accounts Payable
6. Payment of salaries to employees is recorded as a(n)
a. asset
b. liability
c. revenue
d. expense
7. The trial balance
a. shows the income earned during the year
b. shows the total amount of assets
c. shows the accuracy of the general ledger
d. is the first financial statement prepared
8. Which account is shown on the balance sheet?
a. Cash
b. Utilities Expense
c. Withdrawals by owner
d. Revenue
9. Which account is shown on the income statement?
a. Equipment
b. Owner, Capital Account
c. Accounts Payable
d. Rent Expense
10. Which account is shown on the statement of owner’s equity?
a. Fees Earned
b. Accounts Receivable
c. Owner, Withdrawals
d. Accounts Payable
Answer Key to Chapter 2 Quiz