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Chapter 9.5® - How to Analyze Accounting Transactions Part #1

Let’s analyze transactions of a hypothetical firm called Simpsons Corp. to show how debits, credits & double-entry accounting work. We will analyze these transactions in two steps i) Analyze the source document from where the transaction originates and ii) Apply double-entry accounting rules to identify the effects of the transaction on the Assets side of the accounting equation and the Liabilities + Shareholder’s equity side.

1) Investment by Owner

Transaction: Mr. Simpson invests \$120,000 to his business on January 1st, 2010.

Analysis: Assets increase. Owner’s equity Increases.

Double-Entry Accounting: Debit the Cash asset account for \$120k. Credit the Simpson, Owner’s Equity account for \$120k.

 1) Investment by Owner Cash Dr. \$120,000 Simpson, Owner’s Equity Cr. \$120,000 Mr. Simpson invests \$120,000 to his business on January 1st, 2010.

Transaction: Simpsons Corp purchases supplies by paying \$3,000 cash.

Analysis: Assets (supplies) increase. Assets (cash) decrease. This only affects the left side of the accounting equation (the assets side) but does not change the total amount of assets.

Double-Entry Accounting: Debit the Supplies account for \$3000. Credit the cash account for \$3,000.

 2) Buy Supplies for Cash Supplies Dr. \$3,000 Cash Cr. \$3,000 Simpsons Corp purchases supplies by paying \$3,000 cash.

3) Buy Office Furniture for Cash

Transaction: Simpsons Corp buys office furniture for \$10,000 cash.

Analysis: Assets (office furniture) increase. Assets (cash) decrease. This only affects the left side of the accounting equation (the assets side) but does not change the total amount of assets.

Double-Entry Accounting: Debit the Office Furniture account for \$10,000. Credit the cash account for \$10,000.

 3) Buy Office Furniture for Cash Office Furniture Dr. \$10,000 Cash Cr. \$10,000 Simpsons Corp buys office furniture for \$10,000 cash.

4) Buy Office Printer & Desks on Credit

Transaction: Simpsons Corp buys office printer for \$2,000 on credit and \$3,000 of desks for which it signed a promissory note.

Analysis: Assets (office printer) increase. Assets (desks) increase. Accounts payable & Notes payable increases (two liabilities).

Double-Entry Accounting: Debit the Office Printer account for \$2,000 and Desks account for \$3,000. Credit the Accounts Payable account for \$2,000 and Notes payable for \$3,000.

 4) Buy Office Printer & Desks on Credit Office Printers Dr. \$2,000 Desks Dr. \$3,000 Accounts Payable Cr. \$2,000 Cash Cr. \$3,000 Simpsons Corp buys office printer for \$2,000 on credit and \$3,000 of desks for which it signed a promissory note.

5. Provide Consulting Service for Cash.

Transaction: Simpsons Corp does consulting service for a client and earns \$15,000 cash paid via a bank transfer.

Analysis: Assets (Cash) increase. Revenues increase (Owner’s equity increases).

Double-Entry Accounting: Debit the Cash account for \$15,000 (increase). Credit the Consulting Revenues account for \$15,000 (increase).

 5) Provice Consulting Services for Cash Cash Dr. \$15,000 Consulting Revenue Cr. \$15,000 Simpsons Corp does consulting service for a client and earns \$15,000 cash paid via a bank transfer.

6. Pay Rent Expense via Cash.

Transaction: Simpsons Corp pays its January 2010 rent totalling \$2,800.

Analysis: Rent Expenses increase. Cash decreases.

Double-Entry Accounting: Debit the Rent expense account for \$2,800. Credit the Cash account for \$2,800.

 6) Pay Rent Expense via Cash Rent Expense Dr. \$2,800 Cash Cr. \$2,800 Simpsons Corp pays its January 2010 rent totalling \$2,800.

7. Payment of Employee Salaries for Cash.

Transaction: Simpsons Corp pays its January 2010 employee salaries totalling \$5,000.

Analysis: Salaries expense (expense) increases. Cash (asset) decreases.

Double-Entry Accounting: Debit the Salaries expense account for \$5,000. Credit the Cash account for \$5,000.

 7) Payment of Employee Salaries for Cash Salaries Expense Dr. \$5,000 Cash Cr. \$5,000 Simpsons Corp pays its January 2010 employee salaries totalling \$5,000.

8. Rents Office Space on Credit

Transaction: Simpsons Corp rents out its office space for 1 month with rent set at \$700.

Analysis: Asset (Accounts Receivable) increases. Rental revenue (Revenue account) increases.

Double-Entry Accounting: Debit the Accounts Receivable account for \$700. Credit the Rental revenue account for \$700.

 Rent Office Space on Credit Accounts Receivable Dr. \$700 Rental Revenue Cr. \$700 Simpsons Corp rents out its office space for 1 month with rent set at \$700.