PARACCOUNTANT Association of Canada THE ACCOUNTING PUZZLE Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of

PARACCOUNTANT Association of Canada

THE ACCOUNTING PUZZLE

Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of the picture on the front of the box. To rectify this problem we have created the “picture” for accounting. Refer to this picture every time you analyze a business transaction.

Use the Page Down key to advance through the presentation and the Page Up key to go back a step.


Before we begin we’ll have a short quiz. Press the Page Down key to reveal the question, decide on an answer and then press the Page Down key to reveal the answer.

Which is better, a Debit or a Credit?

Neither!! They are opposites to each other just like left and right, up and down, in and out, positive and negative.

2 + 3 x 4 = ?

2 + 3 x 4 = 14 (Order of Operations)

Multiplication and Division before Addition and Subtraction


The purpose of the first question was to dispel any preconceived notions that a Debit is better than a Credit or a Credit is better than a Debit. They are only a way of causing an amount to go up or an amount to go down.

If an account has a Debit balance, a Debit entry will make it go up and a Credit entry will make it go down.

If an account has a Credit balance, a Credit entry will make it go up and a Debit entry will make it go down.

Now let’s look at the Accounting Puzzle


Assets(Things you own)


Assets• Cash in Bank

• Accounts Receivable

• Vehicle

• Equipment


Assets Liabilities(Money you owe)• Cash in Bank


• Vehicle

• Equipment


Assets Liabilities• Accounts Payable

• Bank Loan

• Cash in Bank


• Vehicle

• Equipment


Assets Liabilities

Equity(Net worth)

• Cash in Bank


• Vehicle

• Equipment

• Accounts Payable

• Bank Loan


Assets Liabilities

Equity

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital


Assets Liabilities

Equity

Revenue(Earnings)

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital


Assets Liabilities

Equity

Revenue

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital

• Bookkeeping Fees Earned

• Consulting Fees Earned


Assets Liabilities

Equity

RevenueExpenses(Costs Incurred)

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital




Assets Liabilities

Equity

RevenueExpenses

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital



• Advertising

• Bank Charges

• Vehicle Expense


Assets Liabilities

Equity

RevenueExpenses

DEBIT BALANCE CREDIT BALANCE

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital



• Advertising

• Bank Charges

• Vehicle Expense

• Debit increases the balance

• Credit decreases the balance

• Credit increases the balance

• Debit decreases the balance

Balance Sheet

Income Statement

The balance in these accounts at a specific point in time (ie: December 31)

The accumulated change in these accounts over a period of time (ie: month or year)

Assets = Liabilities + Equity

Revenue – Expenses = Net Income

TOTAL DEBITS = TOTAL CREDITS


Only memorization will help you remember where an account belongs in the puzzle (account type: Asset, Liability, Equity, Revenue or Expense) and whether an account’s normal balance is a Debit or a Credit. To help you practice the following screen will test you. Do the following:

1.Press the Page Down key to reveal the Account Name.

2.Decide what the Account Type should be.

3.Press the Page Down key to reveal the Account Type.

4.Decide what the Normal Balance should be.

5.Press the Page Down key to reveal the Normal Balance.

Practice this test until you get 100%.


ACCOUNT NAME ACCOUNT TYPE NORMAL BALANCE

Accounts Payable Liability CreditAccounts Receivable Asset DebitBookkeeping Fees Earned Revenue CreditAdvertising Expense Expense DebitCash in Bank Asset DebitBank Charges Expense DebitVehicle Asset DebitBank Loan Liability CreditConsulting Fees Earned Revenue CreditOwner’s Capital Equity CreditVehicle Expense Expense DebitEquipment Asset Debit

If you did not get 100% on this test, use the Page Up key to return to the Puzzle and try again!!!


CONGRATULATIONS!! If you are looking at this screen you have passed the test 100% error free. We stress this because the Account Names, Types and Normal Balances are used again and again. In fact, the puzzle is the foundation on which all your future accounting lessons are built. Make sure that foundation is strong!!!


Business Transactions and T-Accounts

To illustrate the effect of business transactions on the different accounts we post “General Journal Entries to “T-Accounts”.

DATE ACCOUNT TYPE DEBIT CREDIT

January 2 Cash in Bank (increase) ASSET 50,000

Owner Capital (increase) EQUITY 50,000

Explanation: Investment by Owner

The following is a General Journal Entry to record the receipt, by the business, of $50,000 from the Owner.

Just as you may keep a “Diary” or “Journal” to record the day’s events, in bookkeeping we keep a journal to record any business transactions. There are five main components to a “General Journal Entry”, the Date, Account, Type, Amount and Explanation.

Notice that total Debits = total Credits


We will now create several General Journal Entries and post them to “T-Accounts” to see, over time, what the effects will be on the General Ledger Accounts.

The following screen shows the T-Accounts we will use for this exercise.

“T-Accounts” represent “Ledger Cards”.

The left side of the “T-Account” is used to enter Debit amounts.

The right side of the “T-Account” is used to enter Credit amounts as follows:

Cash in Bank

DEBITS CREDITS


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense




Owner Capital (increase) EQUITY 50,000

Explanation: Investment by Owner

An investment of $50,000 to the business from the owner.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000



January 2 Vehicle (increase) ASSET 20,000

Cash in Bank (decrease) ASSET 20,000

Explanation: Bought and paid for an automobile

The business purchases an automobile for $20,000.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000



January 2 Equipment (increase) ASSET 1,000

Cash in Bank (decrease) ASSET 1,000

Explanation: Bought and paid for Office Equipment

The business purchases Office Equipment for $1,000.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000



January 2 Advertising (increase) EXPENSE 500

Accounts Payable (increase) LIABILITY 500

Explanation: Purchased advertising on account

The business purchases $500 worth of Advertising on account and will pay for it later.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

500



January 10 Accounts Receivable (increase) ASSET 2,000

Consulting Fees (increase) REVENUE 2,000

Explanation: Did the work and didn’t get paid

The business earns $2,000 in consulting fees and sends the bill to the client who will pay later.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000



January 11 Vehicle expense (increase) EXPENSE 100

Accounts Payable (increase) LIABILITY 100

Explanation: Purchase gasoline on account

The business purchases $100 worth of Gas for the vehicle on account and will pay for it later.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000 100

100



January 12 Accounts Receivable (increase) ASSET 1,500

Bookkeeping Fees (increase) REVENUE 1,500

Explanation: Did the work and didn’t get paid

The business earns $1,500 in bookkeeping fees and sends the bill to the client who will pay later.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000 100

1001,500

1,500




Bank Loan (increase) LIABILITY 1,500

Explanation: Borrowed money from the Bank

The business borrows $1,500 from the bank


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000 100

1001,500

1,500

1,500

1,500




Accounts Receivable (decrease) ASSET 2,000

Explanation: Received money owed from client bill of January 10.

Received the $2,000 for the consulting fees earned and billed on the January 10th.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000 100

1001,500

1,500

1,500

1,500

2,000

2,000 eliminates



January 20 Accounts Payable (decrease) LIABILITY 500

Cash in Bank (decrease) ASSET 500

Explanation: Paid bill for advertising dated January 2.

Paid the $500 for the advertising from January 2nd.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,000

20,000

20,000

1,0001,000

500

5002,000

2,000 100

1001,500

1,500

1,500

1,500

2,000

2,000 500

500

eliminates



January 31 Bank Charges (increase) EXPENSE 25

Cash in Bank (decrease) ASSET 25

Explanation: Record Bank Charge

Recorded the $25 bank charge on the statement.


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,00020,000

20,000

1,000

1,000

500

5002,000

2,000 100

1001,500

1,500

1,500

1,500

2,000

2,000 500

500

25

25


Now that we have completed all the transactions, we need to come up with the total Debits and total Credits for each of the accounts as follows:


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000 50,00020,000

20,000

1,000

1,000

500

5002,000

2,000 100

1001,500

1,500

1,500

1,500

2,000

2,000 500

500

25

25

53,500 21,525 1,000 50,000 500

3,500 2,000 500 600 1,500 25

20,000 1,500 2,000 100


For accounts that have an amount for total Debits and an amount for total Credits we must determine whether the final balance is a Debit balance or a Credit balance. We do this by subtracting the smaller amount from the larger amount which will leave the amount on the correct side of the “T” as follows:


Cash in Bank

Accounts Receivable

Vehicle

Equipment

Accounts Payable

Bank Loan

Owner Capital

Bookkeeping Fees

Consulting Fees

Advertising

Bank Charges

Vehicle Expense

50,000

50,00020,000

20,000

1,000

1,000 500

5002,000

2,000 100

1001,500

1,500

1,500

1,500

2,000

2,000 500

500

25

25

53,500 21,525

1,000 50,000 500

3,500 2,000 500 600 1,500 25

20,000 1,500 2,000 100

- 21,525

31,975

- 2,000

1,500

- 500

100


The next step is to create a “Trial Balance”, using the final amounts for each account, to make sure that total Debits equals total Credits as follows:


ACCOUNT DEBIT CREDIT

Cash in Bank 31,975

Accounts Receivable 1,500

Vehicle 20,000

Equipment 1,000

Accounts Payable 100

Bank Loan 1,500

Owner Capital 50,000

Bookkeeping Fees 1,500

Consulting Fees 2,000

Advertising 500

Bank Charges 25

Vehicle Expense 100

TOTALS 55,100 55,100

TRIAL BALANCE

Use the Page Up and then Page Down keys to go back and forth from here to the T-Accounts.


Now that we have confirmed that the total Debits amount equals the total Credits amount we can use the Trial Balance to create three Financial Statements.

First, let’s divide the Trial Balance into its components.


ACCOUNT DEBIT CREDIT

Cash in Bank 31,975

Accounts Receivable 1,500

Vehicle 20,000

Equipment 1,000

Accounts Payable 100

Bank Loan 1,500

Owner Capital 50,000

Bookkeeping Fees 1,500

Consulting Fees 2,000

Advertising 500

Bank Charges 25

Vehicle Expense 100

TOTALS 55,100 55,100

REVENUE

EXPENSES

ASSETS

LIABILITIES

EQUITY

TRIAL BALANCE


The first Financial Statement is the Income Statement which is also referred to as the Statement of Earnings.


REVENUE:

Bookkeeping Fees

$ 1,500

Consulting Fees

2,000

TOTAL REVENUE $ 3,500

EXPENSES:

Advertising $ 500

Bank Charges 25

Vehicle Expenses

100

TOTAL EXPENSES 625

NET INCOME $ 2,875

We will need the “Net Income” amount of $2,875 for the next statement.

INCOME STATEMENT

REVENUE – EXPENSES = NET INCOME


The second Financial Statement is the

Statement of Change in Owner’s Equity.


Owner Capital at the Beginning $ 0

Plus:Owner Investments

$50,000

Net Income

2,875 52,875

$ 52,875

Less:Owner Withdrawals

$ 0

Net Loss

0 0

Owner Capital at the End $ 52,875

We will need the “Owner Capital at the End” amount of $52,875 for the next statement.

STATEMENT OF CHANGE IN OWNER’S EQUITY

In reality, a company has either a Net Income or a Net Loss. It can never have both. Also, the Owner

Withdrawals account will be discussed later.


The third Financial Statement is the Balance Sheet which is also referred to as the Statement of Financial Position.


BALANCE SHEETAssets:

Cash in Bank

$ 31,975

Accounts Receivable1,500

Vehicle 20,000

Equipment1,000

Total Assets $ 54,475

Liabilities:

Accounts Payable$ 100

Bank Loan

1,500

Total Liabilities $ 1,600

Owner’s Equity 52,875

Total Liabilities & Equity $ 54,475

Notice that the “Total Assets” amount is equal to the “Total Liabilities & Equity” amount.

ASSETS = LIABILITIES + EQUITY


BOOKKEEPING QUIZ

The following is a quiz to see if you remembered all the important issues for your foundation. Press the Page Down key to reveal the question, decide on an answer, then press the Page Down key to reveal the answer.


DEBITS CREDITSWhat are the column headings?


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITSWhat are the account types?


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment

Name four Assets.


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

Name two Liabilities.


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital

Name an Equity.


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital



Name two Revenues.


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital



• Advertising

• Bank Charges

• Vehicle Expense

Name three Expenses.


Assets Liabilities

Equity

RevenueExpenses

DEBITS CREDITS

• Cash in Bank


• Vehicle

• Equipment


• Bank Loan

• Owner Capital



• Advertising

• Bank Charges

• Vehicle Expense

Balance Sheet

Income Statement

What are the row headings?


What is the Balance Sheet equation?

ASSETS = LIABILITIES + EQUITY

What is the Income Statement equation?

REVENUE – EXPENSES = NET INCOME


Name the five components of a General Journal Entry.

Date, Account, Type, Amount and Explanation

Name the three Financial Statements in order.

1. Income Statement

2. Statement of Change in Owner’s Equity

3. Balance Sheet


Congratulations!! If you have successfully completed this instruction and fully understand the concepts you are ready to advance to the next level of bookkeeping.

Documents

PARACCOUNTANT Association of Canada THE ACCOUNTING PUZZLE Learning accounting is like trying to put together a 1,000 piece puzzle without the benefit of