Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 355

Accounting Terminology

Chapter 14

Transaction 7

Paid cash for rent, $800

When we look at the three questions discussed earlier, we see

a. The two accounts affected are Cash and Rent Expense.

b. Cash is an asset and Rent Expense is an expense that affects owner’s equity.

c. Cash decreases.

Rent Expense increases.

Assets = Liabilities + Owner’s Equity

Trans.
No.

Cash + Supplies + Accounts

Receivable,

Lisa Cook

+ Prepaid

Insurance

= Accounts

Payable/

Office

Supply

+ Your

Name,

Capital

+ Revenue - Expenses - Drawing

1. 7500 + + + * + 7500 + - -


2. -300
   7200

+ +300 + + - + 7500 + - -

3. -550
   6650

+ 300 + + +550 * + 7500 + - -

4. 6650 + +450
   750

+ + 550 = +450 + 7500 + - -

5. -200
   6450

+ 750 + + 550 = -200

250

+ 7500 + - -

6. +1200
   7650

+ 750 + + 550 250 + 7500 + 1200 - -

7. -800
   6850

+ 750 + + 550 = 250 + 7500 + 1200 - 800 -

We see from the accounting equation that we decrease the amount of Cash we have on hand by $800, and

since Cash is an asset and on the left side of the accounting equation, when we are using T accounts, we

place the $800 on the credit side (right side) of the Cash account as seen below. The second part of the

transaction is an increase to Rent Expense because we have paid more money in expenses than we had

before. Notice on the T account below that Rent Expense, although classified as an expense, is under the

Owner’s Equity side of the accounting equation. This is because expenses decrease Owner’s Equity. Since

any expense is a decrease to Owner’s Equity, it is treated the opposite way as a normal Owner’s Equity ac-

count; therefore, to increase Rent Expense, we place $800 on the debit (left side) of the T account. Notice,

we ALWAYS have equal debits and credits.

Assets = Liabilities + Owner’s Equity

Cash Rent Expense

Debit Credit Debit Credit

+ – – +

800 800

Student Guide