Copyright © 2007 Prentice-Hall. All rights reserved 1 Recording Business Transactions Chapter 2.

Copyright © 2007 Prentice-Hall. All rights reserved

1

Recording Business Recording Business TransactionsTransactions

Recording Business Recording Business TransactionsTransactions

Chapter 2


2

Objective 1Objective 1Objective 1Objective 1

Use accounting terms

Copyright © 2007 Prentice-Hall. All rights reserved 4

AccountAccountAccountAccount

• Basic summary device

• Detailed record of increases and decreases in specific assets, liabilities, or owner’s equity during a period


LedgerLedgerLedgerLedger

• Book or printout holding all the accounts


LiabilitiesLiabilities EquityEquityAssetsAssets = +

Accounting EquationAccounting EquationAccounting EquationAccounting Equation

Accounts are grouped in 3 broad categories:


AssetsAssetsAssetsAssets

Economic resources that will benefit the business in the future

• Cash• Accounts Receivable• Notes Receivable• Prepaid Expenses• Land• Building• Equipment, Furniture, Fixtures


LiabilitiesLiabilitiesLiabilitiesLiabilities

Creditors’ claims to assets (debt)

• Accounts Payable

• Notes Payable

• Accrued Liabilities


Owner’s EquityOwner’s EquityOwner’s EquityOwner’s Equity

Owner’s claim to the assets

• Capital

• Withdrawals

• Revenues

• Expenses


RevenuesRevenues

NotesPayable

NotesPayable

Accounts Receivable

C. Lapp,Capital

C. Lapp,Capital

AccountsPayable

AccountsPayable

LedgerLedger

CashCash

All Individual Accounts Combined All Individual Accounts Combined Make Up the LedgerMake Up the Ledger

All Individual Accounts Combined All Individual Accounts Combined Make Up the LedgerMake Up the Ledger


Chart of AccountsChart of AccountsChart of AccountsChart of Accounts

• List of all accounts used by a company along with the account numbers


12


Apply the rules of debit and credit


Double Entry SystemDouble Entry SystemDouble Entry SystemDouble Entry System

• Record dual effects of each transaction

• Each transaction affects at least two accounts

• Each transaction is recorded with at least– One debit– One credit

• Total debits must equal total credits


Account Name

(Left Side) Debit

(Right Side) Credit

Simple tool for analyzing and determining the balance in a given account

T-AccountT-AccountT-AccountT-Account


Debit CreditDebit Credit

AssetsAssets

+ + --

Rules of Debit and CreditRules of Debit and CreditRules of Debit and CreditRules of Debit and Credit

LiabilitiesLiabilities EquityEquity== ++Debit CreditDebit Credit - +- +

Debit CreditDebit Credit - +- +


Rules of Debit and CreditRules of Debit and CreditRules of Debit and CreditRules of Debit and Credit

Owner’s EquityOwner’s EquityDebit CreditDebit Credit - +- +

RevenuesRevenues

- +- +Debit CreditDebit Credit

Owner’s Owner’s CapitalCapital


Owner’s Owner’s WithdrawalsWithdrawals

Debit CreditDebit Credit + + --

ExpensesExpenses


+ + --


RevenuesRevenues ExpensesExpensesOwner’s Owner’s CapitalCapital


__ ++ __

Expanding the Expanding the Rules of Debit and CreditRules of Debit and Credit

Expanding the Expanding the Rules of Debit and CreditRules of Debit and Credit

Owner’s Equity



- +- +Debit CreditDebit Credit + + --

Debit CreditDebit Credit + + --


Remember: Just ask ALICE!Remember: Just ask ALICE!Remember: Just ask ALICE!Remember: Just ask ALICE!

Debit Credit

+ A = Assets -

- L = Liabilities +

- I = Income* +

- C = Capital +

+ E = Expenses -

* Really, this is revenues, but “r” just doesn’t fit in!

The first and the last are increased

with a debit

The middle three are increased with

credits


LiabilitiesLiabilities EquityEquityAssetsAssets == ++Normal BalancesNormal BalancesNormal BalancesNormal Balances


+ -+ -Debit CreditDebit Credit

- +- +Debit CreditDebit Credit

- +- +

NormalNormalBalanceBalance




++++

Owner’s Equity

Normal BalancesNormal BalancesNormal BalancesNormal Balances


+ -+ -Debit Debit CreditCredit- +- +


- +- +




RevenuesRevenuesRevenuesRevenues ExpensesExpensesExpensesExpensesOwner’s Owner’s CapitalCapital

Owner’s Owner’s CapitalCapital



____ ____Debit CreditDebit Credit

+ -+ -



21


Record transactions in the journal


JournalJournalJournalJournal

• Chronological record of the transactions

• Consists of at least one debit and one credit


Journalizing TransactionsJournalizing TransactionsJournalizing TransactionsJournalizing Transactions

• Identify each account affected and its type

• Determine whether each account is increased or decreased. Use the rules of debit and credit

• Record transaction in journal, including a brief explanation– Debit side of entry is entered first– Total debits should always equal total credits


General JournalGeneral JournalGeneral JournalGeneral Journal

Journal Page 1

Date Description Debit Credit

Jul 1 Cash 45,000

Lange, Capital 45,000

Investment from owner

Accounts AffectedAccounts Affected

Dollar amount of debits and credits

Dollar amount of debits and credits

Explanation of transaction

Explanation of transaction

Transaction Date

Transaction Date



Style conventions that must be followed:• Year is entered at the top of each page• The month is only entered for the first entry

on a page unless the month changes in the middle of the page. The month may be abbreviated

• Enter numerical date for each transaction, even if there are many entries on same date



• Debits are ALWAYS entered first in an entry. Use the EXACT account title and do not abbreviate

• Credits are INDENTED and listed second

• Do not use dollar signs

• SKIP A LINE between each entry

• Never split an entry between two pages


Exercise 2-5Exercise 2-5Exercise 2-5Exercise 2-5

Analysis of June 1 transaction:

• Cash is increasing

• Cash is an asset account

• Increase an asset with a debitGENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Jun 1 Cash 25,000




• M. Brown, Capital is increasing

• Capital is an owner’s equity account

• Increase owner’s equity with a creditGENERAL JOURNAL


Jun 1 Cash 25,000

M. Brown, Capital 25,000

Owner invested in business




• Medical Supplies is increasing

• Medical Supplies is an asset account



Jun 2 Medical Supplies 10,000




• Accounts Payable is increasing

• Accounts Payable is a liability account

• Increase a liability with a creditGENERAL JOURNAL



Accounts Payable 10,000

Purchased medical supplies




• Rent Expense is increasing

• Rent Expense is an expense account

• Increase an expense with a debitGENERAL JOURNAL


Jun 2 Rent Expense 4,000




• Cash is decreasing

• Cash is an asset account

• Decrease an asset with a creditGENERAL JOURNAL



Cash 4,000

Paid rent for the month




• Accounts Receivable is increasing

• Accounts Receivable is an asset account



Jun 3 Accounts Receivable 12,000




• Service Revenue is increasing

• Service Revenue is a revenue account

• Increase a revenue with a creditGENERAL JOURNAL



Service Revenue 12,000

Performed services


35


Post from the journal to the ledger


PostingPostingPostingPosting

• Periodically, journal entries are posted to ledger accounts to determine balances in each account

• Posting – copying amounts from the journal to the ledger


Exercise 2-9Exercise 2-9Exercise 2-9Exercise 2-9Cash Accounts Payable Service Revenue

Accounts Receivable M. Brown, Capital Rent Expense

Medical Supplies

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Jun 1 Cash 25,000


Owner invested in business

25,000

25,000

25,000

25,000


Cash

25,000

Accounts Payable Service Revenue

M. Brown, Capital Rent Expense

25,000

Accounts Receivable




Purchased medical supplies


Medical Supplies

10,000

10,000

10,000

10,000


Cash

25,000



25,000

Accounts Receivable


Medical Supplies10,000

10,000



Cash 4,000


4,000

4,000

4,000

4,000


Cash

25,000



25,000

Accounts Receivable



10,0004,000

4,000




Performed services

12,000

12,000

12,000

12,000


Cash

25,000



25,000

Accounts Receivable



10,0004,000

4,00012,000

12,000Bal 21,000Bal 21,000 Bal 10,000Bal 10,000 Bal 12,000Bal 12,000

Bal 4,000Bal 4,000Bal 25,000Bal 25,000Bal 12,000Bal 12,000

Bal 10,000Bal 10,000


Flow of Accounting DataFlow of Accounting DataFlow of Accounting DataFlow of Accounting Data

Transaction Occurs

Source Documents Prepared

Transaction Analyzed

Transaction Journalized & Posted


43


Prepare and use a trial balance


Trial BalanceTrial BalanceTrial BalanceTrial Balance

• List of all accounts with their balances


Mike Brown, M.D.

Trial Balance

June 30, 2008

Cash 21,000

Accounts Receivable 12,000

Medical Supplies 10,000




Rent Expense 4,000

Totals 47,000 47,000

Exercise 2-9 (part 3)Exercise 2-9 (part 3)Exercise 2-9 (part 3)Exercise 2-9 (part 3)


Locating Trial Balance ErrorsLocating Trial Balance ErrorsLocating Trial Balance ErrorsLocating Trial Balance Errors

What if it doesn’t balance?

• Is the addition correct?

• Are all accounts listed?

• Are the balances listed correctly?


Locating Trial Balance ErrorsLocating Trial Balance ErrorsLocating Trial Balance ErrorsLocating Trial Balance Errors

• Divide the difference by two– Is there a debit/credit balance for this amount

posted in the wrong column?

• Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error




Aug 1 Cash 60,000

R. Woodward, Capital 60,000

To record investment by owner

2 Supplies 200

Accounts Payable 200

Purchased supplies on account

Cash increases. It is an asset. Increase assets with debits.Capital increases. Owner’s equity is increased with a

credit.

Supplies, an asset, increases. Increase assets with debits.Accounts Payable increases. It is a liability. Increase

liabilities with a credit




Aug 4 Building 50,000

Cash 50,000

Purchased building

6 Cash 3,000


Performed service

Both of these accounts are assets. Building is increasing. Increase assets with

debits. Cash is decreasing. Decrease

assets with credits.

Cash, an asset, is increasing. Increase assets with debits.

Revenue accounts are increased with credits




Aug 9 Accounts Payable 100

Cash 100

Paid on account

17 Accounts Receivable 2,100


Performed services

Accounts Payable, which is decreasing,

is a liability. Decrease liabilities by debiting them. Decrease the asset, Cash, with a

credit.

Both of these accounts are assets. Building is increasing. Increase assets with

debits. Cash is decreasing. Decrease

assets with credits




Aug 23 Cash 1,200

Accounts Receivable 1,200

Received payment on account

Both of these accounts are assets. Cash is increasing – debit.

Accounts Receivable is decreasing - credit




Aug 31 Salary Expense 1,200

Cash 1,200

Paid salaries

31 Rent Expense 500

Cash 500


Both of these transactions involve

recognizing expenses. Since expenses

decrease owner’s equity, and owner’s equity is decreased with a debit, debit expenses. Cash is decreasing – credit


Exercise 2-19Exercise 2-19Exercise 2-19Exercise 2-19Aug 9 100

Cash

Aug 1 60,000 Aug 4 50,000Aug 6 3,000

Accounts Receivable

Aug 17 2,100Service Revenue

Aug 6 3,000

Bal. 12,400

BuildingAug 4 50, 000

R. Woodward, Capital

Aug 1 60,000

Rent Expense

Salary Expense

Aug 2 200

Supplies

Aug 2 200Accounts Payable

Aug 9 100Bal. 100

Aug 17 2,100

Aug 23 1,200

Aug 23 1,200

Aug 31 1,200Aug 31 500

Bal. 900Bal. 5,100

Aug 31 1,200

Aug 31 500

Take the difference between total debits and total credits to

determine the balance in each account. If

debits are greater than credits, the account has a debit balance

and vice versa


Woodward Technology Solutions

Trial Balance

August 31, 2008

Cash 12,400

Accounts Receivable 900

Supplies 200

Building 50,000

Accounts Payable 100

R. Hawk, Capital 60,000


Salary Expense 1,200

Rent Expense 500

Totals 65,200 65,200



55

End of Chapter 2End of Chapter 2End of Chapter 2End of Chapter 2

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