recording business transactions
TRANSCRIPT
The account
• Debit & credits• Shareholder
equity• Summary of DR
CR rules
Steps of Recording Process
• JOURNEL• LEDGER• POSTING
Recording process
• Summary
Trial balance
• Limitations of Trial balance
Accounting cycle• The name given to the collective process of recording and
processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements.
1. Collecting and analysing data from transactions and events.
2. Putting transactions into the general journal.
3. Posting entries to the general ledger.
4. Preparing an unadjusted trial balance.
5. Adjusting entries appropriately.
6. Preparing an adjusted trial balance.
7. Organizing the accounts into the financial statements.
8. Closing the books.
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The accounting cycle, also commonly referred to as accounting process, is a series of procedures in the collection, processing, & communication of financial information.
KEY POINTSSource:-• documents are important because they are the ultimate proof a
business transaction has occurred.
An account:- • is a part of the accounting system used to classify and summarize
the increases, decreases, and balances of each asset, liability, stockholders' equity item, dividend, revenue, and expense.
The accounting requirement:- • that each transaction be recorded by an entry that has equal debits
and credits is called double-entry procedure.
This double-entry:-• procedure keeps the accounting equation in balance
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• account • A registry of pecuniary transactions; a written or printed statement of
business dealings or debts and credits, and also of other things subjected to a reckoning or review
• Account a written or printed statement of business dealings or debts and credits, and also of other things
• accounting • The development and use of a system for recording and analysing the
financial transactions and financial status of a business or other organization.
• Accounts Receivable • Amounts that customers owe the company for normal credit purchases.
• Accumulated Depreciation• Accumulated depreciation is known as a contra account, because it
separately shows a negative amount that is directly associated with another account.
,Asset• Something or someone of any value; any portion of one's property
or effects so considered
• Asset Items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable; securities and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (as opposed to liabilities)
• assets Any property or object of value that one possesses, usually considered as applicable to the payment of one's debts
• Assets A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit
Bad Debt • A debt which cannot be recovered from the debtor, either
because the debtor doesn't have the money to pay or because the debtor cannot be found and/or forced to pay
• bad debts A bad debt is an amount owed to a business or individual that is written off by the creditor as a loss (and classified as an expense) because the debt cannot be collected and all reasonable efforts to collect it have been exhausted. This usually occurs when the debtor has declared bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself.
Balance Sheet balance sheet A summary of a person's or organization's assets, liabilities. and equity as of a specific date. Balance Sheet A balance sheet is often described as a "snapshot of a company's financial condition." A standard company balance sheet has three parts: assets, liabilities, and ownership equity
.credit • an entry in the right hand column of an account; credits
increase liability, income, and equity accounts and decrease asset and expense accounts
debit • an entry in the left hand column of an account to record a debt;
debits increase asset and expense accounts and decrease liability, income, and equity accounts
Debit • a written or printed statement of business dealings or debts and
credits, and also of other things subjected to a reckoning or review
Debt Money• that one person or entity owes or is required to pay to another,
generally as a result of a loan or other financial transaction
The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline
in value of assets.Depreciation subtracts a specified amount from the original purchase price to account for the wear and tear on the asset.
Depreciation
dividend
dividend A pro rata payment of money by a company to its shareholders, usually made periodically (e.g., quarterly or annually)
Equity Ownership interest in a company, as determined by subtracting liabilities from assets.
Equity ownership, especially in terms of net monetary value of some business.
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Expense in accounting, an expense is money spent or costs incurred in an businesses efforts to generate revenue
.inventory
A detailed list of all of the items on hand.Inventory includes goods ready for sale, as well as raw material and partially completed products that will be for sale when they are completed.
Categories of General Ledger Accounts•The five types of accounts fall into
one of two categoriesReal Accounts
Nominal Accounts
Categories of General Ledger Accounts
Real Accounts Nominal Accounts
This category includes Assets, Liabilities, and Stockholders’ Equities (i.e., Balance Sheet accounts)
Accounts are permanent.Account balances are
carried forward from one fiscal year to the next.
Nominal accounts include revenues and expenses.
Nominal accounts are temporary.
Nominal account balances are closed out to zero at the end of the fiscal year
journalJournal• a book or computer file in which monetary transactions are
entered the first time they are processed
journal entry • A journal entry, in accounting, is a logging of transactions into
accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced." Journal entries can record unique items or recurring items, such as depreciation or bond amortization.
ledgerledger
• A collection of accounting entries consisting of credits and debits.
Ledger
• A book for keeping notes, especially one for keeping accounting records.(accounting) A collection of accounting entries consisting of credits and debits.
Liabilities • liability An obligation, debt or responsibility owed to
someone.• liabilities An amount of money in a company that is
owed to someone and has to be paid in the future, such as tax, debt, interest, and mortgage payments
•Liabilities Probable future sacrifices of economic benefits arising from present obligations to transfer assets or providing services as a result of past transactions or events.
TERMSdebit• an entry in the left hand column of an account to record a
debt; debits increase asset and expense accounts and decrease liability, income, and equity accounts
account• A registry of pecuniary transactions; a written or printed
statement of business dealings or debts and credits, and also of other things subjected to a reckoning or review
credit• an entry in the right hand column of an account; credits
increase liability, income, and equity accounts and decrease asset and expense accounts
Shareholder
Equity
Common stock +
Retained Earning
Revenues - Expense- Dividend
Assetsliabilities+ =
Analysing Transactions
Account• Record of increases and decreases in a specific asset, liability,
equity, revenue, or expense item.• Debit = “Left”• Credit = “Right”
Account Name
Debit / Dr. Credit / Cr.
An Account can be illustrated in a T-Account form.
Debits & CreditsDouble-entry accounting system• Each transaction must affect two or more
accounts to keep the basic accounting equation in balance.• Recording done by debiting at least one
account and crediting another.
DEBITS must equal CREDITS.
Account Debit Credit
Assets Increase Decrease
Contra Assets Decrease Increase
Liabilities Decrease Increase
Equity Decrease Increase
Contributed Capital Decrease Increase
Revenue Decrease Increase
Expenses Increase Decrease
Distributions Increase Decrease
Summary of debit & credit
What Are Debits & Credits?
Tools used for recording transactions• Debit (DR)• Credit (CR)
Debit refers to the LEFT and Credit to the RIGHT side of the T-Account
LEFT RIGHT
DEBIT SIDE CREDIT SIDE
Debits & Credits Summary,
Chapter 3-23
AssetsAssets
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Normal Balance Credit
Normal Balance Credit
Balance Sheet Income Statement
= + -Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
Assets &liabilities
Chapter 3-23
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-24
LiabilitiesLiabilities
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Assets Debits should exceed credits.Liabilities Credits should exceed debits. The normal balance is on the increase side.
Normal Balances•The normal balances for each of the FIVE types of accounts are as follows:
Account Name
Debit Balance Credit Balance
Assets Expenses
Liabilities Stockholders’ Equity Revenues
Owner’s investments & revenues increase owner’s equity (credit).
Owner’s drawings & expenses decrease owner’s equity (debit).
Owners’ Equity
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s CapitalOwner’s Capital
Chapter 3-23
Owner’s DrawingOwner’s Drawing
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
Owner’s EquityOwner’s Equity
Relationship among the assets, liabilities & owner’s equity of a business:
Expansion of the Basic Equation
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Assets Liabilities= Owner’s EquityBasic Equation
Expanded Basic Equation
+
The purpose of earning revenues is to benefit the owner(s).
The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital.
Expenses have the opposite effect: expenses decrease owner’s equity.
Revenue & Expense
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
ExpenseExpense
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal BalanceNormal Balance
RevenueRevenue
The Journal• Book of original entry.• Transactions recorded in chronological order.
Contributions to the recording process:• Discloses the complete effects of a transaction.• Provides a chronological record of transactions.• Helps to prevent or locate errors because the debit
and credit amounts can be easily compared
On January 1, 19X7, Caldwell Company borrows $10,000 from the bank.
Prepare the appropriate general journal entry for the above transaction.
Journal EntriesExample 1
Two accounts are affected: Cash is increased by $10,000. Notes Payable is increased by $10,000.
Journal Entries
On January 15, 19X7, Caldwell Company purchases a truck for $19,500 cash.
Prepare the appropriate journal entry for the above transaction.
solution
Example 2
Two accounts are affected:Trucks is increased by $19,500.Cash is decreased by $19,500.
On January 20, 19X7, Caldwell Co. pays the $400 electric bill for January.
Prepare the appropriate journal entry for the above transaction.
Solution
Example 3
Two accounts are affected:Utility Expense is increased by $400.Cash is decreased by $400.
Simple Entry Two accounts, one debit and one credit.
Compound Entry Three or more accounts.
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Example – On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).
The Trial Balance•A list of accounts and their balances at a given time.Purpose is to prove that debits equal credits.
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A general ledger contains the entire group of accounts maintained by a company. The general ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.
The Dividends account is a contra account to Retained Earnings. Therefore, it is affected by debits and credits
Dividends Account