recording business transactions

Copyright © 2007 Prentice-Hall. All rights reserved

1

Recording Business Recording Business TransactionsTransactions

Chapter 2


2

Objective 1Objective 1

Use accounting terms

Copyright © 2007 Prentice-Hall. All rights reserved 4

AccountAccount

• Basic summary device• Detailed record of increases and

decreases in specific assets, liabilities, or owner’s equity during a period


LedgerLedger

• Book or printout holding all the accounts


Liabilities EquityAssets = +

Accounting EquationAccounting Equation

Accounts are grouped in 3 broad categories:


AssetsAssetsEconomic resources that will benefit the business

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


LiabilitiesLiabilities

Creditors’ claims to assets (debt)• Accounts Payable• Notes Payable• Accrued Liabilities


Owner’s EquityOwner’s Equity

Owner’s claim to the assets• Capital• Withdrawals• Revenues • Expenses


Revenues

NotesPayable

Accounts Receivable

C. Lapp,Capital

AccountsPayable

Ledger

Cash

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


Chart 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 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-Account


Debit CreditDebit CreditAssetsAssets

+ + --

Rules of Debit and CreditRules of Debit and Credit

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

Debit CreditDebit Credit - +- +


Rules of Debit and CreditRules of Debit and CreditOwner’s EquityOwner’s Equity


RevenuesRevenues

- +- +Debit CreditDebit Credit

Owner’s Owner’s CapitalCapital


Owner’s Owner’s WithdrawalsWithdrawals

Debit CreditDebit Credit + + --

ExpensesExpenses

Debit CreditDebit Credit + + --


RevenuesRevenues ExpensesExpensesOwner’s Owner’s CapitalCapital


__ ++ __

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

Owner’s Equity

Debit CreditDebit Credit - +- + Debit CreditDebit Credit

- +- +Debit CreditDebit Credit + + -- Debit CreditDebit Credit

+ + --


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 Balances

Debit CreditDebit Credit+ -+ -

Debit CreditDebit Credit- +- +


NormalNormalBalanceBalance




++

Owner’s Equity

Normal BalancesNormal Balances

Debit CreditDebit Credit+ -+ -

Debit Debit CreditCredit- +- +





RevenuesRevenues ExpensesExpensesOwner’s Owner’s CapitalCapital


__ __Debit CreditDebit Credit

+ -+ -



21


Record transactions in the journal


JournalJournal

• Chronological record of the transactions• Consists of at least one debit and one

credit


Journalizing 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 Journal

Journal Page 1Date Description Debit CreditJul 1 Cash 45,000

Lange, Capital 45,000

Investment from owner

Accounts Affected

Dollar amount of debits and credits

Explanation of transaction

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 2-5

Analysis of June 1 transaction:• Cash is increasing• Cash is an asset account• Increase an asset with a debit

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Jun 1 Cash 25,000



Analysis of June 1 transaction:• M. Brown, Capital is increasing• Capital is an owner’s equity account• Increase owner’s equity with a credit


Jun 1 Cash 25,000M. Brown, Capital 25,000

Owner invested in business



Analysis of June 2 transaction:• Medical Supplies is increasing• Medical Supplies is an asset account• Increase an asset with a debit


Jun 2 Medical Supplies 10,000



Analysis of June 2 transaction:• Accounts Payable is increasing• Accounts Payable is a liability account• Increase a liability with a credit


Jun 2 Medical Supplies 10,000Accounts Payable 10,000

Purchased medical supplies



Analysis of June 2 transaction:• Rent Expense is increasing• Rent Expense is an expense account• Increase an expense with a debit


Jun 2 Rent Expense 4,000



Analysis of June 2 transaction:• Cash is decreasing• Cash is an asset account• Decrease an asset with a credit


Jun 2 Rent Expense 4,000Cash 4,000

Paid rent for the month



Analysis of June 3 transaction:• Accounts Receivable is increasing• Accounts Receivable is an asset account• Increase an asset with a debit


Jun 3 Accounts Receivable 12,000



Analysis of June 3 transaction:• Service Revenue is increasing• Service Revenue is a revenue account• Increase a revenue with a credit


Jun 3 Accounts Receivable 12,000Service Revenue 12,000

Performed services


35


Post from the journal to the ledger


PostingPosting

• 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 2-9Cash Accounts Payable Service Revenue

Accounts Receivable M. Brown, Capital Rent Expense

Medical Supplies


Jun 1 Cash 25,000M. Brown, Capital 25,000

Owner invested in business

25,00025,000

25,000

25,000


Cash

25,000

Accounts Payable Service Revenue

M. Brown, Capital Rent Expense

25,000

Accounts Receivable


Jun 2 Medical Supplies 10,000Accounts Payable 10,000

Purchased medical supplies


Medical Supplies

10,00010,000

10,000

10,000


Cash

25,000



25,000

Accounts Receivable


Medical Supplies10,000

10,000


Jun 2 Rent Expense 4,000Cash 4,000

Paid rent for the month

4,0004,000

4,000

4,000


Cash

25,000



25,000

Accounts Receivable



10,0004,000

4,000GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Jun 3 Accounts Receivable 12,000Service Revenue 12,000

Performed services

12,00012,000

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 Data

Transaction Occurs

Source Documents Prepared

Transaction Analyzed

Transaction Journalized & Posted


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Prepare and use a trial balance


Trial BalanceTrial Balance

• List of all accounts with their balances


Mike Brown, M.D.Trial BalanceJune 30, 2008

Cash 21,000Accounts Receivable 12,000Medical Supplies 10,000Accounts Payable 10,000M. Brown, Capital 25,000Service Revenue 12,000Rent Expense 4,000 Totals 47,000 47,000

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


Locating 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 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 60,000R. Woodward, Capital 60,000

To record investment by owner

2 Supplies 200

Accounts Payable 200Purchased 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 50,000Cash 50,000

Purchased building

6 Cash 3,000

Service Revenue 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 100Cash 100

Paid on account

17 Accounts Receivable 2,100

Service Revenue 2,100Performed 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 1,200Accounts 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 1,200Cash 1,200

Paid salaries

31 Rent Expense 500

Cash 500Paid rent for the month

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 2-19Aug 9 100

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

Accounts Receivable Aug 17 2,100

Service RevenueAug 6 3,000

Bal. 12,400

BuildingAug 4 50, 000

R. Woodward, CapitalAug 1 60,000

Rent Expense

Salary Expense

Aug 2 200Supplies

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 SolutionsTrial Balance

August 31, 2008Cash 12,400Accounts Receivable 900Supplies 200Building 50,000Accounts Payable 100R. Hawk, Capital 60,000Service Revenue 5,100Salary Expense 1,200Rent Expense 500 Totals 65,200 65,200



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End of Chapter 2End of Chapter 2