recording business transactions chapter 2 2-1copyright © 2014 pearson education, inc. publishing as...

Recording Business

Transactions

Chapter 2

2-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

Learning Objectives

1. Explain accounts as they relate to the accounting equation and describe common accounts

2. Define debits, credits, and normal account balances using double-entry accounting and T-accounts

3. Record transactions in a journal and post journal entries to the ledger


Learning Objectives

4. Prepare the trial balance and illustrate how to use the trial balance to prepare financial statements

5. Use the debt ratio to evaluate business performance


Learning Objective 1

Explain accounts as they relate to the

accounting equation and describe common

accounts


What Is an Account?

• Each element of the Accounting Equation contains smaller elements called accounts.

• Account—the detailed record of all increases and decreases that have occurred in an individual asset, liability, equity, revenue or expense during a specified period.

LiabilitiesAssets = + Equity


Chart of Accounts

• Companies typically maintain a listing of all of the accounts that they use in their accounting system, called the Chart of Accounts.

• Often accounts are numbered.– The numbers will usually be

grouped by account type.

Large companies can have thousands of

different accounts that are used in their

accounting system.

It is easier to reference a specific account if

there is a number assigned to it.


Chart of Accounts



Define debits, credits, and normal account

balances using double-entry accounting and

T-accounts


What Is Double-Entry Accounting?

• Transactions always have two impacts on the accounting equation.– When Smart Touch

bought land, the Land account increased, but the Cash account decreased by the same amount.

– These “double” entries help keep the accounting equation in balance.


What Is a T-Account?

• A T-account is a shortened visual form of the more formal general ledger account format.

• Increases are shown on one side of the T-account and decreases on the other side.

• The T-account is balanced at the end of each period.

+/- +/-Account Name


What Are Debits and Credits?

• Debits and Credits are used to record the increases and decreases in T-accounts. – Debit means “left” – Credit means “right”

• Any time we put a debitin one account, we have to put an equal credit inanother account.

Debit (DR) Credit (CR)Account Name



• An account with more debits than credits will have a “debit” balance.

• An account with more credits than debits willhave a “credit” balance.

• Some accounts will beincreased with debits, andsome accounts will be increased with credits.

Debit (DR) Credit (CR)Account Name



• We can explain the balancing impact of transactions using T-accounts and debits and credits.



• When Smart Touch purchases land, we use debits to increase the Land account, and credits to decrease the Cash account.

20,000 Cash

20,000 Land


Increases in company’s contributions or

distributions will be reflected in the changing Common

Stock and Dividends accounts, respectively.


Debit for Credit forDecreases Increases

Common Stock

Debit forIncreases

Dividends


When revenues exceed expenses, net income

increases Retained Earnings.


Debit for Credit forDecreases Increases

Retained Earnings

Credit forIncreases

RevenuesDebit forIncreases

Expenses


Learning Objective3

Record transactions in a journal and post

journal entries to the ledger


How Do You Record Transactions?

The next step in the process is to formally record the transaction in the

General Journal.2-18Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall


• Transactions are first recorded using a “journal entry."

• The account to be debited is usually written first.

2-19

Date Description Debit Credit

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall


• In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock.

• Cash should be debited for $30,000 and Common Stock should be credited for $30,000.

2-20




• In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock.

• Cash should be debited for $30,000 and Common Stock should be credited for $30,000.

2-21


1-Nov Cash 30,000 Common Stock 30,000 Sale of Common Stock .



• Next, each amount should be “posted” to the appropriate T-account.

• Without this step, the trial balance will NOT balance.

2-22





2-23



30,000 30,000

Cash Common Stock



• In Transaction #2, Smart Touch purchased Land for $20,000 cash.

• Land should be debited for $20,000 and Cash should be credited for $20,000.

2-24




• In Transaction #2, Smart Touch purchased Land for $20,000 cash.

• Land should be debited for $20,000 and Cash should be credited for $20,000.

2-25


2-Nov Land 20,000 Cash 20,000 Paid cash for land.





2-26





2-27



20,000 30,000 20,000

Land Cash



• In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash.

• Office Supplies should be debited for $500 and Accounts Payable should be credited for $500.

2-28




• In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash.

• Office Supplies should be debited for $500 and Accounts Payable should be credited for $500.

2-29

3-Nov Office Supplies 500 Accounts Payable 500 Purchased office supplies on account.





2-30





2-31



500 500 Office Supplies Accounts Payable



Prepare the trial balance and illustrate

how to use the trial balance to prepare

financial statements


Trial Balance

The primary purpose of the trial balance is to

prove the mathematical equality of debits and credits after posting.

The amounts come from the individual

account balances in the General Ledger.

Smart Touch Learning

Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$

Accounts Receivable 1,000

Office Supplies 500

Prepaid Rent 3,000

Furniture 18,000

Building 60,000

Land 20,000

Accounts Payable 200

Utilities Payable 100

Unearned Revenue 600

Notes Payable 60,000

Common Stock 48,000

Dividends 5,000 -

Service Revenue 16,500

Rent Expense 2,000

Salaries Expense 3,600

Utilities Expense 100

125,400$ 125,400$

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 2-33

First, we prepare the Income Statement.


Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$


Office Supplies 500

Prepaid Rent 3,000

Furniture 18,000

Building 60,000

Land 20,000





Common Stock 48,000

Dividends 5,000 -


Rent Expense 2,000



125,400$ 125,400$


Revenues Service Revenue 16,500$ Expenses Salaries Expense 3,600$ Rent expense 2,000 Utilities Expense 100 Total expenses 5,700 Net income 10,800$

SMART TOUCH LEARNINGIncome Statement

Two Months Ended December 31, 2014

The information for the Statement of

Retained Earnings comes from the trial

balance AND from the Income Statement.


Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$


Office Supplies 500

Prepaid Rent 3,000

Furniture 18,000

Building 60,000

Land 20,000





Common Stock 48,000

Dividends 5,000 -


Rent Expense 2,000



125,400$ 125,400$


Retained Eanings, 11/1/14 -$ Net Income for 2 Months 10,800

10,800 Dividends (5,000) Retained Earnings, 12/31/14 5,800$

SMART TOUCH LEARNINGStatement of Retained Earnings


Revenues Service Revenue 16,500$ Expenses Salaries Expense 3,600$ Rent expense 2,000 Utilities Expense 100 Total expenses 5,700 Net income 10,800$

SMART TOUCH LEARNINGIncome Statement


The information for the Statement of

Owner’s Equity comes from the trial balance AND from the Income

Statement.


Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$


Office Supplies 500

Prepaid Rent 3,000

Furniture 18,000

Building 60,000

Land 20,000





Common Stock 48,000

Dividends 5,000


Rent Expense 2,000



125,400$ 125,400$


AssetsCash 12,200$ Accounts Receivable 1,000 Office Supplies 500 Prepaid Rent 3,000 Furniture 18,000 Building 60,000 Land 20,000 Total Assets 114,700$

LiabilitiesAccounts Payable 200$ Utilities Payable 100 Unearned Revenue 600 Notes Payable 60,000 Total Liabilities 60,900

Stockholders' Equity Common Stock 48,000 Retained Earnings 5,800

Total Stockholders' Equity 53,800$ Total Liabilities & Stockholders' Equity 114,700$

31-Dec-14


Use the debt ratio to evaluate business

performance


The Debt Ratio

• The debt ratio shows the proportion of assets financed with debt.

• It can be used to evaluate a business’s ability to pay its debts and to determine if the company has too much debt to be considered financially “healthy.”


End of Chapter 2


recording business transactions chapter 2 2-1copyright © 2014 pearson education, inc. publishing as...

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