1 Recording Business Transactions Chapter 2

2 Objective 1 Use accounting terms

The Accounting Process Record Transactions in the Journal Copy (post) to the Ledger Prepare the Trial Balance

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

Copyright © 2007 Prentice-Hall. All rights reserved 5 LedgerLedger Book or printout holding all the accounts

Copyright © 2007 Prentice-Hall. All rights reserved 6 Liabilities Equity Assets =+ Accounting Equation Accounts are grouped in 3 broad categories:

Copyright © 2007 Prentice-Hall. All rights reserved 7 AssetsAssets Economic resources that will benefit the business in the future Cash Accounts Receivable Notes Receivable Prepaid Expenses Land Building Equipment, Furniture, Fixtures

Copyright © 2007 Prentice-Hall. All rights reserved 8 LiabilitiesLiabilities Creditors’ claims to assets (debt) Accounts Payable Notes Payable Accrued Liabilities

Copyright © 2007 Prentice-Hall. All rights reserved 9 Owner’s Equity Owner’s claim to the assets Capital Withdrawals Revenues Expenses

Copyright © 2007 Prentice-Hall. All rights reserved 10 RevenuesNotes Payable Accounts Receivable C. Lapp, Capital Accounts Payable Ledger Cash All Individual Accounts Combined Make Up the Ledger

Copyright © 2007 Prentice-Hall. All rights reserved 11 Chart of Accounts List of all accounts used by a company along with the account numbers

12 Objective 2 Apply the rules of debit and credit

Copyright © 2007 Prentice-Hall. All rights reserved 13 Double 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

Copyright © 2007 Prentice-Hall. All rights reserved 14 Account Name (Left Side) Debit (Right Side) Credit Simple tool for analyzing and determining the balance in a given account T-AccountT-Account

Copyright © 2007 Prentice-Hall. All rights reserved 15 Debit Credit Assets Rules of Debit and Credit LiabilitiesEquity=+ Debit Credit Debit Credit

Copyright © 2007 Prentice-Hall. All rights reserved 16 Rules of Debit and Credit Owner’s Equity Debit Credit Revenues Debit Credit Owner’s Capital Debit Credit Owner’s Withdrawals Debit Credit Expenses Debit Credit

Copyright © 2007 Prentice-Hall. All rights reserved 17 RevenuesExpenses Owner’s Capital Owner’s Withdrawals _ + _ Expanding the Rules of Debit and Credit Owner’s Equity Debit Credit Debit Credit Debit Credit Debit Credit

Copyright © 2007 Prentice-Hall. All rights reserved 18 LiabilitiesEquityAssets=+ Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance

Copyright © 2007 Prentice-Hall. All rights reserved Owner’s Equity Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance RevenuesRevenuesExpensesExpenses Owner’s Capital Owner’s Withdrawals ____ Debit Credit + - NormalBalance

20 Objective 3 Record transactions in the journal

Copyright © 2007 Prentice-Hall. All rights reserved 21 JournalJournal Chronological record of the transactions Consists of at least one debit and one credit

Copyright © 2007 Prentice-Hall. All rights reserved 22 Journalizing 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

Copyright © 2007 Prentice-Hall. All rights reserved 23 General Journal Journal Page 1 DateDescriptionDebitCredit Jul 1Cash45,000 Lange, Capital45,000 Investment from owner Accounts Affected Dollar amount of debits and credits Explanation of transaction Transaction Date

Copyright © 2007 Prentice-Hall. All rights reserved 24 General Journal 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

Copyright © 2007 Prentice-Hall. All rights reserved 25 General Journal 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

Copyright © 2007 Prentice-Hall. All rights reserved 26 Exercise 2-5 Analysis of June 1 transaction: Cash is increasing Cash is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000

Copyright © 2007 Prentice-Hall. All rights reserved 27 Exercise 2-5 Analysis of June 1 transaction: M. Brown, Capital is increasing Capital is an owner’s equity account Increase owner’s equity with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000 M. Brown, Capital25,000 Owner invested in business

Copyright © 2007 Prentice-Hall. All rights reserved 28 Exercise 2-5 Analysis of June 2 transaction: Medical Supplies is increasing Medical Supplies is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000

Copyright © 2007 Prentice-Hall. All rights reserved 29 Exercise 2-5 Analysis of June 2 transaction: Accounts Payable is increasing Accounts Payable is a liability account Increase a liability with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000 Accounts Payable10,000 Purchased medical supplies

Copyright © 2007 Prentice-Hall. All rights reserved 30 Exercise 2-5 Analysis of June 2 transaction: Rent Expense is increasing Rent Expense is an expense account Increase an expense with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000

Copyright © 2007 Prentice-Hall. All rights reserved 31 Exercise 2-5 Analysis of June 2 transaction: Cash is decreasing Cash is an asset account Decrease an asset with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000 Cash4,000 Paid rent for the month

Copyright © 2007 Prentice-Hall. All rights reserved 32 Exercise 2-5 Analysis of June 3 transaction: Accounts Receivable is increasing Accounts Receivable is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000

Copyright © 2007 Prentice-Hall. All rights reserved 33 Exercise 2-5 Analysis of June 3 transaction: Service Revenue is increasing Service Revenue is a revenue account Increase a revenue with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000 Service Revenue12,000 Performed services

34 Objective 4 Post from the journal to the ledger

Copyright © 2007 Prentice-Hall. All rights reserved 35 PostingPosting Posting – copying amounts from the journal to the ledger

Copyright © 2007 Prentice-Hall. All rights reserved 36 Exercise 2-9 CashAccounts PayableService Revenue Accounts Receivable M. Brown, Capital Rent Expense Medical Supplies GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000 M. Brown, Capital25,000 Owner invested in business 25,000

Copyright © 2007 Prentice-Hall. All rights reserved 37 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000 Accounts Payable10,000 Purchased medical supplies Exercise 2-9 Medical Supplies 10,000

Copyright © 2007 Prentice-Hall. All rights reserved 38 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000 Cash4,000 Paid rent for the month 4,000

Copyright © 2007 Prentice-Hall. All rights reserved 39 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 4,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000 Service Revenue12,000 Performed services 12,000

Copyright © 2007 Prentice-Hall. All rights reserved 40 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 4,000 12,000 Bal 21,000 Bal 10,000 Bal 12,000 Bal 4,000 Bal 25,000 Bal 12,000 Bal 10,000

Copyright © 2007 Prentice-Hall. All rights reserved 41 Flow of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analyzed Transaction Journalized & Posted

42 Objective 5 Prepare and use a trial balance

Copyright © 2007 Prentice-Hall. All rights reserved 43 Trial Balance List of all accounts with their balances

Copyright © 2007 Prentice-Hall. All rights reserved 44 Mike Brown, M.D. Trial Balance June 30, 2008 Cash21,000 Accounts Receivable12,000 Medical Supplies10,000 Accounts Payable10,000 M. Brown, Capital25,000 Service Revenue12,000 Rent Expense4,000 Totals47,00047,000 Exercise 2-9 (part 3)

Copyright © 2007 Prentice-Hall. All rights reserved 45 Locating 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

Copyright © 2007 Prentice-Hall. All rights reserved 46 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug1Cash60,000 R. Woodward, Capital60,000 To record investment by owner 2Supplies200 Accounts Payable200 Purchased supplies on account

Copyright © 2007 Prentice-Hall. All rights reserved 47 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug4Building50,000 Cash50,000 Purchased building 6Cash3,000 Service Revenue3,000 Performed service

Copyright © 2007 Prentice-Hall. All rights reserved 48 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug9Accounts Payable100 Cash100 Paid on account 17Accounts Receivable2,100 Service Revenue2,100 Performed services

Copyright © 2007 Prentice-Hall. All rights reserved 49 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug23Cash1,200 Accounts Receivable1,200 Received payment on account

Copyright © 2007 Prentice-Hall. All rights reserved 50 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug31Salary Expense1,200 Cash1,200 Paid salaries 31Rent Expense500 Cash500 Paid rent for the month

Copyright © 2007 Prentice-Hall. All rights reserved 51 Exercise 2-19 Aug Cash Aug 1 60,000 Aug 4 50,000 Aug 6 3,000 Accounts Receivable Aug 17 2,100 Service Revenue Aug 6 3,000 Bal. 12,400 Building Aug 4 50, 000 R. Woodward, Capital Aug 1 60,000 Rent Expense Salary Expense Aug Supplies Aug Accounts Payable Aug Bal. 100 Aug 17 2,100 Aug 23 1,200 Aug 31 1,200 Aug Bal. 900 Bal. 5,100 Aug 31 1,200 Aug

Copyright © 2007 Prentice-Hall. All rights reserved 52 Woodward Technology Solutions Trial Balance August 31, 2008 Cash12,400 Accounts Receivable900 Supplies200 Building50,000 Accounts Payable100 R. Hawk, Capital60,000 Service Revenue5,100 Salary Expense1,200 Rent Expense500 Totals65,20065,200 Exercise 2-19

53 End of Chapter 2