Chapter 2: Recording Business Transactions. Learning Objectives: Use accounting terms: describe the basic tools of an accounting system, the account, the ledger, and the journal). Apply the rules of debit and credit: describe the double-entry system and define debits and credits. Record transactions in the journal: Explain the flow of information through an accounting system by use of journals and ledgers. Post from the journal to the ledger. Prepare trial balances and explain their use and limitations.

1-Use accounting terms: AccountBasic summary device. Detailed record of increases and decreases in specific assets, liabilities, or stockholders’ equity during a period LedgerBook (or printout) holding all the accounts JournalThe chronological record of transactions Trial Balance The list of all accounts with their balances. Accounting Equation Assets = Liabilities + Stockholders’ Equity

Accounts are grouped in 3 broad categories: 1- Assets: Economic resources that will benefit the business in the future. –Cash, – Accounts Receivable, –Notes Receivable, –Prepaid Expenses, – Land & Building, – Equipment, –Furniture Fixtures. 2-Liabilities: Creditors’ claims to assets (debt). Accounts Payable Notes Payable Accrued Liabilities

3-Stockholders’ Equity: Owners’ claim to the assets. Common Stock Retained Earnings Dividends Revenues Expenses

The following diagram summarizes the accounting process covered in this chapter: Record Transactions in the Journal Copy (post) to the Ledger Prepare the Trial Balance

All Individual Accounts Combined Make Up the Ledger Chart of Accounts: List of all accounts used by a company along with the account numbers. 2- Apply the rules of debit and credit: 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.

T-Account: Simple tool for analyzing and determining the balance in a given account. In every account, debits and credits have opposite effects. In an account where a debit is an increase, a credit is a decrease. When you analyze transactions, think in terms of debits and credits instead of increase and decrease. Account Name (Left Side) Debit (Right Side) Credit

Rules of Debit and Credit: Assets are on the left side of the accounting equation…..therefore, you increase assets on the left side of the account. DEBIT Liabilities and equity are on the right side of the equation….therefore, you increase those accounts on the right side of the account. CREDIT.

Final Rules of Debit and Credit: ASSETS=LIABILITIES+STOCKHOLDERS’ EQUITY ASSETS=LIABILITIES+Common Stock+Retained Earning+Revenues-Expenses-Dividends Revenues increase equity, so a revenue’s normal balance is a credit. Expenses decrease equity, so an expense’s normally has a debit balance. Stockholders’ equity includes: –Common Stock: a credit-balance account –Retained Earnings: a credit-balance account –Dividends: a debit-balance account The sum of these three accounts should be a credit

Objective 3: Record transactions in the journal Journal: Chronological record of the transactions. Consists of at least one debit and one credit. 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.

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. 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.

Flow of Accounting Data: Transactions Occurs Source Documents Prepared Transaction Journalized & Posted Transaction Analyze

Objective 5: Prepare and use a trial balance Trial Balance: List of all accounts with their balances: 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.

Example: Cookie Lapp Travel Design, Inc. Cookie Lapp starts her new business as a corporation named Cookie Lapp Travel Design, Inc. The Inc. in the company name abbreviates Incorporated, which lets people know the business is a corporation: 1- Cookie Lapp Travel Design received $30,000 cash from Lapp the stockholder and issued common stock to Lapp. 2- Lapp Paid $20,000 cash for land. 3- Lapp purchased $500 of office supplies on account agreeing to pay within 30 days. 4- Lapp collected cash of $5,500 for service revenue that she earned by providing travel services for clients. 5- Lapp performs service for clients and lets then pay later. She earned $3,000 of service revenue or account. 6- Lapp paid the following cash expenses: Rent expense on a computer, $600; Office rent, $1,100; Employee salary, $1,200; and Utilities expense, $ Lapp paid $300 on the account payable created in transaction Cookie Lapp remodeled her home with personal funds. 9- Lapp collected $2,000 cash from the client in transaction Lapp sells a parcel of land owned by the travel agency. The sale price, $9,000, equals her cost. 11- Lapp received a telephone bill for $100 and will pay this expense next month.

Requirements: Record the preceding transactions in the journal of Cookie Lapp Travel Design, Inc. Post to the ledger. Prepare the trial balance of Cookie Lapp Travel Design, Inc. at April 30, 2008.

DateAccounts and ExplanationDebitCredit 1 Apr. 1Cash500 Common Stock Issued Stock. 2 Land20,000 Cash 20,000 Paid Cash for Land. 3 Office supplies 500 Accounts Payable 500 Performed service and receive cash. 4 Cash5,500 Service Revenue 5,500 Performed service and receive cash. 5 Accounts Receivable3,000 Service Revenue 3,000 Performed service on account. 6 Rent Expense, Computer600 Rent Expense, office1,000 Salary Expense1,200 Utilities Expense400 Cash 3,200 Paid cash expenses.

7 Accounts Payable300 Cash 300 Paid cash on account. 9 Cash2,000 Accounts Receivable 2,000 Received cash on account. 10 Cash9,000 Land 9,000 Sold land at cost. 11 Utilities Expenses100 Accounts Payable 100 Received utility bill. 12 Dividends2,000 Cash 2,000 Paid dividends.

Assets Cash 130,000220,000 45,50063,200 92, ,000122,000 Bal.21,000

REVENUE Service Revenue -45, ,000 Bal.8,500

EXPENSES Rent Expense, Computer Bal.600

Accounts Receivable -53,000-92,000 Bal.1,000

Office supplies Bal.500

Land -220, ,000 Bal.11,000

Dividends -122,000 Bal.2,000

Rent Expense, Office -61,000 Bal.1,000

Accounts Payable Bal.300

STOCKHOLDERS’ EQUITY Common Stock 30,000 Bal.30,000

Salary Expense -61,200 Bal.1,200

Utilities Expense Bal.500

COOKIE LAPP TRAVEL DESIGN, INC. Trial Balance April 30, 2008 Balance Account TitleDebitCredit Cash$21,000 Accounts receivable1,000 Office supplies500 Land11,000 Accounts payable $ 300 Common stock 30,000 Dividends2,000 Service revenue 8,500 Rent expense, office600 Rent expense, computer1,000 Salary expense1,200 Utilities expense500 Total$38,800