Chapter 3 The Recording Process

3-1 Three Parts of an Account (1) ACCOUNT TITLE (Left Side) (2) DEBIT (Right Side) (3) CREDIT Total Debits > Total Credits = Debit Balance Total Credits > Total Debits = Credit Balance Total Debits = Total Credits = Zero Balance

3-1 Three Parts of an Account (continued) Example: CASH 9/1 Balance 12,000 9/5 2,000 9/30 Balance 11,000 9/10 2,000 9/20 1,000 (Debit Balance) ACCOUNTS PAYABLE 9/6 3,000 9/21 2,000 9/1 Balance 6,000 9/17 9,000 9/30 Balance 10,000 (Credit Balance)

3-2 Double Entry Recording Rules ASSETS LIABILITIES Increase Account by DEBIT Decrease Account by CREDIT Decrease Account by DEBIT Increase Account by CREDIT Normal Balance Normal Balance DIVIDENDS COMMON STOCK Increase Account by DEBIT Decrease Account by CREDIT Decrease Account by DEBIT Increase Account by CREDIT Normal Balance Normal Balance RETAINED EARNINGS EXPENSES Decrease Account by DEBIT Increase Account by CREDIT Increase Account by DEBIT Decrease Account by CREDIT Normal Balance Normal Balance REVENUES Decrease Account by DEBIT Increase Account by CREDIT Normal Balance

3-2 Double Entry Recording Rules (continued) SUMMARY Debit Credit ASSETS Increase (N) Decrease LIABILITIES COMMON STOCK RETAINED EARNININGS DIVIDENDS REVENUES EXPENSES

3-4 The Recording Process ANALYZE Business Transactions (for effects on specific accounts) Business Documents RECORD Transactions entered in a Journal (book of original entry) Journalizing TRANSFER Journal Information transferred to Ledger Accounts Posting

Account Titles and Explanation 3-5 Journalizing General Journal Date Account Titles and Explanation Ref. Debit Credit 2008 Sept. 1 Cash 15,000 Common Stock (To record sale of stock) 1. 2. 3. 4. 5. Key: 1. Enter date in Date Column. 2. Enter debit account title(s) at left margin of Account Titles and Explanation Column and amounts in Debit Column. 3. Enter credit account title(s) [INDENT CREDIT ACCOUNT TITLE(S)] and amounts in Credit Column. 4. Enter explanation under account titles. 5. Ref. Column is left blank until posting.

3-6 Analyzing and Journalizing Transactions Steps in the Recording Process Instructions: Analyze and journalize the transactions provided. Sept. 1 Stockholders Invested $5,000 in his video services corporation. 2 The corporation paid $500 cash for the store rent. 5 The corporation purchased video supplies of $1,000. 9 The corporation purchased video equipment for $12,000 paying $2,000 in cash and signed a $10,000 twenty-four month 9% note payable. 12 The corporation provided video services and collected cash of $3,000. 15 Declared and paid a $500 cash dived to stockholders.

3-6 Analyzing and Journalizing Transactions (continued) General Journal Date Account Titles and Explanation Ref. Debit Credit 2008 Sept. 1 Cash Common Stock (Shares of stock issued for cash) 5,000 2 Rent Expense (Paid rent) 500 5 Supplies (Paid cash for supplies) 1,000 9 Equipment Notes payable (Purchased equipment, paying cash and issuing notes payable) 12,000 2,000 10,000 12 Service Revenue (Collected cash for services provided) 3,000 15 Dividends (Declared and paid a cash dividend)

3-7 Forms of Accounts and Balances Tabular Account (or T-Account) Three-Column All forms must show increases and decreases to the account in order to determine the account balances (amounts are assumed). Cash 101 Cash 9/1 Bal. + 12,000 9/5 + 500 9/10 - 2,000 9/20 - 1,500 9/30 Bal. 9,000 9/1 Bal. 12,000 9/5 500 9/10 2,000 9/20 1,500 9/30 Bal. 9,000 Three-Column Account Form Cash No. 101 Date Explanation Ref. Debit Credit Balance 2008 Sept. 1 12,000 5 Jl 500 12,500 10 2,000 10,500 20 1,500 9,000 30 POSTING

Account Titles and Explanation 3-8 Steps in Posting Instructions: Post the first two entries recorded in the General Journal. General Journal Jl Date Account Titles and Explanation Ref. Debit Credit 2009 Sept. 1 Cash Common Stock (Issued shares of stock for cash) 101 340 5,000 2 Rent Expense (Paid rent) 560 500 Cash No. 101 Date Explanation Ref. Debit Credit Balance 2009, Sept. 1 Jl 5,000 2 500 4,500 Common Stock No. 340 Date Explanation Ref. Debit Credit Balance 2009, Sept. 1 Jl 5,000 Rent Expense No. 560 Date Explanation Ref. Debit Credit Balance 2009, Sept. 2 Jl 500

Double-Entry Accounting “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.” Scale or Balance T account Left Side Receive DEBIT Right Side Give CREDIT Luca Pacioli Developer of Double-Entry Accounting Receive DEBIT Give CREDIT

Illustrate Step 2- Journalizing Accounting for the Hospitality Industry Elisa S. Moncarz and Nestor de Portocarrero ©2004 Pearson Education, Inc. Upper Saddle River, NJ 07458

Business Transactions Additional Example Entry H. Chris Clark (stockholder) ABC Restaurant paid dividends of $2,000. Reduction in obligation Cash receive Debit ABC (payor) give Credit give Credit General Journal Date Description Debit Credit 11/30 Dividends 2,000 Cash 2,000

Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given =

Business Transactions Entry B. Land Owner (seller) ABC Restaurant buys land for $20,000. Land Cash receive Debit ABC (buyer) give Credit give Credit General Journal Date Description Debit Credit 11/5 Land 20,000 Cash 20,000

Business Transactions Entry C. Supplier (seller) ABC Restaurant buys supplies for $1,350, agreeing to pay in the near future. Supplies A promise to pay later receive Debit ABC (buyer) give Credit give Credit General Journal Date Description Debit Credit 11/10 Supplies 1,350 Accounts Payable 1,350

Business Transactions Entry D. Customer (buyer) ABC Restaurant earns fees of $7,500, receiving cash. Cash Services receive Debit ABC (seller) give Credit give Credit General Journal Date Description Debit Credit 11/18 Cash 7,500 Fees Earned 7,500

Business Transactions Entry E. Various suppliers ABC Restaurant paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Services, benefits Cash receive Debit ABC (buyer) give Credit give Credit General Journal Date Description Debit Credit 11/18 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 Cash 3,650

Business Transactions Entry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is $550. Use of supplies Supplies receive Debit ABC (user) give Credit give Credit General Journal Date Description Debit Credit 11/30 Supplies Expense 800 Supplies 800 Balance of Supplies account $1,350 less $550 on hand = $800 used

ABC Restaurant Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 52 Rent Expense 800 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900 …and do not forget that all debits should equal all credits…!