Recording Business Transactions Chapter 2

Objective 1 Use accounting terms

Accounting Terms Account Ledger Journal Trial Balance The detailed record of the changes in a particular asset, liability, or owner’s equity. Account The record holding all the account. Ledger The chronological record of transactions Journal The list of all the accounts with their balances. Trial Balance

Accounting Terms Cash Individual asset accounts All individual combined make up the ledger. Accounts Payable Ledger Individual liability accounts Gay Gillen, Capital Individual owner’s equity accounts

Classification of Accounts What are some asset accounts? Cash Notes Receivable Accounts Receivable Prepaid Expenses Land Building Equipment

Classification of Accounts What are some liability accounts? Notes Payable Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term Liabilities (bonds)

Classification of Accounts What are some owner’s equity accounts? Capital or owner’s interest in the business Withdrawals Revenues Expenses

Classification of Accounts In a corporation, the owner’s equity account is called Stockholders’ Equity. Contributed Capital Retained Earnings

Double-Entry Accounting Double entry bookkeeping means to record the dual effects of each business transaction. Assets = Liabilities + Owner’s Equity Assets are on the left (debit) side. Liabilities and Equity are on the right (credit) side.

DEBIT SIDE CREDIT SIDE The T Account Account name Page: 1 Page: 1 Ref. Explanation Debit amount Credit amount Account name DEBIT SIDE CREDIT SIDE

The T-Account Account Title Debit Credit Left Side Right Side

The Four-Column Account Format Account: Cash Account No. xxx Balance Date Item Ref. Debit Credit Debit Credit

Objective 2 Apply the Rules of Debit and Credit.

Rules of Debit and Credit Assets Liabilities Owner’s Equity = + Debit + Credit – Debit – Credit + Debit – Credit +

Expense and Revenue accounts Expenses Revenues Debit + Credit – Debit – Credit +

The Double-Entry System Each transaction is recorded with at least: One debit One credit Total debits must equal total credits.

Objective 3 Record Transactions in the Journal.

Journals What is a journal? It is a list in chronological order of all the transactions for a business. Identify transaction from source documents. Specify accounts affected. Apply debit/credit rules. Record transaction with description.

JOURNAL Page Number: 1 Page Number: 2 DEBIT CREDIT DEBIT CREDIT CASH ACCOUNTS and EXPLANATION ACCOUNTS and EXPLANATION DEBIT CREDIT DATE DATE POST REF. POST REF. DEBIT CREDIT May 1 CASH 100 950 950 Trasferred total CAPITAL 100 May 8 CASH CASH 500 NOTE PAYABLE 500 May 10 ACCOUNTS PAYABLE 300 300 CASH 300 RENT EXPENSES May 15 50 50 CASH Total 950 950

General Journal

General Journal Cash................. 30.000 Capital............... May 1 Cash................. 30.000 Capital............... 30.000 April 2 Cash 30,000 Capital 30,000

Recording Transactions On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel. What is the journal entry? April 2 Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner

Objective 4 Post from the Journal to the Ledger.

Posting What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger.

Post from the Journal to the Ledger. April 2 Cash 30,000 Capital 30,000 Dr Dr Capital Cash Cr Cr 30.000 30.000

The Four-Column Account Format Account: Cash Account No. xxx Balance Date Item Ref. Debit Credit Debit Credit May 2 30.000 30.000 Account: Capital Account No. xxx Balance Date Item Ref. Debit Credit Debit Credit Column

Normal Account Balances Assets = Liabilities + Owner’s Equity Debits = Credits The side where we expect increases to be recorded is the normal balance side.

Normal Account Balances Assets 30,000 20,000 Liabilities 3.000 5,000 10.000 Bal. 5,000 Bal. 7,000 Owner’s Equity 50.000 Bal. 50.000

Objective 5 Prepare and use a Trial Balance.

Trial Balance What is a trial balance? It is an internal document. It is a listing of all the accounts with their related balances. Before computers, it provided a check on accuracy by showing whether total debits equal total credits.

Trial Balance Format: Two-Column Account Title Debit Credit Total

Trial Balance Format: Four-Column ACCOUNT TITLE TOTAL BALANCE Debit Credit Cash 30.000 40.000 10.000 15.000 70.000 25.000 45.000 70.000 25.000 Cash 80.000 80.000 Capital Bal.45.000 Acc. Rec. 40.000 40.000 Acc. Pay. 25.000 30.000 5.000 135.000 135.000 85.000 85.000

End of Chapter 2