Recording Business Transactions Chapter 2

Learning Objectives Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts Define debits, credits, and normal account balances and use double-entry accounting and T-accounts List the steps of the transaction recording process

Learning Objectives Journalize and post sample transactions to the ledger Prepare the trial balance from the T-accounts

1 Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts

The Accounting Process Record transactions in the journal Copy (post) to the ledger Prepare the trial balance

The Account Basic summary device Detailed record of all changes that have occurred in a particular asset, liability, or owner’s equity Covers a specific period of time Grouped in three broad categories Assets Liabilities Owner’s Equity

The Journal and The Ledger

Trial Balance Listing of all accounts and their balances

The Accounting Equation ASSETS LIABILITIES EQUITY Economic Resources Claims to Economic Resources

Assets Economic resources that will benefit the business in the future: Cash Accounts receivable Notes receivable Prepaid expenses Land Building Equipment, Furniture, Fixtures

Liabilities A debt (something owed): Accounts payable Notes payable Accrued liabilities

Owner's Equity Owner’s claim to the assets: Capital Drawing Revenues Expenses

Ledger Asset, Liability, and Owner’s Equity Accounts

Chart of Accounts List of all accounts used by a company

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

Double Entry System Record dual effects of each transaction Each transaction has a: Receiving side Giving side

T-Account Tool for analyzing and determining the balance in a given account Account Name (Left Side) (Right Side)

Increases and Decreases in Accounts Whether an account is increased by debit or a credit is determined by the account type Debits are not good or bad

Rules of Debit and Credit The account category governs the increase side or decrease side Rules of debits and credits

Illustrate Debits and Credits The first transaction involves receiving $30,000 cash and issuing Capital The second transaction is a $20,000 purchase of land for cash

S2-1: USING ACCOUNTING VOCABULARY Match the accounting terms on the left with the corresponding definitions on the right. _____Posting _____ Receivable _____ Debit _____ Journal _____ Expense _____ Net Income _____ Normal Balance _____ Ledger _____ Payable _____ Equity Using up assets in the course of operating a business Book of accounts An asset Record of transactions Left side of an account Side of an account where increases are recorded Copying data from the journal to the ledger Always a liability Revenues – Expenses = Assets – Liabilities =

S2-2: Explaining accounts and the rules of debit and credit Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice. When are debits increases? When are debits decreases? 2. When are credits increases? When are credits decreases?

List the steps of the transaction recording process 3 List the steps of the transaction recording process

Steps in the Transaction Recording Process Identify each account affected and its type Determine if each account is increased or decreased Record transaction in the journal Use the rules of debit and credit

Illustrating a Journal Entry Journalize the first transaction of Smart Touch—the receipt of $30,000 cash and issuance of Capital. The accounts affected are Cash and Capital. Cash is an asset. Capital is equity. Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits.

Illustrating a Journal Entry (continued) Four parts: Date of transaction Title of account debited with dollar amount Title of account credited with dollar amount Brief explanation of transaction

General Journal Journal Page 1 Date Description Debit Credit Apr 1 Cash 30,000 Bright, capital Owner investment.

S2-5: JOURNALIZING TRANSACTIONS Ned Brown opened a medical practice in San Diego, California. 1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation. Jan 1 The business received $29,000 cash and issued common stock. 2 Purchased medical supplies on account, $14,000. Paid monthly office rent of $2,600. 3 Recorded $8,000 revenue for service rendered to patients on account.

S2-5 : Journalizing transactions Jan. 1: The business received $29,000 cash and issued common stock. GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-5: Journalizing transactions Jan. 2: Purchased medical supplies on account, $14,000. GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-5 : Journalizing transactions Jan. 2: Paid monthly office rent of $2,600. GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-5 : Journalizing transactions Jan. 3: Recorded $8,000 revenue for service rendered to patients on account. GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

Posting from the Journal to the Ledger Copying amounts from the journal to the ledger

Expanding Debit/Credit Rules to include Revenues and Expenses

Complete Rules of Debit and Credit

Normal Balance of an Account

Flow of Accounting Data from the Journal to the Ledger

Source Documents Origin of accounting transactions

Journalize and post sample transactions to the ledger 4 Journalize and post sample transactions to the ledger

Practice Journalizing: Transaction 1 Cash Capital GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Cash 30,000 Bright, capital Issued capital.

Practice Journalizing and Posting: Transaction 2 Cash Land Capital GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Land 20,000 Cash Bought land.

Practice Journalizing and Posting: Transaction 3 Cash Cash Office supplies Accounts payable GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Office supplies 500 Accounts payable Purchased supplies.

Practice Journalizing and Posting : Transaction 4 Cash Cash Service revenue GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Cash 5,500 Service revenue Received payment on account.

The Ledger Accounts After Posting

S2-10: Preparing a trial balance Oakland Floor Coverings reported the following summarized data at December 31, 2012. Accounts appear in no particular order. Revenues $34,000 Other liabilities $18,000 Equipment 45,000 Cash 12,000 Accounts payable 2,000 Expenses 19,000 Oakland, capital 22,000

S2-10 :Preparing a trial balance Oakland Floor Coverings Trial Balance December 31, 2012 Cash Equipment Accounts payable Other liabilities Oakland, capital Revenues Expenses

S2-6: Journalizing transactions Texas Sales Consultants completed the following transactions during the latter part of January: Jan 22 Performed service for customers on account, $8,000. 30 Received cash on account from customers, $7,000. 31 Received a utility bill, $180, which will be paid during February. Paid monthly salary to salesman, $2,000. Paid advertising expense of $700.

S2-6: Journalizing transactions Jan 22: Performed service for customers on account, $8,000 “On account” indicates Accounts receivable Accounts receivable is an asset account Increase an asset with a debit GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-6: Journalizing transactions Jan. 30: Cash is received Increase cash, an asset Assets are increased by debits The payment is “on account” Decrease Accounts receivable with a credit GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-6: Journalizing transactions Jan. 31: A utility bill is an expense Expenses are increased by debits The bill will be paid later–creating an account payable Liabilities are increased by credits GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-6: Journalizing transactions Jan. 31: Salaries to employees are an expense Expenses are increased by debits The salary was paid in cash Cash, an asset, decreases, Assets are decreased by credits Rent Expense is an expense account. Increase an expense with a debit GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

S2-6: Journalizing transactions March 31: Advertising is another expense Cash is paid GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT

Prepare the trial balance from the T-accounts 5 Prepare the trial balance from the T-accounts

Trial Balance Summary of the ledger Lists all accounts with their balances Accuracy check NOT a balance sheet

Trial Balance

Detecting Trial Balance Errors Search for missing account Divide the difference between total debits and total credits by two Divide out-of-balance amount by nine

Details of the Journal

Four-Column Account

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