1 ACCT 201 LECTURE 2 Recording Business Transactions

2 LECTURE OBJECTIVES 1. Use accounting terms 2. Apply the Rules of Debit and Credit 3. Record Transactions in the Journal 4. Post from the Journal to the Ledger 5. Prepare and use a Trial Balance 6. Analyze Transactions without a Journal

3 O 1: Accounting Terms Account Ledger Assets Liabilities Owner’s equity Double-entry accounting T-account

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

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

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

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

8 John’s Gas Station Example Assume that the business sold $5,000 worth of gasoline on a given day and performed $3,000 of repair services. How much revenue did the business earn that day? $8,000

9 John’s Gas Station Example Revenues increase John’s equity in the business. The business had to pay mechanics and vendors $3,750 for the work performed that day.

10 John’s Gas Station Example Expenses decrease John’s equity in the business. How much was the net increase in John’s equity that day? $4,250

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

12 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.

13 The T-Account Account Title Debit Credit Left Side

14 The T-Account Account Title Debit Credit Right Side

15 Owner’s Equity AssetsLiabilities Debit + Debit – Credit – Debit – Credit + Credit + =+ O 2: Rules of Debit and Credit

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

17 John’s Gas Station Example On July 1, John invested $500,000 in cash and obtained a $300,000 loan to open a gas station. How much was the initial increase in cash? $800,000 Which accounts were affected?

18 John’s Gas Station Example Cash Liabilities Owner’s Equity

19 John’s Gas Station Example John’s Gas Station Balance Sheet July 1, 2002 AssetsLiabilities Cash$800,000Notes payable$300,000 Owner’s Equity John, capital 500,000 Total liabilities Total assets$800,000and owner’s equity$800,000

20 Journals What is a journal? It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit/credit rules. 4 Record transaction with description.

21 What does a journal entry include? – date of the transaction – title of the account debited – title of the account credited – amount of the debit and credit – description of the transaction – dollar signs are omitted

22 Recording Transactions On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel. What is the journal entry? April 2 Cash30,000 Gay Gillen, Capital30,000 Received initial investment from owner

23 Bound books Computer printout Cards Loose leaf pages O 4: Ledger What is a ledger? It is a digest of all accounts utilized by an entity during an accounting period.

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

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

26 Cash (1) 30,000 (2) 20,000 (4) 300 (6) 2,100 Bal. 7,600 Office Supplies (3) 500 Bal. 500 Land (2) 20,000 Bal. 20,000 Asset Accounts After Posting

27 Accounts Payable Gay Gillen, Withdrawals (1) 30,000 Bal. 30,000 (3) 500(4) 300 Bal. 200 Gay Gillen, Capital (6) 2,000 Bal. 2,000 Liabilities and Owner’s Equity Accounts After Posting

28 Details of Journals and Ledgers DateAccounts and Explanation DebitCredit April 2Cash30,000 Gay Gillen, Capital30,000 Received initial investment from owner JournalPage 1

29 Details of Journals and Ledgers Balance Date Ref. Debit Credit Debit Credit April 2 jrl 30,000 30,000 Account: CashAccount: 101 Insert the number of the journal page. Posting

30 Details of Journals and Ledgers Journal Page 1 Date Account and Explanation Post Ref. Debit Credit April 2 Cash ,000 Gay Gillen, Capital ,000 Initial investment from owner Insert the ledger account in the journal.

31 Balance Account: Cash Account No. 101 Date Item Ref. Debit Credit Debit Credit April 2 jr1 30,000 30,000 The Four-Column Account Format

32 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.

33 DEBITS CREDITS Locating Trial Balance Errors What if it doesn’t balance ? Is the addition correct? Are all accounts listed? Are the balances listed correctly?

34 Locating Trial Balance Errors Divide the difference by two. Is there a debit/credit balance for this amount posted in the wrong column? Check journal postings. Review accounts for reasonableness. Computerized accounting programs usually prohibit out-of-balance entries.

35 John’s Gas Station John is considering either purchasing a garage for $70,000 or renting one for $10,000 per year. John does not need to record in the journal all of the transactions that would affect his decision. Why?

36 John’s Gas Station John has not completed a transaction yet. However, John can visualize how the ledger accounts will be affected.

37 Rent the garage Buy the garage Cash 70,000 Building 70,000 John’s Gas Station Rent Expense Cash 10,000

38 REVISION QUESTIONS Q1: A chronological record of transactions is called A. a journal. B. a balance sheet. C. a general ledger. D. a trial balance.

39 Answer: A The journal is also called the book of original entry and is a chronological record of transactions.

40 Q2: A list of all accounts used by a business and their balances at a given time is called A. a journal. B. a balance sheet. C. an income statement. D. a trial balance.

41 Answer: D A trial balance, normally prepared at the end of an accounting period, lists all the accounts and their debit or credit balances. The columns are totaled to prove total debits are equal to total credits.

42 Q3: When recording a transaction in the general journal A. there can only be two accounts affected. B. the amount of the debits must equal the amount of the credits. C. the number of debit accounts must equal the number of credit accounts. D. at least one account from both sides of the accounting equation must be affected.

43 Answer: B In any journal entry there will be at least two accounts affected (there could be more), and total debit amounts must equal total credit amounts.

44 Q4: Which sequence correctly summarizes the accounting process? A. Prepare a trial balance, journalize transactions, post to accounts B. Post to accounts, journalize transactions, prepare a trial balance C. Journalize transactions, post to accounts, prepare a trial balance D. Journalize transactions, prepare a trial balance, post to accounts

45 Answer: C Transactions are first journalized in the journal, then posted to the ledger accounts. Once their balances are determined, a trial balance is prepared to ensure that debits equal credits.

46 Q5: The left side of a T-account is used to record A. Debits B. Credits C. Increases D. Decreases

47 Answer: A Debits are recorded on the left side of a T- account and credits are recorded on the right side of a T-account. Whether an account is increased or decreased with a debit, depends on what type of account it is.

48 Q6: Which type of account is inventory? A. Asset B. Liability C. Owner’s equity D. Expense

49 Answer: A Inventory is an asset. It is an economic resource that will benefit the company in the future when it is sold.

50 Q7: In a journal entry, is an increase in Cash a debit or a credit? A. Debit B. Credit Answer: A Cash is an asset. Assets are increased with debits.

51 Q8: In a journal entry, is an increase in Accounts Payable a debit or a credit? A. Debit B. Credit Answer: B Accounts Payable is a liability. Liabilities are increased with credits.

52 Q9: In a journal entry, is an increase in the owner’s capital a debit or a credit? A. Debit B. Credit Answer: B Capital is an owner’s equity account. Owner’s equity is increased with a credit.

53 Q10: In a journal entry, is an increase in Rent Expense a debit or a credit? A. Debit B. Credit Answer: A Increase expense accounts with a debit.

54 Q11: In a journal entry, is an increase in Fees Earned a debit or a credit? A. Debit B. Credit Answer: B Fees earned is a revenue account. Revenues are increased with credits.

55 Transactions: Oct. 10 – Earned $300 revenue on account Oct. 20 – Received $100 as payment on account Oct. 30 – Earned $200 in cash Q12: On October 31, what is the Cash balance? CashAccounts ReceivableFees Earned Bal 400Bal 200

56 Answer: $700 ($400 + $100 + $200) CashAccounts ReceivableFees Earned Bal 400Bal Bal 700

57 Transactions: Oct. 10 – Earned $300 revenue on account Oct. 20 – Received $100 as payment on account Oct. 30 – Earned $200 in cash Q13: On Oct 31, what is the Accounts Receivable balance? CashAccounts ReceivableFees Earned Bal 400Bal 200

58 Answer: $400 ($200 + $300 - $100) CashAccounts ReceivableFees Earned Bal 400Bal Bal 700Bal 400