C2 - 1 Recording Business Transactions Chapter 2

C2 - 2 Objective 1 Describe the role of accounts in summarizing business transactions

C2 - 3 The Accounting Process Record Transactions in the Journal Copy (post) to the Ledger Prepare the Trial Balance Copyright © 2007 Prentice-Hall. All rights reserved 3

C2 - 4 Account Basic summary device –Describes a category of asset, liability, or expense –Example: land, cash, office supplies After posting is completed, an account it becomes a detailed record of increases and decreases in these categories of assets, liabilities, or owner’s equity during a period

C2 - 5 Recording Transactions in the Journal This is when you write down (in a list) the accounts that will be increased and decreased. Example –Increase (Debit) the Cash Account and Increase (Credit) the Service Revenue Account

C2 - 6 Posting This is when you go through your list of transactions, (the journal), and you record them in the accounts. After posting is completed, an account it becomes a detailed record of increases and decreases in these categories of assets, liabilities, or owner’s equity during a period

C2 - 7 Posting Example Journal entry –Increase (debit) cash $2,000 –Increase (credit) bank note $2,000 Cash $2,000 Bank Note $2,000

C2 - 8 Ledger Book or printout holding all the accounts

C2 - 9 Chart of Accounts A list of accounts in the ledger is called a chart of accounts.

C Smart Touch Learning Chart of Accounts Balance Sheet Income Statement 1.Assets 101 Cash 111 Accounts Receivable 121 Notes Receivable 141 Supplies 151 Furniture 171 Building 191 Land 2.Liabilities 201 Accounts Payable 211 Salary Payable 221Interest Payable 231 Notes Payable 3.Owner’s Equity 301 Sheena Bright, Capital 311 Sheena Bright, Withdrawal 4.Revenue 401Service Revenue 402 Interest Revenue 5.Expenses 501 Rent Expense, Comp. 502 Rent Expense, Office 505 Salary Expense 510 Depreciation Expense 520 Utilities Expense 530Advertising Expense 540 Supplies Expense

C Objective 2 Explain double entry accounting

C Double Entry System Record transactions in a way that keeps the profit equation in balance. –Assets = Liabilities + Owner’s Equity Each transaction affects at least two accounts –(This is why it is called “double entry”) –Each transaction is recorded with at least One debit One credit Total debits must equal total credits

C Total debits = Total credits Increase asset (debit) and then –Decrease asset (credit) –Increase liability (credit) –Increase owner’s equity (credit) Decrease asset (credit) and then –Increase asset (debit) –Decrease liability (debit)

C Total debits = Total credits Increase liability (credit) and then –Increase asset (debit) –Decrease liability (debit) –Decrease owner’s equity (debit) Decrease liability (debit) and then –Decrease asset (credit) –Increase liability (credit) –Increase owner’s (credit)

C Total debits = Total credits Increase owner’s equity (credit) and then –Increase asset (debit) –Decrease liability (debit) –Decrease owner’s equity (debit) Decrease owner’s equity (debit) and then –Decrease asset (credit) –Increase liability (credit) –Increase owner’s (credit)

C Account Name (Left Side) Debit (Right Side) Credit Tool for analyzing and determining the balance in a given account T-Account Assets are normally debit Liabilities and owner’s equity are normally credit

C Assets Debit Credit Rules of Debit and Credit LiabilitiesEquity=+ Debit Credit Debit Credit

C LiabilitiesEquityAssets=+ Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance

C2 - 19

C Sheena Bright deposits $30,000 in a bank account for her business Business Transactions General Journal receive Debit give Credit Smart Touch Learning (investee) Sheena Bright(investor) give Credit Entry 1. DateDescriptionDebitCredit Apr 1

C Sheena Bright Deposits $30,000 in a bank account for her business Business Transactions General Journal receive Debit give Credit Smart Touch Learning (investee) Cash Sheena Bright (investor) give Credit Apr 1. DateDescriptionDebitCredit Apr 1Cash 30,000

C Sheena Bright deposits $20,000 in a bank account for her business. Business Transactions General Journal DateDescriptionDebitCredit Apr 1Cash 30,000 Sheena Bright, Capital 30,000 receive Debit give Credit Smart Touch Learning (investee) Cash A promise to the owner Sheena Bright (investor) give Credit Apr 1.

C Smart Touch buys Land for $20,000. Business Transactions receive Debit give Credit Smart Touch (buyer) Land Owner (seller) give Credit Apr 2. General Journal DateDescriptionDebitCredit Apr 2

C Smart Agency buys Land for $20,000. Business Transactions receive Debit give Credit Smart Touch (buyer) Land Land Owner (seller) give Credit Apr 2. General Journal DateDescriptionDebitCredit Apr 2Land 20,000

C Smart Touch buys Land for $20,000. Business Transactions receive Debit give Credit Smart Touch (buyer) Land Cash Land Owner (seller) give Credit Apr 2. General Journal DateDescriptionDebitCredit Apr 2Land 20,000 Cash 20,000

C Smart Touch purchased Supplies on account for $500 Business Transactions receive Debit give Credit Smart Touch (borrower) Supplier (granter of credit) give Credit Apr 3. General Journal DateDescriptionDebitCredit Apr 3

C Purchased supplies on account for $500 Business Transactions receive Debit give Credit Smart Touch (borrower) Supplier (Granter of credit) give Credit Apr 3. General Journal DateDescriptionDebitCredit Apr 3Supplies 500

C Purchased supplies on account of $500 Business Transactions receive Debit give Credit Smart Touch (borrower) Supplier (Granter of credit) give Credit Apr 3. General Journal DateDescriptionDebitCredit Apr 3Supplies 500 Accounts Payable 500

C Smart Touch Learning Trial Balance April 30, 2010 Cash10,000 Supplies500 Land20,000 Accounts Payable500 Sheena Bright, Capital30,000 30,500 30,500

C RevenuesExpenses Owner’s Capital Owner’s Withdrawals _ + _ Expanding the Rules of Debit and Credit Owner’s Equity Debit Credit Debit Credit Debit Credit Debit Credit

C Owner’s Equity Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + RevenuesRevenuesExpensesExpenses Owner’s Capital Owner’s Withdrawals ____ Debit Credit + - NormalBalanceNormalBalanceNormalBalanceNormalBalance

C Smart Touch received $5,500 cash for services provided. Business Transactions receive Debit give Credit Smart Touch (seller) Customer (buyer) give Credit Apr 8. General Journal DateDescriptionDebitCredit Apr 8

C Smart Touch received $5,500 cash for services provided. Business Transactions receive Debit give Credit Smart Touch (seller) Cash Customer (buyer) give Credit Apr 8. General Journal DateDescriptionDebitCredit Apr 8Cash 5,500

C Smart Touch received $5,500 cash for services provided Business Transactions receive Debit give Credit Smart Touch (seller) Cash Customer (buyer) give Credit Apr 8. Services General Journal DateDescriptionDebitCredit Apr 8Cash 5,500 Service Revenue 5,500

C Smart Touch provided $3,000 of services on credit Business Transactions receive Debit give Credit Smart Touch (seller) Customer (buyer) give Credit Apr 10. General Journal DateDescriptionDebitCredit Apr 10

C Smart Touch provided $3,000 of services on credit. Business Transactions receive Debit give Credit Smart Touch (seller) Accounts Receivable Customer (buyer) give Credit Apr 10. General Journal DateDescriptionDebitCredit Apr 10Accounts Receivable3,000

C Smart Touch provided $3,000 of services on credit. Business Transactions receive Debit give Credit Smart Touch (seller) Accounts Receivable Customer (buyer) give Credit Apr 10. Services General Journal DateDescriptionDebitCredit Apr 10Accounts Receivable 3,000 Service Revenue 3,000

C DateDescriptionDebitCredit Smart Touch paid: rent, comp. $600, rent, office $1,000, salaries, $1,200, utilities, $400. Business Transactions General Journal receive Debit give Credit Smart Touch (buyer) Various suppliers give Credit Apr 15.

C DateDescriptionDebitCredit Apr 15 Rent Expense: Comp600 Rent Expense: Office1,000 Salary Expense1,200 Utilities Expense400 Smart Touch paid: rent, comp.$600; rent, office, $1,000; salaries, $1,200; Utilities, $400; Business Transactions General Journal receive Debit give Credit Smart Touch (buyer) Services, benefits Various suppliers give Credit Apr 15

C DateDescriptionDebitCredit Apr 15 Rent Expense: Comp600 Rent Expense: Office1,000 Salary Expense1,200 Utilities Expense400 Cash 3,200 Smart Touch paid: rent, comp.$600; rent, office, $1,000; salaries, $1,200; Utilities, $400; Business Transactions General Journal receive Debit give Credit Smart Touch (buyer) Services, benefits Various suppliers give Credit Apr 15

C Smart Touch paid $300 of the $500 owed to a supplier. Business Transactions receive Debit give Credit Smart Touch (payor) Reduction in obligation Supplier (payee) give Credit Apr 21 General Journal

C Smart Touch paid $300 of the $500 owed to a supplier. Business Transactions receive Debit give Credit Smart Touch (payor) Reduction in obligation Supplier (payee) give Credit Apr 21 General Journal DateDescriptionDebitCredit Apr 21Accounts Payable 300

C Smart Touch paid $300 of the $500 owed to a supplier. Business Transactions receive Debit give Credit Smart Touch (payor) Reduction in obligation Supplier (payee) give Credit Apr 21. Cash General Journal DateDescriptionDebitCredit Apr 21Accounts Payable 300 Cash 300

C DateDescriptionDebitCredit Smart Touch received $2,000 from the client billed on the 10 th. Business Transactions General Journal receive Debit give Credit Reduction in account rec. (buyer) Receive cash from client give Credit Apr 22.

C DateDescriptionDebitCredit Apr 22 Cash 2,000 Smart Touch received $2,000 from the client billed on the 10 th. Business Transactions General Journal receive Debit give Credit Reduction in account rec. (buyer) Receive cash from client give Credit Apr 22.

C DateDescriptionDebitCredit Apr 22 Cash 2,000 Accounts Receivable 2,000 Smart Touch received $2,000 from the client billed on the 10 th. Business Transactions General Journal receive Debit give Credit Reduction in account rec. (buyer) Receive cash from client give Credit Apr 22.

C DateDescriptionDebitCredit Smart Touch received $9,000 for the sale of land. Business Transactions General Journal receive Debit give Credit Purchase land (buyer) Receive cash for land sale give Credit Apr 24.

C DateDescriptionDebitCredit Apr 24 Cash 9,000 Smart Touch received $9,000 for the sale of land. Business Transactions General Journal receive Debit give Credit Purchase land (buyer) Receive cash for land sale give Credit Apr 24.

C DateDescriptionDebitCredit Apr 24 Cash 9,000 Land 9,000 Smart Touch received $9,000 for sale of land Business Transactions General Journal receive Debit give Credit Purchase of land (buyer) Receive cash or land sale give Credit Apr 24.

C Smart Touch received utility bill to be paid next month. $100 Business Transactions receive Debit give Credit Smart Touch (buyer) Supplier (utility Co. ) give Credit Apr 30. General Journal DateDescriptionDebitCredit Apr 30

C Smart Touch received utility bill to be paid next month. $100 Business Transactions receive Debit give Credit Smart Touch (buyer) Supplies Supplier (Utility Co.) give Credit Apr 30. General Journal DateDescriptionDebitCredit Apr 30Utilities Expense100

C Smart Touch received utility bill to be paid next month. $100 Business Transactions receive Debit give Credit Smart Touch (buyer) Supplies Supplier (Utility Co.) give Credit Apr 30. A promise to pay later General Journal DateDescriptionDebitCredit Apr 30Utilities Expense 100 Accounts Payable 100

C Sheena Bright withdrew $2,000 for personal use. Business Transactions receive Debit give Credit Smart Touch (payor) Sheena Bright(payee) give Credit Apr 30. General Journal DateDescriptionDebitCredit Apr 30

C Sheena Bright withdrew $2,000 for personal use. Business Transactions S receive Debit give Credit Smart touch (payor) Reduction in obligation Sheena Bright(payee) give Credit Apr 30. General Journal DateDescriptionDebitCredit Apr 30Sheena Bright, Withdrawals 2,000

C Withdrew $2,000 for personal use. Business Transactions receive Debit give Credit Smart Touch (payor) Reduction in obligation Sheena Bright(payee) give Credit Apr 30. Cash General Journal DateDescriptionDebitCredit Apr 30 Sheena Bright, Withdrawals 2,000 Cash 2,000

C Smart Touch Learning Trial Balance April 30, 2010 Cash21,000 Accounts Receivable1,000 Supplies500 Land11,000 Accounts Payable300 Sheena Bright, Capital30,000 Sheena Bright, Withdrawals2,000 Service Revenue 8,500 Rent Expense, Computer600 Rent Expense, Office1,000 Salary Expense1,200 Utilities Expense500 38,80038,800

C Financial Statements Smart Touch Learning Income Statement Month Ended April 30, 2010 Service Revenue$8,500 Expenses: Salary expense$1,200 Rent Expense, Office1,000 Rent Expense, Computer600 Utilities Expense 500 Total expenses3,300 Net income$5,200

C Financial Statements Sheena Bright, capital, April 1, 2010$ 0 Add: Investment by owner $30,000 Net income 5,200 Subtotal $35,200 Less withdrawals2,000 Sheena Bright, Capital April 30, 2010$33,200 Smart Touch Learning Statement of Owners Equity Month Ended April 30, 2010

C Smart Touch Learning Balance Sheet April 30, 2010 Assets Liabilities Cash $21,000 Accounts payable $ 300 Accounts receivable 1,000 Office Supplies 500 Owner’s Equity Land 11,000 Sheena Bright, Capital33,200 Total assets 33,500 Total liabilities & owner’s equity 33,500