HFT 2401 Chapter 2 Accounting for Business Transactions

Basics of Double Entry Accounting T- Accounts Debits and Credits Posting Trial Balance

Business Events of an Economic Nature are Identified These economic events are reflected in accounts

Account The basic storage unit for accounting data Accounts must be established for each separate classification  Cash  Revenue  Expenses  Assets  Liabilities  Equity

T- Account Has three basic parts  Title  Left Side  Right Side  Increases are recorded on one side of an account, while decreases are recorded on the opposite  Which side depends on what type of account it is

Sample T- Account Debits – Left Side  Increase or Decrease Credits – Right Side  Increase or Decrease

Types of Accounts Asset Accounts – Normal Balance = Debit Liability Accounts – Normal Balance = Credit Equity Accounts  Permanent Equity – Normal Balance – Credit  Temporary Owners Equity Revenue – Normal Balance = Credit Expense – Normal Balance = Debit

Asset Accounts Cash Receivables Inventories Prepaid Expenses Investments Property, Plant & Equipment (Fixed Assets)

Liabilities Payables Accrued Expenses Unearned Income Guest Prepaid (Advance Deposits) Mortgage Payable

Equity Capital Account – Permanent Equity Temporary Owners Equity – Revenues & expenses  Retained Earnings

Debits and Credits Debit – the left side of any account (dr) Credit – the right side of any account (cr) The difference between debits and credits is called the account balance An account may have either a debit or a credit balance

Double Entry Accounting Uses T-Accounts Basic Rules  Asset accounts-increased by debits and decreased by credits  Liability accounts are increased by credits and decreased by debits  Permanent Equity – Increased by credits and decreased by debits  Revenue – Increased by credits and decreased by debits  Expenses – Increased by debits and decreased by credits

Normal Balances of Accounts AssetDebit LiabilityCredit Owners Equity  CapitalCredit  RevenueCredit  ExpenseDebit  DrawDebit

Ledger / General Ledger Ledger-A group of accounts General Ledger – A group of general accounts including accounts for assets, liabilities, owners equity, revenues, expenses and owner draw Chart of accounts – a complete listing of all accounts  Samples Assets Liabilities Equity Revenue Expenses

Journals & Journalizing Where daily transactions are recorded  Income journal  Payables journal  Expense journal  Payroll journal

Journals Includes  Date of transaction  Titles of accounts used  Account number  Explanation  Page number / posting reference number  Debit and credit amounts

Posting Transferring amounts from the individual journals to the general journal Can be done daily, but must be done at least once every accounting cycle

Trial Balance A listing of all accounts and their respective debit and credit balances Sum of all debits must equal sum of all credits

Preparing the Trial Balance Determine the balance of each account in the ledger List the accounts and show balances – debits in the left column and credits in the right column Add the debits Add the credit Total must balance

Homework Assignment Problem 1 Problem 4 Problem 5 Problem 9 Handout Problem