1. Chapter 3-Recording Transactions

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The Accounting Cycle
Analyze
transactions
Prepare
post-closing
trial balance 1 9
Journalize 2 2
Close 8
Post 3
Prepare
statements 7
Prepare
unadjusted
trial balance 4
Adjust
Prepare
adjusted
trial balance 5 6
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The Account
A detailed record of increases and decreases in a specific asset, liability, or equity item.
Liabilities
Equity
Assets = +
Examples:
Cash
Accounts Payable
Owner, Capital
Accounts Receivable
Notes Payable
Owner, Withdrawals
Supplies
Unearned Revenues
Service Revenue
Furniture
Rent Expense
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4. Double-entry accounting.
at least two accounts are always affected by a transaction. After a transaction is recorded, the equation:
  Assets = Liabilities + Stockholders' Equity
must remain in balance.

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The Ledger
Contains a group of related accounts kept up to date in a systematic manner.
A record containing all accounts used by a business.
May be computerized or maintained manually.
Each company has its own unique set of accounts.
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6. General Ledger
The general ledger is a collection of accounts that accumulates the amounts reported in the major financial statements.
T-accounts are a simplified version of ledgers used in practice.

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The T Account
Represents an account in the ledger.
T-accounts are a simplified version of ledgers used in practice.
The difference between the debit side and credit side is the balance.
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8. Calculating the Account Balance
Example: 1 2 3
Steps:
Add the amounts on the debit side.
Add the amounts on the credit side.
Calculate the difference between the debits and credits.
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9. Double-Entry Accounting
Transactions are recorded using debits and credits.
Every transaction affects at least two accounts.
Equal debits and credits will keep the accounting equation in balance.
Debits = Credits
Always !
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10. Asset Accounts
Assets accounts have left-side balances. They are increased by entries on the left side (debit side) and decreased by the entries on the right side(credit side).

11. Liabilities and Equity
Liabilities and owners' equity accounts have right-side balances. They are increased by entries on the right side(credit side) and decreased by the entries on the left side(debit side).

12. Accounts keep an up-to-date record of the changes in the specific assets and equities, so that financial statements can be prepared at any time.

13. The word "charge" is often used instead of debit. Page 89 text
Debit means left.
Credit means right.
The word "charge" is often used instead of debit.
Page 89 text

14. Double-Entry Accounting= +
Assets
Assets
Liabilities
Liabilities
Liabilities
Equity
Equity
Assets
Liabilities
Owner’s Equity
Debit Credit
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15. Double-Entry Accounting
Equity Accounts
Capital
Withdrawals
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
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16. Analyze and journalize transactions
Recording transactions consists of the following steps:
 Transactions
Source Documents
Journal
Ledger
Trial Balance
Financial Statements

17. Journal Is a complete, chronological record of all transactions.
Journalizing is a process of entering an entire transaction into the journal.
It analyzes which accounts are to be debited and credited.

18. Journal
In the general journal (a complete chronological record of transactions - book of original entry), a journal entry (an analysis of the effects on the accounts - is recorded:
See page 92 in text

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Chart of Accounts
A list of all accounts used in the ledger by a company.
Unique for each company.
Accounts are usually numbered.
A ledger account is found in the Chart of Accounts
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20. Journal Entry a. the title of account(s) to be debited is placed left;
 b. the title of account(s) to be credited is indented;
 c. a brief explanation of the transaction is usually included; and
 d. the post reference column refers to the number of the account in the ledger.

21. Analyzing, Journalizing, Biwheels Transactions
 1. Analyzing a transaction for the journal and ledger requires:
 a. the accounts affected by the transaction to be identified;
 b. deciding if the accounts should be decreased or increased; and
 c. deciding if the accounts should be debited or credited.

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The General Journal
Entries are originally recorded in the General Journal. This process is called journalizing.
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23. Analyzing Transactions
When analyzing transactions it is often easier to notice any effect on cash first, then to think of the effects on other accounts.
Simple entries are for transactions that affect only two accounts.
Compound entries are for transactions that affect more than two accounts. Page 94

24. Posting Post journal entries to the ledgers
Posting" is transferring amounts from the journal to the appropriate accounts in the ledger

25. Each entry in the ledger cross-references (i. e
Each entry in the ledger cross-references (i.e., process of using numbering, dating, and/or some other form of identification to relate each ledger posting to the appropriate journal entry) back to the journal (TRANSPARENCY T3-2) page 92 text.

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Posting
The Posting Process
General journal information is transferred to the general ledger 1 3 2 5 5 4
Steps:
Identify the account.
Enter date
Enter amount
Calculate new account balance
Enter posting references
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27. Revenue and Expenses
Revenue and expenses transactions relate to the balance sheet equation through retained income. Retained income is accumulated revenue less expenses (ignoring dividends)
Revenues increase retained income
Expenses decrese retained income.
Page 96

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Normal Balances
An account’s normal balance is the debit or credit side where increases are recorded.
Liabilities
Equity
Assets = +
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Trial Balance
A list of accounts and their balances at a point in time.
Used to determine if total debits equals total credits.
Also used to prepare financial statements.
© 2007 McGraw-Hill Ryerson Ltd.

30. Contra Account
A contra account always has a companion account and it has a balance on the opposite side from the companion account.
The book value (net book value, carrying amount, or carrying value) is the balance of an account shown on the books, net of any contra accounts. Accumulated deprecation is a contra asset and is the cumulative sum of all depreciation recognized since the date of acquisition of the long-term assets.

31. Summary of transactions
Analyze transaction Journalize transaction Post transaction See page 101 in text

32. Trial Balance Listing of all accounts and their balances
Checks for mathematical accuracy
Does not mean no errors
Summary of all accounts in preparation of financial statements

33. Trial Balance Order of accounts Assets Liabilities Paid in Capital
Retained Earnings
Revenues
Expenses
See page 103 and 104

34. Closing the Books Asset accounts are permanent accounts and not closed
Income statement accounts(temporary accounts) are closed (brought to zero) so that they can be used to accumulate information for the next accounting period.

35. Closing the Books
All balances in the "temporary" stockholder' equity accounts (revenue and expense accounts) are summarized and transferred to a "permanent" stockholders' equity account, Retained Earnings.

36. Closing Process 1. Close all revenues to Income Summary
2. Close all expenses to Income Summary
3. Close Income Summary to Retained Earnings (Permanent Account)
See page 106

37. Errors
When a journal entry contains an error, the entry can be erased or crossed out and corrected - if the error has not been posted
If the error is detected after posting to ledger accounts, the accountant makes a correcting entry.

38. Errors
Some errors in recording revenues and expenses are counterbalanced by offsetting errors in the ordinary bookkeeping process in the next period. Such errors misstate net income in both periods; they also affect the balance sheet of the first period but not the second.

39. Errors
Other errors may not be counterbalanced in the ordinary bookkeeping process.
Until specific correcting entries are made, all subsequent balance sheets will be in error.

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End of chapter
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