1. Recording Transactions
Lecture 3

2. Learning Objectives (LO)
After studying this chapter, you should be able to
Use double-entry accounting
Describe the five steps in the recording process
Analyze and journalize transactions and post journal entries to the ledgers
Prepare and use a trial balance
Close revenue and expense accounts and update retained earnings
Correct erroneous journal entries and describe how errors affect accounts
Explain how computers have transformed the processing of accounting data

3. LO 1 – Double-Entry System
Basic accounting equation + specific accounts (Act.)
ASSETS = LIABILITIES + OWNERS’ EQUITY
Cash Accounts Payable Paid in Capital
Accounts Receivable Notes Payable Retained Earnings
Prepaid items Revenue
Equipment Expenses
Building Gains (later)
Land Losses (later)
Distributions to owners
Dividends
At least two entries required to maintain equality
NET
INCOME

4. LO 1 – Double-Entry System
Analyze transactions, events, circumstances – looking for three things
Which accounts are affected?
What amounts are involved?
In which direction did the accounts change?
Up = +; Down = “–” Debits and credits
Analogy – check register for cash (the account)
Date
Reference Description
Deposit
Withdrawal
Balance
Beginning balance
1,000
6/20/20X2
6/22/20X2
Paycheck
Groceries
200 32
1,200
1.168

5. LO 1 – Double-Entry System
T-account = visualization of every account
EVERY ACCOUNT
Left side
DEBIT
Increase (+) or decrease (–)?
Right side
CREDIT
Increase (+) or Decrease (–)?
Assets
Liabilities
Owners’ Equity = + D C D C
Paid in Capital
Retained Earnings D C
Revenue
(Expense)
(Dividend) D C D C D C

6. LO 1 – Double-Entry System
T-account = visualization of every account
EVERY ACCOUNT
Left side
DEBIT
Increase (+) or decrease (–)?
Right side
CREDIT
Increase (+) or Decrease (–)?
Assets
Liabilities
Owners’ Equity = + D + C – D – C +
Paid in Capital
Retained Earnings D – C +
Revenue
(Expense)
(Dividend) D – C + D – C + D – C +

7. LO 1 – Double-Entry System
Usage as a verb
Debit
Credit
Assets
Increase
Decrease
Liabilities
Owners’ Equity
Paid-in Capital
Retained Earnings
Revenues
(Expenses)
(Dividends)
Debits increase
these accounts
but they also
reduce owners’
equity
At least two entries are required to keep the
accounting equation in balance

8. LO 2 – Recording Process
Transaction Documentation - original records underlying transactions, events, circumstances are analyzed to determine the amounts, accounts, and direction (up/down) each caused
Journal – chronological listing of events (diary)
Ledger – grouping like events into one record, e.g. cash in minus cash out = cash balance
Trial Balance – ledger acts. collectively balance
Transactions
Documentation
Journal
Ledger
Trial
Balance
Financial
Statements

9. LO 2 – Recording Process Analyze each transaction to find
Accounts – Chart of accounts used in the business
Amounts – given/obvious or have to back into
Beg.(10) + Purchase (5) less Used (?) = End (4)
Direction - Debit Assets Liabilities/owners’ equity
- Credit Assets Liabilities/owners’ equity

10. LO 3 –Posting to Ledger Accounts
Posting = copying amounts from the journal to the ledger
At least two postings per transaction
For complex events, could involve many accounts (called compound journal entries)
Cross-referencing - using numbering, dating, and/or some other identification in the ledger to trace it back to the appropriate journal entry or vice versa

11. LO 3 –Posting to Ledger Accounts
Ledger formats may differ

12. LO 3 – Journal/Ledger Examples
Sale of merchandise on credit (Part 1)
Transaction: Customer charged purchase $180,000; paid later in full
Analysis: Accounts Receivable and ultimately Cash increase
Stockholders’ equity increases because Revenue was earned at the time of sale
Journal Entry: Accounts Receivable ,000
Revenue ,000
Cash ,000
Accounts Receivable ,000
Posting:
Cash Accounts Receivable Revenue
180,000
180,000
180,000
180,000

13. LO 3 – Journal/Ledger Examples
Sale of merchandise on credit (Part 2)
Transaction: Cost of merchandise sold, $100,000
Analysis: Merchandise Inventory decreases
Stockholders’ equity decreases because an expense account Cost of Goods Sold (a negative stockholders’ account) increases
Journal Entry: Cost of Goods Sold ,000
Merchandise Inventory ,000
Posting:
Merchandise Inventory Cost of Goods Sold
100,000
100,000

14. LO 3 – Journal/Ledger Examples
Sale of merchandise on credit (Part 3)
Transaction: Customer pays for charged purchase $180,000
Analysis: Accounts Receivable decreases and Cash increases
Journal Entry: Cash ,000
Accounts Receivable ,000
Cash Accounts Receivable Revenue
Posting:
180,000
180,000
180,000
180,000

15. LO 3 – Journal/Ledger Examples
Cash is received before it is earned
Transaction: Customer paid $5,000 in advance, service later performed
Analysis: Cash increases
Unearned Revenue (liability) increases then decreases
Stockholders’ equity increases when Revenue is earned
Journal Entry: Cash 5,000
Unearned Revenue 5,000
Unearned Revenue 5,000
Revenue 5,000
Posting:
Cash Unearned Revenue Revenue
5,000
5,000
5,000
5,000

16. LO 3 – Journal/Ledger Examples
Purchased an asset before consuming 1/3 of it
Transaction: Cost of assets acquired = $6,000; consumed = $2,000
Analysis: Prepaid Rent increases then decreases when consumed
Cash decreases
Stockholders’ equity decreases because an expense account Rent Expense (a negative stockholders’ account) increases
Journal Entry: Prepaid Rent ,000
Cash ,000
Rent Expense 2,000
Prepaid Rent 2,000
Posting:
Cash Prepaid Rent Rent Expense
6,000
6,000
2,000
2,000

17. LO 3 – Journal/Ledger Examples
Purchase an asset and depreciate it (Part 1)
“Matching” suggests expenses include only those costs that contribute to the production of revenue
To deduct total cost of multi-year asset in first year is poor matching
Alternative approach – deduct some each year
Cost ($1,000) less its salvage value ($0) = amount allocated
Estimated useful life (10 years) each year ($100)

18. LO 3 – Journal/Ledger Examples
Purchase an asset and depreciate it (Part 2)
Transaction: Buy equipment $10,000; 10 year life; zero salvage value
Analysis: Cash decrease, Equipment increases then decreases
Stockholders’ equity decreases because an expense account Depreciation Expense (a negative stockholders’ account) increases
Journal Entry: Equipment ,000
Cash ,000
Depreciation Expense * 1,000
Equipment ,000
* {10,000 – 0) / 10 year life = 1,000 / year}
Posting:
Cash Equipment Depreciation Exp.
10,000
10,000
1,000
1,000

19. LO 3 – Journal/Ledger Examples
Purchase an asset and depreciate it (Part 3)
Transaction: Buy equipment $10,000; 10 year life; zero salvage value
Analysis: If reduce Equipment account directly, lose track of initial
Cost. Better to split amounts into two accounts
1) original cost, and 2) amount of cost allocated
Accumulated Depreciation (contra asset account)
Journal Entry: Depreciation Expense * 1,000
Accumulated Depreciation 1,000
* {10,000 – 0) / 10 year life = 1,000 / year}
Posting:
Equipment Accumulated Depreciation
Depreciation Expense
10,000
1,000
1,000

20. LO 3 – Journal/Ledger Examples
Purchase an asset and depreciate it (Part 4)
Equipment ,000
Less Accumulated Depreciation (1,000)
Book Value (appears in the statements) 9,000