1. CHAPTER 5
Business Accounting Cycle Part I

2. Let’s review the basic principle of revenue and expense recognition

3. Revenue and Expense Recognition - Question
Which of the following is true when a customer pays for a service at the time it is provided?
Revenue cannot be recognized even though cash has been collected
Revenue should be recognized evenly over the year
Revenue should be recognized because the service was provided
The revenue account should be increased along with accounts receivable

4. Revenue and Expense Recognition - Question
Which of the following is true when a customer pays for a service before it has been provided?
Revenue cannot be recognized even though cash has been collected
Revenue should be recognized evenly over the year
Revenue should be recognized because the service was provided
The revenue account should be increased along with accounts receivable

5. Revenue and Expense Recognition - Question
XYZ Co. collected $3,000 cash for services to be provided next month. How should this transaction be recorded?
Increase Cash; Increase Revenue
Increase Cash; Increase Unearned Revenue
Increase Accounts Receivable; Increase Revenue
Increase Cash; Decrease Accounts Receivable

6. Revenue and Expense Recognition - Question
Which of the following is true when a company pays an expense before it has been incurred?
The expense should be recognized because cash has been paid
Cash should be decreased and expenses should be increased
The expense should be recognized evenly over the next year
An asset should be recorded

7. Revenue and Expense Recognition - Question
Which of the following accounts does not require adjusting entries?
Depreciation
Prepaid Expenses
Unearned Revenue
Cash

8. Checklist Chapter 5 Transition to Debits and Credits Journal
General Ledger
Trial Balance

9. Transition to Debits and Credits
We have been using “increases” and “decreases” to record transactions.
Formal accounting requires the use of debits and credits.
Debits are recorded on the left side of the T-Account.
Credits are recorded on the right side of the T-Account.
In accounting there are always two entries of equal value for every transaction, called the double entry to ensure that each transaction balances.

10. Debit and Credit Guide
The following table shows how debits and credits will increase or decrease different accounts. Note that debit does not always mean an increase and that credit does not always mean a decrease.

11. The basic principle of debits and credits
Test Your Knowledge
The basic principle of debits and credits

12. Debits and Credits - Question
In the debit and credit system, debits are always recorded on the:
Left
Right
Left or right depending on the financial transaction
Income statement only

13. Debits and Credits - Solution
Debits are always on the left
Credits are always on the right

14. Debits and Credits - Question
What is the logic of debits and credits?
Just another name for increases and decreases
To make sure that you record every entry twice
To ensure that every left entry is always associated with a right entry to balance the balance sheet
To ensure that all assets are equal to all liabilities

15. Debits and Credits - Solution
Debit = left
Credit = right
$100,000
$70,000 =
$30,000
$100,000
$100,000
The left must always balance with the right 15 15

16. Debits and Credits - Question
An increase to an asset should normally be a:
Credit
Debit
Debit or credit depending on the asset

17. Debits and Credits - Solution

18. Debits and Credits - Question
An increase to an expense is normally a:
Debit
Credit
Debit or credit depending on the type of expense

19. Debits and Credits - Solution

20. Debits and Credits - Question
True or False? Depending on the type of transaction, you can have either have only two debits or only have two credits.
True
False

21. Debits and Credits - Solution
To keep the balance sheet in balance, every left entry (which is a debit) must always be associated with a right entry, being the credit. There is never an exception to this rule.
100,000
100,000

22. Debits and Credits - Question
An increase to a liability is normally:
A debit
A credit
Depends on the type of liability

23. Debits and Credits - Solution

24. Entry to Record Paying Cash for Rent
Rent Expense
If you are recording a payment towards your rent, it increases (DR) your expenses and decreases (CR) your cash, as you have just made a cash payment.
Equity would also decrease.

25. Entry for Paying Accounts Payable
If you are recording a payment towards your Accounts Payable, it decreases (DR) because you now owe less to that supplier and cash decreases (CR) because you have used cash to make that payment.
Cash
Accounts Payable

26. Debits and Credits - Question
The entry to record the payment of bank loan principal requires:
Debit expense, credit cash
Debit bank loan, credit cash
Debit cash, credit bank loan
There are no entries as this transaction has no effect on owner’s equity

27. Debits and Credits - Solution
Cash
Bank Loan

28. Debits and Credits - Question
Complete the following transactions in table format. The first transaction has been completed as an example.
Provided services for a customer and received $4,000 cash.
Received a bank loan of $6,000 cash.
Received a $400 bill for utilities which will be paid later.
Provided services to a customer who will pay $2,000 next month.
Paid the utilities bill recorded earlier with $400 cash.

29. Debits and Credits - Solution
Account Name
Increase or Decrease
Debit
Credit 1
Cash
Increase
4,000
Service Revenue 2
6,000
Bank Loan 3
Utilities Expense
400
Accounts Payable 4
Accounts Receivable
2,000 5
Decrease

30. Checklist Chapter 5 Transition to Debits and Credits Journal
General Ledger
Trial Balance

31. Chart of Accounts
Each account (cash, telephone expenses, rent, maintenance, accounts receivable, etc.) is assigned a unique identifying account number.
For example:
100 to 199 = Asset accounts
200 – 299 = Liability accounts
300 – 399 = Equity accounts
400 – 499 = Revenue accounts
500 – 599 = Expense accounts

32. Chart of Accounts
Here is an example of a chart of accounts for a small service company.

33. Transition to Journal Entries
Jan 1: Received $2,000 cash for providing services to a customer Jan 4: Pay $180 cash for telephone bill
Debit
Credit
Cash
2,000
Service Revenue
2,000
Cash
180
Telephone Expense
180
2,180
We now need to formally enter these transactions in an accounting record. 33

34. Journal Entries JOURNAL Page 1 Date Account Title and Explanation PR
Debit
Credit
2011
Jan 1
Cash
101
2,000
Service Revenue
400
Provided services for cash
Jan 4
Telephone Expense
550
180
Paid telephone bill
Date & year: Journal entries are in chronological order.
Debited accounts will always be listed first.
Credited accounts will always be listed after the debited accounts.
The amount of the transaction entered in the appropriate debit and credit column.
A brief explanation will follow each transaction.
Unique account identifying number for each account. These numbers are from the chart of accounts.

35. Journal Entries JOURNAL Page 1
Date
Account Title and Explanation PR
Debit
Credit
2011
Jan 1
Cash
101
2,000
Service Revenue
400
Provided services for cash
Jan 4
Telephone Expense
550
180
Paid telephone bill
While entering transactions into a journal you will notice that the transactions for each account are scattered (e.g. increases and decreases to cash will appear many times without providing the total balance of cash). All the activities need to be grouped into their own accounts, which is done in the general ledger.

36. Journal Entries - Question
True or False? Every journal entry will have at least one debit and one credit.
True
False

37. Journal Entries - Question
Which of the following is normally true about the order of line entries within each journal entry?
Income statement accounts appear after balance sheet accounts
The line entries are listed throughout the journal entry in order of the PR number
Debits appear together, before credits

38. Checklist Chapter 5 Transition to Debits and Credits Journal
General Ledger
Trial Balance

39. General Ledger
The general ledger organizes each account and tracks the balance of each account. Information is extracted from the journal and grouped together into the various accounts. Records can be easily accessed and sorted by account.

40. General Ledger Transfer the date. Transfer the journal page number.
Enter the amount in the proper column.
Account:
GL No.
Date
Description PR
Debit
Credit
Balance
Cash
101
Notice the running balance
Jan 1 J1
2,000
2,000 DR
Jan 4 J1
180
1,820 DR
Update the account balance.
Enter the account number in the journal.
Repeat the steps for all lines in the journal.
Account:
GL No.
Date
Description PR
Debit
Credit
Balance
Service Revenue
400
Jan 1 J1
2,000
2,000 CR
Account:
GL No.
Date
Description PR
Debit
Credit
Balance
Telephone Expenses
550
Jan 4 J1
180
180 DR 40

41. General Ledger - Question
True or False? All journal entries should be posted to the general ledger.
True
False

42. Checklist Chapter 5 Transition to Debits and Credits Journal
General Ledger
Trial Balance

43. The Trial Balance
Every debit must have a credit entry to keep the balance sheet in balance. To ensure that this has been done, it is necessary to complete a trial balance. The closing balance from each general ledger account must be transferred to the trial balance. All debit balances are transferred to the debit side and all credits are transferred to the credit side.

44. Creating a Trial Balance
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jan 1 J1
2,000 DR
Jan 4
180
1,820
List the account name.
Transfer the ending balance to the proper side of the trial balance.
Repeat for each account.
Total the debit and credit columns to ensure the trial balance balances.
Account: Service Revenue
GL No. 400
Date
Description PR
Debit
Credit
Balance
Jan 1 J1
2,000 CR
Account: Telephone Expense
GL No. 550
Date
Description PR
Debit
Credit
Balance
Jan 4 J1
180 DR
This slide has numerous animations.
Trial Balance
January 31, 2013
Account
Debit
Credit
Total
Cash
1,820
Service Revenue
2,000
Telephone Expense
180
2,000
2,000

45. Trial Balance - Question
What is the main purpose of the trial balance?
To ensure the financial statements will be accurate
To ensure that total debits equals total credits
To prepare adjusting entries
To see what caused the changes in an account balance

46. Trial Balance - Question
True or False? A general ledger can be prepared after the trial balance has been prepared.
True
False

47. Checklist Chapter 5 Transition to Debits and Credits Journal
General Ledger
Trial Balance

48. Complete the following exercise.

49. Exercise
We will enter 5 transactions, one step at a time: Use the chart of accounts shown earlier in this presentation, which is also found on page 105 of your textbook.
Date
Description
Amount
June 2
Received and deposited payment from repair work
$2,000
June 3
Paid employee salary
600
June 4
Paid rent with cash
400
June 5
Purchased equipment to be paid next month
9,000
June 6
Paid cash towards accounts payable

50. Exercise
June 2. Received and deposited payment from repair work: $2,000
JOURNAL Page 1
DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 2
Cash
101
2,000
Service Revenue
400
2,000
Performed services for cash

51. Exercise June 3. Paid employee salary: $600 JOURNAL Page 1 DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 3
Salaries Expense
545
600
Cash
101
600
Paid employee salary

52. Exercise June 4. Paid rent with cash: $400 JOURNAL Page 1 DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 4
Rent Expense
540
400
Cash
101
400
Paid rent with cash

53. Exercise June 5. Purchased equipment to be paid next month: $9,000
JOURNAL Page 1
DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 5
Property, Plant & Equipment
120
9,000
Accounts Payable
200
9,000
Purchased equipment on account

54. Exercise June 6. Paid cash towards accounts payable: $400
JOURNAL Page 1
DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 6
Account Payable
200
400
Cash
101
400
Paid a portion of accounts payable

55. Exercise
The information from the journal must now be posted to the general ledger. We will examine each journal transaction in turn and post the amounts to the general ledger.

56. Exercise JOURNAL Page 1 DATE ACCOUNT TITLE & EXPLANATION PR DEBIT
CREDIT
Jun 2
Cash
101
2,000
Service Revenue
400
Performed services for cash
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000
2,000 DR
Account: Service Revenue
GL No. 400
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000
2,000 CR

57. Exercise Notice the running total in the Cash account balance.
JOURNAL Page 1
DATE
ACCOUNT TITLE & EXPLANATION PR
DEBIT
CREDIT
Jun 3
Salaries Expense
545
600
Cash
101
Paid employee salary
Notice the running total in the Cash account balance.
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000 DR
Jun 3 J1
600
1,400 DR
Account: Salaries Expense
GL No. 545
Date
Description PR
Debit
Credit
Balance
Jun 3 J1
600
600 DR

58. Exercise JOURNAL Page 1 DATE ACCOUNT TITLE & EXPLANATION PR DEBIT
CREDIT
Jun 4
Rent Expense
540
400
Cash
101
Paid rent with cash
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000 DR
Jun 3
600
1,400
Jun 4 J1
400
1,000 DR
Account: Rent Expense
GL No. 540
Date
Description PR
Debit
Credit
Balance
Jun 4 J1
400
400 DR

59. Exercise JOURNAL Page 1 DATE ACCOUNT TITLE & EXPLANATION PR DEBIT
CREDIT
Jun 5
Property, Plant & Equipment
120
9,000
Accounts Payable
200
Purchased equipment on account
Account: Property, Plant & Equipment
GL No. 120
Date
Description PR
Debit
Credit
Balance
Jun 5 J1
9,000
9,000 DR
Account: Accounts Payable
GL No. 200
Date
Description PR
Debit
Credit
Balance
Jun 5 J1
9,000
9,000 CR

60. Exercise JOURNAL Page 1 DATE ACCOUNT TITLE & EXPLANATION PR DEBIT
CREDIT
Jun 6
Accounts Payable
200
400
Cash
101
Paid a portion of accounts payable
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000 DR
Jun 3
600
1,400
Jun 4
400
1,000
Jun 6 J1
400
600 DR
Account: Accounts Payable
GL No. 200
Date
Description PR
Debit
Credit
Balance
Jun 5 J1
9,000 CR
Jun 6 J1
400
8,600 CR

61. Exercise
The information from the ledger must now be used to create a trial balance. The ledger balances will be given to you to create the trial balance.

62. Property, Plant & Equipment
Exercise
Account: Cash
GL No. 101
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000 DR
Jun 3
600
1,400
Jun 4
400
1,000
Jun 6
Trial Balance
January 31, 2013
Account
Debit
Credit
Total
Cash
$600
Account: Property, Plant & Equipment
GL No. 120
Date
Description PR
Debit
Credit
Balance
Jun 5 J1
9,000 DR
Property, Plant & Equipment
9,000
Accounts Payable
$8,600
Service Revenue
2,000
Account: Accounts Payable
GL No. 200
Date
Description PR
Debit
Credit
Balance
Jun 5 J1
9,000 CR
Jun 6
400
8,600
Rent Expense
400
Salaries Expense
600
$10,600
$10,600
Account: Service Revenue
GL No. 400
Date
Description PR
Debit
Credit
Balance
Jun 2 J1
2,000 CR
Account: Rent Expense
GL No. 540
Date
Description PR
Debit
Credit
Balance
Jun 4 J1
400 DR
Account: Salaries Expense
GL No. 545
Date
Description PR
Debit
Credit
Balance
Jun 3 J1
600 DR

63. End of Chapter 5