1. Recording Business Transactions Chapter 2 2-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

2. Learning Objectives 1.Explain accounts as they relate to the accounting equation and describe common accounts 2.Define debits, credits, and normal account balances using double-entry accounting and T-accounts 3.Record transactions in a journal and post journal entries to the ledger 2-2Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

3. Learning Objectives 4.Prepare the trial balance and illustrate how to use the trial balance to prepare financial statements 5.Use the debt ratio to evaluate business performance 2-3Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

4. Learning Objective 1 Explain accounts as they relate to the accounting equation and describe common accounts 2-4Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

5. What Is an Account? Each element of the Accounting Equation contains smaller elements called accounts. AccountAccount—the detailed record of all increases and decreases that have occurred in an individual asset, liability, equity, revenue or expense during a specified period. LiabilitiesAssets =+ Equity 2-5Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

6. Chart of Accounts Chart of AccountsCompanies typically maintain a listing of all of the accounts that they use in their accounting system, called the Chart of Accounts. Often accounts are numbered. –The numbers will usually be grouped by account type. Large companies can have thousands of different accounts that are used in their accounting system. It is easier to reference a specific account if there is a number assigned to it. 2-6Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

7. Chart of Accounts 2-7Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

8. Learning Objective 2 Define debits, credits, and normal account balances using double- entry accounting and T-accounts 2-8Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

9. What Is Double-Entry Accounting? Transactions always have two impacts on the accounting equation. –When Smart Touch bought land, the Land account increased, but the Cash account decreased by the same amount. –These “double” entries help keep the accounting equation in balance. 2-9Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

10. What Is a T-Account? A T-account is a shortened visual form of the more formal general ledger account format. Increases are shown on one side of the T-account and decreases on the other side. The T-account is balanced at the end of each period. 2-10Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

11. What Are Debits and Credits? Debits and Credits are used to record the increases and decreases in T-accounts. –Debit means “left” –Credit means “right” Any time we put a debit in one account, we have to put an equal credit in another account. 2-11Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

12. What Are Debits and Credits? An account with more debits than credits will have a “debit” balance. An account with more credits than debits will have a “credit” balance. Some accounts will be increased with debits, and some accounts will be increased with credits. 2-12Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

13. What Are Debits and Credits? We can explain the balancing impact of transactions using T-accounts and debits and credits. 2-13Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

14. What Are Debits and Credits? When Smart Touch purchases land, we use debits to increase the Land account, and credits to decrease the Cash account. 2-14Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

15. Increases in company’s contributions or distributions will be reflected in the changing Common Stock and Dividends accounts, respectively. What Are Debits and Credits? 2-15Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

16. When revenues exceed expenses, net income increases Retained Earnings. What Are Debits and Credits? 2-16Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

17. Learning Objective3 Record transactions in a journal and post journal entries to the ledger 2-17Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

18. How Do You Record Transactions? The next step in the process is to formally record the transaction in the General Journal. 2-18Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

19. How Do You Record Transactions? Transactions are first recorded using a “journal entry." The account to be debited is usually written first. 2-19Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

20. How Do You Record Transactions? In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock. Cash should be debited for $30,000 and Common Stock should be credited for $30,000. 2-20Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

21. How Do You Record Transactions? In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock. Cash should be debited for $30,000 and Common Stock should be credited for $30,000. 2-21Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

22. How Do You Record Transactions? Next, each amount should be “posted” to the appropriate T-account. NOTWithout this step, the trial balance will NOT balance. 2-22Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

23. How Do You Record Transactions? 2-23Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

24. How Do You Record Transactions? In Transaction #2, Smart Touch purchased Land for $20,000 cash. Land should be debited for $20,000 and Cash should be credited for $20,000. 2-24Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

25. How Do You Record Transactions? In Transaction #2, Smart Touch purchased Land for $20,000 cash. Land should be debited for $20,000 and Cash should be credited for $20,000. 2-25Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

26. How Do You Record Transactions? Next, each amount should be “posted” to the appropriate T-account. NOTWithout this step, the trial balance will NOT balance. 2-26Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

27. How Do You Record Transactions? 2-27Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

28. How Do You Record Transactions? In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash. Office Supplies should be debited for $500 and Accounts Payable should be credited for $500. 2-28Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

29. How Do You Record Transactions? In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash. Office Supplies should be debited for $500 and Accounts Payable should be credited for $500. 2-29Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

30. How Do You Record Transactions? Next, each amount should be “posted” to the appropriate T-account. NOTWithout this step, the trial balance will NOT balance. 2-30Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

31. How Do You Record Transactions? 2-31Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

32. Learning Objective 4 Prepare the trial balance and illustrate how to use the trial balance to prepare financial statements 2-32Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

33. Trial Balance The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. The amounts come from the individual account balances in the General Ledger. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall2-33

34. First, we prepare the Income Statement. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall2-34

35. The information for the Statement of Retained Earnings comes from the trial balance AND from the Income Statement. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall2-35

36. The information for the Statement of Owner’s Equity comes from the trial balance AND from the Income Statement. Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall2-36

37. Learning Objective 5 Use the debt ratio to evaluate business performance 2-37Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

38. The Debt Ratio The debt ratio shows the proportion of assets financed with debt. It can be used to evaluate a business’s ability to pay its debts and to determine if the company has too much debt to be considered financially “healthy.” Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall2-38

39. End of Chapter 2 2-39Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall