12/29/15
ACCT 652 Accounting
Week 2–Charts of accounts, Journals,
T-accounts, and special journals
Some slides © Times Mirror Higher Education Division,
Inc. Used by permission
© Michael D. Kinsman, Ph.D.
Review of last week
•  We did a lot. Some highlights of what we
did last week are:
–  Accounting Principles
•  The Entity Principle
•  The Objectivity Principle
•  The Cost Principle
•  The Going Concern Principle
–  Generally Accepted Accounting Principles
(GAAP)
ACCT 652 Week 2
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Review of last week (2)
•  ASSETS: Something worth something.
•  LIABILITIES: Debts.
•  OWNER’S EQUITY: The difference between
assets and liabilities (assets minus liabilities).
•  REVENUES: What you get for what you do.
•  EXPENSES: What it costs you to do it.
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Review of how do they fit together?
Assets = Liabilities + New Owner’s Equity
Assets + Expenses = Liabilities + Owner’s Equity + Revenue
Income = Revenue - Expenses
New Owner’s Equity = Income + Old Owner’s Equity
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The T-account reviewed
Left
Assets
+
Liabilities
Owner’s equity
Revenue
Expense
+
+ means account increases here
Right
+
+
+
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The Chart of accounts
•  The chart of accounts
•  Usually, account
is simply a listing of
numbers are assigned
our accounts with
with first digits as
account numbers
follows:
assigned.
–  1: Assets
–  2: Liabilities
•  That list makes finding
–  3: Equities
the correct account a
–  4: Revenues
lot easier.
–  5 and up: Expenses
•  Account number may
include many digits to
convey information.
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Recording to accounts
•  Last week, we used a simplified T-account.
In practice, we usually first record to a
journal, which is a sequential (time based)
record of transactions. The most general
journal is called “The General Journal.”
•  Transactions are then posted to a T-account.
The group of T–accounts, taken together, is
called a General Ledger.
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The General Journal
•  The format for the General Journal appears as
follows:
GENERAL JOURNAL
Date
MM
Page
Post.
Ref.
Description
DD Account #1
Account #2
Journal Entry Explanation
Debit
##
Credit
XXX XX
XXX XX
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The General Journal
•  Notice that in the General Journal hides a T–
account. That shows you how things should be
posted to the General Ledger:
GENERAL JOURNAL
Date
MM
Description
DD Account #1
Account #2
Journal Entry Explanation
ACCT 652 Week 2
Page
Post.
Ref.
Debit
##
Credit
XXX XX
XXX XX
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The General Journal
The debits part of the entry is
always written first. It always
starts at the left margin of the
column.
GENERAL JOURNAL
Date
MM
Page
Post.
Ref.
Description
DD Account #1
Account #2
Journal Entry Explanation
Debit
##
Credit
XXX XX
XXX XX
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The General Journal
The credits part of the entry
always comes after the debits
part and is indented to the right.
GENERAL JOURNAL
Date
MM
Page
Post.
Ref.
Description
DD Account #1
Account #2
Journal Entry Explanation
Debit
##
Credit
XXX XX
XXX XX
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The General Journal
Also note that an explanation is
always written in to provide
additional information on the
transaction.
GENERAL JOURNAL
Date
MM
Description
DD Account #1
Account #2
Journal Entry Explanation
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Page
Post.
Ref.
Debit
##
Credit
XXX XX
XXX XX
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The General Journal
After the explanation (which may
be as many lines as required to
make it clear) comes a blank line.
It separates journal entries.
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Journal Entries
•  On December 1, 20X1, Terry Dow invested
$30,000 in his new business, Clear Copy Co.
GENERAL JOURNAL
Date
Description
Page
Post.
Ref.
Debit
Credit
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Journal Entries
•  On December 1, 20X1, Terry Dow invested
$30,000 in his new business, Clear Copy Co.
GENERAL JOURNAL
Date
Dec.
Description
1
Cash
Page
Post.
Ref.
Debit
1
Credit
30,000.00
T. Dow, Capital
Investment by owner.
ACCT 652 Week 2
30,000.00
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T-accounts in practice:
•  In practice, T-accounts on a manual bookkeeping
system usually look like the following:
GENERAL LEDGER
Account:
Acct. No.
##
Balance
Date
Item
Post.
Ref.
Debit
Credit
DR (CR)
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T-accounts in practice
•  Notice that the T-account that we started to use
last week is still there:
GENERAL LEDGER
Account:
Date
Acct. No.
Account Name
Item
Post.
Ref.
Debit Credit
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##
Balance
DR (CR)
17
Posting: Six Basic Steps
➊ Find the account page.
➋ Enter the date.
➌ Enter the amount.
➍ Enter the journal page # in the posting reference
column in the general ledger.
➎ Enter the new account balance.
➏ Enter the account # in the posting reference
column in the journal.
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Posting Journal Entries
Example - Transaction 1
On December 1, 20X1, Terry Dow invested
$30,000 in his new business, Clear Copy Co.
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
1
Debit
Cash
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
•  Notice that for simplicity, cents have been left off. Do not do
that in practice (or homework or exams!)
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Posting Journal Entries
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
1
Debit
Cash
Credit
30,000
T. Dow, Capital
Investment by owner.
Account:
Cash
30,000
Post the debit portion
of the entry for
GENERAL LEDGER
Transaction 1 to the
Acct. No.
Cash ledger
account.
Post.
Date
Item
Ref.
Debit
101
Credit
Balance
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Step 1: Find the Account
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
1
Debit
Cash
Credit
30,000
T. Dow, Capital
Investment by owner.
Ac cou n t:
D ate
Cash
1
Ite m
30,000
GEN ER AL LED GER
Acct . N o.
Pos t.
R e f.
D ebit
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C redit
101
B alance
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Step 2: Enter the Date
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
D escription
1
Cash
1
Debit
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
2
GEN ER AL LED GER
Ac cou n t:
D ate
D ec.
Cash
Acct . N o.
Pos t.
R e f.
Ite m
D ebit
101
C redit
B alance
1
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Step 3: Post the Amount
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
1
Page
Post.
Ref.
Description
Cash
Debit
30,000
T. Dow, Capital
Investment by owner.
30,000
3
GENERAL LEDGER
Account:
Cash
Date
Dec.
1
1
Credit
Acct. No.
Post.
Ref.
Item
Debit
30,000
Credit
101
Balance
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Step 4: Enter the Journal Page #
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
1
Page
Post.
Ref.
Description
Cash
Debit
1
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
4
GENERAL LEDGER
Account:
Date
Dec.
1
Cash
Acct. No.
Item
Post.
Ref.
J1
Debit
30,000
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Credit
101
Balance
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Step 5: Enter the Acct. Balance
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
1
Debit
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
GENERAL LEDGER
Account:
Cash
Date
Dec.
1
Acct. No.
Post.
Ref.
J1
Item
Debit
30,000
5
Credit
101
Balance
30,000
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Step 6: Enter the Account #
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
1
Page
Post.
Ref.
Description
Cash
101
1
Debit
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
6
GENERAL LEDGER
Account:
Cash
Date
Dec.
1
Acct. No.
Post.
Ref.
J1
Item
Debit
30,000
Credit
101
Balance
30,000
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Posting Journal Entries
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
1
Page
Post.
Ref.
Description
Cash
101
Debit
30,000
T. Dow, Capital
Investment by owner.
Account:
Date
Dec.
1
Cash
Post the credit portion
of the entry for
Transaction
1 to Dow’s
GENERAL LEDGER
Acct. No.
Capital ledger account.
Item
Post.
Ref.
J1
Debit
30,000
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1
Credit
Credit
30,000
101
Balance
30,000
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Step 1: Find the Account
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
101
1
Debit
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
GENERAL LEDGER
Account:
1
T. Dow, Capital
Date
Post.
Ref.
Item
Acct. No.
Debit
301
Credit
Balance
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Step 2: Enter the Date
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
101
1
Debit
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
2
GENERAL LEDGER
Account:
T. Dow, Capital
Date
Dec.
1
Acct. No.
Post.
Ref.
Item
Debit
Credit
301
Balance
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Step 3: Post the Amount
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
101
Debit
T. Dow, Capital
Investment by owner.
30,000
GENERAL LEDGER
Account:
Date
Dec.
1
T. Dow, Capital
Item
Post.
Ref.
1
Credit
30,000
Debit
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Acct. No.
301
Credit
30,000
Balance
30
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Step 4: Enter the Journal Page #
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
101
Debit
1
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
4
GENERAL LEDGER
Account:
T. Dow, Capital
Date
Dec.
1
Post.
Ref.
J1
Item
Debit
Acct. No.
301
Credit
30,000
Balance
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Step 5: Enter the Acct. Balance
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
Page
Post.
Ref.
Description
1
Cash
101
Debit
1
Credit
30,000
T. Dow, Capital
Investment by owner.
30,000
GENERAL LEDGER
Account:
T. Dow, Capital
Date
Dec.
1
Acct. No.
Post.
Ref.
J1
Item
Debit
5
Credit
30,000
301
Balance
30,000
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Step 6: Enter the Account #
Example - Transaction 1
GENERAL JOURNAL
Date
Dec.
1
Page
Post.
Ref.
Description
Cash
101
301
T. Dow, Capital
Investment by owner.
1
Debit
Credit
30,000
30,000
6
GENERAL LEDGER
Account:
Date
Dec.
1
T. Dow, Capital
Item
Acct. No.
Post.
Ref.
J1
Debit
ACCT 652 Week 2
Credit
30,000
301
Balance
30,000
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Some things you may want to try
•  Some people, me included, put brackets
around credit balances (not the entry, only
the balance in the General Ledger account).
That makes figuring out whether a balance
is debit or credit a snap:
GENERAL LEDGER
Account:
D ate
Dec.
1
T. Dow, Capital
Item
Acct. No.
Post.
R ef.
J1
D ebit
C redit
3 0 ,0 0 0
301
B a la nc e
(3 0 ,0 0 0 )
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Label this “page 8” in your
notes!
•  When we refer to this, I will simply call it
page 8.
•  In the General Journal, explanations are
mandatory.
•  In the General Ledger, explanations are only
used in five situations.
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General Ledger explanations
❶ Opening: A balance that has no General
Journal entry gets an explanation of
“Opening” and a check mark in the posting
reference column.
❷  Closing: Any entry associated with the
closing process gets an explanation of
“Closing.” Of course, it also had a General
Journal entry, so that’s its posting reference.
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General Ledger explanations (2)
❸ Adjusting: To show that this entry is an
Adjusting Journal Entry (AJE), “Adjusting.”
❹  Error correction: To show that this entry
corrects an earlier entry, “Error correction.”
❺  Reversing To show that this reverses an
earlier made adjustment, “Reversing.” We will
talk about this later tonight.
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General Ledger Explanations (3)
•  No other entry should have an explanation
in the General Ledger.
•  Why is this important? For three reasons:
–  Neatness. General Ledgers do not need to be
cluttered up with lots of explanations.
–  Efficiency. The General Journal already has
the explanation. Only in the case of unusual
items does it help.
–  Grading: I will take off points if you do.
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A note on dollar signs
•  Dollar signs should only occur in formal financial
statements, which are three in number:
–  The Balance Sheet (including the Statement of Equity,
even if that is separate)
–  The Income Statement
–  The Statement of Cash Flows
•  Dollar signs do not go in “non-public” documents
like trial balances, ledgers, journals or
worksheets.
•  I take points for dollar sign errors!
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Trial Balance
•  At any time you are posting, you can take a
Trial Balance.
–  A Trial Balance is a listing of each account with its
balance as of a specific date.
•  All debit balances are in one column.
•  All credit balances are in another column.
–  The totals of each column should be the same–if
not, I suppose you have a Trial Un-balance! You
need to find why you are out of balance.
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Preparing the Trial Balance
Five Steps
➊ Find the balance of each account in the ledger.
➋ List each account and place its balance beside it; the
debit balances in one column and the credit balances in
another.
➌ Compute the total of the debit balances.
➍ Compute the total of the credit balances.
➎ Verify that the two column totals are equal.
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Locating Errors in the Trial Balance
•  Verify that the trial balance columns were
correctly added.
•  Verify that account balances were accurately
copied from the ledger.
•  Check to see if a debit was misposted as a credit,
or visa-versa. A good trick is to take the
difference between the debit and credit totals,
divide by 2, and look for that amount of posting.
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Locating Errors in the Trial Balance
•  Recalculate each account balance.
•  Verify that each of the original journal
entries had equal debits and credits.
•  Check to see if a number was
transposed (for example, a 79 was
posted as a 97.) With a transposition,
the difference is always divisible by 9.
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The Accounting Process
•  Next week, you will have not only the General
Journal, you will also have several special journals
that make bookkeeping easier. These include:
–  Cash Receipts Journal for receipts of cash.
–  Cash Disbursements Journal for payments of cash.
–  Purchases Journal for purchases of merchandise on
credit.
–  Sales Journal for “normal” sales made on credit.
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The accounting process
Posted monthly
Dotted lines are posted daily
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Contra accounts
•  Contra accounts are, in fact, parts of other
accounts. You can usually spot them in a
Balance Sheet or an Income Statement because of
the words “less” or “net of”, as in
Accounts receivable, less allowance for doubtful accounts
Accounts receivable, net of allowance for doubtful accounts
•  We have contra accounts because they preserve
information: In the above example, we know how much
accounts receivable we have and how much we expect to
write off.
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Contra accounts (2)
•  Contra asset: Accumulated depreciation is a contra
asset to equipment:
Net
Accumulated
Equipment = Equipment + Depreciation
40000
50000
10000
•  The advantage of using the contra account is that we
know what we originally paid for the equipment.
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Other contra account examples
•  Contra liability: Unearned interest when you
record total payments of a loan as a liability.
•  Contra equity: Owner draw is contra to owner’s
equity.
•  Contra revenue: Sales returns and allowances is
contra to sales.
•  Contra expense: Purchase returns is contra to
purchases.
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Cash versus accrual accounting
•  When is revenue? That is to say, when do
you recognize revenue?
•  You recognize revenue when you get the cash.
•  You recognize revenue when you send a bill.
•  You recognize revenue when the customer gets the
product.
•  You recognize revenue when you complete a sale.
•  You recognize revenue when you ship the product.
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It depends. What method of
accounting do you use?
•  The cash basis of accounting can be used by
businesses without inventory. Those are
usually going to be professionals–like
Kinsman & Kinsman. The advantage is that
you only have to report cash you have
received on your tax return as revenue. So,
for cash basis businesses, the answer is:
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Cash basis businesses
•  When is revenue? That is to say, when do
you recognize revenue?
•  You recognize revenue when you get the cash.
•  That means cash basis businesses don’t
have accounts receivable on their books.
They simply keep a list of receivables.
•  They also recognize expense when they
actually pay the bill.
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Cash basis businesses
•  When you record revenue for a cash basis
business, you make the following entry:
GENERAL JOURNAL
Date
MM
Description
DD Cash
Revenue
Record revenue
Page
Post.
Ref.
Debit
Credit
1,000.00
1,000.00
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It depends. What method of
accounting do you use?
•  The accrual basis of accounting must be
used by businesses with inventory. Those
are going to be all retail and manufacturing
businesses. The advantage is that you better
match revenues and expenses. So, for
accrual basis businesses, the answer is:
ACCT 652 Week 2
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Accrual basis businesses
•  When is revenue? That is to say, when do
you recognize revenue?
•  You recognize revenue when you complete a sale.
•  Completing a sale means that you have
shipped product and the customer has agreed to
pay.
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Accrual basis businesses
•  When you record revenue for an accrual
basis business, you make the following
entries:
GENERAL JOURNAL
Date
MM
Description
Page
Post.
Ref.
DD Accounts receivable
Revenue
Record sale made
M M DD+ Cash
Accounts receivable
Record revenue collected
Debit
Credit
1,000.00
1,000.00
1,000.00
1,000.00
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Can you switch back and forth
from cash to accrual if you want?
•  The IRS has some real problems with that.
•  Furthermore, consider the issues of
consistency between your statements.
–  The answer is, in general, NO.
•  However, some cash basis firms keep their
books on an accrual basis, and some accrual
basis firms keep their books on a cash basis,
both for “simplicity.” So...
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How do you convert from cash to
accrual statements?
•  Think about what is different between cash
and accrual.
❶ The accrual basis business recognized income
earlier (its beginning accounts receivable are
income it took in a previous year on accrual
that cash did not). That cash was probably
received this year, and will be recognized as
revenue by the cash basis business in this year.
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How do you convert from cash to
accrual statements?
❷ The accrual basis company’s ending
receivables are already in its income, but
should not be in the cash businesses income
because they have not been received in
cash.
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How do you convert from cash to
accrual statements?
❸ The beginning payables of the accrual
business have already been taken as expense
last year by the accrual business, even though
no cash was paid for them. They were
probably paid this year.
❹ The accrual basis company has ending
payables that were taken as expense this year,
even though no cash was paid for them.
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How do you convert from accrual
to cash statements?
•  So, in general, you do the following:
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An example to try
•  A company had accrual basis profits of
$95,000 in 2015.
•  It had ending 2014 (beginning 2015) A/R of
$5,000, and ending 2015 A/R of $10,000.
•  It had ending 2014 (beginning 2015) A/P of
$3,000, and ending 2015 A/P of $5,000.
•  What is the company’s cash basis profit for
2015?
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An example to try answered!
Accrual basis income
95,000.00
Minus change in accounts receivable
-Ending receivables
(10,000.00)
+Beginning receivables
5,000.00 (5,000.00)
Plus change in accounts payable:
+Ending payables
5,000.00
-Beginning payables
(3,000.00) 2,000.00
Cash basis income
92,000.00
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Of course, if you were asked to
go from Cash basis to Accrual
Cash basis income
92,000.00
Plus change in accounts receivable
+Ending receivables
10,000.00
-Beginning receivables
(5,000.00) 5,000.00
Minus change in accounts payable:
-Ending payables
(5,000.00)
+Beginning payables
3,000.00 (2,000.00)
Cash basis income
95,000.00
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Reversing entries
•  When a bookkeeper is keeping books on a
cash basis, and we convert them to an
accrual basis with adjusting entries, there is
a chance the bookkeeper will become
confused. Consider the set of adjusting
entries we made in the next slide.
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Adjusting entries
•  On December 31, we made two adjustments to
the books to get them current:
GENERAL JOURNAL
Date
12
12
Page
Post.
Ref.
Description
Adjusting journal entries
31 Rent expense
Accrued rent payable
Accrue rent for December
31 Salaries expense
Accrued salaries payable
Accrue salaries for the last
week of December, unpaid
Debit
Credit
10,000.00
10,000.00
25,000.00
25,000.00
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Now we close
•  Of course, the next step after the adjusting
process is to close the books. That will
leave the expense accounts we adjusted–
salaries and rent–with zero balances.
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Reversing entries
•  On January 1, we make two reversals to the
books so the bookkeeper would not be messed
up:
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After reversing
•  After we reverse, we have a credit balance
in the two expense accounts we adjusted.
•  Now when the bookkeeper makes the
expense payments, the balance of the
expense accounts is zero–which correctly
reflects the expense for this year. The
expense paid was last year’s expense!
ACCT 652 Week 2
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Reversing entries–concluded
•  After we make these entries, there will be a
zero balance in both accrual accounts, and a
negative balance in the expense accounts.
•  When the bookkeeper pays the bills, that
will wipe out the balance in the expense
accounts.
•  We do this because of accounting ease for
the bookkeeper.
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23
12/29/15
I’m tired!
•  That finishes what I’d planned to do in our
night 2 together. Please keep asking
questions. They’re important.
ACCT 652 Week 2
70
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