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Chapter 4
The Bookkeeping Process and
Transaction Analysis
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2008 The©McGraw-Hill
Companies,
Inc., Inc.,
All All
Rights
2011 by The McGraw-Hill
Companies,
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Reserved.
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LO1
The Balance Sheet Equation—A
Mechanical Key
A = L + OE
The basic accounting equation can be
expanded to include revenues and
expenses.
A = L + PIC + RE + R - E
BEG
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1-3
LO2
Transaction
a
b
c
d
e
f
Total
The Balance Sheet Equation
Cash
+
2,000
6,000
(2,000)
Assets
Accounts
Receivable
=
+
=
+
+
Paid-in
Capital
2,000
+
Owners' Equity
Retained
Earnings
+ Revenues
- Expenses
6,000
8,000
10,000
(3,000)
3,000
8,000
(2,000)
12,000 +
Equipment
Liabilities
Notes
Payable
8,000
3,000
+
7,000
=
14,000
+
2,000
+
0 +
8,000
-
2,000
2,000
6,000
Transactions
a. The owners invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and
signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be
received within 30 days.
e. The company provided services for $8,000 and received cash.
f.
Wages of $2,000 were paid in cash.
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1-4
LO3
Transaction
a
b
c
d
e
f
Total
The Balance Sheet Equation
Cash
+
2,000
6,000
(2,000)
Assets
Accounts
Receivable +
=
Equipment =
3,000
8,000
(2,000)
12,000 +
Liabilities
Notes
Payable
10,000
(3,000)
+
+
Paid-in
Capital
+
2,000
Owners' Equity
Retained
Earnings + Revenues
- Expenses
6,000
8,000
8,000
3,000 +
7,000 =
14,000 +
2,000 +
0 +
8,000
-
2,000
2,000
6,000
Statement of Changes in
Retained Earnings
Beginning Balance
$
Add: Net Income
6,000
Less: Dividends
Ending Balance
$
6,000
Income Statement
Revenues
$
8,000
Expenses
2,000
Net Income
$
6,000
Balance Sheet
Assets
Cash
$
Accounts Receivable
Equipment
12,000
3,000
7,000
Total Assets
22,000
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$
Liabilities
Notes Payable
$
Owners' Equity
Paid-in Capital
Retained Earnings
Total Liabilities &
Owners' Equity
$
14,000
2,000
6,000
22,000
4-4
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1-5
Bookkeeping Jargon
LO4
Transactions are initially recorded in
a journal.
Cash
Equipment
Inventory
Transactions are then recorded—
posted to—individual accounts in
the ledger.
Notes
Payable
Accounts are used to organize or
group transactions to facilitate
financial statement preparation.
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1-6
LO4
T-Account
The left side of the
T-account is always
the debit side.
The right side of the
T-account is always the
credit side.
Account Name
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Left
Right
Debit
Credit
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1-7
Debits and Credits
LO5
A = L + OE
ASSETS
LIABILITIES
EQUITIES
Debit
Credit
for
for
Increase Decrease
Debit
Credit
for
for
Decrease Increase
Debit
Credit
for
for
Decrease Increase
Remember that owners’ equity
includes paid-in capital and
retained earnings.
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Paid-in
capital
Retained
earnings
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1-8
LO5
McGraw-Hill/Irwin
Revenue and Expenses
Increases in
owners’ equity.
Increase with a
credit.
Decreases in
owners’ equity.
Increase with a
debit.
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1-9
LO5
Debits and Credits
A = L + OE
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Account Name
Debit side
Credit side
Normal balance for:
Normal balance for:
Assets
Liabilities
Expenses
Owners' equity
Revenues
Debit entries increase: Credit entries increase:
Assets
Liabilities
Expenses
Owners' equity
Revenues
Debit entries decrease: Credit entries decrease:
Liabilities
Assets
Owners' equity
Expenses
4-9
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1-10
Journal Entry Format
LO5
Provide a reference
date for each transaction.
Date
6/30
Debits are recorded first.
Description
Cash
Paid-in Capital
To record an investment
by the owners.
Credits are indented and
recorded after debits.
Debit
2,000
Credit
2,000
Total debits must equal
total credits.
A brief description of the transaction to explain the entry.
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1-11
LO5
The Bookkeeping Process
Transactions
Recorded in the Journal
Date
6/30
Description
Cash
Paid-in Capital
To record an investment
by the owners.
Debit
2,000
Credit
2,000
Source Documents
Posted to the Ledger
Account Name
Debit
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Credit
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1-12
Types of Adjusting Entries
LO6
At the end of the period, we need to make adjusting entries to bring the
accounts up to date for the financial statements.
Accruals
Reclassifications
Transactions for which
cash has NOT yet been
received or paid, but the
effect of which must be
recorded in the accounts
in order to accomplish a
matching of revenues
and expenses.
The initial recording of a
transaction does not
result in assigning
revenues to the period in
which they were earned
or expenses to the
period in which they
were incurred.
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1-13
Accruing Expenses
LO6
Examples include:
Wages and Salaries
Interest Payable
Property Taxes
Accruing Revenues
Examples Include:
Interest Earned
Work Completed But Not Yet Billed to
Customer
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1-14
LO6
Reclassifying Assets to Expenses
End of month adjusting
entries
Assets
Expenses
Adjusting entries:
Prepaid Insurance
Supplies
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Insurance Expense
Supplies Expense
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1-15
LO6
Reclassify Liabilities to Revenues
End of month adjusting entries
Liabilities
Unearned Revenue
Unearned Rental Revenue
Airline Ticket Advanced Sales
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Revenues
Revenue
Rental Revenue
Ticket Revenue
4-15
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1-16
Closing Entries
LO7
Expenses, Losses and Dividends
Bal
xxx To Close
xxx
End Bal
To Close
End Bal
0.00
Expenses,
losses, and
dividends
decrease
retained
earnings
Retained Earnings
Beg Bal
Closing Entry
xxx
Closing Entry
End Bal
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Revenues and Gains
xxx Balance
xxx
xxx
0.00
Revenues and
gains increase
retained
earnings
xxx
xxx
4-16
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