Chapter 2
Explain accounts, journals, and ledgers as they
relate to recording transactions and describe
common accounts
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2
Record Transactions in the
Journal
Copy (post) to the Ledger
Prepare the Trial Balance
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3


Basic summary device
Detailed record of increases and decreases in
specific assets, liabilities, or owner’s equity during
a period
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
Journal
◦ Chronological record of transactions
◦ Organized by date

Ledger
◦ Book (or computer record) of all account activity
◦ Organized by account
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
Listing of all accounts and their balances
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Accounts are grouped in 3 broad categories:
Assets
=
Liabilities
+
Owner’s
equity
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Economic resources that will benefit the business
in the future







Cash
Accounts receivable
Notes receivable
Prepaid expenses
Land
Building
Equipment, Furniture, Fixtures
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Creditors’ claims to assets (debt)



Accounts payable
Notes payable
Accrued liabilities
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Owner’s claim to the assets
 Capital
◦ Net worth invested by the owner

Withdrawals
◦ Owner takes business assets for personal use


Revenues
Expenses
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All Individual Accounts Combined Make Up the Ledger
Accounts
payable
Common stock
Cash
Liability accounts
Ledger
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
List of all accounts used by a company along with
the account numbers
Acct. #
Account title
101
Cash
111
Accounts receivable
150
Equipment
201
Accounts payable
301
Common stock
305
Retained earnings
401
Service revenue
501
Rent expense
525
Advertising expense
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12
A _______ is a record of transaction
 A. ledger
 B. journal
 C. trial balance
 D. posting

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A journal is a record of transaction
 A. ledger

 B.
journal
C. trial balance
 D. posting

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




Accounts Receivable is a(n) _____ account.
A. asset
B. liability
C. capital
D. revenue
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 Accounts
Receivable is a(n) _____
account.
 A.
asset
 B.
liability
 C. capital
 D. revenue
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16
Notes Payable is a(n) _____ account.
 A. asset
 B. liability
 C. capital
 D. revenue

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 Notes
Payable is a(n) _____ account.
 A. asset
B.
liability
 C.
capital
 D. revenue
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Define debits, credits, and normal account balances.
Use double entry accounting and T-accounts.
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




Wrote First book written on double-entry
accounting.
used journals and ledgers,
a person should not go to sleep at night until
the debits equaled the credits!
His ledger included assets (including
receivables and inventories), liabilities, capital,
income, and expense accounts.
Demonstrated year-end closing entries and
proposed a trial balance
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21


Record dual effects of each transaction
Each transaction has a:
◦Receiving side
◦Giving side

Examples:
◦ Company purchases supplies (receiving)
with cash (giving)
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Simple tool for analyzing and determining the balance
in a given account
Account Name
(Left Side)
(Right Side)
Debit
Credit
Abbreviated dr
Abbreviated cr
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
Whether an account is increased by
debit or a
credit is determined by the account type
◦ Asset, liability, or equity

Debits are not good or bad
◦ Neither are credits
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Assets
Debit
+
Credit
-
=
Liabilities
Debit
-
Credit
+
+
Owner’s
equity
Debit
-
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Credit
+
25
Assets
Debit
+
Normal
Balance
Credit
-
=
Liabilities
Debit
-
Credit
+
Normal
Balance
+
Equity
Debit
Credit
-
+
Normal
Balance
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Owner’s
Capital
Debit Credit
Withdrawals
Debit
+
Credit
-
-
+
Revenues
Debit
-
Credit
+
Expenses
Debit
+
Credit
-
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Owner’s equity
Owner’s
Capital
Debit
-
Credit
_
Withdrawals
Debit
+
+
Normal
Balance
Normal
Balance
Credit
-
+
Revenues
Debit
Credit
-
+
_
Expenses
Debit
Credit
+
-
Normal Normal
Balance Balance
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


Assets
Withdrawals
Expenses



Liabilities
Capital
Revenues
This indicates the normal balance of each account group.
The normal balance is also what increases the account.
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Cash
$20,000
$12,000
$8,000
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
The left side of an account is used to record:

A. Debits
 B.
Increases
 C. Credits
 D. Decreases
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 A.
Debits
 B.
Increases
 C. Credits
 D. Decreases
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List the steps of the transaction recording process
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Identify each
account
affected and
its type
Determine if
each account
is increased
or decreased
Record
transaction in
the journal
Use the rules of
debit and credit
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
Four parts:
◦
◦
◦
◦
Date of transaction
Title of account debited with dollar amount
Title of account credited with dollar amount
Brief explanation of transaction
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Transaction
Date
Accounts Affected
Journal
Description
Date
Jul 1 Cash
Josie Smith, Capital
Page 1
Debit Credit
45,000
45,000
Owner investment
Explanation of
transaction
Dollar amount of
debits and credits
36

Copying amounts from the journal to the ledger
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37
March 22:
 “On account” indicates Accounts receivable
 Accounts receivable is an asset account
 Increase an asset with a debit
GENERAL JOURNAL
DATE
DESCRIPTION
Mar 22 Accounts receivable
REF
DEBIT
CREDIT
4,000
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March 22:
 “Performed services” indicates revenue has been
earned
 Revenues are increased by credits
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Mar 22 Accounts receivable
Service revenue
DEBIT
CREDIT
4,000
4,000
Performed services on account
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March 30:
 Cash is received
◦ Increase cash, an asset
◦ Assets are increased by debits

The payment is “on account”
◦ Decrease Accounts receivable with a credit
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Mar 30 Cash
Accounts receivable
DEBIT
CREDIT
3,000
3,000
Received payment on account
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March 31:
 A utility bill is an expense
◦ Expenses are increased by debits

The bill will be paid later – creating an account
payable
◦ Liabilities are increase by credits
GENERAL JOURNAL
DATE
DESCRIPTION
Mar 31 Utilities expense
Accounts payable
REF
DEBIT
CREDIT
130
130
Received utility bill
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March 31:
 Salaries to employees are an expense
◦ Expenses are increased by debits

The salary was paid in cash
◦ Cash, an asset, decreases
◦ Assets are decreased by credits
JOURNAL
Rent Expense isGENERAL
an expense
account
REF
DATE
DESCRIPTION
DEBIT
CREDIT
 Increase an expense with a debit
Mar 31 Salaries expense
2,300
Cash
2,300

Paid salaries
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March 31:
 Advertising is another expense
 Cash is paid
GENERAL JOURNAL
DATE
DESCRIPTION
Mar 31 Advertising expense
Cash
REF
DEBIT
CREDIT
400
400
Paid advertising
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

Origin of accounting transactions
Examples:
◦
◦
◦
◦
Bank deposit tickets
Invoices
Checks
Stock certificates
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A. Journalize the transactions, post to the
accounts, and prepare a trial balance.
B. Journalize the transactions; prepare a trial
balance and post to the accounts.
C. Post to the accounts, journalize transactions,
prepare a trial balance.
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A. Journalize the transactions, post to the
accounts, and prepare a trial balance.
B. Journalize the transactions; prepare a trial
balance and post to the accounts.
C. Post to the accounts, journalize transactions,
prepare a trial balance.
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46
Journalize and post sample transactions to the
ledger
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47
Cash
Service revenue
Accounts receivable
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Accounts receivable
Service revenue
DEBIT
CREDIT
9,000
9,000
Performed legal services on account
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Cash
Service revenue
9,000
Accounts receivable
9,000
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Accounts receivable
Service revenue
DEBIT
CREDIT
9,000
9,000
Performed legal services on account
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Cash
Service revenue
9,000
Accounts receivable
9,000
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Cash
Accounts receivable
DEBIT
CREDIT
5,400
5,400
Received payment on account
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Cash
5,400
Service revenue
9,000
Accounts receivable
9,000
5,400
3,600
GENERAL JOURNAL
DATE
REF
DESCRIPTION
Cash
Accounts receivable
DEBIT
CREDIT
5,400
5,400
Received payment on account
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51

When you make a sale on account, your entry is
 A.
Debit to Cash
 B. Debit to Accounts Receivable
 C. Debit to Sales Revenue
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
When you make a sale on account, your entry is
 A.
Debit to Cash
 B. Debit to Accounts Receivable
 C. Debit to Sales Revenue
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53

When you make a purchase an
equipment on account, your entry is
 A.
Credit to Cash
 B. Credit to Purchase
 C. Credit to Accounts Payable
 D. Credit to Equipment
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
When you make a purchase an
equipment on account, your entry is
 A.
Credit to Cash
 B. Credit to Purchase
 C. Credit to Accounts Payable
 D. Credit to Equipment
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Prepare the trial balance from the T-Accounts
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 Summary
of the ledger
 Lists all accounts with their
balances
 Accuracy check
◦ Debits should equal credits
 NOT
a balance sheet
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

Search for missing account
Divide the difference between debits and credits
by two
◦ Is there a debit/credit balance for this amount posted in
the wrong column?

Divide out of balance amount by nine
◦ Slide – Adding or dropping a zero ($100 instead of
$1,000)
◦ Transposition – inverting two digits ($459 instead of
$495)
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Date of
transaction
Posting
reference
GENERAL JOURNAL
DATE
Jan 2
DESCRIPTION
Cash
Josie Smith, Capital
Accounts debited
and credited
REF
DEBIT
CREDIT
1,000
1,000
Amounts debited
and credited
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GENERAL JOURNAL
DATE
Jan
2
POST
REF
DESCRIPTION
Cash
101
Josie Smith, Capital
Date
2
2-Jan
Jrnl. Ref.
J.1.
Debit
Date
DEBIT
CREDIT
1,000
301
1
Cash
Page 1
1,000
4
Account No. 101
Jrnl. Ref.
Credit
1,000
3
5
Josie Smith, Capital
Date
Jrnl. Ref.
Debit
Date
2-Jan
Account No. 301
Jrnl. Ref.
J.1.
Credit
1,000
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60
CASH
Date Item
1-Apr
3-Apr
5-Apr
6-Apr
Acct No. 101
Balance
Jrnl
Ref Debit Credit
J.1 20,000
J.1
9,000
J.1
3,000
J.1
10,000
Debit Credit
20,000
11,000
14,000
4,000
Alternative to the T-Account
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61
 Income
statement accounts are:
 a) assets and liabilities
 b) revenues and withdrawals
 c) revenues and expenses
 d) assets and withdrawals
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 a)
assets and liabilities
 b) revenues and withdrawals
 c) revenues and expenses
 d) assets and withdrawals
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63
ASSETS – LIABILITIES
 B. ASSETS – EQUITY
 C. SALES REVENUE + EXPENSES
 D. SALES REVENUE – EXPENSES
 E. CASH - EXPENSES
 A.
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ASSETS – LIABILITIES
 B. ASSETS – EQUITY
 C. SALES REVENUE + EXPENSES
 D. SALES REVENUE – EXPENSES
 E. CASH - EXPENSES
 A.
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65