Recording Business
Transactions
Chapter 2
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1
Objective 1
Use accounting terms
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2
Account
• Basic summary device
• Detailed record of increases and
decreases in specific assets, liabilities, or
owner’s equity during a period
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4
Ledger
• Book or printout holding all the accounts
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5
Accounting Equation
Accounts are grouped in 3 broad categories:
Assets
=
Liabilities
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+
Equity
6
Assets
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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Liabilities
Creditors’ claims to assets (debt)
• Accounts Payable
• Notes Payable
• Accrued Liabilities
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8
Owner’s Equity
Owner’s claim to the assets
• Capital
• Withdrawals
• Revenues
• Expenses
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9
All Individual Accounts Combined
Make Up the Ledger
Accounts
Notes
Payable
Payable
Cash
Accounts
Receivable
Ledger
C. Lapp,
Revenues
Capital
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10
Chart of Accounts
• List of all accounts used by a company
along with the account numbers
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11
Objective 2
Apply the rules of debit and credit
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12
Double Entry System
• Record dual effects of each transaction
• Each transaction affects at least two
accounts
• Each transaction is recorded with at least
– One debit
– One credit
• Total debits must equal total credits
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13
T-Account
Simple tool for analyzing and determining the
balance in a given account
Account Name
(Left Side)
(Right Side)
Debit
Credit
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14
Rules of Debit and Credit
Assets
Debit
+
Credit
-
=
Liabilities
Debit
-
Credit
+
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+
Equity
Debit
-
Credit
+
15
Rules of Debit and Credit
Owner’s Equity
Owner’s
Withdrawals
Debit
+
Debit
-
Credit
+
Credit
-
-
Expenses
Debit
+
Owner’s
Capital
Debit Credit
+
Revenues
Debit Credit
Credit
-
-
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+
16
Expanding the
Rules of Debit and Credit
Owner’s Equity
Owner’s _
Owner’s
Capital
Withdrawals
Debit Credit
Debit Credit
-
+
+
-
+
Revenues
Debit
-
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_
Expenses
Credit Debit
+
+
Credit
-
17
middle three
Remember: Just askareTheALICE!
increased with
The first and the
last are increased
with a debit
credits
Debit
+
-
A = Assets
L = Liabilities
I = Income*
Credit
+
+
+
C = Capital
E = Expenses
+
-
* Really, this is revenues, but “r” just doesn’t fit in!
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18
Normal Balances
Assets
Debit
+
Normal
Balance
Credit
-
=
Liabilities
Debit
-
Credit
+
Normal
Balance
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+
Equity
Debit
-
Credit
+
Normal
Balance
19
Normal Balances
Owner’s Equity
Owner’s
Capital
Debit
-
Credit
_
Owner’s
Withdrawals
Debit
+
+
Normal
Balance
Normal
Balance
Credit
-
+
Revenues
Debit
Credit
-
+
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_ Expenses
Debit
Credit
+
-
Normal Normal
Balance Balance
20
Objective 3
Record transactions in the journal
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21
Journal
• Chronological record of the transactions
• Consists of at least one debit and one
credit
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22
Journalizing Transactions
• Identify each account affected and its type
• Determine whether each account is
increased or decreased. Use the rules of
debit and credit
• Record transaction in journal, including a
brief explanation
– Debit side of entry is entered first
– Total debits should always equal total credits
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23
General Journal
Transaction
Date
Accounts Affected
Journal
Description
Page 1
Debit Credit
45,000
45,000
Date
Jul 1 Cash
Lange, Capital
Investment from owner
Explanation of
transaction
Dollar amount of
debits and credits
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24
General Journal
Style conventions that must be followed:
• Year is entered at the top of each page
• The month is only entered for the first
entry on a page unless the month changes
in the middle of the page. The month may
be abbreviated
• Enter numerical date for each transaction,
even if there are many entries on same
date
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25
General Journal
• Debits are ALWAYS entered first in an
entry. Use the EXACT account title and do
not abbreviate
• Credits are INDENTED and listed second
• Do not use dollar signs
• SKIP A LINE between each entry
• Never split an entry between two pages
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26
Exercise 2-5
Analysis of June 1 transaction:
• Cash is increasing
• Cash is an asset account
• Increase an asset with a debit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 1 Cash
DEBIT
CREDIT
25,000
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27
Exercise 2-5
Analysis of June 1 transaction:
• M. Brown, Capital is increasing
• Capital is an owner’s equity account
• Increase owner’s equity with a credit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 1 Cash
M. Brown, Capital
Owner invested in business
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DEBIT
CREDIT
25,000
25,000
28
Exercise 2-5
Analysis of June 2 transaction:
• Medical Supplies is increasing
• Medical Supplies is an asset account
• Increase an asset with a debit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 2 Medical Supplies
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DEBIT
CREDIT
10,000
29
Exercise 2-5
Analysis of June 2 transaction:
• Accounts Payable is increasing
• Accounts Payable is a liability account
• Increase a liability with a credit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 2 Medical Supplies
Accounts Payable
Purchased medical supplies
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DEBIT
CREDIT
10,000
10,000
30
Exercise 2-5
Analysis of June 2 transaction:
• Rent Expense is increasing
• Rent Expense is an expense account
• Increase an expense with a debit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 2 Rent Expense
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DEBIT
CREDIT
4,000
31
Exercise 2-5
Analysis of June 2 transaction:
• Cash is decreasing
• Cash is an asset account
• Decrease an asset with a credit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 2 Rent Expense
Cash
Paid rent for the month
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DEBIT
CREDIT
4,000
4,000
32
Exercise 2-5
Analysis of June 3 transaction:
• Accounts Receivable is increasing
• Accounts Receivable is an asset account
• Increase an asset with a debit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 3 Accounts Receivable
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DEBIT
CREDIT
12,000
33
Exercise 2-5
Analysis of June 3 transaction:
• Service Revenue is increasing
• Service Revenue is a revenue account
• Increase a revenue with a credit
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Jun 3 Accounts Receivable
Service Revenue
Performed services
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DEBIT
CREDIT
12,000
12,000
34
Objective 4
Post from the journal to the ledger
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35
Posting
• Periodically, journal entries are posted to
ledger accounts to determine balances in
each account
• Posting – copying amounts from the
journal to the ledger
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36
Exercise 2-9
Cash
Accounts Payable
Service Revenue
M. Brown, Capital
Rent Expense
25,000
Accounts Receivable
25,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
25,000
Jun 1 Supplies
Cash
Medical
M. Brown, Capital
Owner invested in business
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25,000
37
Exercise 2-9
Cash
Accounts Payable
Service Revenue
10,000
25,000
GENERAL JOURNAL
DATE
DESCRIPTION
Accounts Receivable
REF
M. Brown, Capital
Jun 2 Medical Supplies
25,000
Accounts Payable
Purchased medical supplies
DEBIT
CREDIT
Rent Expense
10,000
10,000
Medical Supplies
10,000
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38
Exercise 2-9
Cash
Accounts Payable
Service Revenue
10,000
25,000 4,000
M. Brown, Capital
Accounts Receivable
Rent Expense
4,000
25,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Medical
Supplies
Jun
2 Rent
Expense
10,000 Cash
DEBIT
CREDIT
4,000
4,000
Paid rent for the month
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39
Exercise 2-9
Cash
Accounts Payable
12,000
10,000
25,000 4,000
Accounts Receivable
Service Revenue
Rent Expense
M. Brown, Capital
12,000
4,000
25,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Medical
Jun 3 Supplies
Accounts Receivable
10,000
Service Revenue
Performed services
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DEBIT
CREDIT
12,000
12,000
40
Exercise 2-9
Cash
25,000 4,000
Bal 21,000
Accounts Receivable
12,000
Bal 12,000
Accounts Payable
Service Revenue
10,000
12,000
Bal 10,000
Bal 12,000
M. Brown, Capital
25,000
Bal 25,000
Rent Expense
4,000
Bal 4,000
Medical Supplies
10,000
Bal 10,000
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41
Flow of Accounting Data
Transaction Occurs
Source Documents Prepared
Transaction Analyzed
Transaction Journalized & Posted
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42
Objective 5
Prepare and use a trial balance
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43
Trial Balance
• List of all accounts with their balances
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44
Exercise 2-9 (part 3)
Mike Brown, M.D.
Trial Balance
June 30, 2008
Cash
21,000
Accounts Receivable
12,000
Medical Supplies
10,000
Accounts Payable
M. Brown, Capital
Service Revenue
Rent Expense
4,000
Totals
47,000
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10,000
25,000
12,000
47,000
45
Locating Trial Balance Errors
What if it doesn’t balance?
• Is the addition correct?
• Are all accounts listed?
• Are the balances listed correctly?
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46
Locating Trial Balance Errors
• Divide the difference by two
– Is there a debit/credit balance for this amount
posted in the wrong column?
• Divide the difference by 9. If evenly
divisible, the error may be a slide or
transposition error
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47
Cash increases. It is
Supplies, an asset,
an asset. Increase
increases. Increase
assets with debits.
assets with debits.
Capital increases.
Accounts Payable
GENERAL JOURNAL
Owner’s equity is
increases.
It is a
REF with
DESCRIPTION
DEBIT
increased
a
liability. Increase
credit.
liabilities with
a credit
60,000
Exercise 2-18
DATE
Aug 1 Cash
R. Woodward, Capital
CREDIT
60,000
To record investment by owner
2 Supplies
200
Accounts Payable
200
Purchased supplies on account
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48
Cash,
anthese
asset, is
Both of
increasing.
accounts
are Increase
assets.
assetsiswith
debits.
Building
increasing.
Revenueassets
accounts
Increase
withare
GENERAL JOURNAL
increased
with credits
debits. Cash
is
REF Decrease
DESCRIPTION
DEBIT
decreasing.
assets with credits.
Exercise 2-5
DATE
Aug 4 Building
Cash
CREDIT
50,000
50,000
Purchased building
6 Cash
3,000
Service Revenue
3,000
Performed service
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49
Accounts
Both ofPayable,
these
which
accounts
is decreasing,
are assets.
is
Building
a liability.
is Decrease
increasing.
liabilities
Increase by
assets
debiting
with
GENERAL JOURNAL
them.
debits.
Decrease
Cash is
the
DESCRIPTION
DEBIT
decreasing.
asset, REF
Cash,Decrease
with a
assetscredit.
with credits
Exercise 2-18
DATE
Aug 9 Accounts Payable
Cash
CREDIT
100
100
Paid on account
17 Accounts Receivable
Service Revenue
2,100
2,100
Performed services
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50
Both of these accounts
are assets. Cash is
increasing – debit.
Accounts Receivable is
GENERAL JOURNAL
decreasing - credit
Exercise 2-18
DATE
DESCRIPTION
REF
Aug 23 Cash
Accounts Receivable
DEBIT
CREDIT
1,200
1,200
Received payment on account
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51
Both of these
Exercisetransactions
2-18
involve
DATE
Aug 31
recognizing expenses.
GENERAL JOURNAL
Since expenses
decrease
owner’s
REF
DESCRIPTION
DEBIT
equity, and owner’s
Salary Expense
1,200
equity is decreased
with a debit, debit
Cash
expenses. Cash is
decreasing – credit
Paid salaries
31 Rent Expense
Cash
CREDIT
1,200
500
500
Paid rent for the month
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52
Aug 1
Aug 6
Aug 23
Cash
60,000 Aug 4 50,000
3,000 Aug 9
100
1,200 Aug 31 1,200
Aug 31
500
Accounts Payable
Aug 2
200
Aug 9
100
Exercise 2-19
Bal. 100
R. Woodward, Capital
Bal. 12,400
Aug 1 60,000
Accounts Receivable
Aug 17 2,100
Aug 23 1,200
Bal.
900
Supplies
Aug 2
200
Building
Aug 4 50, 000
Take the difference
Service Revenue
between total debits
Aug 6 to3,000
and total credits
Augbalance
17 2,100
determine the
in each account. IfBal. 5,100
debits are greater than
Rent Expense
credits, the account
Aug 31
500 balance
has a debit
and vice versa
Salary Expense
Aug 31
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1,200
53
Exercise 2-19
Woodward Technology Solutions
Trial Balance
August 31, 2008
Cash
12,400
Accounts Receivable
900
Supplies
200
Building
50,000
Accounts Payable
100
R. Hawk, Capital
60,000
Service Revenue
5,100
Salary Expense
1,200
Rent Expense
Totals
500
65,200
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65,200
54
End of Chapter 2
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55
