Transactions
Transaction: A business transaction is an exchange of things of value.
Determine if the
business is new
this year or if
there are opening
balances
Make sure your
debits equal your
credits.
If there are
opening balances,
put them in your
T-accounts first.
Write a description
of the transaction
below your journal
entry.
Look at the first
transaction,and
determine its
substance.
Write the date of
the transaction
on your paper.
What accounts
does the
transactiion
affect?
Determine the
debit amounts of
the transaction.
Determine the
credit amount of
the transaction.
Examples:
1) Someone sold unused equipment for $400.
2) Paid $375 cash to Central Supply Co. for an accounts payable that had
become due.
Formatting for journal entries:
1.
2.
3.
4.
Mention the date for each transaction, even if it’s on the same day.
Enter the debits first.
Indent the credit transaction.
Write the amount debited on the debits column, and the amount
credited on the credits column.
5. Write the substance, and indent it.
BEP (Business Entity Principle):
Each business is considered a separate unit or entity. For the purpose of
accounting, the financial data for the business must be kept separate from the
owner’s personal data.
Simple Ledger  T-Accounts
Formatting
 Ensure that the accounts are ordered accordingly: Assets (left), liabilities
(right), Owners Equity (right)
 The format is identical to a balance sheet & income statement (assets,
liabilities, owner’s equity, revenue, expenses) however the accounts are in
T-chart form
Steps for entry
 Place the account name in the middle of each account
 Record the date and opening balance from the balance sheet on the
appropriate side of the account
 Make a line and put the final balance below it on the correct side.
Error Checking
 Make sure that the debits equal the credits
Double Entry System- A system in which the transactions are recorded in
one or more accounts as a debit and one or more accounts as a credit. They
must balance each other
Common Mistakes- Putting money on the wrong side of the t- account (ie.
Debit instead of a credit)
Accrual Accounting- the system under which the revenue is recorded when
earned and expenses are recorded when incurred
Revenue and Expenses
Revenue is credited since revenues cause an increase to the owner's equity credit
balance.
Expenses are debited in order to cause a decrease in the owner's equity.
Time period principle-definition and constant use of the same accounting period
Revenue recognition-revenue is recognized only when a specific critical event has
occurred and the amount of revenue is measurable.
Matching principle-expenses for an accounting period should be matched with
revenue generated during same period to derive an accurate net income for that
period
Revenue-amounts earned by the business from sale or services during routine
operations
Expenses-the cost incurred to generate revenue
Drawings-an equity account used to record a withdrawal if assets by the owner
Examples of transactions:
Repair service revenue
Salaries
250
250
Trial balance
Formatting
First comes the balance sheet accounts
Assets first then liabilities in the order of most liquidity.
Then comes income statements, revenue then come expenses
Creating from T-Accounts
Plug in final balance in the accounts, and then transfer to trial balance. Post assets then
liabilities and then revenue. In the order of most liquidity.
Finding Error
Accounts not being in Balance
1. Check for missing accounts
2. Double check all accounts
Using To Make Financial Statement
A trial balance can be easily be transferred to financial statements as everything is already in
correct order, just a matter of plugging in numbers.
Income Statement
 Shows your company’s financial position over a long period of
time
 Net Income - More revenue than expenses
 Net Loss – More expenses than revenue
Income Statement- like the balance sheet helps to illustrate the current
value of a business. Revenues and expenses are listed on the income
statement as they are accrued and categorized as operating or non-operating
activities
Balance Sheet- shows the company’s assets, liabilities and shareholder
equity.
We need an income statement because it is a direct result that is recorded in
the journals and ledgers, and then transformed into concise, compiled
revenue and expense figures.
Formatting – Individual accounts on the left, totals on the right. Date
“for the period ending…”, Dollar signs at the top of columns, lines under
numbers that you need to add or subtract, double underline under net
income/loss
The Balance Sheet
Formatting:
The title consists of the name of the business, ‘Balance Sheet’ and the date all centred.
‘Assets’ centred as the title and below on the left are the assets in order of liquidity with
a single line underneath the final asset. ‘Liabilities’ is centred as the title and below are
the liabilities in order of liquidity with a single line beneath the final liability. Total
Liabilities are totalled and below them is ‘Owner’s Equity’ centred as the title. The name
of the owner, Capital is the assets minus the liabilities and has a single line underneath
it. The ‘total liabilities and owner’s equity’ is added up and has a double line underneath.
The total liabilities are written in line with total liabilities and owner’s equity and also
double underlined. If they total liabilities and owner’s equity is equal to total liabilities, it
is balanced.
Accounting Equation
The equation that finds the owner’s/business’s net worth (Assets – Liabilities = Owner’s
Equity)
Liquidity
How fast you can turn items into cash
Assets
1.
2.
3.
4.
5.
6.
Cash
Accounts Receivable
Supplies
Equipment
Building
Land
Liabilities
1. Accounts Payable
2. Bank Loan
3. Mortgage Payable
A/R vs. A/P
Accounts receivable is money owed to the business and accounts payable is money
that the business owes to other companies.
Monetary Unit Assumption
The MUA assumes that all business transactions and relationships can be expressed in
terms of money or monetary units. GAAP assumes that the MUI is stable.
How the I.S. ties in
The Income Statement is the financial statement that determines net income or loss for
a stated period of time and the balance sheet does this financial statement AT A GIVEN
time.