Recording Business Transactions
Chapter 2
Explain accounts, journals, and ledgers as theyrelate to recording transactions and describecommon accounts
2
Learning Objective 1
Copyright (c) 2009 Prentice Hall. All rights reserved.
The Accounting Process
RecordTransactionsin the Journal
Copy (post) tothe Ledger
Prepare theTrial Balance
3
Basic summary device
Detailed record of increases and decreases inspecific assets, liabilities, or owner’s equity duringa period
4
Account
C:\Users\Courtney\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\3FVER00L\MCj02791260000[1].wmf
Copyright (c) 2009 Prentice Hall. All rights reserved.
Journal
◦Chronological record of transactions
◦Organized by date
Ledger
◦Book (or computer record) of all account activity
◦Organized by account
Journal and Ledger
5
C:\Users\Courtney\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\3FVER00L\MCBD20191_0000[1].wmf
Copyright (c) 2009 Prentice Hall. All rights reserved.
Listing of all accounts and their balances
Trial Balance
6
C:\Users\Courtney\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.IE5\3FVER00L\MCj02925740000[1].wmf
Copyright (c) 2009 Prentice Hall. All rights reserved.
Accounts are grouped in 3 broad categories:
7
Accounting Equation
Liabilities
Liabilities
Owner’s
equity
Owner’s
equity
Assets
Assets
=
+
Copyright (c) 2009 Prentice Hall. All rights reserved.
Economic resources that will benefit the businessin the future
Cash
Accounts receivable
Notes receivable
Prepaid expenses
Land
Building
Equipment, Furniture, Fixtures
8
Assets
Copyright (c) 2009 Prentice Hall. All rights reserved.
Creditors’ claims to assets (debt)
Accounts payable
Notes payable
Accrued liabilities
9
Liabilities
Copyright (c) 2009 Prentice Hall. All rights reserved.
Owner’s claim to the assets
Capital
◦Net worth invested by the owner
Withdrawals
◦Owner takes business assets for personal use
Revenues
Expenses
10
Owner’s Equity
Copyright (c) 2009 Prentice Hall. All rights reserved.
11
Ledger
Cash
All Individual Accounts Combined Make Up the Ledger
Accountspayable
Common stock
Asset accounts
Liability accounts
Equity accounts
List of all accounts used by a company along withthe account numbers
12
Chart of Accounts
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
Copyright (c) 2009 Prentice Hall. All rights reserved.
13
Learning Objective 2
Define debits, credits, and normal account balances.  Usedouble entry accounting and T-accounts.
Copyright (c) 2009 Prentice Hall. All rights reserved.
Record dual effects of each transaction
Each transaction has a:
◦Receiving side
◦Giving side
Examples:
◦Company purchases supplies (receiving) with cash(giving)
14
Double Entry System
Copyright (c) 2009 Prentice Hall. All rights reserved.
15
T-Account
Simple tool for analyzing and determining the balancein a given account
Account Name
(Left Side)Debit
(Right Side)Credit
Abbreviated dr
Abbreviated cr
Copyright (c) 2009 Prentice Hall. All rights reserved.
Whether an account is increased by debit or acredit is determined by the account type
◦Asset, liability, or equity
Debits are not good or bad
◦Neither are credits
Increase and Decreases in Accounts
16
Copyright (c) 2009 Prentice Hall. All rights reserved.
17
Rules of Debit and Credit
Debit    CreditDebit    Credit
AssetsAssets
  +       -  +       -
LiabilitiesLiabilities
Owner’sOwner’s
equityequity
==
++
Debit    CreditDebit    Credit
  -       +  -       +
Debit    CreditDebit    Credit
  -       +  -       +
Copyright (c) 2009 Prentice Hall. All rights reserved.
18
Normal Balances
LiabilitiesLiabilities
EquityEquity
AssetsAssets
==
++
Debit      CreditDebit      Credit
+       -+       -
Debit      CreditDebit      Credit
-       +-       +
Debit      CreditDebit      Credit
-       +-       +
NormalNormal
BalanceBalance
NormalNormal
BalanceBalance
NormalNormal
BalanceBalance
Copyright (c) 2009 Prentice Hall. All rights reserved.
19
Expanding Debit/Credit Rules Revenues & Expenses
RevenuesRevenues
  -       +  -       +
Debit    CreditDebit    Credit
Owner’sCapitalOwner’sCapital
Debit    CreditDebit    Credit
  -       +  -       +
WithdrawalsWithdrawals
Debit    CreditDebit    Credit
  +       -  +       -
ExpensesExpenses
Debit    CreditDebit    Credit
  +       -  +       -
Copyright (c) 2009 Prentice Hall. All rights reserved.
20
Normal Balances
Owner’s equity
Debit      CreditDebit      Credit
-       +-       +
NormalNormal
BalanceBalance
Owner’sCapitalOwner’sCapital
Owner’sCapitalOwner’sCapital
__
__
__
__
Debit    CreditDebit    Credit
++
++
Debit      CreditDebit      Credit
+       -+       -
Debit     CreditDebit     Credit
-       +-       +
NormalNormal
BalanceBalance
NormalNormal
BalanceBalance
RevenuesRevenues
RevenuesRevenues
ExpensesExpenses
ExpensesExpenses
WithdrawalsWithdrawals
WithdrawalsWithdrawals
+       -+       -
NormalNormal
BalanceBalance
Copyright (c) 2009 Prentice Hall. All rights reserved.
Assets
Withdrawals
Expenses
Liabilities
Capital
Revenues
Debit Credit
21
This indicates the normal balance of each account group.
The normal balance is also what increases the account.
Copyright (c) 2009 Prentice Hall. All rights reserved.
22
T-Account Example
Cash
$20,000
$12,000
$8,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
List the steps of the transactions to the ledger
23
Learning Objective 3
Copyright (c) 2009 Prentice Hall. All rights reserved.
Identify eachaccountaffected andits type
Determine ifeach accountis increasedor decreased
Recordtransaction inthe journal
Journalizing Process
24
Use the rules ofdebit and credit
Copyright (c) 2009 Prentice Hall. All rights reserved.
Four parts:
◦Date of transaction
◦Title of account debited with dollar amount
◦Title of account credited with dollar amount
◦Brief explanation of transaction
Journal Entry
25
Copyright (c) 2009 Prentice Hall. All rights reserved.
26
General Journal
                                  Journal                        Page 1
Date
Description
Debit
Credit
Jul 1
Cash
45,000
    Josie Smith, Capital
45,000
Owner investment
Accounts Affected
Accounts Affected
Dollar amount ofdebits and credits
Dollar amount ofdebits and credits
Explanation oftransaction
Explanation oftransaction
TransactionDate
TransactionDate
Copyright (c) 2009 Prentice Hall. All rights reserved.
Copying amounts from the journal to the ledger
27
Posting
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 22:
“On account” indicates Accounts receivable
Accounts receivable is an asset account
Increase an asset with a debit
28
Short Exercise 2-6
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Mar22Accounts receivable4,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 22:
“Performed services” indicates revenue has beenearned
Revenues are increased by credits
29
Short Exercise 2-6 (continued)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Mar22Accounts receivable4,000
Service revenue4,000
Performed services on account
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
30
Short Exercise 2-6 (continued)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
      Accounts receivable
3,000
Received payment on account
Mar 30  Cash3,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 31:
A utility bill is an expense
◦Expenses are increased by debits
The bill will be paid later – creating an accountpayable
◦Liabilities are increase by credits
Short Exercise 2-6 (continued)
31
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Received utility bill
Mar 31Utilities expense130
Accounts payable130
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
Rent Expense is an expense account
Increase an expense with a debit
32
Short Exercise 2-6 (continued)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
     Cash
2,300
Paid salaries
Mar31Salaries expense2,300
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 31:
Advertising is another expense
Cash is paid
33
Short Exercise 2-6 (continued)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Mar31Advertising expense400
Cash400
Paid advertising
Copyright (c) 2009 Prentice Hall. All rights reserved.
Origin of accounting transactions
Examples:
◦Bank deposit tickets
◦Invoices
◦Checks
◦Stock certificates
Source Documents
34
Copyright (c) 2009 Prentice Hall. All rights reserved.
Journalize and post sample transactions to theledger
35
Learning Objective 4
Copyright (c) 2009 Prentice Hall. All rights reserved.
36
Short Exercise 2-8
Cash
Service revenue
Accounts receivable
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Accounts receivable
9,000
      Service revenue
9,000
Performed legal services on account
Copyright (c) 2009 Prentice Hall. All rights reserved.
37
Short Exercise 2-8 (continued)
Cash
Service revenue
Accounts receivable
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Accounts receivable
9,000
      Service revenue
9,000
Performed legal services on account
9,000
9,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
38
Short Exercise 2-8 (continued)
Cash
Service revenue
Accounts receivable
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Cash
5,400
      Accounts receivable
5,400
Received payment on account
9,000
9,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
39
Short Exercise 2-8 (continued)
Cash
Service revenue
Accounts receivable
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Cash
5,400
      Accounts receivable
5,400
Received payment on account
9,000
9,000
5,400
5,400
3,600
Copyright (c) 2009 Prentice Hall. All rights reserved.
Prepare the trial balance from the T-Accounts
40
Learning Objective 5
Copyright (c) 2009 Prentice Hall. All rights reserved.
Summary of the ledger
Lists all accounts with their balances
Accuracy check
◦Debits should equal credits
NOT a balance sheet
41
Trial Balance
Copyright (c) 2009 Prentice Hall. All rights reserved.
Search for missing account
Divide the difference between debits and creditsby two
◦Is there a debit/credit balance for this amount posted inthe 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)
42
Locating Trial Balance Errors
Copyright (c) 2009 Prentice Hall. All rights reserved.
Details of the Journal
43
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Jan
2
Cash
1,000
    Josie Smith, Capital
1,000
Date oftransaction
Accounts debitedand credited
Amounts debitedand credited
Postingreference
Copyright (c) 2009 Prentice Hall. All rights reserved.
Details of the Ledger
44
GENERAL JOURNAL                          Page 1
DATE
DESCRIPTION
POSTREF
DEBIT
CREDIT
Jan
2
Cash
101
1,000
    Josie Smith, Capital
301
1,000
Cash        Account No. 101
Date
Jrnl. Ref.
Debit
Date
Jrnl. Ref.
Credit
2-Jan
J.1.
1,000
 
 
Josie Smith, Capital    Account No. 301
Date
Jrnl. Ref.
Debit
Date
Jrnl. Ref.
Credit
 
2-Jan
J.1.
1,000
 
1
1
5
5
4
4
3
3
2
2
Copyright (c) 2009 Prentice Hall. All rights reserved.
Four-Column Account
45
CASH
 
 
 
 
Acct No. 101
 
Balance
Date
Item
JrnlRef
Debit
Credit
Debit
Credit
1-Apr
 
J.1
20,000
 
20,000
 
3-Apr
 
J.1
 
9,000
11,000
 
5-Apr
 
J.1
3,000
 
14,000
 
6-Apr
 
J.1
 
10,000
4,000
 
Alternative to the T-Account
Copyright (c) 2009 Prentice Hall. All rights reserved.
End of Chapter 2