ACCOUNTING FOR BUSINESS BANKING TRANSACTIONS LECTURE 2 Business

ACCOUNTING FOR BUSINESS & BANKING TRANSACTIONS LECTURE 2

Business Transactions • IN THIS CHAPTER, we introduce the T–account, the concepts of debits and credits, the journal, the recording process of journalizing, the ledger, the process of posting, and the trial balance. These tools are all basic to a double–entry accounting system. • Business transactions are the raw data of accounting. First, business events are observed and those of an economic nature are identified.

Business Transactions • An account is the basic element used in an accounting system to classify and summarize business transactions. Think of the account as a basic storage unit for data. Thus, accounts must be established for each separate classification. For example, each business will have a cash account, as well as accounts to record different types of sales and expenses. • To illustrate accounts, we start with a T–account that has three basic parts: the title, the left side, and the right side. The T–account’s name is derived from its appearance.

Asset Accounts • • • Cash includes cash on hand in the custody of cashiers and other employees, plus the cash on deposit with banks. Notes Receivable. A formal written promise to pay a sum of money at a fixed future date is called a promissory note. Businesses refer to these notes as notes receivable when they receive them from debtors. Generally, the Notes Receivable account contains only notes receivable from debtors who maintain open accounts with the enterprise. Accounts Receivable. Goods or services are often sold to guests on the basis of the guests’ oral or implied promises to pay in the future. Such sales are known as sales on account, and the promises to pay are known as accounts receivable. Accrued Interest Receivable. This account consists of interest earned on interest–bearing assets that the business has not yet received at the date of the balance sheet. Marketable Securities (stocks and bonds) that are purchased as short–term investments and are thus readily convertible to cash are classified as marketable securities. Inventories of Merchandise. Several accounts will be maintained for the inventory of goods for sale, including but not limited to Beverage Inventory, Food Inventory, and Gift Merchandise Inventory. Office Supplies. Postage stamps, stationery, paper, pencils, and similar items are known as office supplies. They are assets when purchased. As they are used in the business, they become expenses. Other Prepaid Expenses. Prepaid expenses are items that are assets when purchased but become expenses as they are used. Prepaid items include prepaid rent, unexpired insurance, and prepaid taxes. Investments in securities of affiliated or associated companies and other securities purchased as nontemporary investments are included in an investment account. Property and Equipment. This class of assets includes land, buildings, furniture, carpets, linen, china, glassware, and uniforms. A separate account is maintained for each type of property and equipment.

Liability Accounts • • Notes Payable. This account includes promissory notes given to creditors. Promissory notes given to banks may be shown separately from notes to other creditors. Accounts Payable. An account payable is an amount the business owes to a creditor, resulting from an oral or implied promise to pay at some future date. Taxes Charged to Guests and Withheld from Employees. All taxes collected from guests or withheld from employees are generally recorded in separate accounts, such as Sales Taxes Payable, FICA Payable, Federal Income Taxes Withheld, State Income Taxes Withheld, and City Income Taxes Withheld. Income Taxes Payable. The firm will record the amount of federal, state, and city income taxes due for prior fiscal years in separate accounts. The estimated liability for income taxes on the current year’s net income to date will also be recorded in these accounts. Accrued Expenses for a period not yet paid at the end of the accounting period (such as wages, salaries, interest, and utilities) are recorded as well as the liability. A separate account is maintained for each item. Advance Deposits. This is the unearned portion of revenue resulting from cash received from a guest for a period following the end of the accounting period. Deposits on banquets and room reservations may also be shown as advance deposits. Mortgage Payable. A mortgage payable is a long–term debt for which the creditor has a secured prior claim against one or more of the hospitality firm’s assets.

Owners’ Equity Accounts • Capital Account. When an individual invests in a business organized as a sole proprietorship, the investment is recorded in an account bearing the investor’s name. All other capital accounts will be “closed” into this account periodically. If the firm is incorporated, the Capital account is replaced by two types of accounts: (1) Capital Stock, in which different accounts are maintained for different types of stock; and (2) Retained Earnings, in which net income or loss (the results of operations less dividends declared) is recorded. • Revenue and Expense Accounts. Revenues increase owners’ equity, whereas expenses decrease it. The prime objective of a business enterprise is to earn a profit. If the enterprise is to succeed, detailed information regarding the kinds of revenues and expenses must be supplied to management on a timely basis. This information is maintained in a separate account for each revenue and expense item. Common revenue and expense accounts include the following:

Mechanics of Double–Entry Accounting

Debit and Credit • The left side of any account is always called the debit side and the right side is always called the credit side, as arbitrarily established by accountants. Debit and credit are abbreviated “dr” and “cr, ” respectively. To debit an account is simply to record an amount on the left side of the account; to credit an account is to record an amount on the right side. The difference between the total debits and credits of an account is called the account balance. Thus, an account may have either a debit balance or a credit balance.

Mechanics of Double–Entry Accounting

Mechanics of Double–Entry Accounting 1. Asset accounts are increased by debits and decreased by credits. 2. Liabilities and owners’ equity accounts are increased by credits and decreased by debits.

General Ledger • A group of accounts is defined as a ledger. The general ledger is the group of general accounts that includes accounts for assets, liabilities, owners’ equity, revenues, expenses, and owner’s drawing. 1. T-accounts 2. Journalizing 3. Ledgering 4. Trial Balance Sheet

T-account 1. Don Carson forms Carson Catering on December 1, 20 X 1, and invests $5, 000 of his personal funds in the business:

T-account 2. On December 5, Carson Catering pays $500 for advertising in the local paper. The accounts affected are as follows:

T-account 3. In anticipation of catering events, Carson Catering purchases a van on December 8, 20 X 1, costing $15, 000. A down payment of $3, 000 is made, and the remainder ($12, 000) is financed through Big Motors Acceptance Corporation (BMAC).

T-account 4. On December 12, 20 X 1, Carson Catering purchases food costing $200 to be served at a party for M. J. Jolly.

T-account 5. On December 13, 20 X 1, Carson Catering purchases $300 of operating supplies on account from Supplies, Inc. These supplies will be used for several catered events over the next few months.

T-account 6. On December 13, Carson Catering caters the party for M. J. Jolly and receives payment of $800.

T-account 7. On December 19, 20 X 1, Carson Catering purchases food for a party to be catered for Mary Chris Smith. This transaction is the same as Transaction 4. Food Expense is increased by (debited for) $300, and Cash is decreased by (credited for) $300.

T-account 8. On December 20, 20 X 1, Carson Catering caters the party for Mary Smith for $1, 000. She pays $300, and Carson agrees to allow Mary two weeks to pay the remainder due of $700.

T-account 9. On December 22, 20 X 1, Carson Catering purchases $25 of gasoline for its van.

T-account 10. On December 28, 20 X 1, Carson Catering pays $400 to part–time employees who assisted with the two catered events.

T-account 11. On December 28, 20 X 1, Carson Catering pays Supplies, Inc. , the $300 due.

T-account 12. On December 28, 20 X 1, Don Carson withdraws $200 from Carson Catering for his personal use. The Cash and Drawing accounts are affected as follows

General Journal

General Ledger

General Ledger

General Ledger

General Ledger

General Ledger

Trial Balance