Recording Business Transactions Chapter 2 1 Copyright 2012

Learning Objectives Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts Define debits, credits, and normal account balances and use double-entry accounting and T-accounts List the steps of the transaction recording process 2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objectives Journalize and post sample transactions to the ledger Prepare the trial balance

1 Explain accounts, journals, and ledgers as they relate to recording transactions and describe

The Accounting Process Record transactions in the journal Copy (post) to the ledger Prepare

The Account Basic summary device Detailed record of all changes that have occurred in a particular asset, liability, or owner’s equity Covers a specific period of time Grouped in three broad categories Assets Liabilities Owner’s Equity 6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

The Journal and The Ledger Journal Ledger 7 Copyright © 2012 Pearson Education, Inc.

Trial Balance Listing of all accounts and their balances 8 Copyright © 2012 Pearson

The Accounting Equation ASSETS Economic Resources 9 LIABILITIES EQUITY Claims to Economic Resources Copyright

Assets Economic resources that will benefit the business in the future: Cash Accounts receivable Notes receivable Prepaid expenses Land Building Equipment, Furniture, Fixtures 10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Liabilities A debt (something owed): Accounts payable Notes payable Accrued liabilities 11 Copyright ©

Owner's Equity Owner’s claim to the assets: Capital Drawing Revenues Expenses 12 Copyright ©

Ledger Asset, Liability, and Owner’s Equity Accounts 13 Copyright © 2012 Pearson Education, Inc.

Chart of Accounts List of all accounts used by a company 14 Copyright ©

2 Define debits, credits, and normal account balances and use double-entry accounting and T-accounts

Double Entry System Record dual effects of each transaction Each transaction has a: Receiving

T-Account Tool for analyzing and determining the balance in a given account 17 Copyright

Increases and Decreases in Accounts Whether an account is increased by debit or a credit is determined by the account type Debits are not good or bad 18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Rules of Debit and Credit The account category governs the increase side or decrease

Illustrate Debits and Credits The first transaction involves receiving $30, 000 cash and issuing Capital The second transaction is a $20, 000 purchase of land for cash 20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Match the accounting terms on the left with the corresponding definitions on the right. A. Using up assets in the course of 1. _____Posting operating a business 2. _____ Receivable B. Book of accounts 3. _____ Debit C. An asset 4. _____ Journal D. Record of transactions 5. _____ Expense E. Left side of an account 6. _____ Net Income F. Side of an account where 7. _____ Normal Balance increases are recorded 8. _____ Ledger G. Copying data from the journal to 9. _____ Payable the ledger H. Always a liability 10. _____ Equity I. Revenues – Expenses = J. Assets – Liabilities = 21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice. 1. When are debits increases? When are debits decreases? 2. When are credits increases? When are credits decreases? 22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

3 List the steps of the transaction recording process 23 Copyright © 2012 Pearson

Steps in the Transaction Recording Process 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 24 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Illustrating a Journal Entry Journalize the first transaction of Smart Touch— the receipt of $30, 000 cash and issuance of Capital. The accounts affected are Cash and Capital. Cash is an asset. Capital is equity. Both accounts increase by $30, 000. Assets increase with debits. Equity increases with credits. 25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Illustrating a Journal Entry (continued) Four parts: a) b) c) d) 26 Date of transaction Title of account debited with dollar amount Title of account credited with dollar amount Brief explanation of transaction Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

General Journal Description Date Apr 1 Cash Bright, capital Page 1 Debit Credit 30,

Ned Brown opened a medical practice in San Diego, California. 1. Record the preceding transactions in the journal of Ned Brown, M. D. , P. C. Include an explanation. Jan 1 The business received $29, 000 cash and issued common stock. 2 Purchased medical supplies on account, $14, 000. 2 Paid monthly office rent of $2, 600. 3 Recorded $8, 000 revenue for service rendered to patients on account. 28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Jan. 1: The business received $29, 000 cash and issued common stock. GENERAL JOURNAL

Jan. 2: Purchased medical supplies on account, $14, 000. GENERAL JOURNAL DATE 30 DESCRIPTION

Jan. 2: Paid monthly office rent of $2, 600. GENERAL JOURNAL DATE 31 DESCRIPTION

Jan. 3: Recorded $8, 000 revenue for service rendered to patients on account. GENERAL

Posting from the Journal to the Ledger Copying amounts from the journal to the

Expanding Debit/Credit Rules to include Revenues and Expenses 34 Copyright © 2012 Pearson Education,

Complete Rules of Debit and Credit 35 Copyright © 2012 Pearson Education, Inc. Publishing

Normal Balance of an Account 36 Copyright © 2012 Pearson Education, Inc. Publishing as

Flow of Accounting Data from the Journal to the Ledger 37 Copyright © 2012

Source Documents Origin of accounting transactions 38 Copyright © 2012 Pearson Education, Inc. Publishing

4 Journalize and post sample transactions to the ledger 39 Copyright © 2012 Pearson

Practice Journalizing: Transaction 1 Capital Cash GENERAL JOURNAL DATE DESCRIPTION Cash Bright, capital RE F DEBIT CREDIT 30, 000 Issued capital. 40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Practice Journalizing and Posting: Transaction 2 Land Cash Capital GENERAL JOURNAL DATE DESCRIPTION Land Cash REF DEBIT CREDIT 20, 000 Bought land. 41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Practice Journalizing and Posting: Transaction 3 Office supplies Cash Accounts payable GENERAL JOURNAL DATE REF DESCRIPTION Office supplies Accounts payable DEBIT CREDIT 500 Purchased supplies. 42 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Practice Journalizing and Posting : Transaction 4 Cash Service revenue GENERAL JOURNAL DATE REF DESCRIPTION Cash Service revenue DEBIT CREDIT 5, 500 Received payment on account. 43 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

44 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Oakland Floor Coverings reported the following summarized data at December 31, 2012. Accounts appear in no particular order. Revenues $34, 000 Other liabilities Equipment 45, 000 Cash Accounts payable 2, 000 Expenses Oakland, capital 22, 000 45 $18, 000 12, 000 19, 000 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Oakland Floor Coverings Trial Balance December 31, 2012 Cash Equipment Accounts payable Other liabilities Oakland, capital Revenues Expenses 46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Texas Sales Consultants completed the following transactions during the latter part of January: Jan 22 Performed service for customers on account, $8, 000. 30 Received cash on account from customers, $7, 000. 31 Received a utility bill, $180, which will be paid during February. 31 Paid monthly salary to salesman, $2, 000. 31 Paid advertising expense of $700. 47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Jan 22: Performed service for customers on account, $8, 000 “On account” indicates Accounts receivable is an asset account Increase an asset with a debit GENERAL JOURNAL DATE 48 DESCRIPTION REF DEBIT CREDIT Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Jan. 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 49 DESCRIPTION REF DEBIT CREDIT Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Jan. 31: A utility bill is an expense Expenses are increased by debits The bill will be paid later–creating an account payable Liabilities are increased by credits GENERAL JOURNAL DATE 50 DESCRIPTION REF DEBIT CREDIT Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Jan. 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 GENERAL JOURNAL DATE 51 DESCRIPTION REF DEBIT CREDIT Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

March 31: Advertising is another expense Cash is paid GENERAL JOURNAL DATE 52 DESCRIPTION

5 Prepare the trial balance from the T-accounts 53 Copyright © 2012 Pearson Education,

Trial Balance Summary of the ledger Lists all accounts with their balances Accuracy check

Trial Balance 55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Detecting Trial Balance Errors Search for missing account Divide the difference between total debits and total credits by two Divide out-of-balance amount by nine 56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

57 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Four-Column Account 58 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

59 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 60 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.