Recording Business Transactions Chapter 2 HORNGREN HARRISON BAMBER

Recording Business Transactions Chapter 2 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

Objectives 1. Define and use key accounting terms 2. Apply the rules of debit and credit 3. Record transactions in the journal Post from the journal to the ledger Prepare and use a trial balance Set up a chart of accounts for a business Analyse transactions without a journal 4. 5. 6. 7. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -2

Objective 1 Define and use key accounting terms. Horngren ♦ Harrison ♦ Bamber ♦

Accounting Terms Account Owner’s equity Ledger Assets Double-entry accounting Liabilities T-account Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -4

Accounting Terms Cash Individual asset accounts Accounts Payable All individual accounts combined make up the ledger. Ledger Individual liability accounts Paula Lee, Capital Individual owner’s equity accounts Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -5

Classification of Accounts l – – – – What are some asset accounts? Cash Bill Receivable Accounts Receivable Prepaid Expenses Land Building Equipment Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -6

Classification of Accounts l – – What are some liability accounts? Bills Payable Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term Liabilities (mortgages and debentures) Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -7

Classification of Accounts l – – What are some owner’s equity accounts? Capital (or owner’s interest in the business) Withdrawals or Drawings Revenues Expenses Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -8

Jan’s Petrol Station Example Assume that the business sold $5, 000 worth of petrol on a given day and performed $3, 000 of repair services. l How much revenue did the business earn that day? l $8, 000 l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 -9

Jan’s Petrol Station Example Revenues increase Jan’s equity in the business. l The business had to pay mechanics and suppliers $3, 750 for the work performed that day. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 10

Jan’s Petrol Station Example Expenses decrease Jan’s equity in the business. l How much was the net increase in Jan’s equity that day? l $4, 250 l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 11

Double-Entry Accounting Double entry bookkeeping means to record the dual effects of each business transaction. l Assets = Liabilities + Owner’s Equity l Assets are on the left (debit) side. l Liabilities and Equity are on the right (credit) side. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 12

The T-Account Title Debit Credit LEFT SIDE Horngren ♦ Harrison ♦ Bamber ♦ Best

The T-Account Title Debit Credit RIGHT SIDE Horngren ♦ Harrison ♦ Bamber ♦ Best

Objective 2 Apply the rules of debit and credit. Horngren ♦ Harrison ♦ Bamber

Rules of Debit and Credit Assets Debit + Credit – = Liabilities Debit – Credit + + Owner’s Equity Debit – Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia Credit + 2 - 16

The Double-Entry System Each transaction is recorded with at least: One debit AND One credit Total debits must equal total credits. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 17

Jan’s Petrol Station Example On July 1, Jan invested $500, 000 in cash and obtained a $300, 000 loan to open a gas station. l How much was the initial increase in cash? l $800, 000 l Which accounts were affected? l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 18

Jan’s Petrol Station Example Cash Liabilities Owner’s Equity Horngren ♦ Harrison ♦ Bamber ♦

Jan’s Petrol Station Example Jan’s Petrol Station Balance Sheet June 30, 2004 Assets Cash $800, 000 Total assets $800, 000 Liabilities Bills payable $300, 000 Owner’s Equity Jan, capital 500, 000 Total liabilities and owner’s equity $800, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 20

Objective 3 Record transactions in the journal. Horngren ♦ Harrison ♦ Bamber ♦ Best

Journals What is a journal? l It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit / credit rules. 4 Record transaction (with description). l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 22

Journals l – – – What does a journal entry include? date of the transaction title of the account debited title of the account credited amount of the debit and credit (description of the transaction) dollar signs are omitted Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 23

Recording Transactions On April 2, Paula Lee invested $30, 000 in Paula Lee e. Travel. l What is the journal entry? l April 2 Cash 30, 000 Paula Lee, Capital 30, 000 l Received initial investment from owner Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 24

Objective 4 Post from the journal to the ledger. Horngren ♦ Harrison ♦ Bamber

Ledger What is a ledger? l It is a collection of all accounts utilised by an entity during an accounting period. l Loose leaf pages Computer printout Bound books Cards Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 26

Posting What is posting? l It is the transfer of information from the journal to the appropriate accounts in the ledger. l The first transaction was Cash 30, 000 Capital 30, 000 l See other journal entries p 51 -52 of the text Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 27

Asset Accounts After Posting Cash (1) 30, 000 (2) 20, 000 (4) 300 (6) 2, 100 Land (2) 20, 000 Bal. 7, 600 Office Supplies (3) 500 Bal. 500 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 28

Liabilities and Owner’s Equity Accounts After Posting Accounts Payable (4) 300 (3) 500 Bal. 200 Paula Lee, Capital (1) 30, 000 Bal. 30, 000 Paula Lee, Drawings (6) 2, 100 Bal. 2, 100 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 29

Details of Journals and Ledgers Journal Page 1 Date Accounts and Explanation Debit Credit April 2 Cash 30, 000 Paula Lee, Capital 30, 000 Received initial investment from owner Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 30

Details of Journals and Ledgers Account: Cash Date April 2 Ref. jrl Posting Account: 101 Balance Debit Credit 30, 000 Insert the number of the journal page. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 31

Details of Journals and Ledgers Journal Page 1 Date Account and Explanation Post Ref. Debit Credit April 2 Cash 101 30, 000 Paula Lee, Capital 301 30, 000 Initial investment from owner Insert the ledger account in the journal. Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 32

The Four-Column Account Format Account: Cash Account No. 101 Balance Date Item Ref. April 2 jr 1 Debit 30, 000 Credit Debit Credit 30, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 33

Objective 5 Prepare and use a trial balance. Horngren ♦ Harrison ♦ Bamber ♦

Trial Balance What is a trial balance? l It is an internal document. l It is a listing of all the accounts with their related balances. l Before computers, it provided a check on accuracy by showing whether total debits equal total credits. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 35

Locating Trial Balance Errors What if it doesn’t balance ? l Is the addition correct? l Are all accounts listed? l Are the balances listed correctly? l DEBITS CREDITS Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 36

Locating Trial Balance Errors Divide the difference by two. l Is there a debit / credit balance for this amount posted in the wrong column? l Check journal postings. l Review accounts for reasonableness. l Computerised accounting programs usually prohibit out-of-balance entries. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 37

Objective 6 Set up a chart of accounts for a business. Horngren ♦ Harrison

Chart of Accounts in the Ledger This is a listing of all the accounts and related account numbers used by a business. l Each account should have its own assigned number. l The numbering system should allow flexibility for changing business needs. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 39

Paula Lee e. Travel Chart of Accounts Assets 101 Cash 111 Accounts Receivable 141 Office Supplies 151 Office Furniture 155 Computers 191 Land Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 40

Paula Lee e. Travel Chart of Accounts Liabilities 201 Accounts Payable 231 Bills Payable Owner’s Equity 301 Capital 311 Drawings Revenues 401 Service Revenue Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 41

Paula Lee e. Travel Chart of Accounts Expenses 501 Rent Expense 523 Electricity Expense 524 Natural Gas Expense 551 Salary Expense 580 Telephone Expense 581 Mobile Expense – Helen 582 Mobile Expense – Jane 581 Mobile Expense – Amanda Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 42

Normal Account Balances Assets = Liabilities + Owner’s Equity l Debits = Credits l The side where we expect increases to be recorded is the normal balance side. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 43

Objective 7 Analyse transactions without a journal. Horngren ♦ Harrison ♦ Bamber ♦ Best

Jan’s Petrol Station Jan is considering either purchasing a garage for $600, 000 or renting one for $60, 000 per year. l Jan does not need to record in the journal all of the transactions that would affect her decision. l Why? l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 45

Jan’s Petrol Station Jan has not completed a transaction yet. l However, Jan can visualise how the ledger accounts will be affected. l Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 46

Jan’s Petrol Station Rent the garage Cash 60, 000 Rent Expense 60, 000 Buy the garage Cash 600, 000 Building 600, 000 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4 e Copyright © 2004 Pearson Education Australia 2 - 47