Recording Business Transactions Chapter 2 Objective 1 Use

Recording Business Transactions Chapter 2

Objective 1 Use accounting terms

Accounting Terms Account Owner’s equity Ledger Assets Double-entry accounting Liabilities T-account

Accounting Terms Cash Individual asset accounts Accounts Payable All individual accounts combined make up the ledger. Ledger Individual liability accounts Gay Gillen, Capital Individual owner’s equity accounts

Classification of Accounts 4 What are some asset accounts? – Cash – Notes Receivable – Accounts Receivable – Prepaid Expenses – Land – Building – Equipment

Classification of Accounts 4 What are some liability accounts? – Notes Payable – Accounts Payable – Accrued Liabilities (for expenses incurred but not paid) – Long-term Liabilities (bonds)

Classification of Accounts 4 What are some owner’s equity accounts? – Capital or owner’s interest in the business – Withdrawals – Revenues – Expenses

John’s Gas Station Example 4 Assume that the business sold $5, 000 worth of gasoline on a given day and performed $3, 000 of repair services. 4 How much revenue did the business earn that day? 4 $8, 000

John’s Gas Station Example 4 Revenues increase John’s equity in the business. 4 The business had to pay mechanics and vendors $3, 750 for the work performed that day.

John’s Gas Station Example 4 Expenses decrease John’s equity in the business. 4 How much was the net increase in John’s equity that day? 4 $4, 250

Classification of Accounts 4 In a corporation, the owner’s equity account is called Stockholders’ Equity. Contributed Capital Retained Earnings

Double-Entry Accounting 4 Double entry bookkeeping means to record the dual effects of each business transaction. 4 Assets = Liabilities + Owner’s Equity 4 Assets are on the left (debit) side. 4 Liabilities and Equity are on the right (credit) side.

The T-Account Title Debit Left Side Credit

The T-Account Title Debit Credit Right Side

Objective 2 Apply the Rules of Debit and Credit.

Rules of Debit and Credit Assets Debit + Credit – = Liabilities Debit – Credit + + Owner’s Equity Debit – Credit +

The Double-Entry System Each transaction is recorded with at least: One debit One credit Total debits must equal total credits.

John’s Gas Station Example 4 On July 1, John invested $500, 000 in cash and obtained a $300, 000 loan to open a gas station. 4 How much was the initial increase in cash? 4 $800, 000 4 Which accounts were affected?

John’s Gas Station Example Cash Liabilities Owner’s Equity

John’s Gas Station Example John’s Gas Station Balance Sheet July 1, 2002 Assets Cash $800, 000 Total assets $800, 000 Liabilities Notes payable $300, 000 Owner’s Equity John, capital 500, 000 Total liabilities and owner’s equity $800, 000

Objective 3 Record Transactions in the Journal.

Journals 4 What is a journal? 4 It is a list in chronological order of all the 1 2 3 4 transactions for a business. Identify transaction from source documents. Specify accounts affected. Apply debit/credit rules. Record transaction with description.

Journals 4 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

Recording Transactions 4 On April 2, Gay Gillen invested $30, 000 in Gay Gillen e. Travel. 4 What is the journal entry? 4 April 2 Cash 30, 000 Gay Gillen, Capital 30, 000 Received initial investment from owner

Objective 4 Post from the Journal to the Ledger.

Ledger 4 What is a ledger? 4 It is a digest of all accounts utilized by an entity during an accounting period. Loose leaf pages Computer printout Bound books Cards

Posting 4 What is posting? 4 It is the transfer of information from the journal to the appropriate accounts in the ledger.

Normal Account Balances 4 Assets = Liabilities + Owner’s Equity 4 Debits = Credits 4 The side where we expect increases to be recorded is the normal balance side.

Asset Accounts After Posting Cash (1) 30, 000 (2) 20, 000 (4) 300 (6) 2, 100 Bal. 7, 600 Land (2) 20, 000 Bal. 20, 000 Office Supplies (3) 500 Bal. 500

Liabilities and Owner’s Equity Accounts After Posting Accounts Payable (4) 300 (3) 500 Bal. 200 Gay Gillen, Capital (1) 30, 000 Bal. 30, 000 Gay Gillen, Withdrawals (6) 2, 000 Bal. 2, 000

Details of Journals and Ledgers Journal Page 1 Date Accounts and Explanation Debit Credit April 2 Cash 30, 000 Gay Gillen, Capital 30, 000 Received initial investment from owner

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.

Details of Journals and Ledgers Journal Page 1 Date Account and Explanation Post Ref. Debit Credit April 2 Cash 101 30, 000 Gay Gillen, Capital 301 30, 000 Initial investment from owner Insert the ledger account in the journal.

The Four-Column Account Format Account: Cash Account No. 101 Balance Date April 2 Item Ref. jr 1 Debit 30, 000 Credit

Objective 5 Prepare and use a Trial Balance.

Trial Balance 4 What is a trial balance? 4 It is an internal document. 4 It is a listing of all the accounts with their related balances. 4 Before computers, it provided a check on accuracy by showing whether total debits equal total credits.

Locating Trial Balance Errors 4 What if it doesn’t balance ? 4 Is the addition correct? 4 Are all accounts listed? 4 Are the balances listed correctly? DEBITS CREDITS

Locating Trial Balance Errors 4 Divide the difference by two. 4 Is there a debit/credit balance for this amount posted in the wrong column? 4 Check journal postings. 4 Review accounts for reasonableness. 4 Computerized accounting programs usually prohibit out-of-balance entries.

Objective 6 Analyze Transactions without a Journal.

John’s Gas Station 4 John is considering either purchasing a garage for $70, 000 or renting one for $10, 000 per year. 4 John does not need to record in the journal all of the transactions that would affect his decision. 4 Why?