Recording Business Transactions

Chapter 2

Use accounting terms

Objective 1

Accounting Terms

Account

Ledger

Assets

Liabilities

Owner’sequity

Double-entryaccounting

T-account

CashCash

AccountsPayable

AccountsPayable

Gay Gillen,Capital

Gay Gillen,Capital

LedgerLedger

All individualaccountscombinedmake up

the ledger.

Individual asset accounts

Individual liability accounts

Individual owner’s equity accounts

Accounting Terms

Classification of Accounts

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

Classification of Accounts

What are some liability accounts?– Notes Payable– Accounts Payable– Accrued Liabilities (for expenses incurred

but not paid)– Long-term Liabilities (bonds)

Classification of Accounts

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

John’s Gas Station Example

Assume that the business sold $5,000 worth of gasoline on a given day and performed $3,000 of repair services.

How much revenue did the business earn that day?

$8,000

John’s Gas Station Example

Revenues increase John’s equity in the business.

The business had to pay mechanics and vendors $3,750 for the work performed that day.

John’s Gas Station Example

Expenses decrease John’s equity in the business.

How much was the net increase in John’s equity that day?

$4,250

Contributed Capital

Retained Earnings

Classification of Accounts

In a corporation, the owner’s equity account is called Stockholders’ Equity.

Double-Entry Accounting

Double entry bookkeeping means to record the dual effects of each business transaction.

Assets = Liabilities + Owner’s Equity Assets are on the left (debit) side. Liabilities and Equity are on the right

(credit) side.

The T-Account

Account Title

Debit Credit

Left Side

The T-Account

Account Title

Debit Credit

Right Side

Apply the Rules of

Debit and Credit.

Objective 2

Owner’s EquityAssets Liabilities

Debit+

Debit–

Credit–

Debit–

Credit+

Credit+

= +

Rules of Debit and Credit

One debit One credit

Each transaction is recorded with at least:

Total debits must equal total credits.

The Double-Entry System

John’s Gas Station Example

On July 1, John invested $500,000 in cash and obtained a $300,000 loan to open a gas station.

How much was the initial increase in cash? $800,000 Which accounts were affected?

John’s Gas Station Example

Cash

Liabilities

Owner’s Equity

John’s Gas Station Example

John’s Gas StationBalance SheetJuly 1, 2002

Assets LiabilitiesCash $800,000 Notes payable $300,000

Owner’s EquityJohn, capital 500,000

Total liabilitiesTotal assets $800,000 and owner’s equity $800,000

Record Transactions

in the Journal.

Objective 3

Journals

What is a journal? 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.

Journals

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

On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel.

What is the journal entry? April 2

Cash 30,000 Gay Gillen, Capital

30,000 Received initial investment from owner

Post from the Journal

to the Ledger.

Objective 4

Boundbooks

Computerprintout

Cards

Loose leafpages

Ledger

What is a ledger? It is a digest of all accounts utilized by an

entity during an accounting period.

Posting

What is posting? It is the transfer of information from the

journal to the appropriate accounts in the ledger.

Normal Account Balances

Assets = Liabilities + Owner’s Equity Debits = Credits The side where we expect increases to be

recorded is the normal balance side.

Cash(1) 30,000 (2) 20,000

(4) 300 (6) 2,100

Bal. 7,600

Office Supplies(3) 500

Bal. 500

Land (2) 20,000

Bal. 20,000

Asset Accounts After Posting

Accounts Payable

Gay Gillen, Withdrawals

(1) 30,000

Bal. 30,000

(3) 500(4) 300

Bal. 200 Gay Gillen, Capital

(6) 2,000

Bal. 2,000

Liabilities and Owner’s Equity Accounts After Posting

Details of Journals and Ledgers

Date Accounts and Explanation Debit CreditApril 2 Cash 30,000

Gay Gillen, Capital 30,000Received initialinvestment from owner

Journal Page 1

Details of Journals and Ledgers

BalanceDate Ref. Debit Credit Debit CreditApril 2 jrl 30,000 30,000

Account: Cash Account: 101

Insert the number of the journal page.

Posting

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.

Balance

Account: Cash Account No. 101

Date Item Ref. Debit Credit Debit Credit

April 2 jr1 30,000 30,000

The Four-Column Account Format

Prepare and use a Trial Balance.

Objective 5

Trial Balance

What is a trial balance? It is an internal document. It is a listing of all the accounts with their

related balances. Before computers, it provided a check on

accuracy by showing whether total debits equal total credits.

DEBITS CREDITS

Locating Trial Balance Errors

What if it doesn’t balance ? Is the addition correct? Are all accounts listed? Are the balances listed correctly?

Locating Trial Balance Errors

Divide the difference by two. Is there a debit/credit balance for this

amount posted in the wrong column? Check journal postings. Review accounts for reasonableness. Computerized accounting programs usually

prohibit out-of-balance entries.

Analyze Transactions

without a Journal.

Objective 6

John’s Gas Station

John is considering either purchasing a garage for $70,000 or renting one for $10,000 per year.

John does not need to record in the journal all of the transactions that would affect his decision.

Why?

John’s Gas Station

John has not completed a transaction yet. However, John can visualize how the ledger

accounts will be affected.

Rent the garage

Buy the garage

Cash70,000

Building70,000

John’s Gas Station

Rent ExpenseCash10,000 10,000

End of Chapter 2