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Recording Business Transactions

Recording Business Transactions. Chapter 2. Objective 1. Use accounting terms. Account. Basic summary device Detailed record of increases and decreases in specific assets, liabilities, or owner’s equity during a period. Ledger. Book or printout holding all the accounts. =. +.

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Recording Business Transactions

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  1. Recording Business Transactions Chapter 2

  2. Objective 1 Use accounting terms

  3. Account • Basic summary device • Detailed record of increases and decreases in specific assets, liabilities, or owner’s equity during a period

  4. Ledger • Book or printout holding all the accounts

  5. = + Accounting Equation Accounts are grouped in 3 broad categories: Assets Liabilities Equity

  6. Assets Economic resources that will benefit the business in the future • Cash • Accounts Receivable • Notes Receivable • Prepaid Expenses • Land • Building • Equipment, Furniture, Fixtures

  7. Liabilities Creditors’ claims to assets (debt) • Accounts Payable • Notes Payable • Accrued Liabilities

  8. Owner’s Equity Owner’s claim to the assets • Capital • Withdrawals • Revenues • Expenses

  9. Cash Notes Payable Accounts Payable Ledger Accounts Receivable Revenues C. Lapp, Capital All Individual Accounts Combined Make Up the Ledger

  10. Chart of Accounts • List of all accounts used by a company along with the account numbers

  11. Objective 2 Apply the rules of debit and credit

  12. Double Entry System • Record dual effects of each transaction • Each transaction affects at least two accounts • Each transaction is recorded with at least • One debit • One credit • Total debits must equal total credits

  13. Simple tool for analyzing and determining the balance in a given account Account Name (Left Side) Debit (Right Side) Credit T-Account

  14. = + Assets Liabilities Equity Debit Credit Debit Credit Debit Credit + - - + - + Rules of Debit and Credit

  15. Owner’s Capital Owner’s Withdrawals Debit Credit Debit Credit + - - + Revenues Expenses Debit Credit - + Debit Credit + - Rules of Debit and Credit Owner’s Equity Debit Credit - +

  16. Expanding the Rules of Debit and Credit Owner’s Equity _ _ Owner’s Capital Owner’s Withdrawals + Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit + - + - - + - +

  17. Remember: Just ask ALICE! The middle three are increased with credits The first and the last are increased with a debit * Really, this is revenues, but “r” just doesn’t fit in!

  18. Debit Credit Debit Credit Debit Credit + - - + - + = + Normal Balance Normal Balance Normal Balance Assets Liabilities Equity Normal Balances

  19. Normal Balance Normal Balance Normal Balance Normal Balance Normal Balances Owner’s Equity _ _ Owner’s Capital Owner’s Withdrawals + Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit - + + - - + + -

  20. Objective 3 Record transactions in the journal

  21. Journal • Chronological record of the transactions • Consists of at least one debit and one credit

  22. Journalizing Transactions • Identify each account affected and its type • Determine whether each account is increased or decreased. Use the rules of debit and credit • Record transaction in journal, including a brief explanation • Debit side of entry is entered first • Total debits should always equal total credits

  23. General Journal Transaction Date Accounts Affected Explanation of transaction Dollar amount of debits and credits

  24. General Journal Style conventions that must be followed: • Year is entered at the top of each page • The month is only entered for the first entry on a page unless the month changes in the middle of the page. The month may be abbreviated • Enter numerical date for each transaction, even if there are many entries on same date

  25. General Journal • Debits are ALWAYS entered first in an entry. Use the EXACT account title and do not abbreviate • Credits are INDENTED and listed second • Do not use dollar signs • SKIP A LINE between each entry • Never split an entry between two pages

  26. Exercise 2-5 Analysis of June 1 transaction: • Cash is increasing • Cash is an asset account • Increase an asset with a debit Jun 1 Cash 25,000

  27. Exercise 2-5 Analysis of June 1 transaction: • M. Brown, Capital is increasing • Capital is an owner’s equity account • Increase owner’s equity with a credit Jun 1 Cash 25,000 M. Brown, Capital 25,000 Owner invested in business

  28. Exercise 2-5 Analysis of June 2 transaction: • Medical Supplies is increasing • Medical Supplies is an asset account • Increase an asset with a debit Jun 2 Medical Supplies 10,000

  29. Exercise 2-5 Analysis of June 2 transaction: • Accounts Payable is increasing • Accounts Payable is a liability account • Increase a liability with a credit Jun 2 Medical Supplies 10,000 Accounts Payable 10,000 Purchased medical supplies

  30. Exercise 2-5 Analysis of June 2 transaction: • Rent Expense is increasing • Rent Expense is an expense account • Increase an expense with a debit Jun 2 Rent Expense 4,000

  31. Exercise 2-5 Analysis of June 2 transaction: • Cash is decreasing • Cash is an asset account • Decrease an asset with a credit Jun 2 Rent Expense 4,000 Cash 4,000 Paid rent for the month

  32. Exercise 2-5 Analysis of June 3 transaction: • Accounts Receivable is increasing • Accounts Receivable is an asset account • Increase an asset with a debit Jun 3 Accounts Receivable 12,000

  33. Exercise 2-5 Analysis of June 3 transaction: • Service Revenue is increasing • Service Revenue is a revenue account • Increase a revenue with a credit Jun 3 Accounts Receivable 12,000 Service Revenue 12,000 Performed services

  34. Objective 4 Post from the journal to the ledger

  35. Posting • Periodically, journal entries are posted to ledger accounts to determine balances in each account • Posting – copying amounts from the journal to the ledger

  36. Service Revenue Cash Accounts Payable Rent Expense M. Brown, Capital Accounts Receivable Medical Supplies Exercise 2-9 25,000 25,000 25,000 Jun 1 Cash 25,000 M. Brown, Capital 25,000 Owner invested in business 25,000

  37. Service Revenue Cash Accounts Payable Rent Expense M. Brown, Capital Accounts Receivable Medical Supplies Exercise 2-9 10,000 25,000 Jun 2 Medical Supplies 10,000 Accounts Payable 10,000 Purchased medical supplies 10,000 25,000 10,000 10,000

  38. Service Revenue Cash Accounts Payable Rent Expense M. Brown, Capital Accounts Receivable Medical Supplies Exercise 2-9 10,000 25,000 4,000 4,000 25,000 4,000 Jun 2 Rent Expense 4,000 Cash 4,000 Paid rent for the month 10,000 4,000

  39. Service Revenue Cash Accounts Payable Rent Expense M. Brown, Capital Accounts Receivable Medical Supplies Exercise 2-9 12,000 10,000 25,000 4,000 12,000 4,000 25,000 12,000 Jun 3 Accounts Receivable 12,000 Service Revenue 12,000 Performed services 10,000 12,000

  40. Service Revenue Cash Accounts Payable Rent Expense M. Brown, Capital Accounts Receivable Medical Supplies Exercise 2-9 12,000 10,000 25,000 4,000 Bal 21,000 Bal 10,000 Bal 12,000 12,000 4,000 25,000 Bal 12,000 Bal 25,000 Bal 4,000 10,000 Bal 10,000

  41. Flow of Accounting Data

  42. Objective 5 Prepare and use a trial balance

  43. Trial Balance • List of all accounts with their balances

  44. Exercise 2-9 (part 3) Mike Brown, M.D. Trial Balance June 30, 2008 Cash 21,000 Accounts Receivable 12,000 Medical Supplies 10,000 Accounts Payable 10,000 M. Brown, Capital 25,000 Service Revenue 12,000 Rent Expense 4,000 Totals 47,000 47,000

  45. Locating Trial Balance Errors What if it doesn’t balance? • Is the addition correct? • Are all accounts listed? • Are the balances listed correctly?

  46. Locating Trial Balance Errors • Divide the difference by two • Is there a debit/credit balance for this amount posted in the wrong column? • Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error

  47. Cash increases. It is an asset. Increase assets with debits. Capital increases. Owner’s equity is increased with a credit. Supplies, an asset, increases. Increase assets with debits. Accounts Payable increases. It is a liability. Increase liabilities with a credit Exercise 2-18 Aug 1 Cash 60,000 R. Woodward, Capital 60,000 To record investment by owner 2 Supplies 200 Accounts Payable 200 Purchased supplies on account

  48. Both of these accounts are assets. Building is increasing. Increase assets with debits. Cash is decreasing. Decrease assets with credits. Cash, an asset, is increasing. Increase assets with debits. Revenue accounts are increased with credits Exercise 2-5 Aug 4 Building 50,000 Cash 50,000 Purchased building 6 Cash 3,000 Service Revenue 3,000 Performed service

  49. Accounts Payable, which is decreasing, is a liability. Decrease liabilities by debiting them. Decrease the asset, Cash, with a credit. Both of these accounts are assets. Building is increasing. Increase assets with debits. Cash is decreasing. Decrease assets with credits Exercise 2-18 Aug 9 Accounts Payable 100 Cash 100 Paid on account 17 Accounts Receivable 2,100 Service Revenue 2,100 Performed services

  50. Both of these accounts are assets. Cash is increasing – debit. Accounts Receivable is decreasing - credit Exercise 2-18 Aug 23 Cash 1,200 Accounts Receivable 1,200 Received payment on account

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