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Recording Business Transactions

AGRICULUTURAL TECHNICAL INSTITUTE BUS TEC T101 ACCOUNTING Recording Business Transactions Chapter 2 CH 1: ACCT & THE BUS ENVIRONMENT REVIEW The Account Equation (A=L+C) is the basis for all accounting FINANCIAL BUSINESS TRANSCTIONS FINANCIAL STATEMENTS ACCOUNTING

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Recording Business Transactions

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  1. AGRICULUTURAL TECHNICAL INSTITUTEBUS TEC T101 ACCOUNTING RecordingBusiness Transactions Chapter 2

  2. CH 1: ACCT & THE BUS ENVIRONMENT REVIEW The Account Equation (A=L+C) is the basis for all accounting FINANCIAL BUSINESSTRANSCTIONS FINANCIALSTATEMENTS ACCOUNTING

  3. CH 1: ACCT & THE BUS ENVIRONMENT REVIEW 1. Termsa. Assetsb. Liabilitiesc. Equityd. Revenuee. Expenses f. Acct Principles 2. Procedures a. Transactionsb. Prepare Financial St 1. Income St 2. Equity St. 3. Balance Sh. 4. Cash Flow St

  4. ACCOUNTING CONCEPTS CH 1: ACCT & THE BUS ENVIRONMENT CH 2: RECORDING TRANSACTIONS CH 3: MEASURING INCOME; ADJUSTMENTS CH 4: COMPLETING THE ACCTING CYCLE CH 5: MERCHANDISE OPERATIONS CH 6: SPECIAL JOURNALS CH 7: CONTROLLING CASH CH 8: RECEIVABLES CH 9: MERCHANDISE INVENTORY CH 10: PAYROLL CH 17 CASH FLOW APPENDIX C: INCOME TAX

  5. CH 2: RECORDING BUS TRANSACTIONS LEARNING OBJECTIVES AFTER COMPLETING THIS CHAPTER, THE STUDENT SHOULD BE ABLE TO: 1. Define & Use Key Accounting Terms 2. Apply the Rules of Debits and Credits 3. Record Transactions in the Journal 4. Post from the Journal to the Ledger 5. Prepare & Use a Trial Balance

  6. 46 1 Define & Use Key Accounting Terms OBJ Ledger Accounts Individual asset accounts All individual accounts combined make up the ledger. Cash Accounts Payable Ledger Individual liability accounts Gay Gillen, Capital Individual owner’s equity accounts

  7. 55 1 Define & Use Key Accounting Terms Chart of Accounts in the Ledger OBJ • This is a listing of all accounts & related account numbers used by a business. • Each account should have its own number. • The numbering system should allow flexibility for changing business needs. Typically for a small business 100’s = Assets Accts 400’s = Revenue 200’s = Liability Accts 500’s = Expenses 300’s = Equity Accts

  8. 45 1 Define & Use Key Accounting Terms OBJ Assets • What are some asset accounts? • Cash (Checking Acct) • Accts Receivable (Unwritten Promises to Pay) • Notes Receivable (Written Promises to Pay) • Prepaid Expenses (Expense Paid in Advance) • Equipment • Building • Land In Order by Liquidity: Time to Convert to Cash

  9. 45 1 Define & Use Key Accounting Terms OBJ Assets Liabilities • What are some liability accounts? • Accounts Payable (Things bought on short term credit) • Notes Payable (Loans longer than 1 yr) • Accrued Liabilities (for expenses incurred but not paid) • Long-term Liabilities (bonds)

  10. 46 1 Define & Use Key Accounting Terms OBJ Assets Liabilities Owner’s Equity • What are some owner’s equity accounts? • Capital or owner’s interest in the business • Withdrawals by the owner • Revenues from business activities • Expenses related to business activities • In a corporation, the owner’s equity account is called Stockholders’ Equity. Contributed Capital Retained Earnings

  11. 47 1 Define & Use Key Accounting Terms Double-Entry Accounting OBJ • Double entry bookkeeping means to record the multiple 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.

  12. 47 1 Define & Use Key Accounting Terms The T-Account OBJ Account Title Debit Credit LEFT SIDE RIGHT SIDE Debits are always on the left, and Credits on the right But their effects differs based on what account is changed

  13. 48 Apply the rules of debit & credit. 2 Rules of Debit and Credit OBJ Assets Liabilities + Owner’s Equity = Debit + Credit - Debit - Credit + Debit - Credit + $Debits = $Credits NB NB NB Normal Account Balances The side where we expect increases (+) to be recorded is the normal balance side.

  14. 48 Apply the rules of debit & credit. 2 Rules of Debit and Credit OBJ A = L + E + D C + EXPENSES: D+ REVENUE: C+

  15. 48 Apply the rules of debit & credit. 2 The Double-Entry System OBJ Each transaction is recorded with at least: One debit One credit Total debits must equal total credits. 1. For any one transaction DEBITS CREDITS 2. For any account in Ledger 3. For the Ledger as a whole 4. For the Balance Sheet

  16. 50 3 Record Transactions in Journal. Journals OBJ • What is a journal? • It is a list in CHRONOLOGICAL order of all the transactions for a business. • Identify transaction from source documents (sales slip, invoice, etc.) • Specify accounts affected. • Apply debit/credit rules. • Record transaction with description.

  17. 50 Record Transactions in Journal. 3 Journal Entry Rules OBJ • date of the transaction • What does a journal entry include? • title of the account debited (First) • title of the account credited (Second) • description of the transaction -amount of the debit and credit -dollar signs are omitted Date Accounts & Explanation Debit Credit Aug 2 Supplies 500 Acct Payable 500 Bought Supplies on Acct

  18. Record Transactions in Journal. 3 OBJ • When should a transaction be recorded? a. Must effect the entity’s financial position b. Must be reliable 2. Where should the transaction be recorded? -- In the Journal 3. What to record for each transaction? -- Incr / Decr for all accounts affected 4. How should the transaction be recorded? -- Follow the rules of debits and credits

  19. 52 Record Transactions in Journal. 3 OBJ 1. SHAY GILLIAN FORMS A BUSINESS BY TRANSFERRING $30,000 FROM A SAVING ACCT TO A BUSINESS CHECKING ACCT ON APR 2 ASSETS LIAB CAPITAL = ACCT REC = CK SUPP EQP BLD INV REC/EXP LD ACTS NOTES +30000 +30000 General Journal Page 1 Date Accounts & Explanation Debit Credit April 2 Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner

  20. 52 Record Transactions in Journal. 3 OBJ 2. PAID $20,000 CASH ON 4/3 FOR LD TO BUILD AN OFFICE. ASSETS LIAB CAPITAL ACCT REC = CK SUPP EQP BLD ACTS NOTES INV REC/EXP LD +30000 +30000 +20000 -20000 General Journal Page 1 Date Accounts & Explanation Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 20,000 April 3 Land 20,000 Cash Buy land for office building

  21. 53 Record Transactions in G Journal 3 OBJ 3. BOUGHT OFFICE SUPPLIES FOR $500 ON ACCOUNT ON APR 6 ASSETS LIAB CAPITAL ACCT REC = CK SUPP EQP BLD ACTS NOTES INV REC/EXP LD +30000 +30000 +20000 -20000 +500 +500 General Journal Page 1 Date Accounts & Explanation Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 20,000 April 3 Land 20,000 Cash April 6 Supplies 500 Accounts Payable 500

  22. 51 Posting from Gen Journal 4 Ledger OBJ Journals It is a list in chronological order of all the transactions for a business. It is a digest of all accounts utilized by an entity during an accounting period. It is a listing of transactions for an entity . Loose leaf pages Bound books Computer printout Cards Posting is the process of transferring of data from the journal to appropriate ledger accounts.

  23. 46 Post from Journal to T Accts 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 1 Capital Assets Liabilities Cash Gillian Equip Acct Payable 30,000 30,000 Revenue Bldg Acct Rec Notes Payable Expenses Supplies Land

  24. 47 Post from Journal to T Accts 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Land April 2 20,000 20,000 Cash 2 Capital Assets Liabilities Cash Gillian Equip Acct Payable 20,000 30,000 30,000 Revenue Bldg Acct Rec Notes Payable Expenses Supplies Land 20,000

  25. 47 Post from Journal to T Accts 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Supplies April 2 500 500 Acct Payable 3 Capital Assets Liabilities Cash Gillian Equip Acct Payable 20,000 30,000 30,000 500 Revenue Bldg Acct Rec Notes Payable Expenses Supplies Land 500 20,000

  26. 47 Post from Journal to T Accts 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit April 4 300 Acct Payable 300 Cash April 6 2,000 Gillian, Withdraws 2,000 Cash

  27. 48 Post from Journal to T Accts 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Capital Assets Liabilities Cash Gillian Equip Acct Payable 20,000 30,000 30,000 300 500 300 30,000 Bal 200 2,100 Bldg Revenue Bal 7,600 Notes Payable Acct Rec Withdraw Expenses Supplies Land 500 2,100 20,000 Bal 500 Bal 2,000 Bal 20000

  28. 54 Prepare & use a trial balance. 5 Trial Balance OBJ • 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.

  29. Prepare & use a trial balance. 55 5 Trial Balance OBJ Gillian Travel As of _____ 20xx Debit Account Credit 7, 700 Cash Acct Rec 0 500 Supplies 0 Equip 0 Buildings 20,000 Land Acct Payable 200 Notes Payable 0 Gillian, Capital 30,000 Gillian, Withdraw 2,000 Revenue 0 0 Expense TOTAL 30,200 30,200

  30. 65 Prepare & use a trial balance. 5 Locating Trial Balance Errors OBJ • What if it doesn’t balance ? • Is the addition correct? • Are all accounts listed? • Are the balances listed correctly? DEBITS CREDITS

  31. 65 Prepare & use a trial balance. 5 Locating Trial Balance Errors OBJ • 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.

  32. Post Fr Journal to 4 Col Ledger 4 The Four-Column Account Format OBJ Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 30,000 30,000 GJ Why this format instead of T accounts? 1. Has room for reference information 2. Has a running balance, so information is easier to give

  33. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000

  34. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account

  35. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 1 Enter the date from the journal

  36. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account 2. Copy (post) journal name & page from journal to the appropriate ledger account

  37. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 GJ-1 1 2 Enter the date Enter journalpg&no

  38. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account 2. Copy (post) journal name & page from journal to the appropriate ledger account 3. Copy (post) debit from journal to the appropriate ledger account

  39. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 GJ-1 30,000 1 3 3 2 Enter debit orcredit Enter the date Enter journalpg&no

  40. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account 2. Copy (post) journal name & page from journal to the appropriate ledger account 3. Copy (post) debit from journal to the appropriate ledger account 4. Calculate running balance

  41. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 Gay Gillen, Capital 30,000 Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 GJ-1 30,000 30,000 1 3 3 2 4 Enter debit orcredit Enter the date Enter journalpg&no Cal RunBal

  42. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account 2. Copy (post) journal name & page from journal to the appropriate ledger account 3. Copy (post) debit from journal to the appropriate ledger account 4. Calculate running balance 5. Copy (post) ledger account number back to the Post Ref col in the journal

  43. 53 Post Fr Journal to 4 Col Ledger 4 OBJ General Journal Page 1 Date Accounts & Explanation Ref Debit Credit Cash April 2 30,000 101 Gay Gillen, Capital 30,000 Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit April 2 GJ-1 30,000 30,000 1 3 3 2 4 5 Enter debit orcredit Enter the date Enter journalpg&no Cal RunBal Put acct no in Post Ref col

  44. 54 Post Fr Journal to 4 Col Ledger 4 OBJ Posting Steps 1. Copy (post) transaction date from journal to the appropriate ledger account 2. Copy (post) journal name & page from journal to the appropriate ledger account 3. Copy (post) debit from journal to the appropriate ledger account 4. Calculate running balance 5. Copy (post) ledger account number back to the Post Ref col in the journal 6. Repeat steps 1-4 for the credit entry

  45. CH 2: RECORDING BUS TRANSACTIONS SUMMARY 2. New Procedures a. Journalizing b. Postingc. Preparing Trial Balance 1. New Terms a. T Accounts b. Ledgerc. Journald. Debits & Creditse. Normal Balance f. Trial Balance

  46. Next Topic CHAPTER 3: THE ADJUSTING PROCESS

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