Recording Business Transactions

1
Recording Business Transactions

• Chapter 2

2
Objective 1

• Define and use key
• accounting terms.

3
Accounting Terms
Account
Owners equity
Ledger
Double-entry accounting
Assets
T-account
Liabilities
4
Accounting Terms
Cash
Individual asset accounts
All individual accounts combined make up the
ledger.
Accounts Payable
Ledger
Individual liability accounts
Gay Gillen, Capital
Individual owners equity accounts
5
Classification of Accounts

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

6
Classification of Accounts

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

7
Classification of Accounts

• What are some owners equity accounts?
• Capital or owners interest in the business
• Withdrawals
• Revenues
• Expenses

8
Johns 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

9
Johns Gas Station Example

• Revenues increase Johns equity in the business.
• The business had to pay mechanics and vendors
  3,750 for the work performed that day.

10
Johns Gas Station Example

• Expenses decrease Johns equity in the business.
• How much was the net increase in Johns equity
  that day?
• 4,250

11
Classification of Accounts

• In a corporation, the owners equity account is
  called Stockholders Equity.

Contributed Capital
Retained Earnings
12
Double-Entry Accounting

• Double entry bookkeeping means to record the dual
  effects of each business transaction.
• Assets Liabilities Owners Equity
• Assets are on the left (debit) side.
• Liabilities and Equity are on the right (credit)
  side.

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The T-Account
Account Title
Debit
Credit
LEFT SIDE
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The T-Account
Account Title
Debit
Credit
RIGHT SIDE
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Objective 2

• Apply the rules of
• debit and credit.

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Rules of Debit and Credit
Owners Equity
Assets
Liabilities


Debit
Debit
Credit
Debit
Credit
Credit
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The Double-Entry System
Each transaction is recorded with at least
One debit
One credit
Total debits must equal total credits.
18
Johns 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?

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Johns Gas Station Example
Cash
Liabilities
Owners Equity
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Johns Gas Station Example
Johns Gas Station Balance Sheet July 1, 2002
Assets Liabilities Cash 800,000 Not
es payable 300,000 Owners
Equity John, capital 500,000
Total liabilities Total
assets 800,000 and owners equity 800,000
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Objective 3

• Record transactions
• in the journal.

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Journals

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

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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

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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

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Objective 4

• Post from the journal
• to the ledger.

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Ledger

• What is a ledger?
• It is a digest of all accounts utilized by an
  entity during an accounting period.

Computer printout
Loose leaf pages
Bound books
Cards
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Posting

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

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Asset Accounts After Posting
Cash
(1) 30,000 (2) 20,000
Land
(4) 300 (6) 2,100
(2) 20,000
Bal. 20,000
Bal. 7,600
Office Supplies
(3) 500
Bal. 500
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Liabilities and Owners Equity Accounts After
Posting
Accounts Payable
(3) 500
(4) 300
Gay Gillen, Capital
Bal. 200
(1) 30,000
Bal. 30,000
Gay Gillen, Withdrawals
(6) 2,100
Bal. 2,100
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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
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Details of Journals and Ledgers
Posting
Account Cash Account 101
Balance Date Ref. Debit
Credit Debit Credit April 2 jrl
30,000 30,000
Insert the number of the journal page.
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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.
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The Four-Column Account Format
Account Cash Account
No. 101

Balance
Date Item Ref. Debit Credit
Debit Credit
April 2 jr1 30,000
30,000
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Objective 5

• Prepare and use a trial balance.

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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.

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Locating Trial Balance Errors

• What if it doesnt balance ?
• Is the addition correct?
• Are all accounts listed?
• Are the balances listed correctly?

DEBITS CREDITS
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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.

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Objective 6

• Set up a chart of accounts
• for a business.

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Chart of Accounts in the Ledger

• This is a listing of all the accounts and related
  account numbers used by a business.
• Each account should have its own assigned number.
• The numbering system should allow flexibility for
  changing business needs.

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Gay Gillen eTravelChart of Accounts
Assets 101 Cash 111 Accounts Receivable 141
Office Supplies 151 Office Furniture 191 Land
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Gay Gillen eTravelChart of Accounts
Liabilities 201 Accounts Payable 231 Notes
Payable Owners Equity 301 Capital 311
Withdrawals Revenues 401 Service Revenue
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Gay Gillen eTravelChart of Accounts
Expenses 501 Rent Expense 503 Utilities
Expense 502 Salary Expense
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Normal Account Balances

• Assets Liabilities Owners Equity
• Debits Credits
• The side where we expect increases to be recorded
  is the normal balance side.

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Objective 7

• Analyze transactions
• without a journal.

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Johns Gas Station

• John is considering either purchasing a garage
  for 600,000 or renting one for 60,000 per year.
• John does not need to record in the journal all
  of the transactions that would affect his
  decision.
• Why?

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Johns Gas Station

• John has not completed a transaction yet.
• However, John can visualize how the ledger
  accounts will be affected.

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Johns Gas Station
Rent the garage
Cash
Rent Expense
60,000
60,000
Buy the garage
Cash
Building
600,000
600,000
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End of Chapter 2