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Chapter 2 Recording Business Transactions

Chapter 2 Recording Business Transactions. The Accounting Process. Record transactions in the journal. Copy (post) to the ledger. Prepare the trial balance. The Account. Basic summary device

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Chapter 2 Recording Business Transactions

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  1. Chapter 2 Recording Business Transactions

  2. The Accounting Process Record transactions in the journal Copy (post) to the ledger Prepare the trial balance

  3. The Account • Basic summary device • Detailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equity • Covers a specific period of time • Grouped in three broad categories • Assets • Liabilities • Stockholders’ Equity

  4. The Journal and The Ledger • Journal • Chronological record of transactions • Organized by date • Ledger • The book holding all the accounts and their balances • Organized by account

  5. Trial Balance • Listing of all accounts and their balances

  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 A debt (something owed): • Accounts payable • Notes payable • Accrued liabilities

  8. Stockholders’ Equity Owners’ claim to the assets: • Common stock • Retained earnings • Dividends • Revenues • Expenses

  9. Ledger • Asset, Liability, and Stockholders’ equity Accounts

  10. Double Entry System • Record dual effects of each transaction • Each transaction has a: • Receiving side • Giving side • Examples: • Company purchases supplies (receiving) with cash (giving) • Company issues stock (giving) and receives cash (receiving)

  11. Tool for analyzing and determining the balance in a given account Account Name (Left Side) (Right Side) T-Account Dr Debit Cr Credit

  12. Increases and Decreases in Accounts • Whether an account is increased by debit or a credit is determined by the account type • Asset, liability, or equity • Debits are not good or bad • Neither are credits

  13. Rules of Debit and Credit • The account category governs the increase side or decrease side • Increases are recorded on one side • Decreases are recorded on the opposite side • Rules of debits and credits

  14. Illustrate Debits and Credits • The first transaction involves receiving $30,000 cash and issuing common stock • The second transaction is a $20,000 purchase of land for cash

  15. S2-2: EXPLAINING ACCOUNTS AND THE RULES OF DEBITS AND CREDITS Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice. • When are debits increases? When are debits decreases? 2. When are credits increases? When are credits decreases? Debits are increases in the Assets, Dividends, and Expenses. Debits are decreases in the Liabilities, Stockholders’ equity, Retained earnings and Revenues. Credits are increases in the Liabilities, Stockholders’ equity, Retained earnings and revenues. Credits are decreases in the Assets, Dividends, and Expenses.

  16. Steps in the Transaction Recording Process Use the rules of debit and credit

  17. Illustrating a Journal Entry • Journalize the first transaction of Smart Touch—the receipt of $30,000 cash and issuance of common stock • Step 1: The accounts affected are Cash and Common stock. Cash is an asset. Common stock is equity. • Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits.

  18. Illustrating a Journal Entry (continued) • Four parts: • Date of transaction • Title of account debited with dollar amount • Title of account credited with dollar amount • Brief explanation of transaction

  19. S2-5: JOURNALIZING TRANSACTIONS Ned Brown opened a medical practice in San Diego, California. 1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation.

  20. S2-5: JOURNALIZING TRANSACTIONS Jan 1: The business received $29,000 cash and issued common stock • Cash received indicates cash increases • Cash is an Asset; Assets increase with debits • Issued common stock; indicates equity is increasing • Increase equity with credits Jan 1 Cash 29,000 Common Stock 29,000 Issued stock.

  21. S2-5: JOURNALIZING TRANSACTIONS Jan. 2: Purchased medical supplies on account, $14,000 • Medical Supplies, an asset, is increasing • Assets increase with debits • On account, increases accounts payable, a liability • Increase liabilities with credits Jan 2 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account.

  22. S2-5: JOURNALIZING TRANSACTIONS Jan. 2: Paid monthly office rent of $2,600 • Paid rent, an expense, expense is increasing • Expenses increase with debits • Paid cash, cash is an asset • Increase assets with debits Jan 2 Rent Expense 2,600 Cash 2,600 Paid office rent.

  23. S2-5: JOURNALIZING TRANSACTIONS Jan. 3: Recorded $8,000 revenue for service rendered to patients on account • On account indicates Accounts receivable increase • Accounts receivable is an Asset, Assets increase with debits • Rendered services, services are revenues, indicates revenues are increasing • Increase revenues with credits Jan 3 Accounts receivable 8,000 Service revenue 8,000 Performed service on account.

  24. Posting from the Journal to the Ledger • Copying amounts from the journal to the ledger

  25. Expanding Debit/Credit Rules to Include Revenues and Expenses Liabilities Stockholders’ equity Assets + Common stock + Retained earnings + Revenues – Expenses – Dividends

  26. Complete Rules of Debit and Credit

  27. Normal Balance of an Account

  28. Flow of Accounting Data from the Journal to the Ledger

  29. Source Documents • Origin of accounting transactions • Examples: • Bank deposit tickets • Invoices • Checks • Stock certificates

  30. Practice Journalizing and Posting Transaction 1 Common stock Cash 30,000 30,000

  31. Common stock Cash Practice Journalizing and Posting Transaction 2 Land 20,000 30,000 20,000 30,000 10,000

  32. Accounts payable Cash Cash Practice Journalizing and Posting Transaction 3 Office supplies 20,000 20,000 30,000 30,000 500 500 10,000

  33. Service revenue Cash Cash Practice Journalizing and Posting Transaction 4 20,000 20,000 30,000 30,000 5,500 5,500

  34. The Ledger Accounts After Posting

  35. S2-10 : PREPARING A TRIAL BALANCE • Oakland Floor Coverings, Inc. reported the following summarized data at December 31, 2012. Accounts appear in no particular order.

  36. S2-10 : PREPARING A TRIAL BALANCE $ 12,000 45,000 $ 2,000 18,000 22,000 34,000 19,000 $76,000 $76,000

  37. S2-9: POSTING, BALANCING T-ACCOUNTS, AND PREPARING A TRIAL BALANCE Use the January transaction data for Ned Brown, M.D., P.C. given in Short Exercise 2-5. 2. After making the journal entries in Short Exercise 2-5, post to the T-accounts. No dates or posting references are required. Compute the balance of each account, and denote it as Bal

  38. Common stock Cash S2-5 : JOURNALIZING TRANSACTIONS Jan 1 Cash 29,000 Common Stock 29,000 Issued stock. 29,000 29,000

  39. Accounts payable Medical supplies S2-5 : JOURNALIZING TRANSACTIONS Jan 1 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account. 14,000 14,000

  40. Rent expense Cash S2-5 : JOURNALIZING TRANSACTIONS Jan 2 Rent Expense 2,600 Cash 2,600 Paid office rent. 29,000 2,600 2,600

  41. Service revenue Accounts receivable S2-5 : JOURNALIZING TRANSACTIONS Jan 3 Accounts receivable 8,000 Service revenue 8,000 Performed service on account. 8,000 8,000

  42. Accounts payable Service revenue Common stock Rent expense Medical supplies Cash Accounts receivable S2-9: COMPUTE THE BALANCE OF EACH ACCOUNT, AND DENOTE IT AS Bal 14,000 29,000 29,000 2,600 Bal 14,000 Bal 29,000 Bal 26,400 8,000 8,000 Bal 8,000 Bal 8,000 14,000 2,600 Bal 2,600 Bal 14,000

  43. S2-9: PREPARE THE TRIAL BALANCE 3. Prepare the trial balance, complete with a proper heading, at January 3, 2012. $ 26,400 8,000 14,000 $ 14,000 29,000 8,000 2,600 $51,000 $51,000

  44. Trial Balance • Summary of the ledger • Lists all accounts with their balances • Accuracy check • Debits should equal credits • NOT a balance sheet

  45. Trial Balance

  46. Detecting Trial Balance Errors • Search for missing account • Divide the difference between total debits and total credits by two • Is there a debit/credit balance for this amount posted in the wrong column? • Divide out-of-balance amount by nine • Slide–Adding or dropping a zero ($100 instead of $1,000) • Transposition–Reversing two digits ($2,100 instead of $1,200)

  47. Details of the Journal

  48. Four-Column Account

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