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CHAPTER 2

CHAPTER 2. Recording Business Transactions. Recording Process. Debits and Credits Journal Entries Ledger Accounts. Analyze source documents. Journalize transactions in the general journal. Post entries to the accounts in the general ledger. Prepare a trial balance.

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CHAPTER 2

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  1. CHAPTER 2 Recording Business Transactions

  2. Recording Process • Debits and Credits • Journal Entries • Ledger Accounts

  3. Analyze source documents. Journalize transactions in the general journal. Post entries to the accounts in the general ledger. Prepare a trial balance. Prepare financial statements. Steps in The Accounting Cycle

  4. Let’s start withThe General Ledger Account A ledger account is a tool used for classifying and summarizing information about increases, decreases, and balances of financial statements items. • Think of it as a storage container like a bucket. • Dollars, which are used to measure economic transactions, are “poured” into and out of the container.

  5. Two General Ledger Account Formats • Three-Amount Column Format (Debit, Credit, Balance) It is used in general ledgers in the business world • T-Account Format • (Debit, Credit, Balance) • It is used primarily for teaching and analysis of complex transactions

  6. General Ledger AccountThree-Amount Column Format ACCOUNT NAME: ACCOUNT No. 1 2 3 Date Description PR Debit Credit Balance

  7. General Ledger AccountT-Account Format For the sake of simplicity, we often use this format in teaching accounting even though it is no longer used in practice. Account Name Debit Credit

  8. The T-Account Increases to the T-account are recorded on one side of the T-account, and decreases are recorded on the other side. Account Name Debit Credit

  9. Account Name Debit Credit The T-Account The side whichincreases and the side which decreases is determined by the type of account.

  10. What Are Debits and Credits? • Tools used for recording transactions • Debit (DR) • Credit (CR) • Debit refers to the LEFT and Credit to the RIGHT side of the T-Account. • Debit and Credit are neutral terms and donot connote value judgments. Neither is “good” or “bad”!

  11. What Are Debits and Credits? • Tools used for recording transactions • Debit (DR) • Credit (CR) • Debit refers to the LEFT and Credit to the RIGHT side of the T-Account Account Name LEFT RIGHT

  12. What Are Debits and Credits? • Tools used for recording transactions • Debit (DR) • Credit (CR) • Debit refers to the LEFT and Credit to the RIGHT side of the T-Account Account Name LEFT RIGHT Used as Adjectives: DEBIT SIDE CREDIT SIDE

  13. What Are Debits and Credits? • Tools used for recording transactions • Debit (DR) • Credit (CR) • Debit refers to the LEFT and Credit to the RIGHT side of the T-Account Account Name LEFT RIGHT Used as Verbs: Synonym for Debit? DEBIT CREDIT

  14. Names of Ledger Accounts • There are no “magic” names for many accounts • e.g., either “Heat, Light & Power” or “Utilities Expense” could be used for an account name. • Other accounts have names which must be used • e.g., “Cash”, “Accounts Receivable” and “Accounts Payable”.

  15. Account Name Debit Credit Types of Ledger Accounts Let’s see how debits and credits affect the different types of accounts.

  16. Types of Ledger Accounts • Assets • Liabilities • Stockholders’ Equity • Revenues • Expenses

  17. Using Debits and Credits • Again, debits and credits are used to increase or decrease account balances. • Determining whether to use a debit or credit to record an increase or decrease depends on the type of account in question. • The Balance Sheet equation is the basis for the determination.

  18. Balance Sheet Model(Revisited) A = L + SE

  19. Account Name Account Name Account Name Debit Credit Debit Credit Debit Credit Balance Sheet Model(Revisited) Assign a T-Account to each element of the Balance Sheet Model A = L + C

  20. Account Name Account Name Account Name Debit Credit Debit Credit Debit Credit Balance Sheet Model(Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + C

  21. ASSETS Account Name Debit for Increase Credit for Decrease Debit Credit Balance Sheet Model(Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + C Account Name Debit Credit

  22. ASSETS LIABILITIES Account Name Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit Credit Balance Sheet Model(Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + C

  23. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Balance Sheet Model(Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + C

  24. Cash (1) 10,000 (2) 5,000 (3) 1,000 16,000 (4) 600 (5) 2,000 2,600 13,400 bal Three Alternative Approaches to Balancing The T-Account Using the example at the bottom of p. 57 Approach on Previous slide Text Approach Rice’s Approach Cash Cash (1) 10,000 (2) 5,000 (3) 1,000 (4) 600 (5) 2,000 (1) 10,000 (2) 5,000 (3) 1,000 (4) 600 (5) 2,000 13,400 13,400 ALL 3 are O.K.!

  25. Journal Entries Example 2 On January 15, 19X7, Caldwell Company purchases a truck for $19,500 cash. Prepare the appropriate journal entry for the above transaction.

  26. Journal Entries Solution 2 • Two accounts are affected: • Trucks is increased by $19,500. • Cash is decreased by $19,500.

  27. Journal Entries Solution 2 • Two accounts are affected: • Trucks is increased by $19,500. • Cash is decreased by $19,500. GENERAL JOURNAL 1 Page: Date Description PR Debit Credit

  28. Journal Entries Solution 2 • Two accounts are affected: • Trucks is increased by $19,500. • Cash is decreased by $19,500. GENERAL JOURNAL 1 Page: Date Description PR Debit Credit 15-Jan Trucks 150 19,500 Cash 100 19,500 to record purchase of truck

  29. Journal Entries Solution 3 • Two accounts are affected: • Utility Expense is increased by $400. • Cash is decreased by $400. GENERAL JOURNAL 1 Page: Date Description PR Debit Credit 20-Jan Utility Expense 511 400 Cash 100 400 to record payment of January electric bill

  30. Have you ever had that “I’ve-just-been-run-over-by-a-train” feeling?

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