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CHAPTER 2 Recording Business Transactions


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Published in: Economy & Finance, Business

CHAPTER 2 Recording Business Transactions

  1. 1. Recording Business Transactions Chapter 2
  2. 2. Use accounting terms Objective 1
  3. 3. Accounting Terms Account Ledger Assets Liabilities Owner’s equity Double-entry accounting T-account
  4. 4. Cash Cash Accounts Payable Accounts Payable Gay Gillen, Capital Gay Gillen, Capital LedgerLedger All individual accounts combined make up the ledger. Individual asset accounts Individual liability accounts Individual owner’s equity accounts Accounting Terms
  5. 5. Classification of Accounts What are some asset accounts? – Cash – Notes Receivable – Accounts Receivable – Prepaid Expenses – Land – Building – Equipment
  6. 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. 7. Classification of Accounts What are some owner’s equity accounts? – Capital or owner’s interest in the business – Withdrawals – Revenues – Expenses
  8. 8. John’s 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. 9. John’s Gas Station Example Revenues increase John’s equity in the business. The business had to pay mechanics and vendors $3,750 for the work performed that day.
  10. 10. John’s Gas Station Example Expenses decrease John’s equity in the business. How much was the net increase in John’s equity that day? $4,250
  11. 11. Contributed Capital Retained Earnings Classification of Accounts In a corporation, the owner’s equity account is called Stockholders’ Equity.
  12. 12. Double-Entry Accounting Double entry bookkeeping means to record the dual 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.
  13. 13. The T-Account Account Title Debit Credit Left Side
  14. 14. The T-Account Account Title Debit Credit Right Side
  15. 15. Apply the Rules of Debit and Credit. Objective 2
  16. 16. Owner’s Equity Assets Liabilities Debit + Debit – Credit – Debit – Credit + Credit + = + Rules of Debit and Credit
  17. 17. One debit One credit Each transaction is recorded with at least: Total debits must equal total credits. The Double-Entry System
  18. 18. John’s 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?
  19. 19. John’s Gas Station Example Cash Liabilities Owner’s Equity
  20. 20. John’s Gas Station Example John’s Gas Station Balance Sheet July 1, 2002 Assets Liabilities Cash $800,000 Notes payable $300,000 Owner’s Equity John, capital 500,000 Total liabilities Total assets $800,000 and owner’s equity $800,000
  21. 21. Record Transactions in the Journal. Objective 3
  22. 22. Journals What is a journal? It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit/credit rules. 4 Record transaction with description.
  23. 23. 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
  24. 24. 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
  25. 25. Post from the Journal to the Ledger. Objective 4
  26. 26. Bound books Computer printout Cards Loose leaf pages Ledger What is a ledger? It is a digest of all accounts utilized by an entity during an accounting period.
  27. 27. Posting What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger.
  28. 28. Normal Account Balances Assets = Liabilities + Owner’s Equity Debits = Credits The side where we expect increases to be recorded is the normal balance side.
  29. 29. Cash (1) 30,000 (2) 20,000 (4) 300 (6) 2,100 Bal. 7,600 Office Supplies (3) 500 Bal. 500 Land (2) 20,000 Bal. 20,000 Asset Accounts After Posting
  30. 30. Accounts Payable Gay Gillen, Withdrawals (1) 30,000 Bal. 30,000 (3) 500(4) 300 Bal. 200 Gay Gillen, Capital (6) 2,000 Bal. 2,000 Liabilities and Owner’s Equity Accounts After Posting
  31. 31. Details of Journals and Ledgers Date Accounts and Explanation Debit Credit April 2 Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner Journal Page 1
  32. 32. Details of Journals and Ledgers Balance Date Ref. Debit Credit Debit Credit April 2 jrl 30,000 30,000 Account: Cash Account: 101 Insert the number of the journal page. Posting
  33. 33. 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.
  34. 34. Balance Account: Cash Account No. 101 Date Item Ref. Debit Credit Debit Credit April 2 jr1 30,000 30,000 The Four-Column Account Format
  35. 35. Prepare and use a Trial Balance. Objective 5
  36. 36. 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.
  37. 37. DEBITS CREDITS Locating Trial Balance Errors What if it doesn’t balance ? Is the addition correct? Are all accounts listed? Are the balances listed correctly?
  38. 38. 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.
  39. 39. Analyze Transactions without a Journal. Objective 6
  40. 40. John’s Gas Station John is considering either purchasing a garage for $70,000 or renting one for $10,000 per year. John does not need to record in the journal all of the transactions that would affect his decision. Why?
  41. 41. John’s Gas Station John has not completed a transaction yet. However, John can visualize how the ledger accounts will be affected.
  42. 42. Rent the garage Buy the garage Cash 70,000 Building 70,000 John’s Gas Station Rent ExpenseCash 10,000 10,000
  43. 43. End of Chapter 2