2. Chapter 2 Mugan-Akman 2007 2
Accounting Methods for
Measuring Performance
(a) Cash basis of accounting
– Revenues are recognized when cash is received and
expenses are recognized when cash is paid
(b) Accrual basis of accounting
– Revenues and expenses are recognized on an
economic basis regardless of when cash is paid or
received
3. Chapter 2 Mugan-Akman 2007 3
Accounting Methods for
Measuring Performance
(a) Cash basis of accounting
– Revenues are recognized when cash is received and
expenses are recognized when cash is paid
(b) Accrual basis of accounting
– Revenues and expenses are recognized on an
economic basis regardless of when cash is paid or
received
X
4. Chapter 2 Mugan-Akman 2007 4
Recognition of Revenues
• Significant risks and benefits of
ownership passes from the seller to the
buyer
(Transfer of title of goods)
5. Chapter 2 Mugan-Akman 2007 5
Recognition of Expenses
• Expenses are recognized when they
are incurred and helped to produce
revenues
6. Chapter 2 Mugan-Akman 2007 6
Generally Accepted Accounting
Principles and Concepts
• Entity - Every entity is a separate economic unit and should be
kept distinct from the activities of its owners and other
companies
• Monetary Unit- only economic events that have monetary
transactions will be reported in the financial statements
• Cost Principle- assets are presented at their original (historical)
cost
• Going Concern- companies are established with the goal that
they will operate for an indefinitely long period of time
• Periodicity - economic activities of any firm can be divided into
discrete time periods for reporting purposes
• Matching Principle -all revenues must be recorded in the
accounting period in which the goods are sold or services are
rendered and all expenses must be recorded in the accounting
period in which they are incurred to produce such revenues
7. Chapter 2 Mugan-Akman 2007 7
Accounting Cycle
Analyze and
record the
transactions
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
Prepare the
financial
statements
8. Chapter 2 Mugan-Akman 2007 8
Analysis and Recording
Business Transactions
• Business transaction is an economic event
that causes a change in the financial
position
• Financial Position:
– What we own
– How we own
10. Chapter 2 Mugan-Akman 2007 10
Transaction Analysis and The
Duality Concept
if an asset account increases, because of
duality concept there must be a
corresponding
1. increase in a specific liability account
2. or a decrease in a another asset
account
3. or an increase in owners' equity account.
11. Chapter 2 Mugan-Akman 2007 11
How do we record?
• an ACCOUNT: accounting report of a
specific asset, liability or owners’ equity
item
• Has 3 elements: title, debit side and
credit side (also called the “T-Account”)
Title
Debit Credit
12. Chapter 2 Mugan-Akman 2007 12
How do accounts behave?
Assets = Liabilities + Shareholders’ Equity
+ + +
So Assets increase on the left hand or debit
side then they decrease on the credit side
Assets
+ -
debit credit
13. Chapter 2 Mugan-Akman 2007 13
Behavior of Accounts
Liabilities and Owners’ Equity accounts
increase on the credit side, decrease on
the debit side
Liabilities or Owners’ Equity Accounts
- +
debit credit
14. Chapter 2 Mugan-Akman 2007 14
Yağmur Bulut completed the following transactions during
October 2007:
1. 1 October, invested TL 50.000 to start an accounting
practice, Yağmur Bulut, SMMM
2. 2 October, Rented office space and paid TL 1.200 for
October and November.
3. 4 October, paid cash for a Dell computer, TL 2.000.
The computer is expected to remain in service for five
years
4. 5 October, purchased furniture and fixtures for the
office on account, TL 5.400 . These items have an
estimated useful life of 5 years.
5. 6 October, purchased supplies on account, TL 150
6. 8 October, performed tax filing services for a client on
account, TL 375
P2-6
15. Chapter 2 Mugan-Akman 2007 15
7. 22 October, made an agreement with a client to
perform bookkeeping for 6 months and received TL
1.200 in advance
8. 23 October, the electricity invoice for an amount of
TL 52 was received, which will be paid in November
9. 27 October, paid the liability for the purchase of office
supplies
10. 29 October, the client who was billed on 8 October
paid TL 275
11. 31 October, Withdrew cash to pay her son’s school
fee, TL 1.600
16. Chapter 2 Mugan-Akman 2007 16
Date Account Debit Credit
1 October Cash 50,000
Y. Bulut, Capital 50,000
17. Chapter 2 Mugan-Akman 2007 17
Date Account Debit Credit
1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600
Prepaid Rent 600
Cash 1,200
18. Chapter 2 Mugan-Akman 2007 18
Date Account Debit Credit
1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600
Prepaid Rent 600
Cash 1,200
4 October Office Equipment 2,000
Cash 2,000
19. Chapter 2 Mugan-Akman 2007 19
Date Account Debit Credit
1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600
Prepaid Rent 600
Cash 1,200
4 October Office Equipment 2,000
Cash 2,000
5 October Office Furniture 5,400
Accounts Payable 5,400
20. Chapter 2 Mugan-Akman 2007 20
Date Account Debit Credit
1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600
Prepaid Rent 600
Cash 1,200
4 October Office Equipment 2,000
Cash 2,000
5 October Office Furniture 5,400
Accounts Payable 5,400
6 October Supplies 150
Accounts Payable 150
21. Chapter 2 Mugan-Akman 2007 21
Date Account Debit Credit
1 October Cash 50.000
Y. Bulut, Capital 50.000
2 October Rent Expense 600
Prepaid Rent 600
Cash 1.200
4 October Office Equipment 2.000
Cash 2.000
5 October Office Furniture 5.400
Accounts Payable 5.400
6 October Supplies 150
Accounts Payable 150
8 October Accounts Receivable 375
Revenues 375
24. Chapter 2 Mugan-Akman 2007 24
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
25. Chapter 2 Mugan-Akman 2007 25
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
29 October Cash 275
Accounts Receivable 275
26. Chapter 2 Mugan-Akman 2007 26
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
29 October Cash 275
Accounts Receivable 275
31 October Y. Bulut, Withdrawals 1,600
Cash 1,600
27. Chapter 2 Mugan-Akman 2007 27
Accounting Cycle
Analyze and
record the
transactions
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
Prepare the
financial
statements
28. Chapter 2 Mugan-Akman 2007 28
Posting to The Ledger
GENERAL JOURNAL Page 1
Date Account Title and Description Ref* Debit Credit
1 Jan 2004
Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit
Balance
Credit
Balance
1 Jan 2004
Investment by the shareholders P 1 100.000 100.000
LEDGER - Capital Acc. No. 500
Date Description Ref Debit Credit Debit
Balance
Credit
Balance
1 Jan 2004
Investment by the shareholders P 1 100.000 100.000
29. Chapter 2 Mugan-Akman 2007 29
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit
Balance
1 Jan Investment by the shareholders P 1 100.000 100.000
1 Jan Payment of office rent P 1 600 99.400
2 Jan Purchase of office furniture and equipment P 1 5.000 94.400
3 Jan Payment of insurance P 1 120 94.280
10 Jan Borrowing from the bank P 1 15.000 109.280
10 Jan Purchase of office supplies P 1 2.500 106.780
20 Jan Payment for an accounts payable P 1 5.000 101.780
22 Jan Receipt of advance payment from a customer P 1 7.500 109.280
23 Jan Receipt of payment from a customer P 1 5.000 114.280
24 Jan Payment of salaries P 1 9.000 105.280
31 Jan Withdrawal by the owner P 1 3.000 102.280
32. Chapter 2 Mugan-Akman 2007 32
Category of the
Account
Increase
Recorded By
Normal Balance
Assets Debits Debit
Liabilities Credits Credit
Shareholders’
Equity
Capital Credits Credit
Dividends or
Withdrawals
Debits Debit
Revenues Credits Credit
Expenses Debits Debit
NORMAL BALANCES OF ACCOUNTS
