Chapter 2. Explain accounts, journals, and ledgers as they relate to recording transactions and...

Chapter 2

Explain accounts, journals, and ledgers as they relate to recording transactions and

describe common accounts

Record Transactions in the Journal

Copy (post) to the Ledger

Prepare the Trial Balance

Basic summary device Detailed record of increases and decreases

in specific assets, liabilities, or owner’s equity during a period

Journal◦ Chronological record of transactions◦ Organized by date

Ledger◦ Book (or computer record) of all account activity◦ Organized by account

Listing of all accounts and their balances

Accounts are grouped in 3 broad categories:

LiabilitiesLiabilitiesOwner’sequity

Owner’sequity

AssetsAssets = +

Cash Accounts receivable Notes receivable Prepaid expenses Land Building Equipment, Furniture, Fixtures

Economic resources that will benefit the business in the future

Accounts payable Notes payable Accrued liabilities

Creditors’ claims to assets (debt)

Owner’s claim to the assets Capital

◦ Net worth invested by the owner Withdrawals

◦ Owner takes business assets for personal use Revenues Expenses

Ledger

All Individual Accounts Combined Make Up the Ledger

Accounts payable

Common stock

Asset accounts

Liability accounts

Equity acc

List of all accounts used by a company along with the account numbers

Acct. # Account title

101 Cash

111 Accounts receivable

150 Equipment

201 Accounts payable

301 Common stock

305 Retained earnings

401 Service revenue

501 Rent expense

525 Advertising expense

A _______ is a record of transaction

A. ledger B. journal C. trial balance D. posting

A journal is a record of transaction

A. ledgerB. journal C. trial balance D. posting

Accounts Receivable is a(n) _____ account.

A. asset B. liability C. capital D. revenue

Accounts Receivable is a(n) _____ account.

A. assetB. liabilityC. capitalD. revenue

Notes Payable is a(n) _____ account.

A. asset B. liability C. capital D. revenue

Notes Payable is a(n) _____ account.

A. asset

B. liabilityC. capitalD. revenue

Define debits, credits, and normal account balances.

Use double entry accounting and T-accounts.

Father of Accounting

Wrote First book written on double-entry accounting.

used journals and ledgers, a person should not go to sleep at night

until the debits equaled the credits! His ledger included assets (including

receivables and inventories), liabilities, capital, income, and expense accounts.

Demonstrated year-end closing entries and proposed a trial balance

Record dual effects of each transaction Each transaction has a:

◦Receiving side◦Giving side

Examples:◦Company purchases supplies (receiving) with cash (giving)

Simple tool for analyzing and determining the balance in a given account

Account Name

(Left Side) Debit

(Right Side) Credit

Abbreviated dr

Abbreviated cr

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

Debit CreditDebit Credit

AssetsAssets

+ + --

LiabilitiesLiabilitiesOwner’sOwner’s

equityequity== ++Debit CreditDebit Credit - +- +

Debit CreditDebit Credit - +- +

LiabilitiesLiabilities EquityEquityAssetsAssets == ++Debit CreditDebit Credit

+ -+ -Debit CreditDebit Credit

- +- +Debit CreditDebit Credit

- +- +

NormalNormalBalanceBalance

RevenuesRevenues

- +- +Debit CreditDebit Credit

Owner’s Owner’s CapitalCapital

Debit CreditDebit Credit - +- +

WithdrawalsWithdrawals

Debit CreditDebit Credit + + --

ExpensesExpenses

Debit CreditDebit Credit

+ + --

Owner’s equity

Debit Debit CreditCredit- +- +

Owner’s Owner’s CapitalCapital

____ ____Debit CreditDebit Credit

++++Debit CreditDebit Credit

+ -+ -Debit CreditDebit Credit

- +- +

RevenuesRevenuesRevenuesRevenues ExpensesExpensesExpensesExpensesWithdrawalsWithdrawalsWithdrawalsWithdrawals

+ -+ -

Assets Withdrawals Expenses

Liabilities Capital Revenues

This indicates the normal balance of each account group.

The normal balance is also what increases the account.

$20,000 $12,000

$8,000

The left side of an account is used to record:

A. DebitsB. IncreasesC. CreditsD. Decreases

List the steps of the transaction recording process

Use the rules of debit and

credit

Four parts:◦ Date of transaction◦ Title of account debited with dollar amount◦ Title of account credited with dollar amount◦ Brief explanation of transaction

Journal Page 1

Date Description Debit Credit

Jul 1 Cash 45,000

Josie Smith, Capital 45,000

Owner investment

Accounts AffectedAccounts Affected

Dollar amount of debits and credits

Explanation of transaction

Transaction Date

Copying amounts from the journal to the ledger

March 22: “On account” indicates Accounts receivable Accounts receivable is an asset account Increase an asset with a debit

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Mar 22 Accounts receivable 4,000

March 22: “Performed services” indicates revenue has

been earned Revenues are increased by credits

Mar 22 Accounts receivable 4,000

Service revenue 4,000

Performed services on account

March 30: Cash is received

◦ Increase cash, an asset◦ Assets are increased by debits

The payment is “on account”◦ Decrease Accounts receivable with a credit

Accounts receivable 3,000

Received payment on account

Mar 30 Cash 3,000

March 31: A utility bill is an expense

◦ Expenses are increased by debits The bill will be paid later – creating an

account payable◦ Liabilities are increase by credits

Received utility bill

Mar 31 Utilities expense 130

Accounts payable 130

March 31: Salaries to employees are an expense

◦ Expenses are increased by debits The salary was paid in cash

◦ Cash, an asset, decreases◦ Assets are decreased by credits

Rent Expense is an expense account Increase an expense with a debit

Cash 2,300

Paid salaries

Mar 31 Salaries expense 2,300

March 31: Advertising is another expense Cash is paid

Mar 31 Advertising expense 400

Cash 400

Paid advertising

Origin of accounting transactions Examples:

◦ Bank deposit tickets◦ Invoices◦ Checks◦ Stock certificates

A. Journalize the transactions, post to the

accounts, and prepare a trial balance.

B. Journalize the transactions; prepare a trial

balance and post to the accounts.C. Post to the accounts, journalize

transactions, prepare a trial balance.

A. Journalize the transactions, post to the

accounts, and prepare a trial balance.

B. Journalize the transactions; prepare a trial

balance and post to the accounts.C. Post to the accounts, journalize

transactions, prepare a trial balance.

Journalize and post sample transactions to the ledger

Cash Service revenueAccounts receivable

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Service revenue 9,000Performed legal services on account

GENERAL JOURNAL

Service revenue 9,000Performed legal services on account

9,000 9,000

GENERAL JOURNAL

Cash 5,400

Accounts receivable 5,400Received payment on account

9,000 9,000

GENERAL JOURNAL

Cash 5,400

Accounts receivable 5,400Received payment on account

9,000 9,0005,400 5,400

When you make a sale on account, your entry is

A. Debit to CashB. Debit to Accounts Receivable

C. Debit to Sales Revenue

When you make a sale on account, your entry is

A. Debit to CashB. Debit to Accounts Receivable

C. Debit to Sales Revenue

When you make a purchase an equipment on account, your entry is

A. Credit to CashB. Credit to PurchaseC. Credit to Accounts PayableD. Credit to Equipment

When you make a purchase an equipment on account, your entry is

A. Credit to CashB. Credit to PurchaseC. Credit to Accounts PayableD. Credit to Equipment

Prepare the trial balance from the T-Accounts

Summary of the ledgerLists all accounts with their balances

Accuracy check◦Debits should equal credits

NOT a balance sheet

Search for missing account Divide the difference between debits and

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 – inverting two digits ($459 instead of $495)

Jan 2 Cash 1,000

Josie Smith, Capital 1,000

Date of transactio

Accounts debited and credited

Amounts debited and credited

Posting reference

GENERAL JOURNAL Page 1DATE DESCRIPTION POST

REFDEBIT CREDIT

Jan 2 Cash 101 1,000

Josie Smith, Capital 301 1,000

Cash Account No. 101Date Jrnl. Ref. Debit Date Jrnl. Ref. Credit2-Jan J.1. 1,000

Josie Smith, Capital Account No. 301Date Jrnl. Ref. Debit Date Jrnl. Ref. Credit

2-Jan J.1. 1,000

CASH Acct No. 101 Balance

Date ItemJrnl Ref Debit Credit Debit Credit

1-Apr J.1 20,000 20,000 3-Apr J.1 9,000 11,000 5-Apr J.1 3,000 14,000 6-Apr J.1 10,000 4,000

Alternative to the T-Account

Income statement accounts are:

a) assets and liabilitiesb) revenues and withdrawalsc) revenues and expensesd) assets and withdrawals

a) assets and liabilitiesb) revenues and withdrawals

c) revenues and expensesd) assets and withdrawals

A. ASSETS – LIABILITIESB. ASSETS – EQUITYC. SALES REVENUE + EXPENSESD. SALES REVENUE – EXPENSESE. CASH - EXPENSES

Chapter 2. Explain accounts, journals, and ledgers as they relate to recording transactions and...

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