Recording Business Transactions Chapter 2 Use accounting terms Objective 1.
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Transcript of Recording Business Transactions Chapter 2 Use accounting terms Objective 1.
CashCash
AccountsPayable
AccountsPayable
Gay Gillen,Capital
Gay Gillen,Capital
LedgerLedger
All individualaccountscombinedmake up
the ledger.
Individual asset accounts
Individual liability accounts
Individual owner’s equity accounts
Accounting Terms
Classification of Accounts
What are some asset accounts?– Cash– Notes Receivable– Accounts Receivable– Prepaid Expenses– Land– Building– Equipment
Classification of Accounts
What are some liability accounts?– Notes Payable– Accounts Payable– Accrued Liabilities (for expenses incurred
but not paid)– Long-term Liabilities (bonds)
Classification of Accounts
What are some owner’s equity accounts?– Capital or owner’s interest in the business– Withdrawals– Revenues– Expenses
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
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.
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
Contributed Capital
Retained Earnings
Classification of Accounts
In a corporation, the owner’s equity account is called Stockholders’ Equity.
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.
Owner’s EquityAssets Liabilities
Debit+
Debit–
Credit–
Debit–
Credit+
Credit+
= +
Rules of Debit and Credit
One debit One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
The Double-Entry System
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?
John’s Gas Station Example
John’s Gas StationBalance SheetJuly 1, 2002
Assets LiabilitiesCash $800,000 Notes payable $300,000
Owner’s EquityJohn, capital 500,000
Total liabilitiesTotal assets $800,000 and owner’s equity $800,000
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.
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
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
Boundbooks
Computerprintout
Cards
Loose leafpages
Ledger
What is a ledger? It is a digest of all accounts utilized by an
entity during an accounting period.
Posting
What is posting? It is the transfer of information from the
journal to the appropriate accounts in the ledger.
Normal Account Balances
Assets = Liabilities + Owner’s Equity Debits = Credits The side where we expect increases to be
recorded is the normal balance side.
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
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
Details of Journals and Ledgers
Date Accounts and Explanation Debit CreditApril 2 Cash 30,000
Gay Gillen, Capital 30,000Received initialinvestment from owner
Journal Page 1
Details of Journals and Ledgers
BalanceDate Ref. Debit Credit Debit CreditApril 2 jrl 30,000 30,000
Account: Cash Account: 101
Insert the number of the journal page.
Posting
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.
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
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.
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?
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.
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?
John’s Gas Station
John has not completed a transaction yet. However, John can visualize how the ledger
accounts will be affected.
Rent the garage
Buy the garage
Cash70,000
Building70,000
John’s Gas Station
Rent ExpenseCash10,000 10,000