1. Recording Transactions
Chapter 3
Recording Transactions

2. Use Double-Entry Accounting
Learning Objective 1
Use Double-Entry Accounting

3. The Double-Entry Accounting System
LO-1
The Double-Entry Accounting System
Method followed for recording transactions, whereby every transaction affects at least two accounts
Accountants analyze each transaction to determine:
Which accounts it affects
Whether to increase or decrease the balances
How much each balance will change

4. The Double-Entry Accounting System
LO-1
The Double-Entry Accounting System
Transactions are recorded in:
General Journal: Chronological record of an organization’s transactions and how each transaction affects the balances in particular accounts
General Ledger: Collection of all ledger accounts that supports an organization’s financial statements
Ledger account: Listing of all the increases and decreases in a particular account

5. General Ledger: T-Account
LO-1
General Ledger: T-Account
Device used to portray individual ledger accounts in the general ledger
Each T-account takes the form of the capital letter T and represents an individual ledger account
Transactions affecting a particular ledger account are accumulated here

6. General Ledger: T-Account
LO-1
General Ledger: T-Account
Assets increase on the left side of the T-account and decrease on the right side
Liabilities and owners’ equity accounts increase on the right side of the T-account and decrease on the left side

7. General Ledger: T-Account
LO-1
General Ledger: T-Account
Balance: Net result of all activity that has been recorded in an account as of a particular point in time
In a T-account, it is the difference between the total left-side and right-side amounts
The balance in a ledger account at the end of the period is computed as:
Beginning balance + Amount of increases – Amount of decreases

8. Assets = Liabilities + Stockholders’ Equity
LO-1
General Ledger
In the double-entry system, every transaction affects at least two accounts
After each transaction, the balance sheet equation must always remain in balance
The process of creating a new T-account in preparation for recording a transaction is called opening the account
Assets = Liabilities + Stockholders’ Equity

9. Recording Transactions in T-Accounts
LO-1
Recording Transactions in T-Accounts
1. Initial investment by owners, $400,000 cash
Analysis
The asset Cash increases
The stockholders’ equity Paid-in Capital increases

10. Recording Transactions in T-Accounts
LO-1
Recording Transactions in T-Accounts
2. Loan from bank, $100,000
Analysis
The asset Cash increases
The liability Note Payable increases

11. Recording Transactions in T-Accounts
LO-1
Recording Transactions in T-Accounts
3. Acquired store equipment for cash, $15,000
Analysis
The asset Cash decreases
The asset Store Equipment increases

12. Debits and Credits Accountants use the terms
LO-1
Debits and Credits
Accountants use the terms
Debit (abbreviated Dr.): An entry or balance on the left side of any account
Credit (abbreviated Cr.): An entry or balance on the right side of any account
Some accountants use the word “charge” instead of debit

13. Describe the Five Steps in the Recording Process
Learning Objective 2
Describe the Five Steps in the Recording Process

14. LO-2
The Recording Process
Sequence of five steps in recording and reporting transactions

15. Five Steps in Recording Process
LO-2
Five Steps in Recording Process
Step 1- Transaction documentation
Source documents: Original records supporting any transaction
Generated as a result of transactions
Filed to verify details and accuracy of subsequent records
Step 2- General journal or book of original entry
Contains analysis of the transaction, based on the source documents

16. Five Steps in Recording Process
LO-2
Five Steps in Recording Process
Step 3- Ledger
Enter transactions into ledger accounts
Step 4- Trial balance
List of accounts in general ledger together with their balances
Aids in verifying clerical accuracy and in preparing financial statements

17. Five Steps in Recording Process
LO-2
Five Steps in Recording Process
Step 5- Preparing financial statements
Occurs at least once a quarter, every three months, for publicly traded companies in the United States
Occurs at least annually for companies reporting under IFRS

18. Chart of Accounts A numbered or coded list of all account titles
LO-2
Chart of Accounts
A numbered or coded list of all account titles
Typically arranged in order in which accounts appear in the financial statements
Varies across companies as a function of the size, nature, and complexity of the firm
May be used instead of account names

19. Learning Objective 3
Analyze and Journalize Transactions and Post Journal Entries to the Ledgers

20. Journalizing Transactions
LO-3
Journalizing Transactions
This is Step 2 of the recording process
Journalizing: The process of entering transactions into the general journal
Journal entry
An analysis of effects of a single transaction on various accounts, usually accompanied by an explanation
Identifies accounts to be debited and credited

21. Recording Journal Entries
LO-3
Recording Journal Entries
Conventions for recording journal entries in the general journal
Date and identification number comprise the first two columns
Accounts and Explanation in the third column
Names of accounts affected
Debit account titles on the left margin
Credit account titles indented
Narrative explanation of the transaction

22. Recording Journal Entries
LO-3
Recording Journal Entries
Fourth column is posting reference (Post Ref. )
Contains identifying number from chart of accounts, which is used for cross-referencing to ledger accounts
Debit and credit columns are the fifth and sixth columns
Show the amounts debited (left-entry) or credited (right-entry) to each account
Currency symbols not used
Negative numbers do not appear

23. Posting Transactions to the General Ledger
LO-3
Posting Transactions to the General Ledger
This is Step 3 of the recording process
Posting: The transferring of amounts from general journal to the appropriate accounts in the general ledger
Cross-referencing
Helps identify each general ledger posting to appropriate journal entry
Allows users to find all the components of the transaction in the general ledger

24. Posting Transactions to the General Ledger
LO-3
Posting Transactions to the General Ledger
The following example shows
How the $15,000 credit to Cash from the purchase of store equipment in transaction 3 is posted from the general journal to the general ledger
Columns for dates, explanations, journal references, and amounts in the ledger

25. Posting Transactions to the General Ledger
LO-3
Posting Transactions to the General Ledger

26. Posting Transactions to the General Ledger
LO-3
Posting Transactions to the General Ledger
Another format for the general ledger
Shows a running balance of the account holdings in the far right column
Provides status report for account at a glance

27. Simple and Compound Entry
LO-3
Simple and Compound Entry
Simple entry: A journal entry for a transaction that affects only two accounts
Compound entry: A journal entry for a transaction that affects more than two accounts

28. Revenue and Expense Transactions
LO-3
Revenue and Expense Transactions
Assets = Liabilities + Stockholder’s Equity
Assets = Liabilities + ( Paid-in Capital + Retained Earnings)
The T-accounts can be grouped in the following way: = + +

29. Revenue and Expense Transactions
LO-3
Revenue and Expense Transactions
Revenue and expense information is accumulated separately to simplify the preparation of the income statement
However, revenue and expense accounts are part of retained earnings on the balance sheet

30. Revenue and Expense Transactions
LO-3
Revenue and Expense Transactions
Revenue account accumulates items that increase retained earnings
Credit to revenue is effectively a credit to retained earnings
Expense account accumulates items that decrease retained earnings
Debit to expense is effectively a debit to retained earnings
Debit entry increases expense, but decreases retained earnings =

31. Recording Revenue and Expense Transactions
LO-3
Recording Revenue and Expense Transactions
10a. Sales on credit, $160,000
Analysis
The asset Accounts Receivable increases
Stockholders’ equity, specifically Retained Earnings, increases because a revenue account, Sales Revenue, increases
Journal Entry

32. Recording Revenue and Expense Transactions
LO-3
Recording Revenue and Expense Transactions

33. Recording Revenue and Expense Transactions
LO-3
Recording Revenue and Expense Transactions
10b. Cost of merchandise inventory sold, $100,000
Analysis
The asset Merchandise Inventory decreases
Stockholders’ equity, specifically Retained Earnings, decreases because an expense account, Cost of Goods Sold, increases
Journal Entry

34. Recording Revenue and Expense Transactions
LO-3
Recording Revenue and Expense Transactions

35. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions
12. Paid rent for 3 months in advance, $6,000
Analysis
The asset Cash decreases
The asset Prepaid Rent increases
Journal Entry

36. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions

37. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions
13. Recognized expiration of rental services,
$2,000
Analysis
The asset Prepaid Rent decreases
Stockholders’ Equity, specifically Retained Earnings decreases because an expense account, Rent Expense , increases
Journal Entry

38. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions

39. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions
14. Recognized depreciation, $100
Analysis
The asset-reduction account Accumulated Depreciation, Store Equipment increases
Stockholders’ Equity, specifically Retained Earnings, decreases because an expense account, Depreciation Expense, increases
Journal Entry

40. Prepaid Expenses and Depreciation Transactions
LO-3
Prepaid Expenses and Depreciation Transactions

41. Accumulated Depreciation
LO-3
Accumulated Depreciation
Accumulated Depreciation: Cumulative sum of all depreciation recognized since the date of acquisition of an asset
Also called Allowance for Depreciation
Contra account
A separate but related account that offsets or is a deduction from a companion account

42. Accumulated Depreciation
LO-3
Accumulated Depreciation
Balance is on opposite side as that of the related companion account
Contra asset: A contra account whose companion account is an asset
Contra asset has a credit balance
Balance in contra asset is deducted from the related asset account, which has a debit balance

43. LO-3
Book Value
Book Value: Balance of an account shown on the books, minus the value of any associated contra accounts
Called net book value, carrying amount, carrying value

44. Prepare and Use a Trial Balance
Learning Objective 4
Prepare and Use a Trial Balance

45. Preparing the Trial Balance
LO-4
Preparing the Trial Balance
Purpose
Help check accuracy of postings
Establish a summary of balances in all accounts
Total debits should equal total credits

46. Preparing the Trial Balance
LO-4
Preparing the Trial Balance
List assets, liabilities, and stockholders’ equity followed by the income statement accounts, revenues and expenses
All accounts except retained earnings show their balances as of the date the trial balance is prepared

47. Preparing the Trial Balance
LO-4
Preparing the Trial Balance
*If a Retained Earnings balance existed at the start of the accounting period, it would appear here.

48. Close Revenue and Expense Accounts and Update Retained Earnings
Learning Objective 5
Close Revenue and Expense Accounts and Update Retained Earnings

49. LO-5
Closing the Books and Deriving Financial Statements from the Trial Balance
Close the books: To transfer the balances in all revenue and expense accounts to retained earnings
Resets the revenue and expense accounts to zero so that they are ready to record the next period’s transactions

50. LO-5
Closing the Books and Deriving Financial Statements from the Trial Balance
Closing entries: Journal entries that transfer balances in the “temporary” stockholders’ equity accounts (revenue and expense accounts) to the “permanent” stockholders’ equity account, Retained Earnings

51. Two approaches to closing entries
Closing the Books and Deriving Financial Statements from the Trial Balance
Two approaches to closing entries
Two step process
Transfer revenue and expense accounts to an Income Summary account
Transfer Income Summary account to Retained Earnings account
One step process
Transfer the revenue and expense accounts directly into Retained Earnings account, bypassing the Income Summary account

52. Closing the Accounts LO-5 There are three closing entries:
C1: Close all revenue accounts
C2: Close all expense accounts
C3: Close the Income Summary account