Chapter 2 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT Recording Business Transactions

2 - 2 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Objectives 1. Define and use key accounting terms 2. Apply the rules of debit and credit 3. Record transactions in the journal 4. Post from the journal to the ledger 5. Prepare and use a trial balance 6. Set up a chart of accounts for a business 7. Analyse transactions without a journal

2 - 3 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Define and use key accounting terms. Objective 1

2 - 4 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Accounting Terms Account Ledger Assets Liabilities Owner’s equity Owner’s equity Double-entry accounting Double-entry accounting T-account

2 - 5 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Cash Accounts Payable Paula Lee, Capital Ledger All individual accounts combined make up the ledger. Individual asset accounts Individual liability accounts Individual owner’s equity accounts Accounting Terms

2 - 6 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Classification of Accounts l What are some asset accounts? – Cash – Bill Receivable – Accounts Receivable – Prepaid Expenses – Land – Building – Equipment

2 - 7 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Classification of Accounts l What are some liability accounts? – Bills Payable – Accounts Payable – Accrued Liabilities (for expenses incurred but not paid) – Long-term Liabilities (mortgages and debentures)

2 - 8 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Classification of Accounts l What are some owner’s equity accounts? – Capital (or owner’s interest in the business) – Withdrawals or Drawings – Revenues – Expenses

2 - 9 Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example l Assume that the business sold $5,000 worth of petrol on a given day and performed $3,000 of repair services. l How much revenue did the business earn that day? l $8,000

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example l Revenues increase Jan’s equity in the business. l The business had to pay mechanics and suppliers $3,750 for the work performed that day.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example l Expenses decrease Jan’s equity in the business. l How much was the net increase in Jan’s equity that day? l $4,250

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Double-Entry Accounting l Double entry bookkeeping means to record the dual effects of each business transaction. l Assets = Liabilities + Owner’s Equity l Assets are on the left (debit) side. l Liabilities and Equity are on the right (credit) side.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia The T-Account Account Title Debit Credit LEFT SIDE

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia The T-Account Account Title Debit Credit RIGHT SIDE

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Apply the rules of debit and credit. Objective 2

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Owner’s Equity AssetsLiabilities Debit + Debit – Credit – Debit – Credit + Credit + =+ Rules of Debit and Credit

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia One debitOne credit Each transaction is recorded with at least: Total debits must equal total credits. The Double-Entry System ANDAND

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example l On July 1, Jan invested $500,000 in cash and obtained a $300,000 loan to open a gas station. l How much was the initial increase in cash? l $800,000 l Which accounts were affected?

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example Cash Liabilities Owner’s Equity

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station Example Jan’s Petrol Station Balance Sheet June 30, 2004 AssetsLiabilities Cash$800,000Bills payable$300,000 Owner’s Equity Jan, capital 500,000 Total liabilities Total assets$800,000and owner’s equity$800,000

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Record transactions in the journal. Objective 3

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Journals l What is a journal? l 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).

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Journals l 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

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Recording Transactions l On April 2, Paula Lee invested $30,000 in Paula Lee eTravel. l What is the journal entry? l April 2 Cash30,000 Paula Lee, Capital 30,000 Received initial investment from owner

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Post from the journal to the ledger. Objective 4

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Bound books Computer printout Cards Loose leaf pages Ledger l What is a ledger? l It is a collection of all accounts utilised by an entity during an accounting period.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Posting l What is posting? l It is the transfer of information from the journal to the appropriate accounts in the ledger. l The first transaction was Cash30,000 Capital 30,000 See other journal entries p51-52 of the text

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Accounts Payable Paula Lee, Drawings (1) 30,000 Bal. 30,000 (3) 500(4) 300 Bal. 200 Paula Lee, Capital (6) 2,100 Bal. 2,100 Liabilities and Owner’s Equity Accounts After Posting

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Details of Journals and Ledgers DateAccounts and Explanation DebitCredit April 2Cash30,000 Paula Lee, Capital30,000 Received initial investment from owner Journal Page 1

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Details of Journals and Ledgers Balance Date Ref. Debit Credit Debit Credit April 2 jrl 30,000 30,000 Account: CashAccount: 101 Insert the number of the journal page. Posting

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Details of Journals and Ledgers Journal Page 1 Date Account and Explanation Post Ref. Debit Credit April 2 Cash ,000 Paula Lee, Capital ,000 Initial investment from owner Insert the ledger account in the journal.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia 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

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Prepare and use a trial balance. Objective 5

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Trial Balance l What is a trial balance? l It is an internal document. l It is a listing of all the accounts with their related balances. l Before computers, it provided a check on accuracy by showing whether total debits equal total credits.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia DEBITS CREDITS Locating Trial Balance Errors l What if it doesn’t balance ? l Is the addition correct? l Are all accounts listed? l Are the balances listed correctly?

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Locating Trial Balance Errors l Divide the difference by two. l Is there a debit / credit balance for this amount posted in the wrong column? l Check journal postings. l Review accounts for reasonableness. l Computerised accounting programs usually prohibit out-of-balance entries.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Set up a chart of accounts for a business. Objective 6

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Chart of Accounts in the Ledger l This is a listing of all the accounts and related account numbers used by a business. l Each account should have its own assigned number. l The numbering system should allow flexibility for changing business needs.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Assets 101 Cash 111 Accounts Receivable 141 Office Supplies 151 Office Furniture 155 Computers 191 Land Paula Lee eTravel Chart of Accounts

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Liabilities 201 Accounts Payable 231 Bills Payable Owner’s Equity 301 Capital 311 Drawings Revenues 401 Service Revenue Paula Lee eTravel Chart of Accounts

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Expenses 501 Rent Expense 523 Electricity Expense 524 Natural Gas Expense 551 Salary Expense 580 Telephone Expense 581 Mobile Expense – Helen 582 Mobile Expense – Jane 581 Mobile Expense – Amanda Paula Lee eTravel Chart of Accounts

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Normal Account Balances l Assets = Liabilities + Owner’s Equity l Debits = Credits l The side where we expect increases to be recorded is the normal balance side.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Analyse transactions without a journal. Objective 7

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station l Jan is considering either purchasing a garage for $600,000 or renting one for $60,000 per year. l Jan does not need to record in the journal all of the transactions that would affect her decision. l Why?

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Jan’s Petrol Station l Jan has not completed a transaction yet. l However, Jan can visualise how the ledger accounts will be affected.

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia Rent the garage Buy the garage Cash 600,000 Building 600,000 Jan’s Petrol Station Rent Expense Cash 60,000

Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia End of Chapter 2