Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 2 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts Define debits, credits, and normal account balances and use double-entry accounting and T-accounts List the steps of the transaction recording process

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 3 Journalize and post sample transactions to the ledger Prepare the trial balance from the T-accounts

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts 4 1 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 5 Record transactions in the journal Copy (post) to the ledger Prepare the trial balance

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Basic summary device Detailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equity Covers a specific period of time Grouped in three broad categories Assets Liabilities Stockholders’ Equity 6

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journal Chronological record of transactions Organized by date Ledger The book holding all the accounts and their balances Organized by account 7

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Listing of all accounts and their balances 8

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 9 ASSETSLIABILITIESEQUITY Economic Resources Claims to Economic Resources

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Economic resources that will benefit the business in the future: Cash Accounts receivable Notes receivable Prepaid expenses Land Building Equipment, Furniture, Fixtures 10

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A debt (something owed): Accounts payable Notes payable Accrued liabilities 11

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Owners’ claim to the assets: Common stock Retained earnings Dividends Revenues Expenses 12

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Asset, Liability, and Stockholders’ equity Accounts 13

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. List of all accounts used by a company 14

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Define debits, credits, and normal account balances and use double-entry accounting and T-accounts 15 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Record dual effects of each transaction Each transaction has a: Receiving side Giving side Examples: Company purchases supplies (receiving) with cash (giving) Company issues stock (giving) and receives cash (receiving) 16

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 17 Tool for analyzing and determining the balance in a given account Account Name (Left Side) (Right Side) Dr Debit Dr Debit Cr Credit Cr Credit

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 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 18

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 19 The account category governs the increase side or decrease side Increases are recorded on one side Decreases are recorded on the opposite side Rules of debits and credits

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Illustrate Debits and Credits The first transaction involves receiving $30,000 cash and issuing common stock The second transaction is a $20,000 purchase of land for cash 20

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Match the accounting terms on the left with the corresponding definitions on the right. 1._____Posting 2._____ Receivable 3._____ Debit 4._____ Journal 5._____ Expense 6._____ Net Income 7._____ Normal Balance 8._____ Ledger 9._____ Payable 10._____ Equity 21 A.Using up assets in the course of operating a business B.Book of accounts C.An asset D.Record of transactions E.Left side of an account F.Side of an account where increases are recorded G.Copying data from the journal to the ledger H.Always a liability I.Revenues – Expenses = J.Assets – Liabilities = G C E D A I F B H J

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice. 1.When are debits increases? When are debits decreases? 2. When are credits increases? When are credits decreases? 22 Debits are increases in the Assets, Dividends, and Expenses. Debits are decreases in the Liabilities, Stockholders’ equity, Retained earnings and Revenues. Credits are decreases in the Assets, Dividends, and Expenses. Credits are increases in the Liabilities, Stockholders’ equity, Retained earnings and revenues.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. List the steps of the transaction recording process 23 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identify each account affected and its type Determine if each account is increased or decreased Record transaction in the journal 24 Use the rules of debit and credit

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize the first transaction of Smart Touch— the receipt of $30,000 cash and issuance of common stock Step 1: The accounts affected are Cash and Common stock. Cash is an asset. Common stock is equity. Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits. 25

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Four parts: a)Date of transaction b)Title of account debited with dollar amount c)Title of account credited with dollar amount d)Brief explanation of transaction 26

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 27 Journal Page 1 DateDescriptionDebitCredit Apr 1Cash30,000 Common stock30,000 Issued stock. Transaction date Accounts affected Dollar amounts of debits and credits Explanation of transaction

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Ned Brown opened a medical practice in San Diego, California. 1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation. 28 Jan 1The business received $29,000 cash and issued common stock. 2Purchased medical supplies on account, $14,000. 2Paid monthly office rent of $2,600. 3Recorded $8,000 revenue for service rendered to patients on account.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan 1: The business received $29,000 cash and issued common stock Cash received indicates cash increases Cash is an Asset; Assets increase with debits Issued common stock; indicates equity is increasing Increase equity with credits 29 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1Cash 29,000 Common Stock 29,000 Issued stock.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 2: Purchased medical supplies on account, $14,000 Medical Supplies, an asset, is increasing Assets increase with debits On account, increases accounts payable, a liability Increase liabilities with credits 30 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 2: Paid monthly office rent of $2,600 Paid rent, an expense, expense is increasing Expenses increase with debits Paid cash, cash is an asset Increase assets with debits 31 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2Rent Expense 2,600 Cash 2,600 Paid office rent.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 3: Recorded $8,000 revenue for service rendered to patients on account On account indicates Accounts receivable increase Accounts receivable is an Asset, Assets increase with debits Rendered services, services are revenues, indicates revenues are increasing Increase revenues with credits 32 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan3Accounts receivable 8,000 Service revenue 8,000 Performed service on account.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copying amounts from the journal to the ledger 33

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34 Assets Liabilities Stockholders’ equity + Common stock + Retained earnings + Revenues – Expenses – Dividends + Common stock + Retained earnings + Revenues – Expenses – Dividends

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Origin of accounting transactions Examples: Bank deposit tickets Invoices Checks Stock certificates 38

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize and post sample transactions to the ledger 39 4

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 40 Cash Common stock GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash30,000 Common stock30,000 Issued stock. 30,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 41 CashCommon stock Land GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Land20,000 Cash20,000 Received payment on account. 30,000 20,000 10,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42 CashAccounts payable Office supplies GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Office supplies500 Accounts payable500 Received payment on account. 30,000 20,000 Cash 30,000 20,000 10,

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43 CashService revenue GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Cash5,500 Service revenue5,500 Received payment on account. 30,000 20,000 Cash 30,000 20,000 5,500

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Oakland Floor Coverings, Inc. reported the following summarized data at December 31, Accounts appear in no particular order. 45 Revenues$34,000Other liabilities$18,000 Equipment45,000Cash12,000 Accounts payable2,000Expenses19,000 Common stock22,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 46 Oakland Floor Coverings, Inc. Trial Balance December 31, 2012 Cash Equipment Accounts Payable Other Liabilities Common Stock Revenues Expenses $ 12,000 45,000 $ 2,000 18,000 22,000 34,000 19,000 $76,000 $76,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use the January transaction data for Ned Brown, M.D., P.C. given in Short Exercise After making the journal entries in Short Exercise 2-5, post to the T-accounts. No dates or posting references are required. Compute the balance of each account, and denote it as Bal 47 Jan 1The business received $29,000 cash and issued common stock. 2Purchased medical supplies on account, $14,000. 2Paid monthly office rent of $2,600. 3Recorded $8,000 revenue for service rendered to patients on account.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 48 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1Cash 29,000 Common Stock 29,000 Issued stock. Cash Common stock 29,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 49 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account. Medical supplies Accounts payable 14,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 50 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2Rent Expense 2,600 Cash 2,600 Paid office rent. Cash Rent expense 2,600 29,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 51 GENERAL JOURNAL DATEDESCRIPTION RE F DEBITCREDIT Jan 3 Accounts receivable 8,000 Service revenue 8,000 Performed service on account. Accounts receivable Service revenue 8,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 52 Service revenue 8,000 Cash 29,0002,600 Accounts receivable 8,000 Accounts payable 14,000 Common stock 29,000 Medical supplies 14,000 Rent expense 2,600 Bal 26,400 Bal 14,000 Bal 8,000 Bal 14,000 Bal 2,600 Bal 29,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 53 Ned Brown, M.D., P.C. Trial Balance January 3, 2012 Cash Accounts receivable Medical supplies Accounts payable Common stock Service revenue Rent expense Total $ 26,400 8,000 14,000 $ 14,000 29,000 8,000 2,600 $51,000 $51,000 S2-9: PREPARE THE TRIAL BALANCE

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare the trial balance from the T-accounts 54 5

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Summary of the ledger Lists all accounts with their balances Accuracy check Debits should equal credits NOT a balance sheet 55

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Search for missing account Divide the difference between total debits and total 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–Reversing two digits ($2,100 instead of $1,200) 57

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Think of the account, journal, ledger (T-account), and chart as matching tools. Businesses are just matching the business transaction to the account description that best captures the specific event that occurred. The accounting equation must always balance after each transaction is recorded. To achieve this balance, we record transactions using a double entry accounting system. In that system, debits are on the left and credits are on the right. Debits always equal credits. 60

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A transaction occurs and is recorded on a source document. Then, we identify the account names affected by the transaction and determine whether the accounts increased or decreased using the rules of debit and credit for the six main account types. Next, we record the transaction in the journal, listing the debits first. We then post all transactions to the ledger (T-account). 61

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Once the ledger (T-account) balances are calculated, the ending balance for each account is transferred to the trial balance. Recall that the trial balance is a listing of all accounts and their balances on a specific date. Total debits must always equal total credits on the trial balance. If they do not, then review the correcting trial balance errors section on Page 81 of the textbook. 62

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 64 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.