1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Recording Business Transactions Chapter 2

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Use accounting terms

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 The Accounting Process Record Transactions in the Journal Copy (post) to the Ledger Prepare the Trial Balance

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 AccountAccount Basic summary device Detailed record of increases and decreases in specific assets, liabilities, or owner’s equity during a period

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 LedgerLedger Book or printout holding all the accounts

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Liabilities Equity Assets =+ Accounting Equation Accounts are grouped in 3 broad categories:

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 AssetsAssets Economic resources that will benefit the business in the future Cash Accounts Receivable Notes Receivable Prepaid Expenses Land Building Equipment, Furniture, Fixtures

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 LiabilitiesLiabilities Creditors’ claims to assets (debt) Accounts Payable Notes Payable Accrued Liabilities

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Owner’s Equity Owner’s claim to the assets Capital Withdrawals Revenues Expenses

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 RevenuesNotes Payable Accounts Receivable C. Lapp, Capital Accounts Payable Ledger Cash All Individual Accounts Combined Make Up the Ledger

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Chart of Accounts List of all accounts used by a company along with the account numbers

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Objective 2 Apply the rules of debit and credit

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Double Entry System Record dual effects of each transaction Each transaction affects at least two accounts Each transaction is recorded with at least –One debit –One credit Total debits must equal total credits

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Account Name (Left Side) Debit (Right Side) Credit Simple tool for analyzing and determining the balance in a given account T-AccountT-Account

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Debit Credit Assets + - + - Rules of Debit and Credit LiabilitiesEquity=+ Debit Credit - + - + Debit Credit - + - +

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Rules of Debit and Credit Owner’s Equity Debit Credit - + - +Revenues Debit Credit Owner’s Capital Debit Credit - + - + Owner’s Withdrawals Debit Credit + - + - Expenses Debit Credit + - + -

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 RevenuesExpenses Owner’s Capital Owner’s Withdrawals _ + _ Expanding the Rules of Debit and Credit Owner’s Equity Debit Credit - + - + Debit Credit - + - + Debit Credit + - + - Debit Credit + - + -

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Remember: Just ask ALICE! DebitCredit +A = Assets- -L = Liabilities+ -I = Income*+ -C = Capital+ +E = Expenses- * Really, this is revenues, but “r” just doesn’t fit in! The first and the last are increased with a debit The middle three are increased with credits

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 LiabilitiesEquityAssets=+ Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 ++ Owner’s Equity Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance RevenuesRevenuesExpensesExpenses Owner’s Capital Owner’s Withdrawals ____ Debit Credit + - NormalBalance

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Objective 3 Record transactions in the journal

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 JournalJournal Chronological record of the transactions Consists of at least one debit and one credit

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Journalizing Transactions Identify each account affected and its type Determine whether each account is increased or decreased. Use the rules of debit and credit Record transaction in journal, including a brief explanation –Debit side of entry is entered first –Total debits should always equal total credits

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 General Journal Journal Page 1 DateDescriptionDebitCredit Jul 1Cash45,000 Lange, Capital45,000 Investment from owner Accounts Affected Dollar amount of debits and credits Explanation of transaction Transaction Date

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 General Journal Style conventions that must be followed: Year is entered at the top of each page The month is only entered for the first entry on a page unless the month changes in the middle of the page. The month may be abbreviated Enter numerical date for each transaction, even if there are many entries on same date

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 General Journal Debits are ALWAYS entered first in an entry. Use the EXACT account title and do not abbreviate Credits are INDENTED and listed second Do not use dollar signs SKIP A LINE between each entry Never split an entry between two pages

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Exercise 2-5 Analysis of June 1 transaction: Cash is increasing Cash is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 Exercise 2-5 Analysis of June 1 transaction: M. Brown, Capital is increasing Capital is an owner’s equity account Increase owner’s equity with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000 M. Brown, Capital25,000 Owner invested in business

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 Exercise 2-5 Analysis of June 2 transaction: Medical Supplies is increasing Medical Supplies is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 Exercise 2-5 Analysis of June 2 transaction: Accounts Payable is increasing Accounts Payable is a liability account Increase a liability with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000 Accounts Payable10,000 Purchased medical supplies

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 Exercise 2-5 Analysis of June 2 transaction: Rent Expense is increasing Rent Expense is an expense account Increase an expense with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 Exercise 2-5 Analysis of June 2 transaction: Cash is decreasing Cash is an asset account Decrease an asset with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000 Cash4,000 Paid rent for the month

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Exercise 2-5 Analysis of June 3 transaction: Accounts Receivable is increasing Accounts Receivable is an asset account Increase an asset with a debit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Exercise 2-5 Analysis of June 3 transaction: Service Revenue is increasing Service Revenue is a revenue account Increase a revenue with a credit GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000 Service Revenue12,000 Performed services

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 Objective 4 Post from the journal to the ledger

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 PostingPosting Periodically, journal entries are posted to ledger accounts to determine balances in each account Posting – copying amounts from the journal to the ledger

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 Exercise 2-9 CashAccounts PayableService Revenue Accounts Receivable M. Brown, Capital Rent Expense Medical Supplies GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun1Cash25,000 M. Brown, Capital25,000 Owner invested in business 25,000

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Medical Supplies10,000 Accounts Payable10,000 Purchased medical supplies Exercise 2-9 Medical Supplies 10,000

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun2Rent Expense4,000 Cash4,000 Paid rent for the month 4,000

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 4,000 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jun3Accounts Receivable12,000 Service Revenue12,000 Performed services 12,000

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 Cash 25,000 Accounts PayableService Revenue M. Brown, Capital Rent Expense 25,000 Accounts Receivable Exercise 2-9 Medical Supplies 10,000 4,000 12,000 Bal 21,000 Bal 10,000 Bal 12,000 Bal 4,000 Bal 25,000 Bal 12,000 Bal 10,000

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 Flow of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analyzed Transaction Journalized & Posted

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 Objective 5 Prepare and use a trial balance

44. Copyright © 2007 Prentice-Hall. All rights reserved 44 Trial Balance List of all accounts with their balances

45. Copyright © 2007 Prentice-Hall. All rights reserved 45 Mike Brown, M.D. Trial Balance June 30, 2008 Cash21,000 Accounts Receivable12,000 Medical Supplies10,000 Accounts Payable10,000 M. Brown, Capital25,000 Service Revenue12,000 Rent Expense4,000 Totals47,00047,000 Exercise 2-9 (part 3)

46. Copyright © 2007 Prentice-Hall. All rights reserved 46 Locating Trial Balance Errors What if it doesn’t balance? Is the addition correct? Are all accounts listed? Are the balances listed correctly?

47. Copyright © 2007 Prentice-Hall. All rights reserved 47 Locating Trial Balance Errors Divide the difference by two –Is there a debit/credit balance for this amount posted in the wrong column? Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error

48. Copyright © 2007 Prentice-Hall. All rights reserved 48 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug1Cash60,000 R. Woodward, Capital60,000 To record investment by owner 2Supplies200 Accounts Payable200 Purchased supplies on account Cash increases. It is an asset. Increase assets with debits. Capital increases. Owner’s equity is increased with a credit. Supplies, an asset, increases. Increase assets with debits. Accounts Payable increases. It is a liability. Increase liabilities with a credit

49. Copyright © 2007 Prentice-Hall. All rights reserved 49 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-5 Aug4Building50,000 Cash50,000 Purchased building 6Cash3,000 Service Revenue3,000 Performed service Both of these accounts are assets. Building is increasing. Increase assets with debits. Cash is decreasing. Decrease assets with credits. Cash, an asset, is increasing. Increase assets with debits. Revenue accounts are increased with credits

50. Copyright © 2007 Prentice-Hall. All rights reserved 50 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug9Accounts Payable100 Cash100 Paid on account 17Accounts Receivable2,100 Service Revenue2,100 Performed services Accounts Payable, which is decreasing, is a liability. Decrease liabilities by debiting them. Decrease the asset, Cash, with a credit. Both of these accounts are assets. Building is increasing. Increase assets with debits. Cash is decreasing. Decrease assets with credits

51. Copyright © 2007 Prentice-Hall. All rights reserved 51 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug23Cash1,200 Accounts Receivable1,200 Received payment on account Both of these accounts are assets. Cash is increasing – debit. Accounts Receivable is decreasing - credit

52. Copyright © 2007 Prentice-Hall. All rights reserved 52 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Exercise 2-18 Aug31Salary Expense1,200 Cash1,200 Paid salaries 31Rent Expense500 Cash500 Paid rent for the month Both of these transactions involve recognizing expenses. Since expenses decrease owner’s equity, and owner’s equity is decreased with a debit, debit expenses. Cash is decreasing – credit

53. Copyright © 2007 Prentice-Hall. All rights reserved 53 Exercise 2-19 Aug 9 100 Cash Aug 1 60,000 Aug 4 50,000 Aug 6 3,000 Accounts Receivable Aug 17 2,100 Service Revenue Aug 6 3,000 Bal. 12,400 Building Aug 4 50, 000 R. Woodward, Capital Aug 1 60,000 Rent Expense Salary Expense Aug 2 200 Supplies Aug 2 200 Accounts Payable Aug 9 100 Bal. 100 Aug 17 2,100 Aug 23 1,200 Aug 31 1,200 Aug 31 500 Bal. 900 Bal. 5,100 Aug 31 1,200 Aug 31 500 Take the difference between total debits and total credits to determine the balance in each account. If debits are greater than credits, the account has a debit balance and vice versa

54. Copyright © 2007 Prentice-Hall. All rights reserved 54 Woodward Technology Solutions Trial Balance August 31, 2008 Cash12,400 Accounts Receivable900 Supplies200 Building50,000 Accounts Payable100 R. Hawk, Capital60,000 Service Revenue5,100 Salary Expense1,200 Rent Expense500 Totals65,20065,200 Exercise 2-19

55. Copyright © 2007 Prentice-Hall. All rights reserved 55 End of Chapter 2