1. The Debit/Credit Framework The framework used for journals and ledger accounts was created more than 500 years ago. Journals are used to record the effects of each day’s transactions; organized by date. Ledgers are used to summarize the effects of journal entries on each account; organized by account. 1 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

2. Think of the accounting equation as a scale with assets on the left side and liabilities and shareholders’ equity on the right side. 2 ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

3. Accounts increase on the same side as they appear in the accounting equation. – Assets increase on the left side – Liabilities increase on the right side – Shareholders’ equity accounts increase on the right side 3 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

4. 4 Left is debit (dr) and right is credit (cr) Use debits for increase in assets, and decreases in liabilities and shareholders’ equity accounts. Use credits for increases in liabilities and shareholders’ equity, and decreases in asset accounts. LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

5. Step 2: Record Journal entries are used to record transactions and indicate the effects in a debits-equal- credits format. – Each journal entry includes a date – Debits appear first and credits are written below – Total debits equal total credits – Dollar signs are not used 5 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

6. Step 3: Summarize Posting is the process of transferring details of journal entries into the corresponding ledger accounts. 6 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

7. T-Accounts are a simplified version of a ledger account used for summarizing the effects of journal entries. Remember: – Debits are the left side of an account, or the act of entering an amount into the left side. – Credits are the right side of an account, or the act of entering an amount into the right side. The normal balance of an account is the side where increases occur. 7 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

8. 8 (a) Issue Shares to Owners Pizza Palace receives $50,000 cash Pizza Palace gives $50,000 stock (contributed capital) LO3 1 Analyze 2 Record 3 Summarize © 2012McGraw-Hill Ryerson. All rights reserved.

9. 9 (b) Invest in Equipment Pizza Palace receives $42,000 equipment Pizza Palace gives $42,000 cash 3 Summarize 2 Record 1 Analyze LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

10. 10 2 Record 3 Summarize 1 Analyze (c) Obtain Loan from Bank Pizza Palace receives $20,000 cash Pizza Palace gives $20,000 note payable to the bank LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

11. 11 (d) Invest in Equipment Pizza Palace receives $18,000 equipment Pizza Palace gives $16,000 cash and a promise to pay $2,000 on account 1 Analyze 3 Summarize 2 Record LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

12. 12 (e) Order Cookware Pizza Palace receives promise of future delivery Pizza Palace gives promise to pay for purchase An exchange of only promises is not a transaction. No journal entry is required. LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

13. 13 (f) Pay Supplier Pizza Palace receives a release from its promise to pay $2,000 on account Pizza Palace gives $2,000 cash 1 Analyze 3 Summarize 2 Record LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

14. 14 (g) Receive Cookware Pizza Palace receives cookware costing $630 Pizza Palace gives a promise to pay $630 on account 1 Analyze 2 Record 3 Summarize LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

15. Pizza Palace’s T-Accounts 15 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.

16. Trial Balance A trial balance is an internal report that lists all accounts and their balances, and provides a check on debits = credits. 16 LO3 © 2012McGraw-Hill Ryerson. All rights reserved.