Professional Documents
Culture Documents
Recording Business Transactions
Recording Business Transactions
CHAPTER 2
2-2
Chapter 1
2-3
Ledger Accounts
2-4
2-5
2-6
Dollars, which are used to measure economic transactions, are poured into and out of the container.
2-7
General Ledger
Was not a Civil War Hero
2-8
Used in general ledgers in the business world Used primarily for teaching and analysis of complex transactions
T-Account Format
2-9
ACCOUNT NAME:
Date Description PR
ACCOUNT No. 1 2 3
Debit Credit Balance
2-10
Account Name
Debit Credit
2-11
The T-Account
Increases to the T-account are recorded on one side of the T-account, and decreases are recorded on the other side.
Account Name
Debit Credit
2-12
The T-Account
The side which increases and the side which decreases is determined by the type of account.
Account Name
Debit Credit
2-13
Debit refers to the LEFT and Credit to the RIGHT side of the T-Account. Debit and Credit are neutral terms and do not connote value judgments. Neither is good or bad!
2-14
2-15
Debit refers to the LEFT and Credit to the RIGHT side of the T-Account
Account Name
LEFT
RIGHT
2-16
Debit refers to the LEFT and Credit to the RIGHT side of the T-Account
Account Name
LEFT
RIGHT
Used as Adjectives:
DEBIT SIDE
CREDIT SIDE
2-17
Debit refers to the LEFT and Credit to the RIGHT side of the T-Account
Account Name
LEFT
RIGHT
Used as Verbs:
DEBIT
CREDIT
2-18
2-19
e.g., either Heat, Light & Power or Utilities Expense could be used for an account name.
2-20
Lets see how debits and credits affect the different types of accounts.
Account Name
Debit Credit
2-21
Expenses
2-22
Again, debits and credits are used to increase or decrease account balances. Determining whether to use a debit or credit to record an increase or decrease depends on the type of account in question. The Balance Sheet equation is the basis for the determination.
2-23
A = L + SE
2-24
A = L + SE
Account Name Account Name Account Name
Debit
Credit
Debit
Credit
Debit
Credit
2-25
A = L + SE
Account Name Account Name Account Name
Debit
Credit
Debit
Credit
Debit
Credit
2-26
A = L + SE
ASSETS Debit Credit for for Increase Decrease Account Name Account Name
Debit
Credit
Debit
Credit
2-27
A = L + SE
ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase Account Name
Debit
Credit
2-28
A = L + SE
ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase EQUITIES Debit Credit for for Decrease Increase
Stockholders Equity
A Closer Look
Recall that Stockholders Equity consists of the following components:
2-29
C/S + R/E
Stockholders Equity
A Closer Look
Therefore, the Capital Stock and Retained Earnings accounts are affected in the following manner by debits and credits because they are part of Stockholders Equity:
CAPITAL STOCK Debit Credit for for Decrease Increase RET. EARNINGS Debit Credit for for Decrease Increase
2-30
Stockholders Equity
A Closer Look
Also, because Revenue accounts increase Stockholders Equity, they are affected by debits and credits as follows:
2-31
Stockholders Equity
A Closer Look
And because Expense accounts decrease Stockholders Equity, they are affected by debits and credits as follows:
2-32
2-33
Normal Balances
Each of the 5 account types also has a normal balance side. It is always the side which is used to record increases in the account.
2-34
Normal Balances
The normal balances for each of the FIVE types of accounts are as follows: Account Name
Debit Balance Credit Balance
Assets Expenses
2-35
Alternative #1
Alternative #2
Expanded Accounting Equation This is Rices preferred approach
Alternative #3
A L O R E acronym
2-36
Alternative Approach #1
Textbook Approach
59
Check it out at top of page!
2-37
Alternative Approach #2
Expanded Accounting Equation
ASSETS + EXP. = LIAB. + S/H EQUITY + REV.
A + E = L + S/E + R
Dr. Cr. Dr. Cr.
+
Bal.
+
Bal.
2-38
A (ssets) L (iabilities)
+ -
+ + + -
2-39
a. b. c. d.
2-40
a. b. c. d.
BUILDINGS is an asset account and normally has a DEBIT balance. The other three accounts normally have CREDIT balances.
2-41
a. b. c. d.
2-42
a. b. c. d.
2-43
SALARY PAYABLE is a liability account and Accounts Receivable normally has a CREDIT Salary Expense balance. The other three accounts normally have DEBIT balances.
2-44
750
2-45
750
2-46
750 200
What would we do to increase the account by $200?
2-47
750 200
What would we do to increase the account by $200? What would we do to decrease the account by $350?
2-48
750 200
350
What would we do to increase the account by $200? What would we do to decrease the account by $350?
2-49
Accounts Receivable
750 200
350
Note the lack of $. It is understood that the yardstick is dollars. It is not money!
2-50
750 200
350
. . . net the totals on the two sides against each other. Place the residual amount on the appropriate side.
2-51
750 200
600
350
. . . net the totals on the two sides against each other. Place the residual amount on the appropriate side.
2-52
750 200
600
350
(Can use the either the approach above to show the balance, the texts approach or Rices approach)
2-53
Text Approach
Cash
Rices Approach
Cash
(1) 10,000 (4) 600 (1) 10,000 (4) 600 (1) 10,000 (4) 600 (2) 5,000 (5) 2,000 (2) 5,000 (5) 2,000 (2) 5,000 (5) 2,000 (3) 1,000 (3) 1,000 (3) 1,000 16,000 2,600
13,400
bal 13,400
13,400
2-54
2-55
$1,200 $ 500
$ 300 $ 400
2-56
2-57
Implications Question 1
If the company made a Credit entry to Notes Payable, would the account increase or decrease?
2-58
Implications Question 1
If the company made a Credit entry to Notes Payable, would the account increase or decrease?
ANSWER:
Notes Payable would increase.
2-59
Implications Question 2
Notes Payable is the account where we record long-term borrowings. What event would cause us to record an increase in our long-term borrowings?
2-60
Implications Question 2
Notes Payable is the account where we record long-term borrowings. What event would cause us to record an increase in our long-term borrowings?
ANSWER:
Such an increase could imply that the company borrowed money.
2-61
Implications Question 3
If the company borrowed money, which account would also be affected and in what way?
2-62
Implications Question 3
If the company borrowed money, which account would also be affected and in what way?
ANSWER:
There would also be an equal-sized increase in the Cash account.
2-63
Implications Question 4
Suppose instead of an increase to Cash, you find an increase to the Land account. How do you interpret the increase in Notes Payable?
2-64
Implications Question 4
Suppose instead of an increase to Cash, you find an increase to the Land account. How do you interpret the increase in Notes Payable?
ANSWER:
The company acquired land and gave a note that promised to pay for the land in the future.
2-65
Recording Transactions
2-66
Recording Transactions
Initially, all transactions are recorded in the General Journal. Each transaction always affects at least two different accounts.
One account has a debit effect. The second account has a credit effect.
2-67
Date
Description
PR
Debit
Credit
2-68
Journal Entries
Example 1
On January 1, 19X7, Caldwell Company borrows $10,000 from the bank. Prepare the appropriate general journal entry for the above transaction.
2-69
Journal Entries
Solution 1
2-70
Journal Entries
Solution 1
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
2-71
Journal Entries
Solution 1
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
1-Jan
100 201
10,000 10,000
2-72
Journal Entries
Solution 1
Typically, accounts are Two accounts are affected: Cash is increased numbered. The by $10,000. Notes Payable is increased by $10,000. account numbers are used as references for GENERAL JOURNAL Page: posting to the General Date Description on PR Debit Credit Ledger. More 1-Jan Cash 100 10,000 account will Notesnumbers Payable 201 10,000 to record loan from bank come later.
2-73
Journal Entries
Example 2
On January 15, 19X7, Caldwell Company purchases a truck for $19,500 cash. Prepare the appropriate journal entry for the above transaction.
2-74
Journal Entries
Solution 2
2-75
Journal Entries
Solution 2
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
2-76
Journal Entries
Solution 2
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
15-Jan
150 100
19,500 19,500
2-77
Journal Entries
Example 3
On January 20, 19X7, Caldwell Co. pays the $400 electric bill for January. Prepare the appropriate journal entry for the above transaction.
2-78
Journal Entries
Solution 3
2-79
Journal Entries
Solution 3
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
2-80
Journal Entries
Solution 3
GENERAL JOURNAL
Page:
1
Debit Credit
Date
Description
PR
20-Jan
511 100
400 400
2-81
It is a complete collection of all the accounts of a company Accounts are individually numbered for easy reference It is used to collect the information about all of the transactions affecting a specific account A cumulative, running balance is maintained when using the 3-column type
2-82
2-83
Real Accounts
This category includes Assets, Liabilities, and Stockholders Equities (i.e., Balance Sheet accounts)
2-84
Nominal Accounts
Nominal accounts include revenues and expenses. Nominal accounts are temporary. Nominal account balances are closed out to zero at the end of the fiscal year.
2-85
Numbering Accounts
The listing of all accounts and their account numbers is called the chart of accounts.
2-86
Numbering Accounts
The listing of all accounts and their account numbers is called the chart of accounts. A typical account numbering scheme might appear as follows:
Assets 100-199 Liabilities 200-299 Equities 300-399 Revenues 400-499 Expenses 500-599
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-87
1 Credit
Date
Description
PR
Debit
10,000 10,000
Posting to the GL
Example
Date
Page: page Next, find the appropriate Description PR forDebit in the General Ledger Cash. Credit
2-88
GENERAL JOURNAL
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description
10,000
10,000
ACCOUNT No.
PR Debit Credit
100
Balance
Beginning Balance
Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1
2-89
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-90
1 Credit
Date
Description
PR
Debit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
G1
0 10,000
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-91
1 Credit
Date
Description
PR
Debit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
G1
0 10,000
0 10,000
Posting to the GL
Example
Date
Page: Next, find the Notes Payable PR Ledger. Debit pageDescription in the General
2-92
GENERAL JOURNAL
1 Credit
100
10,000
10,000
ACCOUNT No.
Debit Credit
201
Balance
Beginning Balance
Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1
2-93
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
Beginning Balance
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-94
1 Credit
Date
Description
PR
Debit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
G1
0 10,000
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-95
1 Credit
Date
Description
PR
Debit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
G1
0 10,000
0 10,000
Posting to the GL
Example
Examine the next journal entry. Page:
Date Description PR Debit Credit
GENERAL JOURNAL 1
2-96
9,500 9,500
ACCOUNT No.
Debit Credit
100
Balance
G1
0 10,000
0 10,000
Posting to the GL
Example
Record the account reference. Page:
Date Description PR Debit Credit
GENERAL JOURNAL 1
2-97
ACCOUNT No.
Debit Credit
100
Balance
G1
0 10,000
0 10,000
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-98
Date
Description
PR
Debit
Credit
ACCOUNT No.
Debit Credit
100
Balance
G1 G3
0 10,000 9,500
0 10,000
Posting to the GL
Example
GENERAL JOURNAL
Page:
2-99
Date
Description
PR
Debit
Credit
ACCOUNT No.
Debit Credit
100
Balance
G1 G3
0 10,000 9,500
0 10,000 500
2-100
TRIAL BALANCE
Used to periodically test whether the General Ledger is in balance. Consists of a listing of each account with its balance as of a specific date.
All Debit balances are in one column. All Credit balances are in another column.
2-101
Cash Accounts Receivable Equipment Accounts Payable Notes Payable Capital Stock Retained Earnings - 1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense
$ 16,150
2-102
Notice that Total Cash Accounts Receivable Debits are equal Equipment Accounts Payable to Total Credits. Notes Payable
Capital Stock Retained Earnings - 1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense
Credits
$ 16,150
2-103
2-104
Loose Ends
2-105
Loose Ends
Questions on the 15 transactions on pp. 64-71? Dont read the chapter!
2-106
Loose Ends
Questions on the 15 transactions on pp. 64-71? Dont read the chapter!
p. 81
2-107
Loose Ends
Questions on the 15 transactions on pp. 64-71? Dont read the chapter!
p. 81
The Dividends account is not a primary type of account as implied on pp. 58-59!
2-108
Dividends Account
The Dividends account is a contra account to Retained Earnings. Therefore, it is affected by debits and credits as follows:
2-109