CHAPTER 2: RECORDING BUSINESS TRANSACTIONS

* Learning Objectives:

•  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

•  Post transactions from the journal to the ledger

•  Prepare the trial balance from the T-accounts

2.1 The account, the ledger and the journal

•  An account is the detailed record of all the changes that have occurred in a particular asset, liability
or owners’ equity during a period

•  The journal is the chronological record of the transactions

•  The ledger is the record holding all accounts

•  A list of all the ledger accounts, along with their balances, is called a trial balance

Assets

An asset is a resource controlled by an entity as a result of past events that is expected to provide future
economic benefits to the entity in the future

•  Cash •  Prepaid expenses

•  Accounts receivable •  Land

•  Bills receivable •  Buildings

•  Inventories •  Plant and equipment

Liabilities

A liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an outflow

from the entity of resources embodying economic benefits

•  Accounts payable

•  Bills payable

•  Accrued liabilities

Owners’ equity

The financial estimate of owners’ claims to the value in a business is called owners’ equity. It is the
residual interest in the assets of an entity after deducting all liabilities

• Capital

• Drawings

• Income

Chart of accounts
2.2. Debits, credits and double-entry accounting

•  Accounting is based on a double-entry system

•  Each transaction affects at least two accounts

•  A popular account format is called T-account

•  The account category determines how increases and decreases in the account are recorded as debits
and credits

•  The pattern of recording debits and credits is based on the accounting equation

2.3 Recording transactions in the journal

Ex: The Smart Touch business received of Sheena Bright’s $30,000 cash investment in the business.

1.  The source documents:

2.  The accounts affected:

3.  The accounts increased/decreased:

4.  Date Accounts and explanation Debit Credit

2.4 Transactions analysis, journalizing and posting to the accounts

Copying information (posting) from the journal to the ledger

The normal balance of an account (Expanding the accounting equation to

account for revenues and expenses)

Flow of accounting information

Ex: Practice journalizing and posting with specific examples:

Details of transactions occurred at Smart Touch business

(1) Sheena Bright invested $30,000 cash in the business.

(2) Paid $20,000 cash for land.

(3) Bought $500 of office supplies on credit.

(4) Received $5,500 cash from clients for service revenue earned.

(5) Performed training service for clients on credit, $3,000.

(6) Paid cash expenses: computer lease, $600; office rent, $1,100; employee salary, $1,200; electricity
and gas, $400.

Ex: Practice journalizing and posting with specific examples:

Details of transactions

(7) Paid $300 on the account payable created in transaction 3.

(8) Remodelled Sheena Bright’s personal residence. This is not a transaction of the business.

(9) Collected $1,000 on the account receivable created in transaction 5.

(10) Sold land for cash at its cost of $9,000.

(11) Withdrew $2,000 cash for personal expenses.

2.5 The trial balance

•  A trial balance summarises the ledger by listing all the accounts with their balances

•  Throughout the accounting process, total debits should always equal total credits. If not, there is an
error

•  Errors can be detected by calculating the difference between total debits and total credits on the trial
balance

Ex: prepare the trial balance of Smart Touch as at 31 May 201N

 SUMMARY: CHAPTER 2

•  The accounting equation must always balance after each transaction is recorded. To achieve this
balance, we record transactions using a double-entry accounting system

•  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

•  Next, we record the transaction in the journal, listing the debits first. We then post all transactions to
the ledger

•  Once the ledger balances are calculated, the ending balance for each account is transferred to the
trial balance