ACCT2111: Introductory Financial Accounting

Recording Business
Transactions
Prof. Matthew Bonnett
CUHK 2013
 Reading

Course textbook:

 Financial Accounting: International Financial Reporting

Standards, 9th Edition, by Harrison, Horngren,
Thomas and Suwardy. Chapter 2 pp 61-92.

CUHK Business School 2

Transactions
• Events that have a financial impact on the business
and can be measured reliably
– Selling products
– Paying expenses

• Have two sides:

– Giving
– Receiving

• Accounting records both sides of transactions

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The Account

Assets Liabilities Shareholders’

Equity

• Account is a record of all the changes in a particular asset,

liability and shareholders’ equity element
– Basic summary device of accounting

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Examples of Asset Accounts

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Examples of Liability Accounts

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Examples of Shareholders’
Equity Accounts

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Double-Entry Accounting
• Business transactions include two parts
– Giving
– Receiving

• Accounting based on a double-entry system

– Each transaction affects at least two
accounts

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T-Accounts
Account Title
Left side Right side

Debit Credit

• Decisions often are made without a complete accounting system

• T-Accounts allow managers to analyze transactions quickly

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Rules of Debit and Credit

Shareholders’
Assets Liabilities Equity

Debit Credit Debit Credit Debit Credit

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Income and Expenses

Liabilities
Share Capital
Assets +
Beginning Retained Earnings
Shareholders’ +
Income
Equity
Expenses

Dividends

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 Rules of Debit and Credit
Shareholders’ Equity
Assets Liabilities Share Capital Retained earnings

Debit Credit Debit Credit Debit Credit Debit Credit

- - - Dividends
-
**Please note: Page
79 in your textbook
Debit Credit
is wrong Income
and Dividends are Income
- Expenses
displayed
incorrectly. This
slide is correct. Debit Credit Debit Credit
- -
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The Journal
• Chronological record of transactions

• Three steps
– Specify each account affected by the transaction
and classify by type
– Determine if each account is increased or
decreased
• Use debit credit rules
– Record in journal

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Journal Entry

JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

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The Ledger
Cash
Ledger
Individual
asset accounts Share Capital

Individual
equity
accounts
Accounts
payable Individual
liability
accounts

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Posting
JOURNAL

Date Accounts and explanation Debit Credit

May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

Cash Share Capital

$50,000 $50,000

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Flow of Accounting Data

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Trial Balance
• Lists all accounts with their balances

• Assets listed first, then liabilities and shareholders’

equity

• Shows that debits equal credits

• Usually prepared at the end of the period

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Analysing Accounts

Cash
Beginning balance
Cash receipts Cash payments ?
Ending balance

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Analysing Accounts

Accounts receivable

Beginning balance
Sales on account
Collections on account ?
Ending balance

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Analysing Accounts

Accounts payable

Beginning balance

Payments on account ? Purchases on account

Ending balance

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Correcting Accounting Errors
Missing •Trace each account from
account journal to ledger

Divide out-of- •Reversing debits and credits

balance amount
by 2
doubles the error

Divide out-of- •If even, error may be a

balance amount •Slide or
•Transposition
by 9

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Chart of Accounts
Balance Sheet Accounts

Assets Liabilities Shareholders’ Equity

101 Cash 201 Accts. payable 301 Share capital

111 Accts. receivable 231 Notes payable 311 Dividends

141 Office supplies 312 Retained earnings

151 Office furniture Income Statement Accounts

191 Land Revenues Expenses

401 Service revenue 501 Rent expense

502 Salary expense

503 Utilities expense

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Normal Balances of Accounts
Assets Debit
Liabilities Credit
Shareholders’ Equity overall Credit
Share capital Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit

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Short Exercise 2-13
In S2-13, Seventh Investments, Inc., began by issuing shares for
cash of $140,000. The company immediately purchased computer
equipment on account for $100,000.

1. Set up the following T-accounts of Seventh Investments, Inc.---

Cash, Computer equipment, Accounts payable, Share capital.

2. Record the first two transactions of the business directly in the

T-accounts without using a journal.

3.Show that total debits equal total credits.

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Answer to S2-13
Cash Computer Equipment
$140,000 $100,000

Accounts Payable Share Capital

$100,000 $140,000

Debits = $240,000 Credits = $240,000

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Homework Assignments
• E2-18A

• E2-21A

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