Week 4

Financial Accounting
Course code: ACCT88

Instructor – Ehsan Torabizadeh
Week #4 – Fall Semester, Sept 2023

Agenda
 Week 4 Learning Objectives
 Examples of accounting equations
 Debits and credits
 Double-entry accounts
 Journals
 Ledger and chart of accounts
 Journalizing and posting transactions
 Accounting equation analysis
 Trial balance
Week 4 Learning Objectives
1. State and utilize the basic accounting equation, analyze the interrelationships of the
Balance Sheet, Statement of Income, Retained Earnings and Cash Flow.
2. Demonstrate the ability to analyze, journalize and post accounting transactions
including month-end and year-end adjustments.
Accounting Equations - Example
Three founders invest $50,000 to begin XYZ Company, and the business issues common shares to the shareholders:
Copyright © Larson, Dieckmann, (2019). Fundamental Accounting Principles Vol 1. 17th edition.
The XYZ Company purchases land for an office location and pays cash of $40,000. The effect of this transaction on the
accounting equation is:
The XYZ Company buys stationery and other office supplies on account, agreeing to pay $3,700 within 30 days. This
transaction increases both the assets and the liabilities of the business. Its effect on the accounting equation is:
The XYZ Company earns service revenue by providing engineering services. Assume the business provides $7,000 in such
services and collects this amount in cash. The effect on the accounting equation is an increase in the asset Cash and an
increase in Retained Earnings, a shareholders’ equity account.
The XYZ Company provides $3,000 in engineering services to King Contracting Ltd., and King promises to pay the Company
within one month. This promise represents an asset for Tara in the form of an account receivable. The impact of this
transaction on the accounting equation is as follows:
Chart of Accounts
An organization uses a chart of accounts to keep track of all its accounts. The chart of accounts lists the name of every
account and its unique account number, but it does not provide the account balances.
Application: If an accountant is unsure about what account to use when recording a transaction, they can consult the chart
of accounts to help them choose the most appropriate one. If the chart of accounts does not contain an appropriate
account, the accountant can add a new account to the chart and use it to record the transaction.
The T-Account
We can represent an account using the letter T, which we call a T-account. The vertical line divides the account into left
(debit) and right (credit) sides, while the account title rests on the horizontal line.
Increases and Decreases in the Accounts: The Rules of Debit and
Credit
The way we record increases and decreases to an account under the double-entry system varies by account type. The rules
of debit and credit are as follow:
Increases in assets are recorded on the left (debit) side of the T-account, whereas decreases are recorded on the right
(credit) side. When a business receives cash, the Cash account increases, so we debit the left side of the Cash account to
record the increase in this asset. When a business makes a cash payment, we credit the right side of the Cash account to
record the decrease in this account.
Conversely, increases in liabilities and shareholders’ equity are recorded on the right (credit) side of the T-account, whereas
decreases are recorded on the left (debit) side. When a business receives a loan, the Loan Payable account increases, so we
credit the right side of the Loan Payable account to record the increase in this liability. When a business makes a loan
payment, we debit the left side of the Loan Payable account to record the decrease in this account.
The Rules of Debit and Credit, Example
Three founders invest $50,000 to begin XYZ Company, and the business issues common shares to the shareholders
The XYZ Company purchases land for an office location and pays cash of $40,000.
The Company received $50,000 in cash and issued common shares in return. As a result, we debit the left side of the Cash
account to record the increase in this asset and credit the right side of the Share Capital account to record the increase in
shareholders’ equity:
The Rules of Debit and Credit, Example
The Expanded Accounting Equation
Because several accounts from

three separate financial
statements affect shareholders’
equity, we can expand the
accounting equation to explicitly
reflect the impact of changes in
these accounts on shareholders’
equity:
You must remember the following:
For assets:
• To record an increase in assets, use a debit.
• To record a decrease in assets, use a credit.
For liabilities and shareholders’ equity, these rules are reversed:

• To record an increase in liabilities or shareholders’ equity, use a credit.
• To record a decrease in liabilities or shareholders’ equity, use a debit.
You should not proceed
until
you have learned those
rules!
Recall that increases in Dividends and Expenses result in
decreases to shareholders’ equity, so applying the last rule
above means that increases to Dividends and Expenses are
recorded using debits, which is the opposite of the “increase =
credit” rule for all other shareholders’ equity accounts
Example
a manager is considering (a) taking out a $100,000 loan to (b) purchase $100,000 worth of equipment. The
manager could record these proposed transactions in T-accounts as follow:
RECORD BUSINESS TRANSACTIONS IN THE JOURNAL AND
POST THEM TO THE LEDGER
When recording transactions, accountants use a chronological record called a

journal. The recording process follows these three steps:
Step 1. Specify each account affected by the transaction.

Step 2. Use the rules of debit and credit to determine whether each account is
increased or decreased by the transaction.
Step 3. Record the transaction in the journal, including a brief explanation for
the entry and the date of the transaction. The debit side is entered on the left
margin, and the credit side is indented slightly to the right.
Step 3 is also called “recording the journal entry” or “journalizing the

transaction.
Example:
Three founders invest $50,000 to begin XYZ Company, and the business issues common
shares to the shareholders.
Step 1. The business receives cash and issues shares. Cash and Share Capital are affected.
Step 2. Both Cash and Share Capital increase. Debit Cash to record an increase in this
asset. Credit Share Capital to record an increase in this equity account.
Step 3. Record the journal entry for the transaction.
Recording to the journal entry:
A B C D
Date Account and Explanation Debit Credit
Apr 1, 2017 Cash $50,000

Share Capital $50,000
Analyzing Transactions Using Only T-Accounts
We can quickly assess the financial impact of a proposed business transaction by

analyzing it informally using T-accounts.
Analyzing Transactions Using Only T-Accounts
Example:
A manager is considering (a) taking out a $100,000 loan to (b) purchase $100,000 worth
of equipment. The manager could record these proposed transactions in T-accounts as
follow:
Managers who can analyze proposed transactions this way can make business decisions
with a clear idea of their impact on the company’s financial statements
Posting from the Journal to the Ledger
The journal is a chronological record containing all of a company’s transactions. The

journal does not, however, indicate the balances in any of the company’s accounts. To
obtain these balances, we must transfer information from the journal to the ledger,
which is an accounting process we call posting.
The ledger contains all of a company’s accounts, along with their balances as of the most
recent posting date. Posting is a simple process of directly transferring information from
the journal to the ledger: debits in the journal are posted as debits in the ledger
accounts, and likewise for credits.
Posting from the Journal to the Ledger
Recording to the journal entry:

A B C D
Date Account and Explanation Debit Credit
Apr 1, 2017 Cash $50,000

Share Capital $50,000
Posting it to the ledger:
Cash Share Capital
$50,000 $50,000
The Flow of Accounting Data
The flow of accounting data from the business transaction

to the ledger
The Flow of Accounting Data, Example1
XYZ Company received $50,000 cash from shareholders and in

turn issued Share Capital to them. The accounting equation, journal entry,
and posting details for this transaction are as follows:
Transaction Analysis 2
The business paid $40,000 cash for land, resulting in a decrease (credit) to
Cash and an increase (debit) in Land:
The business purchased $3,700 in office supplies on account. The purchase
increased Office Supplies, an asset, and Accounts Payable, a liability.
The business performed engineering services for clients and received cash of
$7,000.
Question: You are required to prepare the accounting equation, journal

entry, and posting details for this transaction.
Transaction Analysis 4, Answer
The transaction increased Cash and Service Revenue.
Ledger Accounts After Posting
For each account, a horizontal line
separates the transaction amounts
from the account balance (Bal.) at the
end of the month. If the sum of an
account’s debits exceeds the sum of its
credits, then the account will have a
debit balance at the end of the period,
as illustrated by the Cash debit
balance of $33,300.
If total credits exceed total debits, a
credit balance results, as reflected in
the Accounts Payable credit balance of
$1,800.
Prepare And Use A Trial Balance
A trial balance lists all of a business’s ledger accounts and their balances.
Asset accounts are listed first, followed by the liability accounts, and then all
the accounts that affect shareholders’ equity. We add all the debit balances
and all the credit balances and place the totals at the bottom of the trial
balance. If the total debits equal the total credits, we can go on to prepare
the financial statements using the account balances from the trial balance
Example of Trial Balance
In-class Activity 1- 7.5%
Margaret Jarvis opens a research services business near a college campus. She names the corporation Jarvis
Research Inc. During the first month of operations, July 2017, Margaret and the business engage in the following
activities:
a. Jarvis Research Inc. issues common shares to Margaret Jarvis, who invests $25,000 to
open the business.
b. The company purchases, on account, office supplies costing $350.
c. Jarvis Research Inc. pays cash of $20,000 to acquire a lot near the campus. The company
intends to use the land as a building site for a business office.
d. Jarvis Research Inc. performs services for clients and receives cash of $1,900.
e. Jarvis Research Inc. pays $100 on the account payable from Transaction (b).
f. Margaret Jarvis pays $2,000 in personal funds for a vacation.
g. Jarvis Research Inc. pays cash expenses for office rent ($400) and utilities ($100).
h. The business sells a small parcel of the land it purchased for its cost of $5,000.
i. The business declares and pays a cash dividend of $1,200.
Requirement:
Using Excel, build a spreadsheet to analyze the preceding transactions in terms of their effects on the accounting
equation of Jarvis Research Inc.
In-class activity 2- 7.5%
Prepare the Trial Balance of ABC Company according to the transactions listed below:
1. ABC Company received $50,000 cash from shareholders and in turn issued Share Capital to them.
2. The business paid $40,000 cash for land.
3. The business purchased $3,700 in office supplies on account.
4. The business performed engineering services for clients and received cash of $7,000
Q&A
36
Thank you!
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Financial Accounting

Course code: ACCT88

Week #4 – Fall Semester, Sept 2023

 Examples of accounting equations

 Debits and credits

 Ledger and chart of accounts

 Journalizing and posting transactions

 Accounting equation analysis

Because several accounts from

For liabilities and shareholders’ equity, these rules are reversed:

When recording transactions, accountants use a chronological record called a

Step 1. Specify each account affected by the transaction.

Step 3 is also called “recording the journal entry” or “journalizing the

Apr 1, 2017 Cash $50,000

We can quickly assess the financial impact of a proposed business transaction by

The journal is a chronological record containing all of a company’s transactions. The

Recording to the journal entry:

Apr 1, 2017 Cash $50,000

Cash Share Capital

The flow of accounting data from the business transaction

XYZ Company received $50,000 cash from shareholders and in

Question: You are required to prepare the accounting equation, journal

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