Financial Accounting

Eleventh Edition
Global Edition
Course outline
 Chapter 1: Conceptual Framework and Financial
Statements
 Chapter 2: Recording Business Transactions
 Chapter 3: Accrual Accounting
 Chapter 4: Presentation of Financial Statements
 Chapter 5: Internal control, cash, and Receivables
 Chapter 6: Inventory and Merchandising Operations
 Chapter 7: PPE and Intangibles
 Chapter 9: Liabilities
 Chapter 10: Stockholders’ Equity
 Chapter 11: Cash flows

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Financial Accounting
Eleventh Edition
Global Edition

Chapter 2
Recording
Business
Transactions

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Recording transactions
• Accountants use a double-entry accounting system in which at least two accounts
are always affected by each transaction.

• Some businesses enter into thousands of transactions daily or even hourly.

– Accountants must carefully keep track of and record these transactions in a
systematic manner

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process

• The sequence of steps in recording transactions:

1. 2.
Transactions Documentation Journal

5. 4.
3.
Financial Trial
Ledger
Statements Balance

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process
1. Documentation
• The process starts with source documents, which are the supporting original records of
any transaction.
– Examples are invoices, receiving reports, cash receipt slips….

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process
2. Journal
• In the second step, an analysis of the transaction is placed in the
general journal, which is a diary of all transactions in an entity’s life in
chronological order
• Journal entry – an analysis of the effects of a transaction on the
accounts in a standard format, using debit and credit

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Rules of Debit and Credit
The T-Account
• The Balance Sheet equation basis for double-entry accounting:
= recording method whereby at least two accounts are always
affected by each transaction

An account = a summary record of the

changes (increases or decreases) in a
particular asset, liability or owners’ equity
during a period

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The rules of Debit and Credit
DT CT
(left side) (right side)

A+ A-
L , SHE - L , SHE +

Expenses Income / Revenue

The type of account determines how to record increases and decreases.

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Rules of Debit and Credit

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalize Transactions in the Books
Quick example

Journalize the following transaction:

The company issues stock and receives $50,000 cash
 Both Cash and Share capital increase

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Journalizing Transactions
• The conventional form for journal entries includes the following:
– The date and identification number of the entry
– The accounts affected and an explanation of the transaction
– The posting reference, which is the number assigned to each
account affected by the transaction
– The amounts that the accounts are to be debited and credited

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Example: Chart of Accounts

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process

• The sequence of steps in recording transactions:

1. 2.
Transactions Documentation Journal

5. 4.
3.
Financial Trial
Ledger
Statements Balance

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Recording Process
3. Posting to the Ledger

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Ledger (Asset, Liability, and
Shareholders’ Equity Accounts)

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

Journalizing and posting to the ledger
Quick example

1. Shareholders invest $ 1,000 cash into the company;

2. The company borrows $ 500 cash from the bank;
3. The company buys a car for $ 300 cash;
4. The company buys inventory for $ 700 on account;
5. The company sells inventory carried at cost $ 500, for $800 on account.

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalizing and posting to the ledger
Quick example

1. Shareholders invest $ 1,000 cash into the company;

Entry
Date No. Accounts and Explanations Debit Credit

2004
1/31 1 cash 1,000
Paid-in capital 1,000

DT Cash CT DT Paid-in-capital CT

1. 1,000 1,000 1.

Cross-referencing - Transactions are often posted to several different

accounts, but cross-referencing (using the same numbering to relate
each posting to the appropriate journal entry) allows users to find all
components of a transaction in the ledger no matter where they start.

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalizing and posting to the ledger
Quick example

2. The company borrows $ 500 cash from the bank;

Entry
Date No. Accounts and Explanations Debit Credit

2004
3/31 2 cash 500
Note Payable 500

DT Cash CT DT Paid-in-capital CT DT Notes Payable CT

1. 1,000 1,000 1. 500 2.

2. 500

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalizing and posting to the ledger
Quick example

3. The company buys a car for $ 300 cash

Entry
Date No. Accounts and Explanations Debit Credit

2004
5/2 3 Equipment 300
cash 300

DT Cash CT DT Paid-in-capital CT DT Notes Payable CT

1. 1,000 300 3. 1,000 1. 500 2.

2. 500

DT Equipment CT

3. 300

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalizing and posting to the ledger
Quick example

4. The company buys inventory $ 700 on account;

Entry
Date No. Accounts and Explanations Debit Credit

2004
8/2 4 Inventory 700
A/P 700

DT Cash CT DT Paid-in-capital CT DT Notes Payable CT

1. 1,000 300 3. 1,000 1. 500 2.

2. 500

DT Equipment CT DT Inventory CT DT A/P CT

3. 300 4. 700 700 4.

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

 Journalizing and posting to the ledger
Quick example
5. The company sells inventory carried at cost $500, for $ 800 on account
Entry
Date No. Accounts and Explanations Debit Credit
2004
11/30 5 A/R 800
Sales 800
COS 500
Inventory 500
DT Cash CT DT Paid-in-capital CT DT Notes Payable CT

1. 1,000 300 3. 1,000 1. 500 2.

2. 500
DT Equipment CT DT Inventory CT DT A/P CT

3. 300 4. 700 500 5. 700 4.

DT A/R CT DT sales CT DT COGS CT

5. 800 800 5. 5. 500

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process
4. Trial balance
• The fourth step includes the preparation of the trial balance, which is a simple listing of
all accounts in the general ledger with their balances.

• The trial balance is usually prepared with the balance sheet accounts first (assets than
liabilities), followed by the income statement accounts.

• Aids in verifying accuracy in preparing the financial statements

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process
4. Trial balance
– Aids in verifying accuracy in preparing the financial statements

DT=CT
Note that a trial balance may balance even when
errors were made in recording or posting.
- A transaction may be recorded as different
amounts in two different accounts.
- A transaction may be recorded in a wrong
account
 Necessary condition, but not sufficient

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.

The Recording Process
5. Financial Statements
• In the final step, the financial statements are prepared.

• The trial balance is the starting point for the preparation of the balance sheet and the
income statement.

0 + 300 - 0 = 300

Copyright © 2018 Pearson Education, Inc. All Rights Reserved.