Recording Business Transactions

1
RecordingBusiness Transactions
AGRICULUTURAL TECHNICAL INSTITUTEBUS TEC T101
ACCOUNTING

• Chapter 2

2
REVIEW
CH 1 ACCT THE BUS ENVIRONMENT
The Account Equation (ALOE) is the basis for
all accounting
FINANCIAL
BUSINESSTRANSCTIONS
FINANCIALSTATEMENTS
ACCOUNTING
3
REVIEW
CH 1 ACCT THE BUS ENVIRONMENT
1. Termsa. Assetsb. Liabilitiesc. Equityd.
Revenuee. Expenses f. Acct Principles
2. Procedures a. Transactionsb. Prepare
Financial St 1. Income St 2. Equity St.
3. Balance Sh. 4. Cash Flow St
4
ACCOUNTING CONCEPTS
Chapter One
Business Transactions
Journal Entries
Chapter Two
Posting to Ledgers
Trial Balance
Financial Statements
5
LEARNING OBJECTIVES
CH 2 RECORDING BUS TRANSACTIONS

• AFTER COMPLETING THIS CHAPTER, THE STUDENT SHOULD
  BE ABLE TO
• 1. Define Use Key Accounting Terms
• 2. Apply the Rules of Debits and Credits
• 3. Record Transactions in the Journal
• 4. Post from the Journal to the Ledger
• 5. Prepare Use a Trial Balance

6
46
1
Define Use Key Accounting Terms
OBJ
Ledger
Accounts
Individual asset accounts
All individual accounts combined make up the
ledger.
Cash
Accounts Payable
Ledger
Individual liability accounts
Gay Gillen, Capital
Individual owners equity accounts
7
Chart of Accounts in the Ledger
55
1
Define Use Key Accounting Terms
OBJ

• This is a listing of all accounts related
  account numbers used by a business.
• Each account should have its own number.
• The numbering system should allow flexibility for
  changing business needs.

Typically for a small business
100s Assets Accts
400s Revenue
200s Liability Accts
500s Expenses
300s Equity Accts
8
45
1
Define Use Key Accounting Terms
OBJ
Assets

• What are some asset accounts?
• Cash (Checking Acct)
• Accts Receivable (Unwritten Promises to Pay)
• Notes Receivable (Written Promises to Pay)
• Prepaid Expenses (Expense Paid in Advance)
• Equipment
• Building
• Land

In Order by Liquidity Time to Convert to Cash
9
45
1
Define Use Key Accounting Terms
OBJ
Assets
Liabilities

• What are some liability accounts?
• Accounts Payable (Things bought on short term
  credit)
• Notes Payable (Loans longer than 1 yr)
• Accrued Liabilities (for expenses incurred but
  not paid)
• Long-term Liabilities (bonds)

10
46
1
Define Use Key Accounting Terms
OBJ
Assets
Liabilities
Owners Equity

• What are some owners equity accounts?
• Capital or owners interest in the business
• Withdrawals by the owner
• Revenues from business activities
• Expenses related to business activities

• In a corporation, the owners equity account is
  called Stockholders Equity.

Retained Earnings
Contributed Capital
11
Double-Entry Accounting
47
1
Define Use Key Accounting Terms
OBJ

• Double entry bookkeeping means to record the
  multiple effects of each business transaction.
• Assets Liabilities Owners Equity
• Assets are on the left (debit) side.
• Liabilities and Equity are on the right (credit)
  side.

12
The T-Account
47
1
Define Use Key Accounting Terms
OBJ
Account Title
Debit
Credit
LEFT SIDE
RIGHT SIDE
Debits are always on the left, and Credits on the
right
But their effects differs based on what account
is changed
13
Rules of Debit and Credit
48
Apply the rules of debit credit.
2
OBJ
Owners Equity

Assets
Liabilities

Debit
Credit -
Debit -
Credit
Debit -
Credit
Debits Credits
NB
NB
NB
Normal Account Balances
The side where we expect increases () to be
recorded is the normal balance side.
14
Rules of Debit and Credit
48
Apply the rules of debit credit.
2
OBJ

A
L

OE

D
C

EXPENSES D
REVENUE C
WITHDRAWALS D
CAPITAL C
15
The Double-Entry System
48
Apply the rules of debit credit.
2
OBJ
Each transaction is recorded with at least
One debit
One credit
Total debits must equal total credits.
1. For any one transaction
DEBITS
CREDITS
2. For any account in Ledger
3. For the Ledger as a whole
4. For the Balance Sheet
16
Reviews Rules of Debits Credits
48
Apply the rules of debit credit.
1
0
OBJ
ACCOUNTING COMPONENT
EFFECT OF DEBIT
EFFECT OF CREDIT
1. Assets
2. Liabilities
3. Owners Equity
4. Revenue
5. Expenses
17
Journals
50
3
Record Transactions in Journal.
OBJ

• What is a journal?
• It is a list in CHRONOLOGICAL order of all the
  transactions for a business.
• Identify transaction from source documents (sales
  slip, invoice, etc.)
• Specify accounts affected.
• Apply debit/credit rules.
• Record transaction with description.

18
Journal Entry Rules
50
Record Transactions in Journal.
3
OBJ

• What does a journal entry include?

• date of the transaction

• title of the account debited (First)

• title of the account credited (Second)

-amount of the debit and credit

• description of the transaction

-dollar signs are omitted
Date Accounts Explanation Debit Credit
Aug 2
Supplies
500
Acct Payable
500
Bought Supplies on Acct
19
Record Transactions in Journal.
3
OBJ

• When should a transaction be recorded?

a. Must effect the entitys financial position
b. Must be reliable
2. Where should the transaction be recorded?
-- In the Journal
3. What to record for each transaction?
-- Incr / Decr for all accounts affected
4. How should the transaction be recorded?
-- Follow the rules of debits and credits
20
52
Record Transactions in Journal.
3
OBJ
1. SHAY GILLIAN FORMS A BUSINESS BY TRANSFERRING
30,000 FROM A SAVING ACCT TO A BUSINESS CHECKING
ACCT ON APR 2
ASSETS
LIAB
CAPITAL

ACCT REC

REC/EXP
INV
CK
BLD
EQP
SUPP
NOTES
ACTS
LD
30000
30000
General Journal Page 1
Date Accounts Explanation Debit Credit
April 2
Cash
30,000
Shay Gillen, Capital
30,000
Received initial investment from owner
21
52
Record Transactions in Journal.
3
OBJ
2. PAID 20,000 CASH ON 4/3 FOR LD TO BUILD AN
OFFICE.
ASSETS
LIAB
CAPITAL
ACCT REC

REC/EXP
INV
NOTES
ACTS
CK
BLD
EQP
SUPP
LD
30000
30000
20000
-20000
General Journal Page 1
Date Accounts Explanation Debit Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
20,000
April 3
Land
20,000
Cash
Buy land for office building
22
53
Record Transactions in G Journal
3
OBJ
3. BOUGHT OFFICE SUPPLIES FOR 500 ON ACCOUNT ON
APR 6
ASSETS
LIAB
CAPITAL
ACCT REC

REC/EXP
INV
NOTES
ACTS
CK
BLD
EQP
SUPP
LD
30000
30000
20000
-20000
500
500
General Journal Page 1
Date Accounts Explanation Debit Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
April 3
Land
20,000
20,000
Cash
April 6
Supplies
500
Accounts Payable
500
Bought supplies on account
23
Ledger
51
Posting from Gen Journal
4
OBJ
Journal
It is a list in chronological order of all the
transactions for a business.

• It is a digest of all accounts utilized by an
  entity during an accounting period. It is a
  listing of transactions for an entity .

Bound books
Loose leaf pages
Computer printout
Cards
Posting
is the process of transferring of data from the
journal to appropriate ledger accounts.
24
51
Posting from Gen Journal
4
OBJ
Posting
is the process of transferring of data from the
journal to appropriate ledger accounts.
First well look at Posting to T-accounts
Then well look at Posting to a 4 column ledger
25
Post from Journal to T Accts
46
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
1
Capital
Assets
Liabilities
Gillian
Cash
Acct Payable
Equip
30,000
30,000
Revenue
Bldg
Acct Rec
Notes Payable
Expenses
Supplies
Land
26
Post from Journal to T Accts
47
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Land
April 3
20,000
20,000
Cash
2
Capital
Assets
Liabilities
Gillian
Cash
Acct Payable
Equip
30,000
30,000
20,000
Revenue
Bldg
Acct Rec
Notes Payable
Expenses
Supplies
Land
20,000
27
Post from Journal to T Accts
47
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Supplies
April 6
500
500
Acct Payable
3
Capital
Assets
Liabilities
Gillian
Cash
Acct Payable
Equip
30,000
30,000
20,000
500
Revenue
Bldg
Acct Rec
Notes Payable
Expenses
Supplies
Land
500
20,000
28
Post from Journal to T Accts
47
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
April 7
300
Acct Payable
300
Cash
April 8
2,000
Gillian, Withdraws
2,000
Cash
29
Post from Journal to T Accts
48
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Capital
Liabilities
Assets
Gillian
Acct Payable
Cash
Equip
30,000
30,000
20,000
500
300
300
30,000
Bal 200
2,000
Revenue
Bldg
Notes Payable
Bal 7,700
Acct Rec
Expenses
Withdraw
Land
Supplies
20,000
500
2,000
Bal 20,000
Bal 500
Bal 2,000
30
51
Posting from Gen Journal
4
OBJ
Posting
is the process of transferring of data from the
journal to appropriate ledger accounts.
Now Lets look at the 4 column account format
31
The Four-Column Account Format
Post Fr Journal to 4 Col Ledger
4
OBJ
Account Cash Account
No. 101

Balance
Date Item Ref. Debit Credit
Debit Credit
April 2
30,000
30,000
GJ
Why this format instead of T accounts?
1. Has room for reference information
2. Has a running balance, so information is
easier to retrieve
32
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
33
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
34
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
Account Cash Account
No. 101
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
1
Enter the date from the journal
35
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
2. Copy (post) journal name page from journal
to the appropriate ledger account
36
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
Account Cash Account
No. 101
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
1
2
Enter the date
Enter journalpgno
37
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
2. Copy (post) journal name page from journal
to the appropriate ledger account
3. Copy (post) debit from journal to the
appropriate ledger account
38
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
Account Cash Account
No. 101
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
1
3
3
2
Enter debit orcredit
Enter the date
Enter journalpgno
39
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
2. Copy (post) journal name page from journal
to the appropriate ledger account
3. Copy (post) debit from journal to the
appropriate ledger account
4. Calculate running balance
40
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
Shay Gillen, Capital
30,000
Account Cash Account
No. 101
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
1
3
3
2
4
Enter debit orcredit
Enter the date
Enter journalpgno
Cal RunBal
41
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
2. Copy (post) journal name page from journal
to the appropriate ledger account
3. Copy (post) debit from journal to the
appropriate ledger account
4. Calculate running balance
5. Copy (post) ledger account number back to the
Post Ref col in the journal
42
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
101
Shay Gillen, Capital
30,000
Account Cash Account
No. 101
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
1
3
3
2
4
5
Enter debit orcredit
Enter the date
Enter journalpgno
Cal RunBal
Put acct no in Post Ref col
43
54
Post Fr Journal to 4 Col Ledger
4
OBJ
Posting Steps
1. Copy (post) transaction date from journal to
the appropriate ledger account
2. Copy (post) journal name page from journal
to the appropriate ledger account
3. Copy (post) debit from journal to the
appropriate ledger account
4. Calculate running balance
5. Copy (post) ledger account number back to the
Post Ref col in the journal
6. Repeat steps 1-4 for the credit entry
44
53
Post Fr Journal to 4 Col Ledger
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
Cash
April 2
30,000
301
Shay Gillen, Capital
30,000
Account Shay Gillen, Capital Account No.
301
Balance

Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
1
3
3
2
4
5
Enter debit orcredit
Enter the date
Enter journalpgno
Cal RunBal
Put acct no in Post Ref col
45
Post from Journal to T Accts
47
4
OBJ
General Journal Page 1
Date Accounts Explanation Ref Debit
Credit
April 3
Land
20,000
Cash
20,000
April 6
Supplies
500
Acct Payable
500
Acct Payable
300
April 7
300
Cash
Gillen, Withdrawals
April 8
2,000
2,000
Cash
46
53
Post Fr Journal to 4 Col Ledger
4
OBJ
Account Land Account
No. 106

Balance
Date Item Ref. Debit Credit
Debit Credit
GJ-1
20,000
20,000
April 3
Account Cash Account No. 101

Balance
Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
April 3
GJ-1
20,000
10,000
47
53
Post Fr Journal to 4 Col Ledger
4
OBJ
Account Supplies Account
No. 103

Balance
Date Item Ref. Debit Credit
Debit Credit
GJ-1
500
500
April 6
Account Accounts Payable Account No. 201

Balance
Date Item Ref. Debit Credit
Debit Credit
April 6
GJ-1
500
500
48
53
Post Fr Journal to 4 Col Ledger
4
OBJ
Account Accounts Payable Account No. 201

Balance
Date Item Ref. Debit Credit
Debit Credit
April 6
GJ-1
500
500
200
April 7
GJ-1
300
Account Cash Account No. 101

Balance
Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
April 3
GJ-1
20,000
10,000
April 7
GJ-1
300
9,700
49
53
Post Fr Journal to 4 Col Ledger
4
OBJ
Account Shay Gillen, Withdrawals Account No. 302

Balance
Date Item Ref. Debit Credit
Debit Credit
April 8
GJ-1
2,000
2,000
Account Cash Account No. 101

Balance
Date Item Ref. Debit Credit
Debit Credit
April 2
GJ-1
30,000
30,000
20,000
April 3
GJ-1
10,000
April 7
GJ-1
300
9,700
April 8
GJ-1
2,000
7,700
50
Trial Balance
54
Prepare use a trial balance.
5
OBJ

• What is a trial balance?
• It is an internal document.
• It is a listing of all the accounts with their
  related balances.
• Before computers, it provided a check on accuracy
  by showing whether total debits equal total
  credits.

51
Trial Balance
Prepare use a trial balance.
55
5
OBJ
Gillen Travel
As of _____ 20xx
Debit
Account
Credit
7, 700
Cash
Acct Rec
0
500
Supplies
0
Equip
0
Buildings
20,000
Land
Acct Payable
200
Notes Payable
0
Gillen, Capital
30,000
Gillen, Withdraw
2,000
Revenue
0
0
Expense
TOTAL
30,200
30,200
52
Locating Trial Balance Errors
65
Prepare use a trial balance.
5
OBJ

• What if it doesnt balance ?
• Is the addition correct?
• Are all accounts listed?
• Are the balances listed correctly?

DEBITS CREDITS
53
Locating Trial Balance Errors
65
Prepare use a trial balance.
5
OBJ

• Divide the difference by two.
• Is there a debit/credit balance for this amount
  posted in the wrong column?
• Check journal postings.
• Review accounts for reasonableness.
• Computerized accounting programs usually prohibit
  out-of-balance entries.

54
54
Post Fr Journal to 4 Col Ledger
1
0
OBJ

• E2-7 Pg 76

5/2
Cash
20,000
Edwards, Capital
20,000
Cash
25,000
5/5
Notes Payable
25,000
5/9
Supplies
200
Accounts Payable
200
5/11
Accounts Receivable
2,600
Service Revenue
2,600
55
54
Post Fr Journal to 4 Col Ledger
1
0
OBJ
Account Cash Account
No. 110

Date Item Ref. Debit Credit
Debit Credit
Account Acct Rec Account No.
120

Date Item Ref. Debit Credit
Debit Credit
Account Supplies Account
No. 130

Date Item Ref. Debit Credit
Debit Credit
56
54
Post Fr Journal to 4 Col Ledger
1
0
OBJ
Account Acct Payable Account No.
210

Date Item Ref. Debit Credit
Debit Credit
Account Notes Payable Account No. 230

Date Item Ref. Debit Credit
Debit Credit
Account Edwards, Capital Account No. 310

Date Item Ref. Debit Credit
Debit Credit
Account Service Rev Account No.
410

Date Item Ref. Debit Credit
Debit Credit
57
Preparing A Trial Balance
54
2
0
OBJ
Account Cash Account
No. 110
Date Item Ref. Debit Credit
Debit Credit

20,000
5/2
GJ1
20,000
25,000
5/5
GJ1
45,000
3,200
5/14
GJ1
41,800
300
5/22
GJ1
41,500
400
5/25
GJ1
41,100
1,400
5/27
GJ1
42,500
Account Acct Rec Account No.
120

Date Item Ref. Debit Credit
Debit Credit
2,600
2,600
5/11
GJ1
5/11
GJ1
1,400
1,200
Account Supplies Account
No. 130

Date Item Ref. Debit Credit
Debit Credit
GJ1
200
5/9
200
58
Preparing A Trial Balance
54
2
0
OBJ
Account Acct Payable Account No.
210

Date Item Ref. Debit Credit
Debit Credit
200
200
5/9
GJ1
300
100
5/22
GJ1
5/9
GJ1
100
0
Account Notes Payable Account No. 230

Date Item Ref. Debit Credit
Debit Credit
25,000
5/5
GJ1
25,000
Account Edwards, Capital Account No. 310

Date Item Ref. Debit Credit
Debit Credit
5/2
GJ1
20,000
20,000
59
Preparing A Trial Balance
54
2
0
OBJ
Account Service Rev Account No.
410

Date Item Ref. Debit Credit
Debit Credit
GJ1
2,600
5/11
2,600
Account Rent Expense Account No. 510

Date Item Ref. Debit Credit
Debit Credit
GJ1
3,200
5/14
3,200
Account Adv Expense Account No. 520

Date Item Ref. Debit Credit
Debit Credit
GJ1
400
5/11
400
Account Util Expense Account No. 530

Date Item Ref. Debit Credit
Debit Credit
GJ1
100
5/11
100
60
54
Preparing A Trial Balance
2
0
OBJ

• E2- 7 4 Pg 76

1 Name
2 Statement
3 Date (Pt of Time)
Db
Cr
Account
4 List Assets Accts Bal
5 List Liab Accts Bal
6 List Capital Accts Bal
7 List Revenue Accts Bal
8 List Expense Accts Bal
9 Total Debits Credits
61
SUMMARY
CH 2 RECORDING BUS TRANSACTIONS
2. New Procedures a. Journalizing b. Postingc.
Preparing Trial Balance
1. New Terms a. T Accounts b. Ledgerc.
Journald. Debits Creditse. Normal Balance f.
Trial Balance
62
Name of BusinessIncome StatementFor Period
Ending xx/xx/20xx
Prepare And Use Financial Statements.
17

• Revenue
• Fees earned 8,500
• Expenses
• Salary expense 1,200
• Utilities telephone expense 400
• Equipment rental expense 400
• Office rent expense 1,100
• Total Expenses 3,100
• Net income (Net Loss) 5,400

63
Name of Business Statement of Owners EquityFor
Period Ending xx/xx/20xx
Prepare And Use Financial Statements.
20
Beginning Capital 0 Add
Contribution of capital 30,000 Net
income 5,400 35,400 Less
Cash distributions (Withdraws) (2,100) Ending
Capital 33,300
64
Name of BusinessBalance SheetAs of xx/xx/20xx
Prepare And Use Financial Statements.
20
Liabilities Accounts payable
200 Notes payable 0 S. Gillen,
capital 33,300 Total liabilities and owners
equity 33,500
Assets Cash
20,000 Accounts receivable
2,000 Supplies 500 Land
11,000 Total assets 33,500
65
Name of BusinessStatement Of Cash FlowsFor
Period Ending xx/xx/20xx
Prepare And Use Financial Statements.
20

• Cash flows from operating activities
• Cash in receipts from services
  rendered 6,500
• Cash out expenses (3,400)
• Net cash flows from Operating
  activities 3,100
• Cash flows from investing activities
• Cash in Sale of land 9,000
  Cash Out Purchase of land (20,000)
  
• Net cash flows from Investing activities
  (11,000)
• Cash Flows from financing Activities
• Cash in Owners Investment 30,000
  Cash Out Owners Withdraw (2,100)
  Net cash flows from Financing
  activities 27,900
• NET INCREASE IN CASH 20,000
• BEGINING CASH 0
• ENDING CASH 20,000

66
Next Topic
CHAPTER 3 THE ADJUSTINGPROCESS