ACCY100 Spring2013 Lectures Notes2

PowerPoint to accompany
Accounting
5e
Horngren, Harrison, Bamber, Best, Fraser, Willett
Recording Business Transactions Chapter 2
Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2006 Pearson Education Australia
Learning Objectives
1. Use accounting terms 2. Apply the rules of debit and credit
3. Record transactions in the journal 4. Post from the journal to the ledger
5. Prepare and use a trial balance 6. Set up a chart of accounts for a business 7. Analyse transactions without a journal
Objective 1
Use accounting terms.
Accounting Terms
Account Journal T-account Ledger Assets Double-entry accounting Liabilities Trial balance
Owners equity
Accounting Terms
Cash Individual asset accounts All individual accounts combined make up the ledger. Ledger Individual liability accounts Paula Lee, Capital
Accounts Payable
Individual owners equity accounts

Classification of Accounts
What are some asset accounts? Cash Accounts Receivable Bills Receivable Prepaid Expenses Inventory Land Building Equipment
What are some liability accounts? Bills Payable Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term (Non-Current) Liabilities (mortgages and debentures)
What are some owners equity accounts? Capital (or owners interest in the business) Drawings Revenues Expenses
Jans Petrol Station Example

Assume that the business sold $5,000 worth of petrol on a given day and performed $3,000 of repair services. How much revenue did the business earn that day? $8,000 Revenues increase Jans equity in the business.

The business had to pay mechanics and suppliers $3,750 for the work performed that day. Expenses decrease Jans equity in the business. How much was the net increase in Jans equity that day? $4,250
Double-Entry Accounting
Double entry bookkeeping means to record the dual 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.
The T-Account
(Ledger Account)
Account Title
Debit Credit
LEFT SIDE
The T-Account
Account Title Debit Credit
RIGHT SIDE
Objective 2
Apply the rules of debit and credit.
The Rules of Debit and Credit
Owners Equity Assets
Liabilities
+
Debit Credit +
Debit +
Credit
Debit
Credit +
The Double-Entry System

Each transaction is recorded with at least: One debit AND One credit
Total debits must equal total credits.


On June 30, Jan invested $500,000 in cash and the business obtained a $300,000 loan (bill payable) to open a petrol station. How much was the initial increase in cash? $800,000 Which accounts were affected?

Cash (asset) Bills Payable (liability) Jan, Capital (owners equity)

Cash
500,000 Bal. 500,000
Bills Payable
300,000 Bal. 300,000
Jan, Capital
800,000 Bal. 800,000

Jans Petrol Station Balance Sheet June 30, 2007
Assets Cash $800,000 Liabilities Bills payable $300,000 Owners Equity Jan, capital 500,000 Total liabilities and owners equity
Total assets $800,000
$800,000
Objective 3
Record transactions in the journal.
Journals
What is a journal? It is a list in chronological order of all the transactions for a business. Identify transaction from source documents. Specify accounts affected. Apply debit / credit rules. Record transaction (with description).
1.
2. 3. 4.
Journals
What does a journal entry include? date of the transaction title of the account debited title of the account credited amount of the debit and credit (description of the transaction) dollar signs are omitted
Recording Transactions
On April 2, Paula Lee invested $30,000 in Paula Lee eTravel. What is the journal entry? April 2 Cash 30,000 Paula Lee, Capital 30,000
Received initial investment from owner
Objective 4
Post from the journal to the ledger.
Ledger
What is a ledger? It is a collection of all accounts utilised by an entity during an accounting period. Loose leaf pages Bound books Computer printout Cards
Posting
What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger. The first transaction was Cash 30,000 Capital 30,000
See other journal entries p52-53 of the text
Asset Accounts After Posting

Cash
(1) 30,000 (2) 20,000 (4) 300 (6) 2,000 Bal. 7,700
Land
(2) 20,000 Bal. 20,000
Office Supplies
(3) 500 Bal. 500
Liabilities and Owners Equity Accounts After Posting

Accounts Payable
(4) 300 (3) 500 Bal. 200
Paula Lee, Capital

(1) 30,000
Bal. 30,000
Paula Lee, Drawings

(6) 2,000 Bal. 2,000
Details of Journals and Ledgers

Journal Page 1
Date Accounts and Explanation Debit Credit April 2 Cash 30,000 Paula Lee, Capital 30,000
Received initial investment from owner

Account: Cash Date April 2 Ref. jrl Account: 101 Balance Debit Credit Debit Credit 30,000 30,000
Posting
Insert the number of the journal page.


Journal
Date
Page 1
Account and Explanation Post Ref. Debit Credit April 2 Cash 101 30,000 Paula Lee, Capital 301 30,000 Initial investment from owner
Insert the ledger account in the journal.

The Four-Column Account Format
Account: Cash
Date
April 2
Account No. 101

Balance
Item Ref.
jr1
Debit
30,000
Credit
Debit
30,000
Credit
Objective 5
Prepare and use a trial balance.
DEBITS
CREDITS
Trial Balance
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. Computerised accounting programs usually prohibit out-of-balance entries.
Paula Lee eTravel Trial balance

Account Cash Office Supplies Land Accounts Payable P Lee Capital P Lee Drawings Total Debit 7,700 500 20,000 Credit
200 30,000
2,000 $30,200 $30,200
Locating Trial Balance Errors

Are the additions correct? Are all accounts listed? Are the balances listed correctly? 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.
Objective 6
Set up a chart of accounts for a business.
Chart of Accounts in the Ledger

This is a listing of all the accounts and related account numbers used by a business. Each account should have its own assigned number. The numbering system should allow flexibility for changing business needs.
Paula Lee eTravel Chart of Accounts

Assets 101 Cash 111 Accounts Receivable 141 Office Supplies 151 Office Furniture 155 Computers 191 Land

Liabilities 201 Accounts Payable 231 Bills Payable Owners Equity 301 Capital 311 Drawings Revenues 401 Service Revenue

Expenses 501 Rent Expense 523 Electricity Expense 524 Natural Gas Expense 551 Salary Expense 580 Telephone Expense 581 Mobile Expense Helen 582 Mobile Expense Jane 581 Mobile Expense Amanda
Normal Account Balances

Assets = Liabilities + Owners Equity Debits = Credits The side where we expect increases to be recorded is the normal balance side. So assets usually have a Dr balance.
But cash could be Dr or perhaps Cr, why?
Expanding the Accounting Equation to Account for Revenue and Expenses

Assets = Liabilities + Owners Equity Capital contributions and Revenues increase Owners Equity. Drawings and Expenses decrease Owners Equity. So: Assets = Liabilities + Capital Drawings + Revenue Expenses
. Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia
Recording Revenue and Expense Transactions

Performed services for a client and collected $3,000 cash Cash 3,000 Service Revenue 3,000
Paid office rent $900 Rent Expense Cash
900
900
End of Chapter 2

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PowerPoint to accompany

Recording Business Transactions Chapter 2

Use accounting terms.

Individual owners equity accounts

Jans Petrol Station Example

Jans Petrol Station Example

Apply the rules of debit and credit.

The Rules of Debit and Credit

Owners Equity Assets

The Double-Entry System

Total debits must equal total credits.

Jans Petrol Station Example

Jans Petrol Station Example

Jans Petrol Station Example

Jans Petrol Station Example

Total assets $800,000

Record transactions in the journal.

Post from the journal to the ledger.

Asset Accounts After Posting

Liabilities and Owners Equity Accounts After Posting

Paula Lee, Capital

Paula Lee, Drawings

Details of Journals and Ledgers

Details of Journals and Ledgers

Insert the number of the journal page.

Details of Journals and Ledgers

Insert the ledger account in the journal.

The Four-Column Account Format

Account No. 101

Prepare and use a trial balance.

Paula Lee eTravel Trial balance

Locating Trial Balance Errors

Set up a chart of accounts for a business.

Chart of Accounts in the Ledger

Paula Lee eTravel Chart of Accounts

Paula Lee eTravel Chart of Accounts

Paula Lee eTravel Chart of Accounts

Normal Account Balances

Expanding the Accounting Equation to Account for Revenue and Expenses

Recording Revenue and Expense Transactions

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