06/01/2014

Accounting Principles
Recording business transactions

Learning objectives

Explain accounts, journals and ledgers as they relate to

recording transactions, and describe common accounts

Define debits, credits and normal account balances, and use

double-entry accounting and T-accounts

List the steps of the transaction recording process

Post transactions from the journal to the ledger

Prepare the trial balance from the T-accounts

The account, the ledger and the journal

An account is the detailed record of all the changes that have

occurred in a particular asset, liability or owners equity during a
period

The journal is the chronological record of the transactions

The ledger is the record holding all accounts

A list of all the ledger accounts, along with their balances, is

called a trial balance

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The account, the ledger and the journal

Record
transactions
in the
journal

Copy (post)
to the ledger

Prepare the
trial balance

Assets
An asset is a resource controlled by an entity as a result of past
events that is expected to provide future economic benefits to the
entity in the future

Cash

Accounts receivable

Bills receivable

Inventories

Prepaid expenses

Land

Buildings

Plant and equipment

Liabilities
A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits

Accounts payable

Bills payable

Accrued liabilities

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Owners equity
The financial estimate of owners claims to the value in a business is
called owners equity. It is the residual interest in the assets of an
entity after deducting all liabilities

Capital

Drawings

Income

Chart of accounts
Balance Sheet Accounts:
Assets

Liabilities

Owners Equity

101 Cash

201 Accounts
Payable

301 S Bright Capital

111 Accounts
Receivables

231 Bills Payable

311 S Bright drawings

141 Office
Supplies

Income Statement Accounts: (Part of

Owners Equity):

151 Office
Furniture

401 Service
Revenue

191 Land

501 Rent Expense

502 Salary
Expense
503 Electricity &
gas Expense

Debits, credits and double-entry accounting

Accounting is based on a double-entry system

Each transaction affects at least two accounts

A popular account format is called T-account

Debit

Account Title

Credit

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Debits, credits and double-entry accounting

The account category determines how increases and decreases

in the account are recorded as debits and credits

The pattern of recording debits and credits is based on the

accounting equation

Accounting equation rules of debit & credit (the effects of debits

& credits on assets, liabilities and owners equity):
Assets
Debit

Credit

= Liabilities

+ Equity

Debit

Credit

Debit

Credit

Recording transactions in the journal

Specify each
account affected
by the
transaction and
classify it by
type

Identify the
transaction from
source
documents

Determine
whether each
account is
increased or
decreased by the
transaction

Enter the
transaction in
the journal,
including a brief
explanation

Copying information (posting) from the journal to

the ledger
Journal entry and posting to the ledger

Journal Entry
May 1

Accounts & explanation

Debit

Cash (A+)

30,000

S Bright - Capital

Credit
30,000

Posting to ledger
Cash
30,000

S Bright - Capital
30,000

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The normal balance of an account

Complete rules of debit & credit

Assets

Liabilities +

Assets

Liabilities

+ Owners
capital

- Owners + Revenue
drawings

- Expenses

Dr Cr +

Dr Cr +

Dr + Cr -

Dr + Cr -

Dr + Cr -

Owners Equity

Dr Cr +

Flow of accounting information

Flow of accounting data from journal to ledger:

Transaction occurs

Source documents prepared

Transaction analysis takes place

Transactions entered in journal

Amounts posted to ledger

The trial balance

A trial balance summarises the ledger by listing all the accounts

with their balances

Throughout the accounting process, total debits should always

equal total credits. If not, there is an error

Errors can be detected by calculating the difference between

total debits and total credits on the trial balance

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Summary:

The accounting equation must always balance after each

transaction is recorded. To achieve this balance, we record
transactions using a double-entry accounting system

A transaction occurs and is recorded on a source document

Then, we identify the account names affected by the transaction

and determine whether the accounts increased or decreased
using the rules of debit and credit

Next, we record the transaction in the journal, listing the debits

first. We then post all transactions to the ledger

Once the ledger balances are calculated, the ending balance for
each account is transferred to the trial balance