CH 02

Recording Business Transactions Chapter 2
2002 Prentice Hall, Inc.
Business Publishing
Accounting, 5/E
Horngren/Harrison/Bamber
2-1
Objective 1
Define and use key accounting terms.
Business Publishing
Accounting, 5/E
2-2
Accounting Terms
Account
Ledger Assets Liabilities
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E
Owners equity Double-entry accounting T-account

Horngren/Harrison/Bamber 2-3
Accounting Terms
Cash Individual asset accounts All individual accounts combined make up the ledger. Ledger
Accounts Payable
Individual liability accounts

Gay Gillen, Capital
Individual owners equity accounts

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2-4
Classification of Accounts

What are some asset accounts? Cash Notes Receivable Accounts Receivable Prepaid Expenses Land Building Equipment
Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2-5

What are some liability accounts? Notes Payable Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term Liabilities (bonds)
Business Publishing
Accounting, 5/E
2-6

What are some owners equity accounts? Capital or owners interest in the business Withdrawals Revenues Expenses
Business Publishing
Accounting, 5/E
2-7
Johns Gas Station Example

Assume that the business sold $5,000 worth of gasoline on a given day and performed $3,000 of repair services. How much revenue did the business earn that day? $8,000
Business Publishing
Accounting, 5/E
2-8

Revenues increase Johns equity in the business. The business had to pay mechanics and vendors $3,750 for the work performed that day.
Business Publishing
Accounting, 5/E
2-9

Expenses decrease Johns equity in the business. How much was the net increase in Johns equity that day? $4,250
Business Publishing
Accounting, 5/E
2 - 10
In a corporation, the owners equity account is called Stockholders Equity. Contributed Capital
Retained Earnings
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 11
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.
Business Publishing
Accounting, 5/E
2 - 12
The T-Account
Account Title Debit Credit
LEFT SIDE
Business Publishing
Accounting, 5/E
2 - 13
The T-Account
Account Title Debit Credit
RIGHT SIDE
Business Publishing
Accounting, 5/E
2 - 14
Objective 2
Apply the rules of debit and credit.
Business Publishing
Accounting, 5/E
2 - 15
Rules of Debit and Credit
Assets
Liabilities
Owners Equity
Debit +
Credit
Debit
Credit +
Debit
Credit +
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Accounting, 5/E
2 - 16
The Double-Entry System

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


On July 1, John invested $500,000 in cash and obtained a $300,000 loan to open a gas station. How much was the initial increase in cash? $800,000 Which accounts were affected?
Business Publishing
Accounting, 5/E
2 - 18
Cash
Liabilities
Owners Equity
Business Publishing
Accounting, 5/E
2 - 19

Johns Gas Station Balance Sheet July 1, 2002
Assets Cash $800,000 Liabilities Notes payable $300,000 Owners Equity John, capital 500,000 Total liabilities and owners equity $800,000
Accounting, 5/E Horngren/Harrison/Bamber 2 - 20
Total assets $800,000

Business Publishing
Objective 3
Record transactions in the journal.
Business Publishing
Accounting, 5/E
2 - 21
Journals
What is a journal? It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit/credit rules. 4 Record transaction with description.
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
Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 23
Recording Transactions
On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel. What is the journal entry? April 2 Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner
Objective 4
Post from the journal to the ledger.
Business Publishing
Accounting, 5/E
2 - 25
Ledger
What is a ledger? It is a digest of all accounts utilized by an entity during an accounting period.
Loose leaf pages Bound books

2002 Prentice Hall, Inc. Business Publishing
Computer printout Cards

Posting
What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger.
Business Publishing
Accounting, 5/E
2 - 27
Asset Accounts After Posting

Cash
(1) 30,000 (2) 20,000 (4) 300 (6) 2,100 Bal. 7,600
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
Gay Gillen, Capital

(1) 30,000
Bal. 30,000
Gay Gillen, Withdrawals

(6) 2,100 Bal. 2,100
Details of Journals and Ledgers

Journal Page 1 Date Accounts and Explanation Debit Credit April 2 Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner
Business Publishing
Accounting, 5/E
2 - 30

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 Gay Gillen, 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 Item Ref. jr1 Debit 30,000
Account No. 101

Balance Credit Debit 30,000 Credit
Business Publishing
Accounting, 5/E
2 - 33
Objective 5
Prepare and use a trial balance.
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Accounting, 5/E
2 - 34
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.
Locating Trial Balance Errors

What if it doesnt balance ? Is the addition correct? Are all accounts listed? Are the balances listed correctly?
DEBITS
CREDITS
Business Publishing
Accounting, 5/E
2 - 36
Locating Trial Balance Errors

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.
Objective 6
Set up a chart of accounts for a business.
Business Publishing
Accounting, 5/E
2 - 38
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.
Business Publishing
Accounting, 5/E
2 - 39
Gay Gillen eTravel Chart of Accounts

Assets 101 Cash 111 Accounts Receivable 141 Office Supplies 151 Office Furniture 191 Land
Business Publishing
Accounting, 5/E
2 - 40

Liabilities 201 Accounts Payable 231 Notes Payable Owners Equity 301 Capital 311 Withdrawals Revenues 401 Service Revenue
Expenses 501 Rent Expense 503 Utilities Expense 502 Salary Expense
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Accounting, 5/E
2 - 42
Normal Account Balances

Assets = Liabilities + Owners Equity Debits = Credits The side where we expect increases to be recorded is the normal balance side.
Business Publishing
Accounting, 5/E
2 - 43
Objective 7
Analyze transactions without a journal.
Business Publishing
Accounting, 5/E
2 - 44
Johns Gas Station

John is considering either purchasing a garage for $600,000 or renting one for $60,000 per year. John does not need to record in the journal all of the transactions that would affect his decision. Why?
Johns Gas Station

John has not completed a transaction yet. However, John can visualize how the ledger accounts will be affected.
Business Publishing
Accounting, 5/E
2 - 46
Johns Gas Station

Rent the garage Cash 60,000 Rent Expense 60,000
Buy the garage

Cash 600,000
2002 Prentice Hall, Inc. Business Publishing
Building 600,000
End of Chapter 2
Business Publishing
Accounting, 5/E
2 - 48

CH 02

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CH 02

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Copyright:

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Recording Business Transactions Chapter 2

2002 Prentice Hall, Inc.

Define and use key accounting terms.

2002 Prentice Hall, Inc.

Owners equity Double-entry accounting T-account

Individual liability accounts

Individual owners equity accounts

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

Johns Gas Station Example

2002 Prentice Hall, Inc.

Johns Gas Station Example

2002 Prentice Hall, Inc.

Johns Gas Station Example

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

Apply the rules of debit and credit.

2002 Prentice Hall, Inc.

Rules of Debit and Credit

2002 Prentice Hall, Inc.

The Double-Entry System

Total debits must equal total credits.

Johns Gas Station Example

2002 Prentice Hall, Inc.

Johns Gas Station Example

2002 Prentice Hall, Inc.

Johns Gas Station Example

Total assets $800,000

Record transactions in the journal.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 22

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 24

2002 Prentice Hall, Inc.

Loose leaf pages Bound books

Computer printout Cards

2002 Prentice Hall, Inc.

Asset Accounts After Posting

Liabilities and Owners Equity Accounts After Posting

Gay Gillen, Capital

Gay Gillen, Withdrawals

Details of Journals and Ledgers

2002 Prentice Hall, Inc.

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

2002 Prentice Hall, Inc.

Prepare and use a trial balance.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 35

Locating Trial Balance Errors

2002 Prentice Hall, Inc.

Locating Trial Balance Errors

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 2 - 37

2002 Prentice Hall, Inc.

Chart of Accounts in the Ledger