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CHAPTER 1
BASICS
OF
ACCOUNTING
2-2
The Body of
Accounting Knowledge
2-3
The
Accounting
Cycle
2-4
Prepare financial
statements and
report them
2-5
Journal Entries
Ledger Accounts
2-6
Types of Accounts
Assets
Liabilities
Stockholders Equity
Revenues
Expenses
2-8
Categories of
General Ledger Accounts
The five types of accounts fall into
one of three categories
Personal Accounts
Real Accounts
Nominal Accounts
2-9
Real Accounts
This category includes Assets,
Liabilities, and Stockholders Equities
(i.e., Balance Sheet accounts)
Nominal Accounts
Nominal accounts include revenues
and expenses.
Nominal accounts are temporary.
Nominal account balances are closed
out to zero at the end of the fiscal year.
Closing Entries will be discussed in
Chapter 4.
2-11
Account Name
Debit Credit
2-14
The T-Account
Increases to the
T-account are
recorded on Account Name
one side of the Debit Credit
T-account, and
decreases are
recorded on the
other side.
2-15
The T-Account
determined by
the type of
account.
2-16
LEFT RIGHT
2-17
LEFT RIGHT
Used as DEBIT CREDIT
Adjectives: SIDE SIDE
2-18
LEFT RIGHT
Used as DEBIT CREDIT Synonym
Verbs: for Debit?
2-19
types of
accounts.
2-23
A = L + SE
2-25
A = L + SE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit
2-26
A = L + SE
Account Name Account Name Account Name
Debit Credit Debit Credit Debit Credit
2-27
A = L + SE
ASSETS Account Name Account Name
Debit Credit Debit Credit Debit Credit
for for
Increase Decrease
2-28
A = L + SE
ASSETS LIABILITIES Account Name
Debit Credit Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase
2-29
A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase
2-30
Stockholders Equity
A Closer Look
Recall that Stockholders Equity consists
of the following components:
C/S + R/E
2-31
Stockholders Equity
A Closer Look
Therefore, the Capital Stock and Retained
Earnings accounts are affected in the
following manner by debits and credits
because they are part of Stockholders
Equity:
Stockholders Equity
A Closer Look
Also, because Revenue accounts increase
Stockholders Equity, they are affected by
debits and credits as follows:
REVENUES
Debit Credit
for for
Decrease Increase
2-33
Stockholders Equity
A Closer Look
And because Expense accounts decrease
Stockholders Equity, they are affected by
debits and credits as follows:
EXPENSES
Debit Credit
for for
Increase Decrease
2-34
Normal Balances
Normal Balances
The normal balances for each of the FIVE
types of accounts are as follows:
Account Name
Debit Balance Credit Balance
Assets Liabilities
Expenses Stockholders
Equity
Revenues
2-36
Alternative #2
A L O R E acronym
2-37
Alternative Approach #1
Expanded Accounting Equation
ASSETS + EXP. = LIAB. + S/H EQUITY + REV.
A + E = L + S/E + R
Dr. Cr. Dr. Cr.
+ - - +
Bal. Bal.
2-38
Alternative Approach #2
A L O R E Acronym
Debit Credit
A (ssets) + -
L (iabilities) - +
O (wners' equity) - +
R (evenues) - +
E (xpenses) + -
2-39
a. Accounts Payable
b. Buildings
c. Interest Revenue
d. Capital Stock
2-40
a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land
2-42
a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land
2-43
Accounts Receivable
750 350
200
Accounts Receivable
750 350
200
Accounts Receivable
750 350
200
600
Accounts Receivable
750 350
200
600
(Can use the either the approach above
to show the balance, the texts
approach or Rices approach)
2-53
Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?
2-58
Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?
ANSWER:
Notes Payable would increase.
2-59
Implications
Question 2
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?
2-60
Implications
Question 2
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?
ANSWER:
Such an increase could imply that the
company borrowed money.
2-61
Implications
Question 3
If the company borrowed money, which
account would also be affected and in
what way?
2-62
Implications
Question 3
If the company borrowed money, which
account would also be affected and in
what way?
ANSWER:
There would also be an equal-sized
increase in the Cash account.
2-63
Implications
Question 4
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?
2-64
Implications
Question 4
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?
ANSWER:
The company acquired land and gave a
note that promised to pay for the land
in the future.
2-65
Recording Transactions
Initially, all transactions are recorded in
the General Journal.
2-66
Recording Transactions
Initially, all transactions are recorded in
the General Journal.
Each transaction always affects at least
two different accounts.
One account has a debit effect.
The second account has a credit effect.
Journal Entries
Example 1
On January 1, 19X7, Caldwell Company
borrows Rs.10,000 from the bank.
Prepare the appropriate general journal
entry for the above transaction.
2-69
Journal Entries
Solution 1
Two accounts are affected:
Cash is increased by Rs.10,000.
Notes Payable is increased by Rs.10,000.
2-70
Journal Entries
Solution 1
Two accounts are affected:
Cash is increased by Rs.10,000.
Notes Payable is increased by Rs.10,000.
GENERAL JOURNAL
Page: 1
Date Description L.F. Debit Credit
2-71
Journal Entries
Solution 1
Two accounts are affected:
Cash is increased by Rs.10,000.
Notes Payable is increased by Rs.10,000.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
2-72
Journal Entries
Solution 1
Typically,
Two accounts accounts areareaffected:
numbered.
Cash is increased The by Rs.10,000.
Notesnumbers
account Payable isare increased by Rs.10,000.
used as references for
GENERAL JOURNAL
posting to the General Page: 1
Ledger. More
Date on
Description PR Debit Credit
1-Jan Cash 100 10,000
account numbers
Notes Payable
will 201 10,000
come
to later.
record loan from bank
2-73
Journal Entries
Example 2
On January 15, 19X7, Caldwell
Company purchases a truck for
Rs.19,500 cash.
Prepare the appropriate journal entry
for the above transaction.
2-74
Journal Entries
Solution 2
Two accounts are affected:
Trucks is increased by Rs.19,500.
Cash is decreased by Rs.19,500.
2-75
Journal Entries
Solution 2
Two accounts are affected:
Trucks is increased by Rs.19,500.
Cash is decreased by Rs.19,500.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
2-76
Journal Entries
Solution 2
Two accounts are affected:
Trucks is increased by Rs.19,500.
Cash is decreased by Rs.19,500.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
15-Jan Trucks 150 19,500
Cash 100 19,500
to record purchase of truck
2-77
Journal Entries
Example 3
On January 20, 19X7, Caldwell Co. pays
the Rs.400 electric bill for January.
Prepare the appropriate journal entry
for the above transaction.
2-78
Journal Entries
Solution 3
Two accounts are affected:
Utility Expense is increased by Rs.400.
Cash is decreased by Rs.400.
2-79
Journal Entries
Solution 3
Two accounts are affected:
Utility Expense is increased by Rs.400.
Cash is decreased by Rs.400.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
2-80
Journal Entries
Solution 3
Two accounts are affected:
Utility Expense is increased by Rs.400.
Cash is decreased by Rs.400.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
20-Jan Utility Expense 511 400
Cash 100 400
to record payment of January
electric bill
2-81
Numbering Accounts
The listing of all accounts and their
account numbers is called the chart of
accounts.
2-82
Numbering Accounts
The listing of all accounts and their
account numbers is called the chart of
accounts.
A typical account numbering scheme
might appear as follows:
Assets 100-199 Revenues 400-499
Liabilities 200-299 Expenses 500-599
Equities 300-399
Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Next, find the appropriate Page: page 1
Date in the General
Description Ledger
PR forDebit
Cash. Credit
1-Jan Cash 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Post the account referencePage:
number. 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Next, find the Notes Payable
Page: 1
Date pageDescription
in the General
PR Ledger.
Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Post the account referencePage:
number. 1
Date Description L.f. Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description L.F Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Posting to the GL
Example
GENERAL JOURNAL
Examine the next journalPage:
entry. 1
Date Description L.F. Debit Credit
15-Jan Trucks 9,500
Cash 9,500
to record purchase of truck
Posting to the GL
Example
GENERAL JOURNAL
Record the account reference.
Page: 1
Date Description LF. Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
Posting to the GL
Example
GENERAL JOURNAL
Page: 3
Date Description LF. Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
Posting to the GL
Example
GENERAL JOURNAL
Page: 3
Date Description L.F. Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
TRIAL BALANCE
Used to periodically test whether the
General Ledger is in balance.
Debits Credits
Cash Rs. 500
Accounts Receivable 1,200
Equipment 3,800
Accounts Payable Rs. 700
Notes Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
Rs.
16,150 Rs.
16,150
2-98
Debits Credits
NoticeCash
that Total Rs. 500
Accounts Receivable 1,200
DebitsEquipment
are equal 3,800
Accounts Payable Rs. 700
to Total
NotesCredits.
Payable 1,450
Capital Stock 3,000
Retained Earnings - 1/1/X8 -
Dividends 250
Revenues 11,000
Salary Expense 5,000
Utility Expense 3,000
Rent Expense 2,400
Rs.
16,150 Rs.
16,150
2-99
DOUBTS PLEASE..