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Recording Business Transactions

Day 6
Session 1 & 2
Objective 1

Define and use key


accounting terms.
Book keeping and Accounting
Book keeping
Recording of business transactions
is called book keeping

Accounting
The process of classifying and summarizing
business transactions, and interpreting their
effect is called accounting
Accounting Terms

Account Owner’s
equity
Ledger
Double-entry
Assets accounting

Liabilities T-account
Accounting Terms
Cash Individual asset accounts
All individual
accounts
combined
make up
the ledger.
Accounts Ledger
Payable
Individual liability accounts

Gay Gillen,
Capital

Individual owner’s equity accounts


Classification of Accounts

• What are some asset accounts?


– Cash
– Accounts Receivable
– Prepaid Expenses
– Land
– Building
– Equipment
Classification of Accounts
• What are some liability accounts?
– Accounts Payable
– Accrued Liabilities (for expenses incurred but
not paid)
– Long-term Liabilities (bonds)
Classification of Accounts
• What are some owner’s equity accounts?
– Capital or owner’s interest in the business
– Withdrawals
– Revenues
– Expenses
John’s 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
John’s Gas Station Example
• Revenues increase John’s equity in the
business.
• The business had to pay mechanics and
vendors $3,750 for the work performed that
day.
John’s Gas Station Example
• Expenses decrease John’s equity in the
business.
• How much was the net increase in John’s
equity that day?
• $4,250
Classification of Accounts
• In a corporation, the owner’s equity account is
called Stockholders’ Equity.

Contributed Capital

Retained Earnings
Double-Entry Accounting
• Double entry bookkeeping means to record
the dual effects of each business transaction.
• Assets = Liabilities + Owner’s Equity
• Assets are on the left (debit) side.
• Liabilities and Equity are on the right (credit)
side.
The Account
• An account may be defined as a record of the
increases, decreases, and balances in an
individual item of asset, liability, capital,
income (revenue), or expense.
The T-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.
Rules of Debit and Credit

Owner’s Equity
Assets = Liabilities +

Debit Credit Debit Credit Debit Credit


+ – – + – +
Rules of Debit and Credit

Expenses Revenues

Debit Credit Debit Credit


+ – – +
The Double-Entry System

Each transaction is recorded with at least:

One debit One credit

Total debits must equal total credits.


John’s Gas Station Example
• 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?
John’s Gas Station Example

Cash

Liabilities

Owner’s Equity
John’s Gas Station Example

John’s Gas Station


Balance Sheet
July 1, 2002
Assets Liabilities
Cash $800,000 Notes payable $300,000
Owner’s Equity
John, capital 500,000
Total liabilities
Total assets $800,000 and owner’s equity $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.
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
Recording Transactions
• On April 2, Gay Gillen invested $30,000 in
Gay Gillen eTravel.
• What is the journal entry?

• Cash 30,000
Gay Gillen, 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 digest of all accounts utilized by an
entity during an accounting period.

Loose leaf Computer


pages printout

Bound
Cards
books
Posting
• What is posting?
• It is the transfer of information from the
journal to the appropriate accounts in the
ledger.
Asset Accounts After Posting

Cash
(1) 30,000 (2) 20,000
Land
(4) 300
(2) 20,000
(6) 2,100
Bal.
Bal. 7,600
20,000
Office Supplies
(3) 500
Bal. 500
Liabilities and Owner’s Equity Accounts
After Posting
Accounts Payable
(4) 300 (3) 500
Gay Gillen, Capital
Bal. 200 (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
Details of Journals and Ledgers

Posting
Account: Cash Account: 101
Balance
Date Ref. Debit Credit Debit Credit
April 2 jrl 30,000 30,000

Insert the number of the journal page.


Details of Journals and Ledgers

Journal Page 1
Date 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 Account No. 101
Balance
Date Item Ref. Debit Credit Debit Credit
April 2 jr1 30,000 30,000
Objective 5
Prepare and use a trial balance.
Chart of accounts

• It is desirable to establish a systematic


method of identifying and locating each
account in the ledger. The chart of accounts,
sometimes called the code of accounts, is a
listing of the accounts by title and numerical
description.
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 doesn’t balance ?
• Is the addition correct?
• Are all accounts listed?
• Are the balances listed correctly?

DEBITS CREDITS
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.
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.
Gay Gillen eTravel
Chart of Accounts

Assets
101 Cash
111 Accounts Receivable
141 Office Supplies
151 Office Furniture
191 Land
Gay Gillen eTravel
Chart of Accounts

Liabilities
201 Accounts Payable
231 Notes Payable
Owner’s Equity
301 Capital
311 Withdrawals
Revenues
401 Service Revenue
Gay Gillen eTravel
Chart of Accounts

Expenses
501 Rent Expense
503 Utilities Expense
502 Salary Expense
Normal Account Balances
• Assets = Liabilities + Owner’s Equity
• Debits = Credits
• The side where we expect increases to be
recorded is the normal balance side.
Objective 7

Analyze transactions
without a journal.
John’s 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?
John’s Gas Station
• John has not completed a transaction yet.
• However, John can visualize how the ledger
accounts will be affected.
John’s Gas Station

Rent the garage


Cash Rent Expense
60,000 60,000

Buy the garage


Cash Building
600,000 600,000
Any questions, please