Financial Accounting

Chapter II

Accounting I
12 chapters

1.  Accounting in Action

2.  The Recording Process
The Basics
3.  Adjusting the Accounts
4.  Completing the Accounting Cycle
5.  Accounting for Merchandising Operations
6.  Inventories
7.  Accounting Information Systems
8.  Internal Control and Cash
9.  Accounting for Receivables
10.  Plan Assets, Natural Ressources and Intangible Assets
11.  Current Liabilities and Payroll Accounting
12.  Accounting for Partnerships
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 Financial Accounting
Chapter II

Chapter 2: Study objectives

1.  Explain what an account is and how it helps the recording process.
2.  Define debits and credits and explain their use in recording business
transactions.
3.  Identify the basic steps in the recording process.
4.  Explain what a journal is and how it helps in the recording process.
5.  Explain what a ledger is and how it helps in the recording process.
6.  Explain what a posting is and how it helps in the recording process.
7.  Prepare a trial balance and explain its purposes.

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 Financial Accounting
Chapter II

The Account
Study Objective 1

n  ..is an accounting record of increases and decreases in a

specific asset, liability or owner‘s equity item.

Debit side Title Credit side

Balance Sheet as of December 31, 2007

Assets Owner's Equity
Liabilities

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 Financial Accounting
Chapter II

Debits and Credits - Terminology

Study Objective 2

n  Debit indicates left and Credit indicates right

n  Recording $ on the left side of an account is debiting the
account
n  Recording $ on the right side is crediting the account
n  If the total of debit amounts is bigger than credits, the
account has a debit balance
n  If the total of credit amounts is bigger than debits, the
account has a credit balance
n  Equality of debits and credits = basis for double-entry
system
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 Financial Accounting
Chapter II

Debits and Credits - Terminology

Study Objective 2

n  Every account has a designated normal balance.

n  It is either a debit or credit.
n  Accounts rarely have an abnormal balance.

Assets Liabilities
Debit for increase Credit for decrease Debit for decrease Credit for increase
Normal balance Normal balance

Owner's Equity
Debit for decrease Credit for increase
Normal balance

Revenues Expenses
Debit for decrease Credit for increase Debit for increase Credit for decrease
Normal balance Normal balance

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 Financial Accounting
Chapter II

Expansion of the Basic Accounting Equation

Study Objective 2

Assets = Liabilities + Owner's Equity

Assets = Liabilities + O.'s Capital - O.'s Drawing + Revenues - Expenses

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
+ - - + - + + - - + + -

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 Financial Accounting
Chapter II

Recap
Study Objective 2

The right side of an account is referred to as the

a)  footing.
b)  chart side.
c)  debit side.
d)  credit side.

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 Financial Accounting
Chapter II

Steps in the recording process

Study Objective 3

1.  Analyze each transaction (+, -)

2.  Enter transaction in a journal
3.  Tansfer journal information to Chapter 2
ledger accounts

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 Financial Accounting
Chapter II

The Journal
Study Objective 4

n  Transactions
n  Are initially recorded in chronological order before they are transferred to the
ledger accounts.
n  A general journal has
1.  Spaces for dates
2.  Account titles and explanations
3.  References
4.  Two amount columns
n  A journal contributes to the recording process:
1.  It discloses in one place the complete effects of a transaction
2.  It provides a chronological record of transactions
3.  It helps to prevent or locate errors because the debit and credit amounts for
each entry can be easily compared

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 Financial Accounting
Chapter II

The journalizing technique

Study Objective 4

Date Debit Account

Title CreditGeneral
Account Journal
Date Title
Account Titles and Explanation Ref Debit Credit
Sep 1, 2008 Cash $15.000
R. Neal, Capital $15.000
(Owner's investment of cash in business)
Brief
explanation
Sep 1, 2008 Computer Equipment $7.000
Cash $7.000
(Purchase of equipment for cash)

n  It is important to use correct and specific account titles in journalizing

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 Financial Accounting
Chapter II

Compound journal entry

Study Objective 4

General Journal
Date Account Titles and Explanation Ref Debit Credit
Sep 1, 2008 Delivery Equipment $14.000
Cash $8.000
Accounts payable $6.000
(Purchased truck for cash with balance on account)

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 Financial Accounting
Chapter II

The Ledger
Study Objective 5

n  A Group of accounts maintained by a company is called the ledger.

n  A General Ledger contains all the assets, liabilities, and owner’s equity
accounts.

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 Financial Accounting
Chapter II

Posting
Study Objective 6

n  Transferring J/E (journal entries) to the ledger is called posting.

n  Posting involves the following steps:
1.  In the ledger, enter in the appropriate columns of the account(s) debited
the date, journal page, and debit amount shown in the journal.
2.  In the reference column of the journal, write the account number to which
the debit amount was posted.
3.  In the ledger, enter in the appropriate columns of the account(s) credited
the date, journal page, and credit amount shown in the journal.
4.  In the reference column of the journal, write the account number to which
the credit amount was posted.

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 Financial Accounting
Chapter II

Posting
Study Objective 6

General Journal - J1
Date Account Titles and Explanation Ref Debit Credit
Sep 1, 2008 Cash 101 $15.000
R. Neal, Capital 306 $15.000
(Owner's investment of cash in business)

General ledger
Cash - 101
Date Explanation Ref Debit Credit Balance
Sep 1, 2008 [usually, no explanation necessary] J1 $15.000 $15.000

R. Neal, Capital - 306

Date Explanation Ref Debit Credit Balance
Sep 1, 2008 [usually, no explanation necessary] J1 $15.000 $15.000

1.  Post to debit account – date, journal page #, account

2.  Enter debit account # in journal reference column
3.  Post to debit account – date, journal page #, account
4.  Enter credit account # in journal reference column

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 Financial Accounting
Chapter II

Chart of accounts
Study Objective 6

n  A Chart of Accounts lists the accounts and the account numbers which
identify their location in the ledger

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 Financial Accounting
Chapter II

Recording process - 1
Study Objective 6

Transaction On October 1, Byrd invest $ 10,000 cash in advertising company called Pioneer Agency

Basic Analysis The asset Cash is increased $10,000. Owner’s equity, C. R. Byrd, Capital is increased $10,000.

Equation Assets = Liabilities + Owner's

Cash Byrd, Capital
$10.000 $10.000

Debit Credit Dr: Increase Assets: debit Cash $ 10,000

Cr: Increase Owner's Equity: credit Byrd, Capital, Capital $ 10,000

Dr Cr
J/E Oct 1 Cash 101 $10.000
C.R. Byrd, Capital 301 $10.000
(Owner's investment of cash in

Posting Cash - 101 C.R. Byrd, Capital - 301

Oct 1 $10.000 Oct 1 $10.000

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 Financial Accounting
Chapter II

Recording process - 2
Study Objective 6

Transaction October 1, C. R. Byrd purchases $5,000 of equipment by issuing a 3-month, 12% note payable.

Basic Analysis The asset Office Equipment is increased $5,000. The liability, Notes Payable is increased $5,000.

Equation Assets = Liabilities + Owner's

Office
Notes Payable Byrd, Capital
Equipment
$5.000 $5.000

Debit Credit Dr: Increase assets: debit Office Equipment $5,000.

Cr: Increase increase liabilities: credit Notes Payable $5,000.

Dr Cr
J/E Oct 1 Office Equipment 157 $5.000
Notes Payable 200 $5.000
(Issued 3-month, 12% note for office
equipment)

Posting Office Eqipment - 157 Notes Payable - 200

Oct 1 $5.000 Oct 1 $5.000

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 Financial Accounting
Chapter II

Recording process - 3
Study Objective 6

October 2, a $1,200 cash advance is received from a client, for advertising services expected to
Transaction
be completed by December 31.

Asset Cash is increased $1,200. Liability Unearned Fees is increased $1,200 (Service has not
Basic Analysis been rendered yet). Liabilities often have the word “payable” in their title, Unearned fees are a
liability.

Equation Assets = Liabilities + Owner's

Unearned
Cash Byrd, Capital
Revenue
$1.200 $1.200

Debit Credit Dr: increase assets: debit Cash $1,200

Cr: increase liabilities: credit Unearned Fees $1,200.

Dr Cr
J/E Oct 2 Cash 101 $1.200
Unearned Revenue 209 $1.200
(Received cash from client for future
services)

Posting Cash - 101 Unearned Revenue - 209

Oct 1 $10.000 Oct 2 $1.200
Oct 2 $1.200

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 Financial Accounting
Chapter II

Recording process - 4
Study Objective 6

Transaction October 3, office rent for October is paid in cash, $900.

The expense Rent is increased $900. Payment pertains only to the current month.Asset Cash is
Basic Analysis
decreased $900.

Equation Assets = Liabilities + Owner's

Rent
Cash
Expense
-$900 -$900

Debit Credit Dr: increase expenses: debit Rent Expense $900.

Cr: decrease assets: credit Cash $900.

Dr Cr
J/E Oct 3 Rent Expense 729 $900
Cash 101 $900

(Paid October rent)

Posting Cash - 101 Rent Expense - 729

Oct 1 $10.000 Oct 3 $900 Oct 3 $900
Oct 2 $1.200

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 Financial Accounting
Chapter II

Recap
Study Objective 6

A purchase of office equipment for cash requires a credit to

a. Office Equipment.
b. Cash.
c. Accounts Payable.
d. Owner’s Equity.

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 Financial Accounting
Chapter II

Trial balance
Study Objective 7

n  The trial balance is a list of accounts and their balances

at a given time.
n  The primary purpose of a trial balance is to prove
debits = credits after posting.
n  If debits and credits do not agree, the trial balance can be
used to uncover errors in journalizing and posting.
n  Preparation of a trial balance
1.  List the account titles and balances
2.  Total the debit and credit columns
3.  Prove the equality of the two columns

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 Financial Accounting
Chapter II

Limitation of s trial balance

Study Objective 7

n  A trial balance does not prove all transactions have been
recorded or the ledger is correct.
n  Numerous errors may exist even though the trial balance
columns agree. For example, the trial balance may
balance even when:
n  a transaction is not journalized
n  a correct journal entry is not posted
n  a journal entry is posted twice
n  incorrect accounts used in journalizing or posting
n  offsetting errors are made in recording

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 Financial Accounting
Chapter II

Trial Balance
Study Objective 7

Pioneer Advertising Agency

Trial Balance
October 31, 2008

Debit Credit Debit Credit

101 Cash $10.300 $11.200 $900
126 Advertising Supplies
130 Prepaid Insurance
157 Office Equipment $5.000 $5.000

200 Notes Payable $5.000 $5.000

201 Accounts Payable
209 Unearned Revenue $1.200 $1.200

301 C.R. Byrd, Capital $10.000 $10.000

306 C.R. Byrd, Drawing

400 Service Revenue

726 Salaries Expense

729 Rent Expense $900 $900
$16.200 $16.200 $17.100 $17.100

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