Recording Business

Transactions

Objective 1
Use accounting terms

Accounting Equation
Accounts are grouped in 3 broad
categories:

Assets
Assets

Liabilities
Liabilities

Equity
Equity

Assets
Economic resources that will benefit the
business in the future
Cash
Debtors
Accounts Receivable
Prepaid Expenses
Land
Building
Equipment, Furniture, Fixtures

Liabilities
Creditors claims to assets (debt)
Accounts Payable
Outstanding liability
Creditors
Long term loans

Owners Equity
Owners claim to the assets
Capital
Withdrawals
Revenues
Expenses

All Individual Accounts Combined

Make Up the Ledger
Cash
Cash
Accounts
Receivable

Accounts
Accounts
Notes
Payable
Notes
Payable
Payable
Payable
Ledger
Ledger

C.
C.Lapp,
Lapp,
Revenues
Capital
Revenues
Capital

Objective 2
Apply the rules of debit and
credit

Double Entry System

Record dual effects of each transaction
Each transaction affects at least two
accounts
Each transaction is recorded with at
least
One debit
One credit

Total debits must equal total credits

10

11

Possible changes in Balance Sheet

Possibility

Example

An increase in assets followed by an Purchase of a tractor using a bank loan

increase in liabilities and vice versa
A decrease in assets followed by a Using the savings deposit in bank to
decrease in liabilities and vice versa
return the loan from a friend
An increase in assets followed by an Interest earned on the savings deposit
increase in equity and vice versa
increasing the net worth
A decrease in assets followed by a Theft of some personal possessions
decrease in equity and vice versa
leads to decrease in owners equity
An increase in an asset followed by a Using my savings balance in bank to
decrease in another asset and vice versa
purchase a computer
An increase in a liability followed by a Taking a new bank loan to return the loan
decrease in another liability and vice versa from a friend
12

T-Account
Simple tool for analyzing and determining
the balance in a given account

Account Name
(Left Side)

(Right Side)

Debit

Credit

13

Rules of Debit and Credit

Assets
Debit

Credit

Liabilities
Debit

Credit

Equity
Debit

Credit

14

Rules of Debit and Credit

Owners Equity
Owners
Withdrawals
Debit

Credit

Expenses
Debit

Credit

Debit

Credit

Owners
Capital
Debit Credit

Revenues
Debit Credit

15

Expanding the
Rules of Debit and Credit
Owners Equity
Owners _
Owners
_ Expenses
+
Revenues
Capital
Withdrawals
Debit Credit
Debit Credit Debit Credit Debit Credit

16

The ALICE!
middle three
Remember:
Just ask
The first and the
are increased with
last are increased
with a debit

credits

Debit
+
-

A = Assets
L = Liabilities
I = Income*

Credit
+
+

C = Capital
E = Expenses

+
-

* Really, this is revenues, but r just doesnt fit in!

17

Objective 3
Record transactions in the
journal

18

Journal
Chronological record of the
transactions
Consists of at least one debit and
one credit

19

Journalizing Transactions
Identify each account affected and its
type
Determine whether each account is
increased or decreased. Use the rules of
debit and credit
Record transaction in journal, including a
brief explanation
Debit side of entry is entered first
Total debits should always equal total credits
20

General Journal
Transaction
Transaction
Date
Date

Accounts
Accounts Affected
Affected

Journal
Description

Date
Jul 1 Cash
Lange, Capital

Page 1
Debit Credit
45,000
45,000

Investment from owner

Explanation
Explanation of
of
transaction
transaction

Dollar
Dollar amount
amount of
of
debits
debits and
and credits
credits

21

 Induction of Capital

22

Exercise 2-5
Analysis of June 1 transaction:
Cash is increasing
Cash is an asset account
Increase an asset with a debit
GENERAL JOURNAL
DATE

Jun 1 Cash

DESCRIPTION

REF

DEBIT

CREDIT

25,000

23

Exercise 2-5
Analysis of June 1 transaction:
M. Brown, Capital is increasing
Capital is an owners equity account
Increase owners equity with a credit
GENERAL JOURNAL
DATE

DESCRIPTION

Jun 1 Cash
M. Brown, Capital
Owner invested in business

REF

DEBIT

CREDIT

25,000
25,000
24

 Purchase of medical Supplies on

Credit

25

Exercise 2-5
Analysis of June 2 transaction:
Medical Supplies is increasing
Medical Supplies is an asset account
Increase an asset with a debit
GENERAL JOURNAL
DATE

DESCRIPTION

Jun 2 Medical Supplies

REF

DEBIT

CREDIT

10,000

26

Exercise 2-5
Analysis of June 2 transaction:
Accounts Payable is increasing
Accounts Payable is a liability
account
Increase a liability
GENERAL JOURNAL
with a credit
DATE

DESCRIPTION

Jun 2 Medical Supplies

Accounts Payable
Purchased medical supplies

REF

DEBIT

CREDIT

10,000
10,000
27

 Payment of rent by Cash

28

Exercise 2-5
Analysis of June 2 transaction:
Rent Expense is increasing
Rent Expense is an expense account
Increase an expense with a debit
GENERAL JOURNAL
DATE

DESCRIPTION

Jun 2 Rent Expense

REF

DEBIT

CREDIT

4,000

29

Exercise 2-5
Analysis of June 2 transaction:
Cash is decreasing
Cash is an asset account
Decrease an asset with a credit
GENERAL JOURNAL
DATE

DESCRIPTION

Jun 2 Rent Expense

Cash
Paid rent for the month

REF

DEBIT

CREDIT

4,000
4,000
30

Exercise 2-5
Analysis of June 3 transaction:
Accounts Receivable is increasing
Accounts Receivable is an asset
account
Increase an GENERAL
JOURNAL
asset with
a debit
DATE

DESCRIPTION

Jun 3 Accounts Receivable

REF

DEBIT

CREDIT

12,000

31

 Provided Services but did not receive

payment

32

Exercise 2-5
Analysis of June 3 transaction:
Service Revenue is increasing
Service Revenue is a revenue
account
Increase a revenue
GENERAL JOURNAL
with a credit
DATE

DESCRIPTION

Jun 3 Accounts Receivable

Service Revenue
Performed services

REF

DEBIT

CREDIT

12,000
12,000
33

Objective 4
Post from the journal to the
ledger

34

Posting
Periodically, journal entries are
posted to ledger accounts to
determine balances in each account
Posting copying amounts from the
journal to the ledger

35

Exercise 2-9
Cash

Accounts Payable

Service Revenue

M. Brown, Capital

Rent Expense

25,000

Accounts Receivable

25,000
GENERAL JOURNAL
DATE

DESCRIPTION

Jun 1 Supplies
Cash
Medical
M. Brown, Capital
Owner invested in business

REF

DEBIT

CREDIT

25,000
25,000
36

Exercise 2-9
Cash

Accounts Payable

Service Revenue

10,000

25,000

GENERAL JOURNAL
DATE

DESCRIPTION

Accounts Receivable

REF

M. Brown, Capital

Jun 2 Medical Supplies

25,000
Accounts Payable
Purchased medical supplies

DEBIT

CREDIT

Rent Expense

10,000

10,000

Medical Supplies

10,000
37

Exercise 2-9
Cash

Accounts Payable

Service Revenue

10,000

25,000 4,000

M. Brown, Capital

Accounts Receivable

Rent Expense

4,000

25,000
GENERAL JOURNAL
DATE

DESCRIPTION

Medical
Supplies
Jun
2 Rent
Expense
10,000 Cash

REF

DEBIT

CREDIT

4,000
4,000

Paid rent for the month

38

Exercise 2-9
Cash

Accounts Payable

12,000

10,000

25,000 4,000

Accounts Receivable

Service Revenue

Rent Expense

M. Brown, Capital

12,000

4,000

25,000
GENERAL JOURNAL

DATE

DESCRIPTION

Medical
Jun 3 Supplies
Accounts Receivable

10,000

Service Revenue
Performed services

REF

DEBIT

CREDIT

12,000
12,000
39

Exercise 2-9
Cash

25,000 4,000
Bal 21,000

Accounts Receivable

12,000
Bal 12,000

Accounts Payable

Service Revenue

10,000

12,000

Bal 10,000

Bal 12,000

M. Brown, Capital

25,000

Rent Expense

4,000

Bal 25,000 Bal 4,000

Medical Supplies

10,000
Bal 10,000
40

Flow of Accounting Data

Transaction Occurs

Source Documents Prepared

Transaction Analyzed

Transaction Journalized & Posted

41

Objective 5
Prepare and use a trial
balance

42

Trial Balance
List of all accounts with their
balances

43

Exercise 2-9 (part 3)

Mike Brown, M.D.
Trial Balance
June 30, 2008
Cash

21,000

Accounts Receivable

12,000

Medical Supplies

10,000

Accounts Payable

10,000

M. Brown, Capital

25,000

Service Revenue

12,000

Rent Expense
Totals

4,000
47,000

47,000

44

Locating Trial Balance Errors

What if it doesnt balance?
Is the addition correct?
Are all accounts listed?
Are the balances listed correctly?

45

Exercise 2-18

Cash increases. It is
Supplies, an asset,
an asset. Increase
increases. Increase
assets with debits.
assets with debits.
Capital increases.
Accounts Payable
GENERAL JOURNAL
Owners equity is
increases.
It is a
REF
DESCRIPTION
DEBIT
increased
with
a
liability. Increase
credit.
liabilities with
a credit
60,000

DATE

Aug 1 Cash
R. Woodward, Capital

CREDIT

60,000

To record investment by owner

2 Supplies
Accounts Payable

200
200

Purchased supplies on account

46

Cash,
anthese
asset, is
Both of
increasing.
Increase
accounts
are assets.
assetsiswith
debits.
Building
increasing.
Revenue assets
accounts
are
Increase
with
GENERAL JOURNAL
increased
with credits
debits. Cash
is
REF
DESCRIPTION
DEBIT
CREDIT
decreasing.
Decrease
assets with credits.

Exercise 2-5
DATE

Aug 4 Building
Cash

50,000

50,000

Purchased building

6 Cash
Service Revenue

3,000
3,000

Performed service
47

Exercise 2-18
DATE

Accounts
Both ofPayable,
these
which
accounts
is decreasing,
are assets.
is
Building
a liability.
is increasing.
Decrease
liabilities
Increase by
assets
debiting
with
GENERAL JOURNAL
them.
debits.
Decrease
Cash is
the
DESCRIPTION
DEBIT
decreasing.
asset, REF
Cash,Decrease
with a
assetscredit.
with credits

Aug 9 Accounts Payable

Cash

CREDIT

100

100

Paid on account

17 Accounts Receivable
Service Revenue

2,100
2,100

Performed services
48

Both of these accounts

are assets. Cash is
increasing debit.
Accounts Receivable is
GENERAL JOURNAL
decreasing - credit

Exercise 2-18
DATE

DESCRIPTION

Aug 23 Cash
Accounts Receivable

REF

DEBIT

CREDIT

1,200
1,200

Received payment on account

49

Both of these
Exercisetransactions
2-18
involve

DATE

Aug 31

recognizing expenses.
GENERAL JOURNAL
Since expenses
decrease
owners
REF
DESCRIPTION
DEBIT
equity, and owners
Salary Expense
1,200
equity is decreased
with a debit, debit
Cash
expenses. Cash is
decreasing credit
Paid salaries

31 Rent Expense
Cash

CREDIT

1,200

500
500

Paid rent for the month

50

Aug 1
Aug 6
Aug 23

Cash
60,000 Aug 4 50,000
3,000 Aug 9
100
1,200 Aug 31 1,200
Aug 31
500

Accounts Payable
Aug 2
Aug 9
100

Exercise 2-19

Bal. 100

R. Woodward, Capital

Bal. 12,400

Accounts Receivable
Aug 17 2,100
Aug 23 1,200
Bal.

900

Supplies
Aug 2

200

Aug 4

Building
50, 000

200

Aug 1 60,000
Take the difference
Service Revenue
between total debits
Aug 6 to3,000
and total credits
Augbalance
17 2,100
determine the
in each account. IfBal. 5,100
debits are greater than
Rent Expense
credits, the account
Aug 31
500 balance
has a debit
and vice versa
Salary Expense
Aug 31

1,200
51

Exercise 2-19
Woodward Technology Solutions
Trial Balance
August 31, 2008
Cash

12,400

Accounts Receivable

900

Supplies

200

Building

50,000

Accounts Payable

100

R. Hawk, Capital

60,000

Service Revenue

5,100

Salary Expense
Rent Expense
Totals

1,200
500
65,200

65,200

52

53