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
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