Recording Business Transactions

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 2

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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.2

Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts

Define debits, credits, and normal account balances and use double-entry accounting and T-accounts

List the steps of the transaction recordingprocess


Journalize and post sample transactions to the ledger

Prepare the trial balance from the T-accounts


Explain accounts, journals, and ledgers as they relate to recording transactions and describe

common accounts

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Recordtransactions

in the journal

Copy (post) tothe ledger

Prepare thetrial balance


Basic summary deviceDetailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equityCovers a specific period of timeGrouped in three broad categories

AssetsLiabilitiesStockholders’ Equity

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JournalChronological record of transactionsOrganized by date

LedgerThe book holding all the accounts and their balancesOrganized by account

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Listing of all accounts and their balances

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ASSETS LIABILITIES EQUITY

EconomicResources

Claims to EconomicResources


Economic resources that will benefit the business in the future:

CashAccounts receivableNotes receivablePrepaid expensesLandBuildingEquipment, Furniture, Fixtures

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A debt (something owed):Accounts payableNotes payableAccrued liabilities

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Owners’ claim to the assets:Common stockRetained earningsDividendsRevenues Expenses

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Asset, Liability, and Stockholders’ equity Accounts

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List of all accounts used by a company

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Define debits, credits, and normal account balances and use double-entry accounting and

T-accounts

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Record dual effects of each transactionEach transaction has a:

Receiving sideGiving side

Examples:Company purchases supplies (receiving) with cash (giving)Company issues stock (giving) and receives cash (receiving)

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Tool for analyzing and determining the balance in a given account

DrDebit

CrCredit

CrCredit


Whether an account is increased by debit or a credit is determined by the account type

Asset, liability, or equity

Debits are not good or badNeither are credits

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The account category governs the increase side or decrease side

Increases are recorded on one sideDecreases are recorded on the opposite side

Rules of debits and credits


The first transaction involves receiving $30,000 cash and issuing common stock The second transaction is a $20,000 purchase of land for cash

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Match the accounting terms on the left with the corresponding definitions on the right.

1. _____Posting2. _____ Receivable3. _____ Debit4. _____ Journal5. _____ Expense6. _____ Net Income7. _____ Normal Balance8. _____ Ledger9. _____ Payable10._____ Equity

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A. Using up assets in the course of operating a business

B. Book of accountsC. An assetD. Record of transactionsE. Left side of an accountF. Side of an account where

increases are recordedG. Copying data from the journal to

the ledgerH. Always a liabilityI. Revenues – Expenses =J. Assets – Liabilities =

GCEDAIFBHJ


Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice.1.When are debits increases?

When are debits decreases?

2. When are credits increases?

When are credits decreases?

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Debits are increases in the Assets, Dividends, and Expenses.

Debits are decreases in the Liabilities, Stockholders’ equity, Retained earnings and Revenues.

Credits are decreases in the Assets, Dividends, and Expenses.

Credits are increases in the Liabilities, Stockholders’ equity, Retained earnings and revenues.


List the steps of the transaction recording process

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Use the rules of debit and

credit


Journalize the first transaction of Smart Touch—the receipt of $30,000 cash and issuance of common stock

Step 1: The accounts affected are Cash and Common stock. Cash is an asset. Common stock is equity.Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits.

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Four parts:a) Date of transactionb) Title of account debited with dollar amountc) Title of account credited with dollar amountd) Brief explanation of transaction

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Journal Page 1

Date Description Debit Credit

Apr 1 Cash 30,000

Common stock 30,000

Issued stock.

Transaction date Accounts affected

Dollar amounts of debits and credits

Explanation of transaction


Ned Brown opened a medical practice in San Diego, California.1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation.

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Jan 1 The business received $29,000 cash and issued common stock.

2 Purchased medical supplies on account, $14,000.

2 Paid monthly office rent of $2,600.

3 Recorded $8,000 revenue for service rendered to patients on account.


Jan 1: The business received $29,000 cash and issued common stock

Cash received indicates cash increasesCash is an Asset; Assets increase with debits

Issued common stock; indicates equity is increasingIncrease equity with credits

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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Jan 1 Cash 29,000

Common Stock 29,000

Issued stock.


Jan. 2: Purchased medical supplies on account, $14,000

Medical Supplies, an asset, is increasingAssets increase with debits

On account, increases accounts payable, a liabilityIncrease liabilities with credits

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Jan 2 Medical supplies 14,000

Accounts payable 14,000

Purchased supplies on account.


Jan. 2: Paid monthly office rent of $2,600Paid rent, an expense, expense is increasing

Expenses increase with debits

Paid cash, cash is an assetIncrease assets with debits

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Jan 2 Rent Expense 2,600

Cash 2,600

Paid office rent.


Jan. 3: Recorded $8,000 revenue for service rendered to patients on account

On account indicates Accounts receivable increaseAccounts receivable is an Asset, Assets increase with debits

Rendered services, services are revenues, indicates revenues are increasing

Increase revenues with credits

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Jan 3 Accounts receivable 8,000

Service revenue 8,000

Performed service on account.


Copying amounts from the journal to the ledger

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Assets

Liabilities Liabilities Stockholders’ equity

Stockholders’ equity

+ Common stock + Retained earnings+ Revenues – Expenses– Dividends

+ Common stock + Retained earnings+ Revenues – Expenses– Dividends





Origin of accounting transactionsExamples:

Bank deposit ticketsInvoicesChecksStock certificates

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Journalize and post sample transactions to the ledger

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Cash Common stock

GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Cash 30,000

Common stock 30,000

Issued stock.

30,000 30,000


Cash Common stockLand

GENERAL JOURNAL


Land 20,000

Cash 20,000Received payment on account.

30,000 30,00020,000 20,000

10,000


Cash Accounts payableOffice supplies

GENERAL JOURNAL


Office supplies 500

Accounts payable 500Received payment on account.

30,000 20,000

Cash

30,000 20,000

10,000

500500


Cash Service revenue

GENERAL JOURNAL


Cash 5,500

Service revenue 5,500Received payment on account.

30,000 20,000

Cash

30,000 20,000

5,500

5,500



Oakland Floor Coverings, Inc. reported the following summarized data at December 31, 2012. Accounts appear in no particular order.

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Revenues $34,000 Other liabilities $18,000

Equipment 45,000 Cash 12,000

Accounts payable 2,000 Expenses 19,000

Common stock 22,000


Oakland Floor Coverings, Inc.

Trial Balance

December 31, 2012

Cash

Equipment

Accounts Payable

Other Liabilities

Common Stock

Revenues

Expenses

$ 12,000 45,000 $ 2,000

18,000 22,000 34,000 19,000 $76,000 $76,000


Use the January transaction data for Ned Brown, M.D., P.C. given in Short Exercise 2-5.2. After making the journal entries in Short Exercise 2-5, post to the T-accounts. No dates or posting references are required. Compute the balance of each account, and denote it as Bal

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Jan 1 The business received $29,000 cash and issued common stock.

2 Purchased medical supplies on account, $14,000.

2 Paid monthly office rent of $2,600.

3 Recorded $8,000 revenue for service rendered to patients on account.



Jan 1 Cash 29,000

Common Stock 29,000

Issued stock.

Cash Common stock

29,000 29,000



Jan 1 Medical supplies 14,000

Accounts payable 14,000

Purchased supplies on account.

Medical supplies Accounts payable

14,000 14,000



Jan 2 Rent Expense 2,600

Cash 2,600

Paid office rent.

Cash Rent expense

2,600 2,60029,000


GENERAL JOURNALDATE DESCRIPTION RE

FDEBIT CREDIT

Jan 3 Accounts receivable 8,000

Service revenue 8,000

Performed service on account.

Accounts receivable Service revenue8,000 8,000


Service revenue

8,000

Cash

29,000 2,600

Accounts receivable

8,000

Accounts payable

14,000

Common stock

29,000

Medical supplies

14,000

Rent expense

2,600

Bal 26,400 Bal 14,000

Bal 8,000 Bal 8,000

Bal 14,000 Bal 2,600

Bal 29,000


Ned Brown, M.D., P.C.

Trial Balance

January 3, 2012

Cash

Accounts receivable

Medical supplies

Accounts payable

Common stock

Service revenue

Rent expense

Total

$ 26,400 8,000 14,000

$ 14,000 29,000 8,000 2,600 $51,000 $51,000

S2-9: PREPARE THE TRIAL BALANCE


Prepare the trial balance from the T-accounts

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Summary of the ledgerLists all accounts with their balancesAccuracy check

Debits should equal credits

NOT a balance sheet

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Search for missing accountDivide the difference between total debits and total credits by two

Is there a debit/credit balance for this amount posted in the wrong column?

Divide out-of-balance amount by nine Slide–Adding or dropping a zero ($100 instead of $1,000)Transposition–Reversing two digits ($2,100 instead of $1,200)

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Think of the account, journal, ledger (T-account), and chart as matching tools. Businesses are just matching the business transaction to the account description that best captures the specific event that occurred.The accounting equation must always balance after each transaction is recorded. To achieve this balance, we record transactions using a double entry accounting system. In that system, debits are on the left and credits are on the right. Debits always equal credits.

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A transaction occurs and is recorded on a source document. Then, we identify the account names affected by the transaction and determine whether the accounts increased or decreased using the rules of debit and credit for the six main account types. Next, we record the transaction in the journal, listing the debits first. We then post all transactions to the ledger (T-account).

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Once the ledger (T-account) balances are calculated, the ending balance for each account is transferred to the trial balance. Recall that the trial balance is a listing of all accounts and their balances on a specific date. Total debits must always equal total credits on the trial balance. If they do not, then review the correcting trial balance errors section on Page 81 of the textbook.

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