Fundamentals of accounting

Transaction Analysis and the Accounting Equation

CHAPTER2

The Recording

ProcessSTUDY OBJECTIVES:

1)Explain what an account is and helps in recording process.

2) Define debit and credit.

3) Explain journal and journalizing process

PreviewofCHAPTER2

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Dt Cr

The accounts can be classified as:

1. Assets. 2. Liabilities.3. Owner’s Equity.

Resources a business owns

Can be divided into :1. Current Assets. 2. Long term Assets.

Assets that can be converted to cash or used to pay current liabilities within 12 months.

Examples :

1. Cash 2. Account Receivables.

known as a non-current asset which cannot easily be converted into cash.

Examples:

1. Land. 2. Building. 3. Machinery.

http://en.wikipedia.org/wiki/Cash

Creditor claims on total assets

Can be divided into:1. Current Liabilities. 2. Long Term Liabilities.

current liabilities are all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle* of a given firm, whichever period is longer.

Examples:1. Account Payable. 2. Rent Payable, Salary Payable.

* An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues

all liabilities of the business that are to be settled in cash more than one year

Examples:1. Debenture. 2. Bank Loan.

The ownership claim on total assets.

Divided into:1. Capital. 2. Drawing. 3. Revenue. 4. Expense.

Luca PacioliFounder of Double Entry

System

Scale or Balance

DEBIT CREDIT

An account must have a titleAn account must have a title

Cash

Account Name

Debit / Dr. Credit / Cr.

An Account can be An Account can be illustrated in a T-illustrated in a T-Account form.Account form.

SO 1 Explain what an account is and how it helps in the recording process.

The Account

Left side of an account is called debit side.

Left side of an account is called debit side.

Cash

Left debit

Right side of an account is called as Right side of an account is called as credit side.credit side.

Right side of an account is called as Right side of an account is called as credit side.credit side.

Cash

Left debit

Right credit

Double-entry system

► Each transaction must affect two or more accounts to

keep the basic accounting equation in balance.

► Recording done by debiting at least one account and

crediting another.

► DEBITS must equal CREDITS.

SO 2 Define debits and credits and explain their use in recording business transactions.

Debit and Credit Procedures

The Account

Account Name


If Debits are greater than Credits, the account will have

a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Debits and Credits


Account Name


$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3

If Debits are less than Credits, the account will have a

credit balance.

Debits and Credits


Assets - Debits should exceed

credits.

Liabilities – Credits should

exceed debits.

Normal balance is on the

increase side.

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities



Debits and Credits


Owner’s investments and

revenues increase owner’s equity

(credit).

Owner’s drawings and expenses

decrease owner’s equity (debit).

Chapter 3-25



OwnerOwner’’s Capitals Capital

Chapter 3-23

OwnerOwner’’s Drawings Drawing



Chapter 3-25



OwnerOwner’’s Equitys Equity

Debits and Credits


Purpose of earning revenues is to

benefit the owner(s).

Effect of debits and credits on

revenue accounts is the same as

their effect on Owner’s Capital.

Expenses have the opposite effect:

expenses decrease owner’s

equity.

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue

Debits and Credits


Chapter 3-23

AssetsAssets



Chapter 3-27



ExpenseExpense

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits/Credits Rules

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



OwnersOwners’’ EquityEquity

SO 2

Chapter 3-26



RevenueRevenue

Cr.Dt.

+-Owner’s equity

+-Liability

-+Asset

ASSETS = LIABILITIES + O/EQUITYASSETS = LIABILITIES + O/EQUITY

Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit



Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.


Question


Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and owner’s capital.

c. assets, liabilities, and owner’s drawings.

d. assets, owner’s drawings, and expenses.


Question


Relationship among the assets, liabilities and owner’s equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Assets Liabilities= Owner’s EquityBasic Equation

Expanded Basic Equation

+Illustration 2-11

Summary of Debits/Credits Rules


Source documents, such as a sales slip, a check, a bill, or a

cash register tape, provide evidence of the transaction.

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Illustration 2-12

Analyze each transaction Enter transaction in a journalTransfer journal information to ledger accounts

Steps in the Recording Process

Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.

SO 4 Explain what a journal is and how it helps in the recording process.

The Journal


Enter the transaction date in the date column.

J1General Journal

CreditDebitRef.Account Titles and ExplanationDate

2011

Oct. 1

The debit account title is entered first at the extreme left margin in the “account titles and explanation column and the amount is recorded in the DEBIT column .

J1General Journal


2011

Oct. 1 Cash 15,000

The credit account title is indented and entered at the next line in the “account titles and explanation column and the amount is recoded in the CREDIT column .

J1General Journal


2011

Oct. 1 Cash 15,000

Owner’s Capital 15,000

A brief explanation of the transaction appears on the line below the credit title.

J1General Journal


2011

Oct. 1 Cash 15,000


(Owner’s investment of cash in the business.)

The column titled Ref. Is left blank when the journal entry is made. This column is used later when journal entry is transferred to the accounts.

J1General Journal


2011

Oct. 1 Cash 15,000


(Owner’s investment of cash in the business.)

If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.

When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.

Journalizing - Entering transaction data in the journal.

SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.

Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash.

Account Title Ref. Debit CreditDate

Cash

Owner’s, Capital

Sept. 1 15,000

15,000

General Journal

Equipment

Cash

7,000

7,000

Illustration 2-13


Simple and Compound Entries

SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.

Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account.

Account Title Ref. Debit CreditDate

Equipment

Cash

July 1 14,000

8,000

General Journal

6,000Accounts payable

Illustration 2-14


Education

Fundamentals of accounting