CHAPTER 2 Recording Business Transactions

1. Recording Business Transactions
Chapter 2

2. Use accounting
terms
Objective 1

3. Accounting Terms
Account
Ledger
Assets
Liabilities
Owner’s
equity
Double-entry
accounting
T-account

4. Cash
CashAccounts
Pay able
Accounts
PayableGay Gillen,
Capital
Gay Gillen,
CapitalLedger
Ledger
All individual
accounts
combined
make up
the ledger.
Individual asset accounts
Individual liability accounts
Individual owner’s equity accounts
Accounting Terms

5. Classification of Accounts
What are some asset accounts?
–Cash
–Notes Receivable
–Accounts Receivable
–Prepaid Expenses
–Land
–Building
–Equipment

6. Classification of Accounts
What are some liability accounts?
–Notes Payable
–Accounts Payable
–Accrued Liabilities (for expenses incurred
but not paid)
–Long-term Liabilities (bonds)

7. Classification of Accounts
What are some owner’s equity accounts?
–Capital or owner’s interest in the business
–Withdrawals
–Revenues
–Expenses

8. John’s Gas Station Example
Assume that the business sold $5,000 worth
of gasoline on a given day and performed
$3,000 of repair services.
How much revenue did the business earn
that day?
$8,000

9. John’s Gas Station Example
Revenues increase John’s equity in the
business.
The business had to pay mechanics and
vendors $3,750 for the work performed
that day.

10. John’s Gas Station Example
Expenses decrease John’s equity in the
business.
How much was the net increase in John’s
equity that day?
$4,250

11. Contributed Capital
Retained Earnings
Classification of Accounts
In a corporation, the owner’s equity account
is called Stockholders’ Equity.

12. Double-Entry Accounting
Double entry bookkeeping means to record
the dual effects of each business
transaction.
Assets = Liabilities + Owner’s Equity
Assets are on the left (debit) side.
Liabilities and Equity are on the right
(credit) side.

13. The T-Account
Account Title
Debit Credit
Left Side

14. The T-Account
Account Title
Debit Credit
Right Side

15. Apply the Rules
of
Debit and Credit.
Objective 2

16. Owner’s Equity
Assets Liabilities
Debit
+
Debit
–
Credit
–
Debit
–
Credit
+
Credit
+
= +
Rules of Debit and Credit

17. One debit One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
The Double-Entry System

18. John’s Gas Station Example
On July 1, John invested $500,000 in cash
and obtained a $300,000 loan to open a gas
station.
How much was the initial increase in cash?
$800,000
Which accounts were affected?

19. John’s Gas Station Example
Cash
Liabilities
Owner’s Equity

20. John’s Gas Station Example
John’s Gas Station
Balance Sheet
July 1, 2002
Assets Liabilities
Cash $800,000Notes payable $300,000
Owner’s Equity
John, capital 500,000
Total liabilities
Total assets$800,000and owner’s equity$800,000

21. Record
Transactions
in the Journal.
Objective 3

22. Journals
What is a journal?
It is a list in chronological order of all the
transactions for a business.
1Identify transaction from source documents.
2Specify accounts affected.
3Apply debit/credit rules.
4Record transaction with description.

23. Journals
What does a journal entry include?
–date of the transaction
–title of the account debited
–title of the account credited
–amount of the debit and credit
–description of the transaction
–dollar signs are omitted

24. Recording Transactions
On April 2, Gay Gillen invested $30,000
in Gay Gillen eTravel.
What is the journal entry?
April 2
Cash 30,000
Gay Gillen, Capital
30,000 Received initial investment from
owner

25. Post from the
Journal
to the Ledger.
Objective 4

26. Bound
books
Computer
printout
Cards
Loose leaf
pages
Ledger
What is a ledger?
It is a digest of all accounts utilized by an
entity during an accounting period.

27. Posting
What is posting?
It is the transfer of information from the
journal to the appropriate accounts in the
ledger.

28. Normal Account Balances
Assets = Liabilities + Owner’s Equity
Debits = Credits
The side where we expect increases to be
recorded is the normal balance side.

29. Cash
(1) 30,000 (2) 20,000
(4) 300
(6) 2,100
Bal.
7,600
Office Supplies
(3) 500
Bal. 500
Land
(2) 20,000
Bal.
20,000
Asset Accounts After Posting

30. Accounts Payable
Gay Gillen, Withdrawals
(1) 30,000
Bal. 30,000
(3) 500(4) 300
Bal. 200
Gay Gillen, Capital
(6) 2,000
Bal. 2,000
Liabilities and Owner’s Equity
Accounts After Posting

31. Details of Journals and Ledgers
DateAccounts and Explanation DebitCredit
April 2Cash 30,000
Gay Gillen, Capital 30,000
Received initial
investment from owner
Journal Page 1

32. Details of Journals and Ledgers
Balance
Date Ref. Debit Credit Debit Credit
April 2 jrl 30,000 30,000
Account: Cash Account: 101
Insert the number of the journal page.
Posting

33. Details of Journals and Ledgers
Journal Page 1
Date Account and
Explanation Post Ref. Debit Credit
April 2 Cash 101 30,000
Gay Gillen, Capital 301
30,000
Initial investment
from owner
Insert the ledger account in the journal.

34. Balance
Account: Cash Account No. 101
Date Item Ref. Debit Credit Debit Credit
April 2 jr1 30,000 30,000
The Four-Column Account
Format

35. Prepare and use a Trial
Balance.
Objective 5

36. Trial Balance
What is a trial balance?
It is an internal document.
It is a listing of all the accounts with their
related balances.
Before computers, it provided a check on
accuracy by showing whether total debits
equal total credits.

37. DEBITS CREDITS
Locating Trial Balance Errors
What if it doesn’t balance ?
Is the addition correct?
Are all accounts listed?
Are the balances listed correctly?

38. Locating Trial Balance Errors
Divide the difference by two.
Is there a debit/credit balance for this
amount posted in the wrong column?
Check journal postings.
Review accounts for reasonableness.
Computerized accounting programs usually
prohibit out-of-balance entries.

39. Analyze
Transactions
without a Journal.
Objective 6

40. John’s Gas Station
John is considering either purchasing a
garage for $70,000 or renting one for
$10,000 per year.
John does not need to record in the journal
all of the transactions that would affect his
decision.
Why?

41. John’s Gas Station
John has not completed a transaction yet.
However, John can visualize how the ledger
accounts will be affected.

42. Rent the garage
Buy the garage
Cash
70,000
Building
70,000
John’s Gas Station
Rent ExpenseCash
10,000 10,000

43. End of Chapter 2