Post on 28-Dec-2015
Recording Business
Transactions
Chapter 2
2-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. Explain accounts as they relate to the accounting equation and describe common accounts
2. Define debits, credits, and normal account balances using double-entry accounting and T-accounts
3. Record transactions in a journal and post journal entries to the ledger
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Learning Objectives
4. Prepare the trial balance and illustrate how to use the trial balance to prepare financial statements
5. Use the debt ratio to evaluate business performance
2-3Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objective 1
Explain accounts as they relate to the
accounting equation and describe common
accounts
2-4Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
What Is an Account?
• Each element of the Accounting Equation contains smaller elements called accounts.
• Account—the detailed record of all increases and decreases that have occurred in an individual asset, liability, equity, revenue or expense during a specified period.
LiabilitiesAssets = + Equity
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Chart of Accounts
• Companies typically maintain a listing of all of the accounts that they use in their accounting system, called the Chart of Accounts.
• Often accounts are numbered.– The numbers will usually be
grouped by account type.
Large companies can have thousands of
different accounts that are used in their
accounting system.
It is easier to reference a specific account if
there is a number assigned to it.
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Chart of Accounts
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Learning Objective 2
Define debits, credits, and normal account
balances using double-entry accounting and
T-accounts
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What Is Double-Entry Accounting?
• Transactions always have two impacts on the accounting equation.– When Smart Touch
bought land, the Land account increased, but the Cash account decreased by the same amount.
– These “double” entries help keep the accounting equation in balance.
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What Is a T-Account?
• A T-account is a shortened visual form of the more formal general ledger account format.
• Increases are shown on one side of the T-account and decreases on the other side.
• The T-account is balanced at the end of each period.
+/- +/-Account Name
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What Are Debits and Credits?
• Debits and Credits are used to record the increases and decreases in T-accounts. – Debit means “left” – Credit means “right”
• Any time we put a debitin one account, we have to put an equal credit inanother account.
Debit (DR) Credit (CR)Account Name
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What Are Debits and Credits?
• An account with more debits than credits will have a “debit” balance.
• An account with more credits than debits willhave a “credit” balance.
• Some accounts will beincreased with debits, andsome accounts will be increased with credits.
Debit (DR) Credit (CR)Account Name
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What Are Debits and Credits?
• We can explain the balancing impact of transactions using T-accounts and debits and credits.
2-13Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
What Are Debits and Credits?
• When Smart Touch purchases land, we use debits to increase the Land account, and credits to decrease the Cash account.
20,000 Cash
20,000 Land
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Increases in company’s contributions or
distributions will be reflected in the changing Common
Stock and Dividends accounts, respectively.
What Are Debits and Credits?
Debit for Credit forDecreases Increases
Common Stock
Debit forIncreases
Dividends
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When revenues exceed expenses, net income
increases Retained Earnings.
What Are Debits and Credits?
Debit for Credit forDecreases Increases
Retained Earnings
Credit forIncreases
RevenuesDebit forIncreases
Expenses
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Learning Objective3
Record transactions in a journal and post
journal entries to the ledger
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How Do You Record Transactions?
The next step in the process is to formally record the transaction in the
General Journal.2-18Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• Transactions are first recorded using a “journal entry."
• The account to be debited is usually written first.
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Date Description Debit Credit
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How Do You Record Transactions?
• In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock.
• Cash should be debited for $30,000 and Common Stock should be credited for $30,000.
2-20
Date Description Debit Credit
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• In Transaction #1, Smart Touch Learning sold $30,000 worth of Common Stock.
• Cash should be debited for $30,000 and Common Stock should be credited for $30,000.
2-21
Date Description Debit Credit
1-Nov Cash 30,000 Common Stock 30,000 Sale of Common Stock .
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• Next, each amount should be “posted” to the appropriate T-account.
• Without this step, the trial balance will NOT balance.
2-22
Date Description Debit Credit
1-Nov Cash 30,000 Common Stock 30,000 Sale of Common Stock .
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How Do You Record Transactions?
2-23
Date Description Debit Credit
1-Nov Cash 30,000 Common Stock 30,000 Sale of Common Stock .
30,000 30,000
Cash Common Stock
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• In Transaction #2, Smart Touch purchased Land for $20,000 cash.
• Land should be debited for $20,000 and Cash should be credited for $20,000.
2-24
Date Description Debit Credit
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• In Transaction #2, Smart Touch purchased Land for $20,000 cash.
• Land should be debited for $20,000 and Cash should be credited for $20,000.
2-25
Date Description Debit Credit
2-Nov Land 20,000 Cash 20,000 Paid cash for land.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• Next, each amount should be “posted” to the appropriate T-account.
• Without this step, the trial balance will NOT balance.
2-26
Date Description Debit Credit
2-Nov Land 20,000 Cash 20,000 Paid cash for land.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
2-27
Date Description Debit Credit
2-Nov Land 20,000 Cash 20,000 Paid cash for land.
20,000 30,000 20,000
Land Cash
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash.
• Office Supplies should be debited for $500 and Accounts Payable should be credited for $500.
2-28
Date Description Debit Credit
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• In Transaction #3, Smart Touch purchased Office Supplies on account for $500 cash.
• Office Supplies should be debited for $500 and Accounts Payable should be credited for $500.
2-29
3-Nov Office Supplies 500 Accounts Payable 500 Purchased office supplies on account.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
• Next, each amount should be “posted” to the appropriate T-account.
• Without this step, the trial balance will NOT balance.
2-30
Date Description Debit Credit
3-Nov Office Supplies 500 Accounts Payable 500 Purchased office supplies on account.
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
How Do You Record Transactions?
2-31
Date Description Debit Credit
3-Nov Office Supplies 500 Accounts Payable 500 Purchased office supplies on account.
500 500 Office Supplies Accounts Payable
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Learning Objective 4
Prepare the trial balance and illustrate
how to use the trial balance to prepare
financial statements
2-32Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Trial Balance
The primary purpose of the trial balance is to
prove the mathematical equality of debits and credits after posting.
The amounts come from the individual
account balances in the General Ledger.
Smart Touch Learning
Trial Balance
December 31, 2014
Debit Credit
Cash 12,200$
Accounts Receivable 1,000
Office Supplies 500
Prepaid Rent 3,000
Furniture 18,000
Building 60,000
Land 20,000
Accounts Payable 200
Utilities Payable 100
Unearned Revenue 600
Notes Payable 60,000
Common Stock 48,000
Dividends 5,000 -
Service Revenue 16,500
Rent Expense 2,000
Salaries Expense 3,600
Utilities Expense 100
125,400$ 125,400$
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First, we prepare the Income Statement.
Smart Touch Learning
Trial Balance
December 31, 2014
Debit Credit
Cash 12,200$
Accounts Receivable 1,000
Office Supplies 500
Prepaid Rent 3,000
Furniture 18,000
Building 60,000
Land 20,000
Accounts Payable 200
Utilities Payable 100
Unearned Revenue 600
Notes Payable 60,000
Common Stock 48,000
Dividends 5,000 -
Service Revenue 16,500
Rent Expense 2,000
Salaries Expense 3,600
Utilities Expense 100
125,400$ 125,400$
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Revenues Service Revenue 16,500$ Expenses Salaries Expense 3,600$ Rent expense 2,000 Utilities Expense 100 Total expenses 5,700 Net income 10,800$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
The information for the Statement of
Retained Earnings comes from the trial
balance AND from the Income Statement.
Smart Touch Learning
Trial Balance
December 31, 2014
Debit Credit
Cash 12,200$
Accounts Receivable 1,000
Office Supplies 500
Prepaid Rent 3,000
Furniture 18,000
Building 60,000
Land 20,000
Accounts Payable 200
Utilities Payable 100
Unearned Revenue 600
Notes Payable 60,000
Common Stock 48,000
Dividends 5,000 -
Service Revenue 16,500
Rent Expense 2,000
Salaries Expense 3,600
Utilities Expense 100
125,400$ 125,400$
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Retained Eanings, 11/1/14 -$ Net Income for 2 Months 10,800
10,800 Dividends (5,000) Retained Earnings, 12/31/14 5,800$
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Revenues Service Revenue 16,500$ Expenses Salaries Expense 3,600$ Rent expense 2,000 Utilities Expense 100 Total expenses 5,700 Net income 10,800$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
The information for the Statement of
Owner’s Equity comes from the trial balance AND from the Income
Statement.
Smart Touch Learning
Trial Balance
December 31, 2014
Debit Credit
Cash 12,200$
Accounts Receivable 1,000
Office Supplies 500
Prepaid Rent 3,000
Furniture 18,000
Building 60,000
Land 20,000
Accounts Payable 200
Utilities Payable 100
Unearned Revenue 600
Notes Payable 60,000
Common Stock 48,000
Dividends 5,000
Service Revenue 16,500
Rent Expense 2,000
Salaries Expense 3,600
Utilities Expense 100
125,400$ 125,400$
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AssetsCash 12,200$ Accounts Receivable 1,000 Office Supplies 500 Prepaid Rent 3,000 Furniture 18,000 Building 60,000 Land 20,000 Total Assets 114,700$
LiabilitiesAccounts Payable 200$ Utilities Payable 100 Unearned Revenue 600 Notes Payable 60,000 Total Liabilities 60,900
Stockholders' Equity Common Stock 48,000 Retained Earnings 5,800
Total Stockholders' Equity 53,800$ Total Liabilities & Stockholders' Equity 114,700$
31-Dec-14
Learning Objective 5
Use the debt ratio to evaluate business
performance
2-37Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
The Debt Ratio
• The debt ratio shows the proportion of assets financed with debt.
• It can be used to evaluate a business’s ability to pay its debts and to determine if the company has too much debt to be considered financially “healthy.”
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 2-38
End of Chapter 2
2-39Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall