Ppt ch 02

Chapter 2

Recording theTransaction

Prepared byBrooke C. W. Barker

Copyright © 2010 by Nelson Education Limited

Chapter 2: The Accounting Equation

Chapter Objectives

After completing this chapter, you will be able to:

define “debit” and “credit” as used in bookkeeping apply the accounting equation to solve for missing values

and to ensure balanced transactions analyze transactions for the purpose of recording them record typical bookkeeping transactions in a General

Journal

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Balancing the books means maintaining equality in the books.

The accounting equation is

Assets = Liabilities + Owner's Equity

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Chapter 2: The Accounting Equation 2-4

Example: The owner invests $150,000 cash to

start his business.


150,000 = Ø + 150,000

Chapter 2: The Accounting EquationCopyright © 2010 by Nelson Education Limited

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He then buys on account a new truck worth $20,000.

The accounting equation must always balance.


150,000 = Ø + 150,000+ 20,000 + 20,000170,000 = 20,000 + 150,000


The balance sheet is the formal representation of the accounting equation. For example,


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150,000 = 50,000 + 100,000

Chapter 2: Debit and Credit

Debit = left side of the equation

Credit = right side of the equation

Chapter 2: Debit and Credit

Assets are on the debit (left) side.

Liabilities and Owner's Equity are on the credit (right) side.

Chapter 2: Rules for Debit and Credit

Debit CreditAssets increase Assets decreaseLiabilities decrease Liabilities increaseEquities decrease Equities increaseRevenues decrease Revenues increaseExpenses increase Expenses decrease


What are the rules for the account called Furniture?

Kind of account:

Increases on:

Decreases on:

Debit CreditA + A -L - L +

OE - OE +R - R +E + E -



Kind of account: AssetIncreases on:

Decreases on:


OE - OE +R - R +E + E -



Kind of account: Asset

Increases on: DebitDecreases on:


OE - OE +R - R +E + E -



Kind of account: Asset

Increases on: Debit

Decreases on: Credit


OE - OE +R - R +E + E -


What are the rules for the account called Sales?

Kind of account:

Increases on:

Decreases on:


OE - OE +R - R +E + E -



Kind of account: RevenueIncreases on:

Decreases on:


OE - OE +R - R +E + E -



Kind of account: Revenue

Increases on: CreditDecreases on:


OE - OE +R - R +E + E -



Kind of account: Revenue

Increases on: Credit

Decreases on: Debit


OE - OE +R - R +E + E -

Chapter 2: Analyzing a Transaction

Before a transaction is recorded, these questions must be answered:

1. What was received or given through the transaction?2. What account is used for the item received or given?3. What kind of account is it?4. Will the account increase or decrease because of this

transaction?5. Will the account be debited or credited? For what

value?6. Is the entry balanced?

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Example #1:

Merchandise was sold for cash, $525.


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Example #1: Merchandise was sold for cash, $525.

1. What was received or given through the transaction?Cash was received. Merchandise was given.

2. What account is used for the item received or given?Bank (or Cash) is used for money.Sales is used when merchandise is sold.

3. What kind of account is it?Bank is an asset. Sales is a revenue.

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4. Will the account increase or decrease because of this transaction?

Bank will increase because we have more money.Sales will increase because we have recorded more sales.

5. Will the account be debited or credited? For what value?Assets increase on the debit, so Bank will be debited for $525.Revenues increase on the credit, so Sales will be credited for

$525.

6. Is the entry balanced?Yes, $525 is on both debit and credit sides.

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The result of the analysis is:

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Accounts Debit Credit

Bank 525.00 Sales 525.00

Analyzing a Transaction

Example #2:

A cheque for $48.95 was issued to pay this month’s phone bill.

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Example #2: A cheque for $48.95 was issued to pay this month’s phone bill.

1. What was received or given through the transaction?Phone bill was received. A cheque was given.

2. What account is used for the item received or given?Telephone Expense is used to record the phone bill.Bank (or Cash) is used to record cheques issued.

3. What kind of account is it?Telephone Expense is an expense. Bank is an asset.

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4. Will the account increase or decrease because of this transaction?

Telephone Expense will increase. It is an additional operating cost.Bank will decrease because we paid out money (by cheque).

5. Will the account be debited or credited? Expenses increase on the debit, so Telephone Expense will be debited. Assets decrease on the credit, so Bank will be credited.

6. Is the entry balanced?Yes, $48.95 is on both debit and credit.

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The result of the analysis is:

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Accounts Debit Credit

Telephone Expense 48.95

Bank 48.95

Chapter 2: General Journal

General Journal

The General Journal is where you will first learn to record all your transactions.

In later chapters, you will learn to use other kinds of journals.

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Let's look at the 10 steps of recording journal entries...

Step 1: Analyze the transaction (as already demonstrated).

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Step 2: Enter the date of the transaction.

The year date is required at the top of every journal page.

The month may be abbreviated when necessary.

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Step 3: Enter the account that will be debited.

The debit is always recorded first. The amount is then entered in the Debit column.

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Step 4: Enter the account that will be credited.

The account credited is always indented about 1 inch (2.5 cm).

The amount is then entered in the Credit column.

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Step 5: Enter an explanation of the transaction.

Invoice numbers, cheque numbers, due dates, etc. If necessary, the explanation can be many lines long.

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Note: In a compound entry, all debits are recorded before the credits.

Take extra care that the compound entry is balanced.

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Step 6: Leave a blank line before starting the next transaction.

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Step 7: Do not split a transaction between two pages.

If you cannot write the entire transaction on the same page, start it at the top of the next page.

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Step 8: Journal pages are numbered sequentially.

General Journal pages are numbered GJ1, GJ2, GJ3, etc.

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Step 9: Dollar signs, decimal points, and commas are not required in journal entries.

Use '00' or '–' when the amount has no cents.

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Step 10: Record journal entries in a “permanent” form.

Use ink, not pencil.

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Chapter 2: General JournalExample 1

On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.

Start a new journal page by giving it a page number.

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GJ1



Enter the date of the transaction (including the year date).

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GJ120--

Feb 1



Enter the account that is debited in this transaction.

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GJ120--

Feb 1 Bank

Debits are written at the left margin



Enter the amount in the Debit column.

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GJ120--

Feb 1 Bank 5 0 0 0 --

Write all amounts neatly. No $ signs, no decimal

points, no commas. Use 00 or '--' for no cents.



On the next line, enter the account that is credited.

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GJ120--

Feb 1 Bank 5 0 0 0 --Capital, M. Palon

Always indent about 1 inch (2.5 cm) for the

credit account.



Enter the amount in the Credit column.

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GJ120--

Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --



Check that the entry is balanced.

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GJ120--




Enter an explanation of the transaction.

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GJ120--


Owner's investment.



Leave a blank line before starting the next entry.

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GJ120--


Owner's investment.

Chapter 2: General Journal Example 2

On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.

Enter the date.

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GJ120--


Owner's investment.

4



Enter the first account debited and the amount.

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GJ120--


Owner's investment.

4 Furniture 1 5 0 0 --



Enter the second account debited and the amount.

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GJ120--


Owner's investment.

4 Furniture 1 5 0 0 --Equipment 8 0 0 --



Enter the account credited and the amount.

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GJ120--


Owner's investment.


Bank 2 3 0 0 --



Enter the explanation.

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GJ120--


Owner's investment.


Bank 2 3 0 0 --Bought furniture and equipment. Issued Chq #1.



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GJ120--


Owner's investment.


Bank 2 3 0 0 --Bought furniture and equipment. Issued Chq #1. This is a compound entry.

Record all debits before recording credits.

Be sure the entry balances.


End of Chapter 2

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Ppt ch 02

Economy & Finance

Transcript of Ppt ch 02