FINANCIAL ACCOUNTING

Chapter
4-1

The
The Account
Account
Account

Record of increases and decreases

in a specific asset, liability, equity,
revenue, or expense item.
Debit = Left
Credit = Right

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

Chapter
4-2

Account Name
Debit / Dr.

Credit / Cr.

Debits
Debits and
and Credits
Credits
Double-entry accounting 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.

Chapter
4-3

Debits
Debits and
and Credits
Credits
If Debits are greater than Credits, the account
will have a debit balance.
Account Name
Debit / Dr.

Transaction #1

$10,000

Transaction #3

8,000

Balance

Chapter
4-4

$15,000

Credit / Cr.

$3,000

Transaction #2

Debits
Debits and
and Credits
Credits
If Credits are greater than Debits, the account
will have a credit balance.
Account Name
Debit / Dr.

Transaction #1

Balance

Chapter
4-5

$10,000

Credit / Cr.

$3,000

Transaction #2

8,000

Transaction #3

$1,000

Debits
Debits and
and Credits
Credits Summary
Summary
Normal
Normal
Balance
Balance
Debit
Debit

Normal
Normal
Balance
Balance
Credit
Credit

Assets

Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-24

Owners Equity

Credit / Cr.

Debit / Dr.

Liabilities

Debit / Dr.

Credit / Cr.

Normal Balance
Normal Balance
Chapter
3-23

Expense
Debit / Dr.

Revenue

Chapter
3-25

Credit / Cr.

Debit / Dr.

Normal Balance

Chapter
3-27

Chapter
4-6

Credit / Cr.

Normal Balance

Chapter
3-26

Debits
Debits and
and Credits
Credits Summary
Summary
Balance Sheet
Asset
Debit

Credit

Chapter
4-7

= Liability + Equity

Income Statement
Revenue - Expense

Debits
Debits and
and Credits
Credits Summary
Summary

Review Question
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.

Chapter
4-8

Debits
Debits and
and Credits
Credits Summary
Summary

Discussion Question
Maria Alvarez, a beginning accounting student,
believes debit balances are favorable and credit
balances are unfavorable. Is Maria correct?
Discuss.

Chapter
4-9

Assets
Assets and
and Liabilities
Liabilities
Assets
Debit / Dr.

Credit / Cr.

Liabilities Credits
should exceed debits.

Normal Balance

Chapter
3-23

Liabilities
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-24

Chapter
4-10

Assets - Debits should

exceed credits.

The normal balance is on

the increase side.

Owners
Owners Equity
Equity
Owners Equity
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-25

Chapter
4-11

Owners investments and

revenues increase owners
equity (credit).
Expenses decrease owners
equity (debit).

Revenue
Revenue and
and Expense
Expense
Revenue
Debit / Dr.

Credit / Cr.

Normal Balance

Chapter
3-26

Expense
Debit / Dr.

Normal Balance

Chapter
3-27

Chapter
4-12

Credit / Cr.

The purpose of earning

revenues is to benefit the
owner(s).
The effect of debits and
credits on revenue accounts
is the same as their effect
on Owners Capital.
Expenses have the opposite
effect: expenses decrease
owners equity.

Debits
Debits and
and Credits
Credits Summary
Summary

Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owners capital.
c. assets and liabilities.
d. assets and expenses.

Chapter
4-13

Steps
Steps in
in the
the Recording
Recording Process
Process

Analyze each transaction

Enter transaction in a journal

Transfer journal information

to ledger accounts

Business documents, such as a sales slip, a check, a

bill, or a cash register tape, provide evidence of the
transaction.
Chapter
4-14

The
The Journal
Journal
Book of original entry (General Ledger).
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.

Chapter
4-15

Journalizing
Journalizing
Journalizing - Entering transaction data in the journal.
E1 (Facts) Presented below is information related to Hanshew
Real Estate Agency.
Oct. 1 Pete Hanshew begins business as a real estate agent with
a cash investment of $15,000.
3 Purchases office furniture for $1,900, on account.
6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200
for realty services provided.
27 Pays $700 on balance related to transaction of Oct. 3.
30 Pays the administrative assistant $2,500 salary for Oct.
Instructions - Journalize the transactions for E1.
Chapter
4-16

Journalizing
Journalizing
E1 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Pete Hanshew begins business as a real estate
agent with a cash investment of $15,000.

Oct. 1

General Journal
Date
Oct.

Account Title
1

Cash
Hanshew, Capital
(Owners investment)

Chapter
4-17

Ref.

Debit

Credit

15,000
15,000

Journalizing
Journalizing
E1 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct. 3

Purchases office furniture for $1,900, on

account.
General Journal

Chapter
4-18

Journalizing
Journalizing
E1 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct. 6

Sells a house and lot for B. Kidman; bills B.

Kidman $3,200 for realty services provided.
General Journal

Chapter
4-19

Journalizing
Journalizing
E1 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct. 27 Pays $700 on balance related to transaction of

Oct. 3.

General Journal

Chapter
4-20

Journalizing
Journalizing
E1 (Facts) Presented below is information related to
Hanshew Real Estate Agency.
Oct. 30 Pays the administrative assistant $2,500

salary for Oct.

General Journal

Chapter
4-21

Journalizing
Journalizing
Simple Entry Two accounts, one debit and one credit.
Compound Entry Three or more accounts.
Example On June 15, H. Burns, purchased equipment
for $15,000 by paying cash of $10,000 and the balance
on account (to be paid within 30 days).
General Journal

Chapter
4-22

The
The Ledger
Ledger
A General Ledger contains the entire group of
accounts maintained by a company.
The General Ledger includes all the asset,
liability, owners equity, revenue and expense
accounts.

Chapter
4-23

Standard
Standard Form
Form of
of Account
Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.
Cash
Date
Oct.

Chapter
4-24

Explanation
1
27
30

Ref.

No. 101
Debit

Credit

15,000
700
2,500

Balance
15,000
14,300
11,800

Posting
Posting
Posting the process of transferring amounts from the
journal to the ledger accounts.
General Journal
Date
Oct. 1

Account Title
Cash
Hanshew, Capital

J1

Ref.

Debit

Credit

15,000

101

15,000

(Owner's investment in business)

General Ledger
Cash
Date

Oct. 1

Chapter
4-25

Explanation

Ref.

J1

Debit

15,000

Acct. No. 101

Credit

Balance

15,000

Posting
Posting

Review Question
Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the

journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

Chapter
4-26

The
The Recording
Recording Process
Process Illustrated
Illustrated
Follow these steps:
1. Determine what
type of account
is involved.
2. Determine what
items increased
or decreased
and by how
much.
3. Translate the
increases and
decreases into
debits and
credits.
Chapter
4-27

The
The Trial
Trial Balance
Balance
A list of accounts
and their balances
at a given time.
Purpose is to
prove that debits
equal credits.

Chapter
4-28

Recording
Recording Process
Process

Discussion Question

Jim Benes is confused about how accounting information

flows through the accounting system. He believes the
flow of information is as follows.
a.
b.
c.
d.
e.

Debits and credits posted to the ledger.

Business transaction occurs.
Information entered in the journal.
Financial statements are prepared.
Trial balance is prepared.

Is Jim correct? If not, indicate to Jim the proper flow

of the information.
Chapter
4-29

Closing
Closing the
the Books
Books
At the end of the accounting period, the company
makes the accounts ready for the next period.

Chapter
4-30

Closing
Closing the
the Books
Books
Closing entries formally recognize, in the general
ledger, the transfer of
net income (or net loss)
to owners capital.

Closing entries are only at the end of the annual

accounting period.
Chapter
4-31

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible
to reverse the incorrect entry and then prepare the
correct entry.

Chapter
4-32

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Eg. At Batavia Company, the following errors were discovered
after the transactions had been journalized and posted.
Prepare the correcting entries.
1. A collection on account from a customer was recorded as a
debit to Cash and a credit to Service Revenue for $780.
Incorrect
entry

Cash

Correct
entry

Cash

Correcting
entry

Service revenue

Chapter
4-33

Service revenue
Accounts receivable
Accounts receivable

780
780
780
780
780
780

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Eg. At Batavia Company, the following errors were discovered
after the transactions had been journalized and posted.
Prepare the correcting entries.
2. The purchase of supplies on account for $1,570 was recorded
as a debit to Store Supplies and a credit to Accounts Payable
for $1,750.
Incorrect
entry

Store Supplies

Correct
entry

Store Supplies

Correcting
entry

Accounts payable

Chapter
4-34

Accounts payable
Accounts payable
Store Supplies

1,750
1,750
1,570
1,570
180
180

The
The Classified
Classified Balance
Balance Sheet
Sheet
Presents a snapshot at a point in time.
To improve understanding, companies group
similar assets and similar liabilities together.

Standard Classifications
Assets
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Chapter
4-35

Liabilities and Owners Equity

Current liabilities
Long-term liabilities
Owners equity

The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Assets
Assets that a company expects to convert to
cash or use up within one year.

Chapter
4-36

The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Assets

Companies usually list current asset accounts in the order

they expect to convert them into cash.
Chapter
4-37

The
The Classified
Classified Balance
Balance Sheet
Sheet

Review Question
Cash, and other resources that are reasonably
expected to be realized in cash or sold or
consumed in the business within one year or the
operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
Chapter
4-38

The
The Classified
Classified Balance
Balance Sheet
Sheet
Long-Term Investments
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or
buildings that a company is not currently using in its
operating activities.

Chapter
4-39

The
The Classified
Classified Balance
Balance Sheet
Sheet
Property, Plant, and Equipment
Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a
number of years.
Accumulated depreciation - total amount of
depreciation expensed thus far in the assets
life.
Chapter
4-40

The
The Classified
Classified Balance
Balance Sheet
Sheet
Property, Plant, and Equipment

Chapter
4-41

The
The Classified
Classified Balance
Balance Sheet
Sheet
Intangible Assets
Assets that do not have physical substance.

Chapter
4-42

The
The Classified
Classified Balance
Balance Sheet
Sheet

Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

Chapter
4-43

The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Liabilities
Obligations the company is to pay within the
coming year.
Liquidity - ability to pay obligations expected
to be due within the next year.

Chapter
4-44

The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Liabilities

Chapter
4-45

The
The Classified
Classified Balance
Balance Sheet
Sheet
Long-Term Liabilities
Obligations a company expects to pay after one year.

Chapter
4-46

The
The Classified
Classified Balance
Balance Sheet
Sheet
Owners Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.

Chapter
4-47