Accounting … Chapter 2

Chapter 2
 Account

Record of increases and decreases in a specific assets, liabilities,

equity, revenue or expense items

Example of an account

Dr Cr

(Dr) debt = left

(Cr) = credit = right

 Double entry accounting system

Each transaction effects two account, one of them would be debt

another would be credit

Dr = Cr

Debits must equal credits

1- Assets
Increase in assets  debit
Decrease in assets  credit
2- Liabilities
Decrease in Liabilities  debit
Decrease in Liabilities  credit
3- Owner's equity (capital)

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Accounting … Chapter 2
Decrease in capital  debit
Increase in capital  credit
4- Revenues
Decrease in Revenues debit
Increase in Revenues  credit
5- Expenses:
Increase in Expenses  debit
Decrease in Expenses  credit
6- Withdrawal, (drawings):
Increase in Withdrawal  debit
Decrease in Withdrawal  credit

 Normal balance:

The side when an increase in the account is recorded.

 Note
 Normal balance of assets is debit

 Normal balance of liabilities is credit

 Normal balance of capital is credit

 Normal balance of revenues is credit

 Normal balance of expense is debit

 Normal balance of Withdrawals is debit

Assets = liabilities + owner's equity

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Accounting … Chapter 2
Dr Cr Dr Cr Dr Cr
+ - - + - +

Revenues expenses drawings

Dr Cr Dr Cr Dr Cr
- + + - + -

Ex:

1- Account that normally have debit balances are:

a) Assets, expense and revenues
b) Assets, expense and owner's capital
c) Assets, liabilities and owner's drawings
d) Assets, owner's drawings and expenses
2- Account that normally have credit balance are:
a) Assets, liabilities and owner's capital
b) liabilities, owner's capital and revenues
c) liabilities, revenues and owner's drawings
d) liabilities, owner's capital and expenses
3- debit:
a) increase both assets and liabilities
b) decrease both assets and liabilities
c) increase assets and decrease liabilities
d) decrease assets and increase liabilities
 Journalizing (recording in Journal)

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Accounting … Chapter 2
Book of original entry, it is used to record transaction in order and
helping to prevent or locate errors because the debit and credit amount
can be easily compared.

Journalizing  entering transactions data in the Journal

Example of an account in Journal:

Data Account titles Dr Cr

X X X X

Example
 Given the following information about matrix company :-
 March 1The owner invested $ 15,000 cash to start the business.
 March 3 Purchased supplies from B Company for $ 1,600 cash.
 March 5 Purchased computer equipment for $ 7,000 cash.
 March 8 Purchased supplies of $ 400 and equipment of $ 700 on
account from B Company.
 March 12 Received $ 1,200 cash from customers for programming
services.
 March 14 made an advertising of $ 250 in the daily news on account.
 March 17 provided a programming services of $ 3,500 received cash
of $ 1,500 and $2,000 on credit.
 March 22 Paid rent and employees salaries of $ 800, $ 900 in
accordance.
 March 23 paid a bill of $ 250 for advertising to daily news.
 March 25 Received $ 600 from customers for services on account.
 March 29 with drew $ 1,300 cash from the company for personal use.
 Required :-
Prepare Journal entries to record the above transactions (Journalize
it in the general Journal)
Solve:

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Accounting … Chapter 2
Data Account titles Dr Cr
March 1 Cash 15,000
15,000
capital
March 3 supplies 1,600
Cash 1,600
March 5 equipment 7,000
Cash 7,000
March 8 supplies 400
equipment 700
1,100
account
payable
March 12 Cash 1,200
Service 1,200
revenue
March 14 Advertising expense 250
account 250
payable
March 17 Cash 1,500
Account receivable 2,000
3,500
Service
revenue
March 22 rent expense 800
salaries expense 900
1,700
cash
March 23 account payable 250
250
cash
March 25 Cash 600
Account 600
receivable
March 29 Withdrawals 1,300
1,300
cash

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Accounting … Chapter 2

 Posting Journal entries to the ledger

Posting: - is the process of transferring amount from Journal to the
ledger accounts.
General ledger: - contains the entire group of accounts maintained by a company.
Note that: - it includes assets, liabilities, owner's equity, revenue and
expenses accounts.
Ex: Refer to the previous example
 Post the Journal entries to the T from general ledger account.
Solve:
Cash Mar. 1 15,000
Mar. 1 1,500 Mar. 3 1,600 End bal. $15,000
Mar. 12 1,200 Mar. 5 7,000 Withdrawal
Mar. 17 1,500 Mar. 22 1,700 Mar. 29 1,300
Mar. 25 600 Mar. 29 1,300 End bal. $ 1,300
End bal. $6,450
Capital

equipment
supplies Mar. 5 7,000
Mar. 3 1,600 Mar. 8 700
Mar. 8 400 End bal. $ 7,700
End bal. $2,000

A/P
Service revenue Mar. 23 Mar. 8 1,100
Mar. 12 1,200 250 Mar. 14 250
Mar. 17 3,500
End bal. $ 1,100
End bal. $ 4,700

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Accounting … Chapter 2
A/R Rent expense
Mar. 17 2,000 Mar. 25 600 Mar. 22 800
End bal. $ End bal. End bal. $ 1100
1,400 $800
Advertising expense

Salaries expense Advertising expense

Mar. 22 Mar. 25 60
900 Mar. 14 250
End bal. $ 900 End bal. $ 250

 The trial balance : A list of all accounts and their balances at a

given time.
Note that: - the purpose of the trial balances is to prove that total debts
must equal total credit.
 Disadvantages of the trial balances (limitations):-
1- A transaction is not journalized.
2- Journal entry is posted twice.
3- Error in transactions wouldn't appear in the trial balances.
MCQ : A trial balance will not balance if:-
a) A collect Journal entry is posted twice.
b) The purchase of supplies on account is debited to supplies and
credit to cash.
c) A $ 100 cash drawing by the owner is debited to owner's
drawing for $ 1,000. And credit to cash for $ 100.
d) A $ 450 payment on account is debited to account payable for $
45 and credited to cash for $ 45.
Ex: Refer to the previous example prepare the trial balances.

Account titles Dr Cr
Cash 6,450
Supplies 2,000
Equipment 7,700
A/R 1,400
A/P 1,100
Capital 1,500
Withdrawals 1,300

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Accounting … Chapter 2
Services revenue 4,700
Advertising expense 250
Rent expense 800
Salaries expense 900
Totals $20,800 $20,800

Ex:
Given the following information about Mena Company in August:
 August 1 Mena invested 12,750 cash in the business.
 August 3 purchased office supplies for 375 cash.
 August 7 purchased 7,050 of office equipment on credit.
 August 9 received 1,500 cash as fees for services provided to
customers.
 August 12 paid 7,050 cash to settle the payable for the office
equipment purchased in transaction August 7
 August 15 billed customers 2,700 as fees for services provides.
 August 20 paid the monthly rent with 525 cash.
 August 24 collected 1,125 cash toward the account receivable
created in transaction August 15.
 August 29 Mena withdrew 1,000 cash for personal use.
Required:
1- Journalize the above transaction.
2- Post to ledger account.
3- Prepare the trial balance.
4- Prepare all financial statement.

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Accounting … Chapter 2

Solve
1- General Journal:

Data Account titles Dr Cr

August 1 Cash 12,750
Mena, 12,750
capital
August 3 Office supplies 375
Cash 375
August 7 Office equipment 7,050
account payable 7,050
August 9 Cash 1,500
Service 1,500
revenue
August 12 account payable 7,050
cash 7,050
August 15 Account receivable 2,700
Service 2,700
revenue
August 20 rent expense 525
Service 525
revenue
August 24 Cash 1,125
Account receivable 1,125

August 29 withdrawal 1,000

cas 1,000
h
2- Ledger account:
Cash 12,750 Aug. 12 7,050
Aug. 1 Aug. 3 375 Aug. 9 1,500 Aug. 20 525

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Accounting … Chapter 2
Aug. 24 1,125 Aug. 29 1,000 Supplies
End bal. $ 6,425 Aug. 3 375
End bal. $ 375

Equipment A/R
Aug. 7 7,050 Aug. 15 2,700 Aug. 24 1,125
End bal. $ 7,050 End bal. $ 1,575

A/P Capital
Aug. 12 7,050 Aug. 7 7,050 Aug. 1 12,750
End bal -0- End bal. $ 12,750

withdrawals Service revenue

Aug. 29 1,000 Aug. 9 1,500
End bal $ 1,000 Aug. 15 2,700
End bal $ 4,200

Rent expense
Aug. 20 525
End bal $ 525

3- Trail balance

Account titles Dr Cr
Cash 6,450
Account receivable 1,575
Office supplies 375
Office Equipment 7,050
Account payable 0
Capital 1,750

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Accounting … Chapter 2
Withdrawals 1,000
Services revenue 4,200
rent expense 525
Total 16,950 16,950
4- Income statement

Revenues
Services revenue 4,200
(-) expense
525
Rent expense
Net income 3,675

Statement of owner's equity

Capital – beginning -- 0 –
+ investment $ 12,750
+ net income 3,675
(-) with drawls (100)
= capital – ending $ 15,425
 Statement of cash flow
 Operating activities :-
+ cash in flow: 1,500 + 1,125 = $2,625
-- Cash out flow: 375+ 525 = $ 900
= net cash flow: $(1,725)
 Investing activities :-
+ Cash in flow:
-- Cash out flow: 7,050
= net cash flow: (7,050)
 Financial activities :-
+ cash in flow: $12,750
-- Cash out flow: $1,000
= net cash flow: $ 11,750

 Total net cash flow $ 6,425

+ Beginning cash balance -0-

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Accounting … Chapter 2
= ending cash balance $ 6425

Balance sheet
Assets : Liabilities : -0-
 Cash 6,425 Owner's equity :
 Account receivable 1,575  Capital $15,425
 Office supplies 375
 Office equipment 7,050
Total Assets $ 15,425 total liabilities and equity $15,425

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