Chapter 02-Recording Business Transactions

Chapter 2
1
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Explain accounts, journals, and ledgers as
they relate to recording transactions and
describe common accounts
Define debits, credits, and normal account
balances and use double-entry accounting
and T-accounts
List the steps of the transaction recording
process
2
Journalize and post sample transactions to
the ledger
Prepare the trial balance from the
T-accounts
3
1
Explain accounts, journals, and ledgers as they
relate to recording transactions and describe
common accounts
4
Record
transactions
in the journal
Copy (post) to
the ledger
Prepare the
trial balance
5
Journal
Chronological record of transactions
Organized by date
Ledger
The book holding all the accounts and their
balances
Organized by account
6
Listing of all accounts and their balances
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ASSETS LIABILITIES EQUITY
Economic Claims to Economic

Resources Resources
8
Economic resources that will benefit the business in the
future:
Cash
Accounts receivable
Notes receivable
Prepaid expenses
Land
Building
Equipment, Furniture, Fixtures
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A debt (something owed):
Accounts payable
Notes payable
Accrued liabilities
10
Owners’ claim to the assets:
Common stock
Retained earnings
Dividends
Revenues
Expenses
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2
Define debits, credits, and normal account
balances and use double-entry accounting and
T-accounts
12
Record dual effects of each transaction
Each transaction has a:
Receiving side
Giving side
Examples:
Company purchases supplies (receiving) with cash
(giving)
Company issues stock (giving) and receives cash
(receiving)
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Tool for analyzing and determining the balance
in a given account
Account Name
(Left Side) (Right Side)
Dr Cr
Debit Credit
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Whether an account is increased by debit or a
credit is determined by the account type
Asset, liability, or equity
Debits are not good or bad
Neither are credits
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The account category governs the increase side
or decrease side
Increases are recorded on one side
Decreases are recorded on the opposite side
Rules of debits and credits
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Illustrate Debits and Credits
The first transaction involves receiving $30,000 cash
and issuing common stock
The second transaction is a $20,000 purchase of land
for cash
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Match the accounting terms on the left with the corresponding
definitions on the right.
1. _____Posting
G A. Using up assets in the course of
2. _____
C Receivable operating a business
3. _____
E Debit B. Book of accounts
C. An asset
D Journal
4. _____
D. Record of transactions
A
5. _____ Expense
E. Left side of an account
I
6. _____ Net Income F. Side of an account where
F Normal Balance
7. _____ increases are recorded
B Ledger
8. _____ G. Copying data from the journal to
H Payable
9. _____ the ledger
J
10. _____ Equity H. Always a liability
I. Revenues – Expenses =
J. Assets – Liabilities =
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Margaret Alves is tutoring Timothy Johnson, who is taking
introductory accounting. Margaret explains to Timothy that
debits are used to record increases in accounts and credits
record decreases. Timothy is confused and seeks your advice.
1. When are debits increases?
Debits are increases in the Assets, Dividends, and Expenses.
When are debits decreases?
Debits are decreases in the Liabilities, Stockholders’ equity,
Retained earnings and Revenues.
2. When are credits increases?
Credits are increases in the Liabilities, Stockholders’ equity,
Retained earnings and revenues.
When are credits decreases?
Credits are decreases in the Assets, Dividends, and Expenses.
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3
List the steps of the transaction recording
process
20
Determine if each
Identify each Record
account is
account affected transaction in the
increased or
and its type journal
decreased
Use the rules

of debit and
credit
21
Journalize the first transaction of Smart Touch—
the receipt of $30,000 cash and issuance of
common stock
Step 1: The accounts affected are Cash and
Common stock. Cash is an asset. Common stock is
equity.
Both accounts increase by $30,000. Assets increase
with debits. Equity increases with credits.
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Four parts:
a) Date of transaction
b) Title of account debited with dollar amount
c) Title of account credited with dollar amount
d) Brief explanation of transaction
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Transaction date Accounts affected
Journal Page 1
Date Description Debit Credit
Apr 1 Cash 30,000
Common stock 30,000
Issued stock.
Explanation of Dollar amounts of

transaction debits and credits
24
Ned Brown opened a medical practice in San
Diego, California.
1. Record the preceding transactions in the journal of
Ned Brown, M.D., P.C. Include an explanation.
Jan 1 The business received $29,000 cash and issued

common stock.
2 Purchased medical supplies on account, $14,000.
2 Paid monthly office rent of $2,600.
3 Recorded $8,000 revenue for service rendered to
patients on account.
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JOURNALIZING TRANSACTIONS
Jan 1: The business received $29,000 cash and

issued common stock
Cash received indicates cash increases
Cash is an Asset; Assets increase with debits
Issued common stock; indicates equity is increasing
Increase equity with credits
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Cash 29,000

Common Stock 29,000
Issued stock.
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Jan. 2: Purchased medical supplies on account,

$14,000
Medical Supplies, an asset, is increasing
Assets increase with debits
On account, increases accounts payable, a liability
Increase liabilities with credits
GENERAL JOURNAL
Jan 2 Medical supplies 14,000

Accounts payable 14,000
Purchased supplies on account.
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Jan. 2: Paid monthly office rent of $2,600

Paid rent, an expense, expense is increasing
Expenses increase with debits
Paid cash, cash is an asset
Increase assets with debits
GENERAL JOURNAL
Jan 2 Rent Expense 2,600
Cash 2,600
Paid office rent.
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Jan. 3: Recorded $8,000 revenue for service

rendered to patients on account
On account indicates Accounts receivable increase
Accounts receivable is an Asset, Assets increase
with debits
Rendered services, services are revenues, indicates
revenues are increasing
Increase revenues with credits
GENERAL JOURNAL
Jan 3 Accounts receivable 8,000

Service revenue 8,000
Performed service on account.
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Copying amounts from the journal to the ledger
30
Stockholders’
Liabilities
equity
Assets
+ Common stock
+ Retained earnings
+ Revenues – Expenses
– Dividends
31
32
33
34
Origin of accounting transactions
Examples:
Bank deposit tickets
Invoices
Checks
Stock certificates
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4
Journalize and post sample transactions to the
ledger
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Transaction 1
Cash Common stock
30,000 30,000
GENERAL JOURNAL
Cash 30,000
Common stock 30,000
Issued stock.
37
Transaction 2
Cash Land Common stock
30,000 20,000 20,000 30,000
10,000
GENERAL JOURNAL
Land 20,000
Cash 20,000
Received payment on account.
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Transaction 3
Cash Office supplies Accounts payable
30,000 20,000 500 500
10,000
GENERAL JOURNAL
Office supplies 500

Accounts payable 500
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Transaction 4
Cash Service revenue
30,000 20,000 5,500
5,500
GENERAL JOURNAL
Cash 5,500
40
41
Oakland Floor Coverings, Inc. reported the following
summarized data at December 31, 2012. Accounts
appear in no particular order.
Revenues $34,000 Other liabilities $18,000

Equipment 45,000 Cash 12,000
Accounts payable 2,000 Expenses 19,000
Common stock 22,000
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Oakland Floor Coverings, Inc.
Trial Balance
December 31, 2012
Cash $ 12,000
Equipment 45,000
Accounts Payable $ 2,000
Other Liabilities 18,000
Common Stock 22,000
Revenues 34,000
Expenses 19,000
$76,000 $76,000
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Use the January transaction data for Ned Brown, M.D.,
P.C. given in Short Exercise 2-5.
2. After making the journal entries in Short Exercise 2-5,
post to the T-accounts. No dates or posting references
are required. Compute the balance of each account, and
denote it as Bal
Jan 1 The business received $29,000 cash and issued
common stock.
2 Purchased medical supplies on account, $14,000.
2 Paid monthly office rent of $2,600.
3 Recorded $8,000 revenue for service rendered to
patients on account.
44
GENERAL JOURNAL
Jan 1 Cash 29,000

Common Stock 29,000
Issued stock.
Cash Common stock

29,000 29,000
45
GENERAL JOURNAL
Jan 1 Medical supplies 14,000

Accounts payable 14,000
Purchased supplies on account.
Medical supplies Accounts payable

14,000 14,000
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GENERAL JOURNAL
Jan 2 Rent Expense 2,600

Cash 2,600
Paid office rent.
Cash Rent expense

29,000 2,600 2,600
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GENERAL JOURNAL
DATE DESCRIPTION RE DEBIT CREDIT
F
Jan 3 Accounts receivable 8,000

Performed service on account.
Accounts receivable Service revenue

8,000 8,000
48
Cash Accounts payable Common stock
29,000 2,600 14,000 29,000
Bal 26,400 Bal 14,000 Bal 29,000
Accounts receivable Service revenue

8,000 8,000
Bal 8,000 Bal 8,000
Medical supplies Rent expense

14,000 2,600
Bal 14,000 Bal 2,600
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S2-9: PREPARE THE TRIAL BALANCE
Ned Brown, M.D., P.C.

Trial Balance
January 3, 2012
Cash $ 26,400
Accounts receivable 8,000
Medical supplies 14,000
Accounts payable $ 14,000
Common stock 29,000
Rent expense 2,600
Total $51,000 $51,000
50
5
Prepare the trial balance from the T-accounts
51
Summary of the ledger
Lists all accounts with their balances
Accuracy check
Debits should equal credits
NOT a balance sheet
52
53
Search for missing account
Divide the difference between total debits
and total credits by two
Is there a debit/credit balance for this amount
posted in the wrong column?
Divide out-of-balance amount by nine
Slide–Adding or dropping a zero ($100 instead
of $1,000)
Transposition–Reversing two digits ($2,100
instead of $1,200)
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55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
56
Think of the account, journal, ledger (T-account),
and chart as matching tools. Businesses are just
matching the business transaction to the account
description that best captures the specific event
that occurred.
The accounting equation must always balance
after each transaction is recorded. To achieve this
balance, we record transactions using a double
entry accounting system. In that system, debits
are on the left and credits are on the right. Debits
always equal credits.
57
A transaction occurs and is recorded on a
source document. Then, we identify the
account names affected by the transaction and
determine whether the accounts increased or
decreased using the rules of debit and credit
for the six main account types. Next, we
record the transaction in the journal, listing
the debits first. We then post all transactions
to the ledger (T-account).
58
Once the ledger (T-account) balances are
calculated, the ending balance for each account
is transferred to the trial balance. Recall that the
trial balance is a listing of all accounts and their
balances on a specific date. Total debits must
always equal total credits on the trial balance. If
they do not, then review the correcting trial
balance errors section on Page 81 of the
textbook.
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Copyright
All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
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Chapter 02-Recording Business Transactions

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Chapter 2

Economic Claims to Economic

(Left Side) (Right Side)

Use the rules

Explanation of Dollar amounts of

Jan 1 The business received $29,000 cash and issued

Jan 1: The business received $29,000 cash and

Jan 1 Cash 29,000

Jan. 2: Purchased medical supplies on account,

Jan 2 Medical supplies 14,000

Jan. 2: Paid monthly office rent of $2,600

Jan 2 Rent Expense 2,600

Jan. 3: Recorded $8,000 revenue for service

Jan 3 Accounts receivable 8,000

Office supplies 500

Revenues $34,000 Other liabilities $18,000

Jan 1 Cash 29,000

Cash Common stock

Jan 1 Medical supplies 14,000

Medical supplies Accounts payable

Jan 2 Rent Expense 2,600

Cash Rent expense

Jan 3 Accounts receivable 8,000

Accounts receivable Service revenue

Accounts receivable Service revenue

Medical supplies Rent expense

Ned Brown, M.D., P.C.

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