2-1

CHAPTER 2

Recording Business Transactions

2-2

The Body of Accounting Knowledge

Chapter 1

2-3

Tools of The Recording Process

Debits and Credits Journal Entries

Ledger Accounts

.2-4 First. let’s look at. however.. The Accounting Cycle .

Prepare a trial balance. Post entries to the accounts in the general ledger. Prepare financial statements. . Journalize transactions in the general journal.2-5 Steps in The Accounting Cycle Analyze source documents.

. and balances of financial statements items. decreases. which are used to measure economic transactions.  Dollars.  2-6 Think of it as a storage container like a bucket. are “poured” into and out of the container.Let’s start with The General Ledger Account A ledger account is a tool used for classifying and summarizing information about increases.

2-7 General Ledger Was not a Civil War Hero .

Balance)  Used in general ledgers in the business world Used primarily for teaching and analysis of complex transactions  T-Account Format  . Credit.2-8 Two General Ledger Account Formats  Three-Amount Column Format (Debit.

2-9 General Ledger Account Three-Amount Column Format ACCOUNT NAME: Date Description PR ACCOUNT No. 1 2 3 Debit Credit Balance .

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General Ledger Account
T-Account Format
For the sake of simplicity, we often use this format in teaching accounting even though it is no longer used in practice.

Account Name
Debit Credit

2-11

The T-Account
Increases to the T-account are recorded on one side of the T-account, and decreases are recorded on the other side.

Account Name
Debit Credit

2-12

The T-Account
The side which increases and the side which decreases is determined by the type of account.

Account Name
Debit Credit

 Debit and Credit are neutral terms and do not connote value judgments. Neither is “good” or “bad”!  .2-13 What Are Debits and Credits?  Tools used for recording transactions Debit (DR)  Credit (CR)  Debit refers to the LEFT and Credit to the RIGHT side of the T-Account.

September 23.2-14 [Baltimore Sun. 1998] .

2-15 What Are Debits and Credits?  Tools used for recording transactions Debit (DR)  Credit (CR)   Debit refers to the LEFT and Credit to the RIGHT side of the T-Account Account Name LEFT RIGHT .

2-16 What Are Debits and Credits?  Tools used for recording transactions Debit (DR)  Credit (CR)   Debit refers to the LEFT and Credit to the RIGHT side of the T-Account Account Name LEFT RIGHT Used as Adjectives: DEBIT SIDE CREDIT SIDE .

2-17

What Are Debits and Credits?

Tools used for recording transactions
Debit (DR)  Credit (CR)

Debit refers to the LEFT and Credit to the RIGHT side of the T-Account
Account Name

LEFT

RIGHT

Used as Verbs:

DEBIT

CREDIT

Synonym for Debit?

2-18

Common Business Terminology

2-19

Names of Ledger Accounts

There are no “magic” names for many accounts

e.g., either “Heat, Light & Power” or “Utilities Expense” could be used for an account name.

Other accounts have names which must be used

e.g., “Cash”, “Accounts Receivable” and “Accounts Payable”.

Account Name Debit Credit .2-20 Types of Ledger Accounts Let’s see how debits and credits affect the different types of accounts.

2-21 Types of Ledger Accounts Assets Liabilities Stockholders’ Equity Revenues Expenses .

  . Determining whether to use a debit or credit to record an increase or decrease depends on the type of account in question.2-22 Using Debits and Credits  Again. debits and credits are used to increase or decrease account balances. The Balance Sheet equation is the basis for the determination.

2-23 Balance Sheet Model (Revisited) A = L + SE .

2-24 Balance Sheet Model (Revisited) Assign a T-Account to each element of the Balance Sheet Model A = L + SE Account Name Account Name Account Name Debit Credit Debit Credit Debit Credit .

2-25 Balance Sheet Model (Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + SE Account Name Account Name Account Name Debit Credit Debit Credit Debit Credit .

2-26 Balance Sheet Model (Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + SE ASSETS Debit Credit for for Increase Decrease Account Name Account Name Debit Credit Debit Credit .

2-27 Balance Sheet Model (Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + SE ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase Account Name Debit Credit .

2-28 Balance Sheet Model (Revisited) Debits and credits affect the Balance Sheet Model as follows: A = L + SE ASSETS Debit Credit for for Increase Decrease LIABILITIES Debit Credit for for Decrease Increase EQUITIES Debit Credit for for Decrease Increase .

Stockholders’ Equity A Closer Look Recall that Stockholders’ Equity consists of the following components: 2-29 Capital Stock + Retained Earnings C/S + R/E .

the Capital Stock and Retained Earnings accounts are affected in the following manner by debits and credits because they are part of Stockholders’ Equity: CAPITAL STOCK Debit Credit for for Decrease Increase RET.Stockholders’ Equity A Closer Look Therefore. EARNINGS Debit Credit for for Decrease Increase 2-30 .

because Revenue accounts increase Stockholders’ Equity.Stockholders’ Equity A Closer Look Also. they are affected by debits and credits as follows: 2-31 REVENUES Debit Credit for for Decrease Increase .

they are affected by debits and credits as follows: 2-32 EXPENSES Debit Credit for for Increase Decrease .Stockholders’ Equity A Closer Look And because Expense accounts decrease Stockholders’ Equity.

2-33 Normal Balances Each of the 5 account types also has a normal balance side. It is always the side which is used to record increases in the account. .

2-34 Normal Balances The normal balances for each of the FIVE types of accounts are as follows: Account Name Debit Balance Credit Balance Assets Expenses Liabilities Stockholders’ Equity Revenues .

59  Alternative #2 Expanded Accounting Equation  This is Rice’s preferred approach   Alternative #3  “A L O R E” acronym .2-35 Three Alternative Approaches For Learning Debits and Credits  Alternative #1  The textbook approach on p.

2-36 Alternative Approach #1 Textbook Approach 59 Check it out at top of page! .

= LIAB. A + E = L + S/E + R Dr. + Bal. Cr. . - - + Bal. + S/H EQUITY + REV. Dr. Cr.2-37 Alternative Approach #2 Expanded Accounting Equation ASSETS + EXP.

2-38 Alternative Approach #3 “A L O R E” Acronym Debit Credit A (ssets) L (iabilities) + - + + + - O (wners' equity) R (evenues) E (xpenses) + .

c. b. d.2-39 Debits and Credits Question 1 Which of the following accounts would normally be expected to have a debit (or left-side) balance? a. Accounts Payable Buildings Interest Revenue Capital Stock .

The other three accounts normally have CREDIT balances. b. Accounts Payable Buildings Interest Revenue Capital Stock BUILDINGS is an asset account and normally has a DEBIT balance. d.2-40 Debits and Credits Solution 1 Which of the following accounts would normally be expected to have a debit (or left-side) balance? a. . c.

d.2-41 Debits and Credits Question 2 Which of the following accounts would normally be expected to have a credit (or right-side) balance? a. c. b. Accounts Receivable Salary Expense Salary Payable Land .

2-42 Debits and Credits Solution 2 Which of the following accounts would normally be expected to have a credit (or right-side) balance? a. d. c. b. Accounts Receivable Salary Expense Salary Payable Land .

b. The other three accounts normally have DEBIT balances. Land SALARY PAYABLE is a liability account and Accounts Receivable normally has a CREDIT Salary Expense balance. c. . Salary Payable d.2-43 Debits and Credits Solution 2 Which of the following accounts would normally be expected to have a credit (or right-side) balance? a.

2-44 Debits and Credits Example If the balance in Accounts Receivable (an asset) is $750 (debit side balance). Accounts Receivable 750 .

Accounts Receivable 750 What would we do to increase the account by $200? .2-45 Debits and Credits Example If the balance in Accounts Receivable (an asset) is $750 (debit side balance).

2-46 Debits and Credits Example If the balance in Accounts Receivable (an asset) is $750 (debit side balance). Accounts Receivable 750 200 What would we do to increase the account by $200? .

Accounts Receivable 750 200 What would we do to increase the account by $200? What would we do to decrease the account by $350? .2-47 Debits and Credits Example If the balance in Accounts Receivable (an asset) is $750 (debit side balance).

2-48 Debits and Credits Example If the balance in Accounts Receivable (an asset) is $750 (debit side balance). Accounts Receivable 750 200 350 What would we do to increase the account by $200? What would we do to decrease the account by $350? .

It is not “money”! .2-49 Debits and Credits Example Accounts Receivable 750 200 350 Note the lack of $. It is understood that the yardstick is dollars.

Accounts Receivable 750 200 350 . net the totals on the two sides against each other. . . . . .2-50 Balancing The T-Account To get the balance of the T-Account . Place the residual amount on the appropriate side.

net the totals on the two sides against each other. . Accounts Receivable 750 200 600 350 . . . . . Place the residual amount on the appropriate side.2-51 Balancing The T-Account To get the balance of the T-Account .

.2-52 Balancing The T-Account To get the balance of the T-Account . Accounts Receivable 750 200 600 350 (Can use the either the approach above to show the balance. . the text’s approach or Rice’s approach) .

000 (5) 2.000 (4) 600 (2) 5. 57 Approach on Previous slide Cash Text Approach Cash Rice’s Approach Cash (1) 10.2-53 Three Alternative Approaches to Balancing The T-Account Using the example at the bottom of p.000 (3) 1.000 16.400 13.400 ALL 3 are O.000 (2) 5.! .000 2.000 (5) 2.600 13.000 (5) 2.400 bal 13.000 (2) 5.000 (4) 600 (1) 10.000 (3) 1.000 (3) 1.K.000 (4) 600 (1) 10.

200.Debits and Credits Question 3 The Cash account has three entries: a debit for $1. $ 1. and another credit for $400. $ 700 Credit. d. $ 500 Debit. 2-54 . b. c. $ 500 Credit. a credit for $300. What is the balance in the Cash account? a.900 Debit.

c. $ 500 Credit. b.Debits and Credits Question 3 The Cash account has three entries: a debit for $1.200.200 $ 500 $ 300 $ 400 . Cash 2-55 $1. $ 700 Credit. a credit for $300. and another credit for $400.900 Debit. d. $ 500 Debit. What is the balance in the Cash account? a. $ 1.

.2-56 Implications Of Debits And Credits Debits and Credits are used to indicate that something happened to an account. Interpreting the implications requires an analysis of the entire journal entry.

2-57 Implications Question 1 If the company made a Credit entry to Notes Payable. would the account increase or decrease? .

. would the account increase or decrease? ANSWER: Notes Payable would increase.2-58 Implications Question 1 If the company made a Credit entry to Notes Payable.

2-59 Implications Question 2 Notes Payable is the account where we record long-term borrowings. What event would cause us to record an increase in our long-term borrowings? .

What event would cause us to record an increase in our long-term borrowings? ANSWER: Such an increase could imply that the company borrowed money. .2-60 Implications Question 2 Notes Payable is the account where we record long-term borrowings.

which account would also be affected and in what way? .2-61 Implications Question 3 If the company borrowed money.

2-62 Implications Question 3 If the company borrowed money. which account would also be affected and in what way? ANSWER: There would also be an equal-sized increase in the Cash account. .

you find an increase to the Land account.2-63 Implications Question 4 Suppose instead of an increase to Cash. How do you interpret the increase in Notes Payable? .

How do you interpret the increase in Notes Payable? ANSWER: The company acquired land and gave a note that promised to pay for the land in the future. you find an increase to the Land account.2-64 Implications Question 4 Suppose instead of an increase to Cash. .

. all transactions are recorded in the General Journal.2-65 Recording Transactions  Initially.

all transactions are recorded in the General Journal.  The second account has a credit effect. Each transaction always affects at least two different accounts.2-66 Recording Transactions  Initially.    This methodology was named “double entry” accounting by whom? Pacioli . One account has a debit effect.

2-67 General Journal Page GENERAL JOURNAL Page: Date Description PR Debit Credit .

2-68 Journal Entries Example 1 On January 1. .000 from the bank. Caldwell Company borrows $10. Prepare the appropriate general journal entry for the above transaction. 19X7.

 Notes Payable is increased by $10.000.  .2-69 Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.000.

000.  GENERAL JOURNAL Page: 1 Credit Date Description PR Debit .000.  Notes Payable is increased by $10.2-70 Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.

000 10.000.000 .  Notes Payable is increased by $10.000.  GENERAL JOURNAL Page: 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank 100 201 10.2-71 Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.

2-72 Journal Entries Solution 1 Typically.  Notes Payable is increased by $10. to record loan from bank .000.000 account numbers will Notes Payable 201 10.000 come later.000. accounts are  Two accounts are affected:  Cash is increased numbered. The by $10. More on 1-Jan Cash 100 10. account numbers are used as references for GENERAL JOURNAL posting to the General Page: 1 Date Description PR Debit Credit Ledger.

.500 cash. Prepare the appropriate journal entry for the above transaction.2-73 Journal Entries Example 2 On January 15. 19X7. Caldwell Company purchases a truck for $19.

500.  .  Cash is decreased by $19.500.2-74 Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.

 GENERAL JOURNAL Page: 1 Credit Date Description PR Debit .  Cash is decreased by $19.2-75 Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.500.500.

500 .500 19.500.  GENERAL JOURNAL Page: 1 Credit Date Description PR Debit 15-Jan Trucks Cash to record purchase of truck 150 100 19.2-76 Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.  Cash is decreased by $19.500.

pays the $400 electric bill for January.2-77 Journal Entries Example 3 On January 20. Prepare the appropriate journal entry for the above transaction. . 19X7. Caldwell Co.

2-78 Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.  Cash is decreased by $400.  .

 GENERAL JOURNAL Page: 1 Credit Date Description PR Debit .2-79 Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.  Cash is decreased by $400.

 GENERAL JOURNAL Page: 1 Credit Date Description PR Debit 20-Jan Utility Expense Cash to record payment of January electric bill 511 100 400 400 .2-80 Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.  Cash is decreased by $400.

running balance is maintained when using the 3-column type    .2-81 More About The General Ledger  It is a complete collection of all the accounts of a company Accounts are individually numbered for easy reference It is used to collect the information about all of the transactions affecting a specific account A cumulative.

2-82 Categories of General Ledger Accounts The five types of accounts fall into one of two categories Real Accounts Nominal Accounts .

. Liabilities. Account balances are carried forward from one fiscal year to the next.e. and Stockholders’ Equities (i.2-83 Real Accounts  This category includes Assets.  . Balance Sheet accounts)  Accounts are permanent.

2-84 Nominal Accounts  Nominal accounts include revenues and expenses.    Closing Entries will be discussed in Chapter 4. Nominal account balances are closed out to zero at the end of the fiscal year. Nominal accounts are temporary. .

2-85 Numbering Accounts The listing of all accounts and their account numbers is called the chart of accounts. .

2-86 Numbering Accounts The listing of all accounts and their account numbers is called the chart of accounts. A typical account numbering scheme might appear as follows: Assets 100-199 Liabilities 200-299 Equities 300-399 Revenues 400-499 Expenses 500-599 (See page 63 and inside back cover) .

000 10. .Posting to the GL Example GENERAL JOURNAL Page: 2-87 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank 10.000 Start with the journal entry from the General Journal.

Credit 2-88 GENERAL JOURNAL 1 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH Date Description 10.Posting to the GL Example Date Page: page Next.000 10.000 ACCOUNT No. find the appropriate Description PR forDebit in the General Ledger Cash. PR Debit Credit 100 Balance Beginning Balance 0 0 .

000 ACCOUNT No. Debit Credit 100 Balance Beginning Balance 0 0 .Posting to the GL Example GENERAL JOURNAL Post the account reference number.000 10. Page: Date Description PR Debit Credit 1 2-89 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH Date Description PR 100 10.

000 0 Post the transaction info to the GL. .000 10.Posting to the GL Example GENERAL JOURNAL Page: 2-90 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH Date Description PR 100 10.000 ACCOUNT No. Debit Credit 100 Balance Beginning Balance 1-Jan Loan G1 0 10.

Debit Credit 100 Balance Beginning Balance 1-Jan Loan G1 0 10.000 0 10.Posting to the GL Example GENERAL JOURNAL Page: 2-91 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH Date Description PR 100 10.000 ACCOUNT No.000 Update the General Ledger balance. .000 10.

Debit Credit 201 Balance Beginning Balance 0 0 .000 10. Debit pageDescription in the General 2-92 GENERAL JOURNAL 1 Credit 1-Jan Cash Notes Payable to record loan from bank 100 10.Posting to the GL Example Date Page: Next.000 ACCOUNT NAME: Notes Payable Date Description PR ACCOUNT No. find the Notes Payable PR Ledger.

Debit Credit 201 Balance Beginning Balance 0 0 .000 10.Posting to the GL Example GENERAL JOURNAL Post the account reference number.000 ACCOUNT No. Page: Date Description PR Debit Credit 1 2-93 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable Date Description PR 100 201 10.

.000 ACCOUNT No.000 10. Debit Credit 201 Balance Beginning Balance 1-Jan Loan G1 0 10.Posting to the GL Example GENERAL JOURNAL Page: 2-94 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable Date Description PR 100 201 10.000 0 Post the transaction info to the GL.

Posting to the GL Example GENERAL JOURNAL Page: 2-95 1 Credit Date Description PR Debit 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable Date Description PR 100 201 10.000 ACCOUNT No. .000 Update the General Ledger balance.000 10. Debit Credit 201 Balance Beginning Balance 1-Jan Loan G1 0 10.000 0 10.

500 ACCOUNT No.000 . Debit Credit 100 Balance Beginning Balance 1-Jan Loan from bank G1 0 10.000 0 10. Page: Date Description PR Debit Credit GENERAL JOURNAL 1 2-96 15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH Date Description PR 9.500 9.Posting to the GL Example Examine the next journal entry.

000 0 10.500 ACCOUNT No.000 .500 100 9. Debit Credit 100 Balance Beginning Balance 1-Jan Loan from bank G1 0 10.Posting to the GL Example Record the account reference. Page: Date Description PR Debit Credit GENERAL JOURNAL 1 2-97 15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH Date Description PR 9.

500 ACCOUNT No. .000 9.500 0 10.500 100 9.Posting to the GL Example GENERAL JOURNAL Page: 2-98 3 Date Description PR Debit Credit 15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH Date Description PR 9. Debit Credit 100 Balance Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck G1 G3 0 10.000 Post the entry to the GL.

500 ACCOUNT No.500 0 10.500 100 9.Posting to the GL Example GENERAL JOURNAL Page: 2-99 3 Date Description PR Debit Credit 15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH Date Description PR 9.000 500 Update the General Ledger balance. Debit Credit 100 Balance Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck G1 G3 0 10.000 9. .

 All Credit balances are in another column. Consists of a listing of each account with its balance as of a specific date.   .2-100 TRIAL BALANCE  Used to periodically test whether the General Ledger is in balance. All Debit balances are in one column.

150 $ 16.000 250 5.000 2.400 $ 16.1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense $ 700 1.800 Credits Cash Accounts Receivable Equipment Accounts Payable Notes Payable Capital Stock Retained Earnings . 79) First Company Trial Balance 12/31/X8 Debits $ 500 1.150 .200 3.450 3.2-101 Trial Balance Illustration (Text example is on p.000 11.000 3.

000 11.200 3.400 $ 16.000 250 5.1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense Debits $ 500 1.000 3.450 3. 79) First Company Trial Balance 12/31/X8 Notice that Total Cash Accounts Receivable Debits are equal Equipment Accounts Payable to Total Credits.000 2.800 Credits $ 700 1.2-102 Trial Balance Illustration (Text example is on p. Notes Payable Capital Stock Retained Earnings .150 $ 16.150 .

2-103 Trial Balance Errors Click picture to view video .

2-104 Loose Ends  Questions on the 15 transactions on pp. 64-71? .

64-71?  Don’t read the chapter!   First full par. on p.2-105 Loose Ends Questions on the 15 transactions on pp. 75 .

64-71?  Don’t read the chapter!   First full par. 81 .2-106 Loose Ends Questions on the 15 transactions on pp. on p. 75  Skip Analyzing and Using the Financial Results  p.

81  The Dividends account is not a primary type of account as implied on pp.2-107 Loose Ends Questions on the 15 transactions on pp. 58-59! . 64-71?  Don’t read the chapter!   First full par. 75  Skip Analyzing and Using the Financial Results  p. on p.

2-108 Dividends Account The Dividends account is a contra account to Retained Earnings. Therefore. it is affected by debits and credits as follows: DIVIDENDS Debit Credit for for Increase Decrease .

2-109 Have you ever had that “I’vejust-been-runover-by-atrain” feeling? .