Recording Business Transactions

Chapter 2
Objective 1

Use accounting terms

Accounting Terms

Account Owner’s
equity
Ledger
Double-entry
Assets accounting

Liabilities T-account
 Accounting Terms
Cash Individual asset accounts
Cash All individual
accounts
combined
make up
the ledger.
Accounts
Accounts Ledger
Payable Ledger
Payable
Individual liability accounts

Gay
GayGillen,
Gillen,
Capital
Capital

Individual owner’s equity accounts

Classification of Accounts
 What are some asset accounts?
– Cash
– Notes Receivable
– Accounts Receivable
– Prepaid Expenses
– Land
– Building
– Equipment
Classification of Accounts
 What are some liability accounts?
– Notes Payable
– Accounts Payable
– Accrued Liabilities (for expenses incurred
but not paid)
– Long-term Liabilities (bonds)
Classification of Accounts
 What are some owner’s equity accounts?
– Capital or owner’s interest in the business
– Withdrawals
– Revenues
– Expenses
John’s Gas Station Example
 Assume that the business sold $5,000 worth
of gasoline on a given day and performed
$3,000 of repair services.
 How much revenue did the business earn
that day?
 $8,000
John’s Gas Station Example
 Revenues increase John’s equity in the
business.
 The business had to pay mechanics and
vendors $3,750 for the work performed
that day.
John’s Gas Station Example
 Expenses decrease John’s equity in the
business.
 How much was the net increase in John’s
equity that day?
 $4,250
Classification of Accounts
 In a corporation, the owner’s equity account
is called Stockholders’ Equity.

Contributed Capital

Retained Earnings
Double-Entry Accounting
 Double entry bookkeeping means to record
the dual effects of each business
transaction.
 Assets = Liabilities + Owner’s Equity
 Assets are on the left (debit) side.
 Liabilities and Equity are on the right
(credit) side.
The T-Account

Account Title
Debit Credit

Left Side
The T-Account

Account Title
Debit Credit

Right Side
Objective 2

Apply the Rules of

Debit and Credit.
 Rules of Debit and Credit

Assets Liabilities Owner’s Equity

= +

Debit Credit Debit Credit Debit Credit

+ – – + – +
The Double-Entry System

Each transaction is recorded with at least:

One debit One credit

Total debits must equal total credits.

John’s Gas Station Example
 On July 1, John invested $500,000 in cash
and obtained a $300,000 loan to open a gas
station.
 How much was the initial increase in cash?
 $800,000
 Which accounts were affected?
John’s Gas Station Example

Cash

Liabilities

Owner’s Equity
 John’s Gas Station Example
John’s Gas Station
Balance Sheet
July 1, 2002
Assets Liabilities
Cash $800,000 Notes payable $300,000
Owner’s Equity
John, capital 500,000
Total liabilities
Total assets $800,000 and owner’s equity $800,000
Objective 3

Record Transactions
in the Journal.
Journals
 What is a journal?
 It is a list in chronological order of all the
transactions for a business.
1 Identify transaction from source documents.
2 Specify accounts affected.
3 Apply debit/credit rules.
4 Record transaction with description.
Journals
 What does a journal entry include?
– date of the transaction
– title of the account debited
– title of the account credited
– amount of the debit and credit
– description of the transaction
– dollar signs are omitted
Recording Transactions
 On April 2, Gay Gillen invested $30,000
in Gay Gillen eTravel.
 What is the journal entry?
 April 2
Cash 30,000 Gay
Gillen, Capital30,000 Received initial
investment from owner
Objective 4

Post from the Journal

to the Ledger.
Ledger
 What is a ledger?
 It is a digest of all accounts utilized by an
entity during an accounting period.

Loose leaf Computer

pages printout

Bound
Cards
books
Posting
 What is posting?
 It is the transfer of information from the
journal to the appropriate accounts in the
ledger.
Normal Account Balances
 Assets = Liabilities + Owner’s Equity
 Debits = Credits
 The side where we expect increases to be
recorded is the normal balance side.
 Asset Accounts After Posting
Cash
(1) 30,000 (2) 20,000
Land
(4) 300
(2) 20,000
(6) 2,100
Bal.
Bal.
20,000
7,600
Office Supplies
(3) 500
Bal. 500
 Liabilities and Owner’s Equity
Accounts After Posting
Accounts Payable
(4) 300 (3) 500
Gay Gillen, Capital
Bal. 200 (1) 30,000
Bal. 30,000
Gay Gillen, Withdrawals
(6) 2,000
Bal. 2,000
 Details of Journals and Ledgers

Journal Page 1
Date Accounts and Explanation Debit Credit
April 2 Cash 30,000
Gay Gillen, Capital 30,000
Received initial
investment from owner
 Details of Journals and Ledgers
Posting
Account: Cash Account: 101
Balance
Date Ref. Debit Credit Debit Credit
April 2 jrl 30,000 30,000

Insert the number of the journal page.

 Details of Journals and Ledgers
Journal Page 1
Date Account and
Explanation Post Ref. Debit Credit
April 2 Cash 101 30,000
Gay Gillen, Capital 301
30,000
Initial investment
from owner

Insert the ledger account in the journal.

 The Four-Column Account
Format

Account: Cash Account No. 101

Balance
Date Item Ref. Debit Credit Debit Credit
April 2 jr1 30,000 30,000
Objective 5

Prepare and use a Trial Balance.

Trial Balance
 What is a trial balance?
 It is an internal document.
 It is a listing of all the accounts with their
related balances.
 Before computers, it provided a check on
accuracy by showing whether total debits
equal total credits.
Locating Trial Balance Errors
 What if it doesn’t balance ?
 Is the addition correct?
 Are all accounts listed?
 Are the balances listed correctly?

DEBITS CREDITS
Locating Trial Balance Errors
 Divide the difference by two.
 Is there a debit/credit balance for this
amount posted in the wrong column?
 Check journal postings.
 Review accounts for reasonableness.
 Computerized accounting programs usually
prohibit out-of-balance entries.
Objective 6

Analyze Transactions
without a Journal.
John’s Gas Station
 John is considering either purchasing a
garage for $70,000 or renting one for
$10,000 per year.
 John does not need to record in the journal
all of the transactions that would affect his
decision.
 Why?
John’s Gas Station
 John has not completed a transaction yet.
 However, John can visualize how the ledger
accounts will be affected.
John’s Gas Station
Rent the garage
Cash Rent Expense
10,000 10,000

Buy the garage

Cash Building
70,000 70,000
End of Chapter 2