ACCOUNTING RECORDS

AND SYSTEMS
Chapter Overview

No new concepts introduced.

Focus on manual system because easier to

Recordkeeping fundamentals. visualize.

Why? Accounting is best learned by doing.

Debit-credit mechanism provides an analytical framework.

4-2
The Account

■ Device used for calculating net change in an item (e.g., cash,

inventory, wage expense).
■ Simplest form is T-account.
■ Increases listed on one side; decreases listed on other side (Note:
Which side depends on type of account).

4-3
  Record of increases and decreases
The in a specific asset, liability, owners’
equity, revenue, or expense item.
Account  Debit = “Left”
 Credit = “Right”

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

LO 1
Chart of Accounts

■ List of all accounts.

■ Numbers assigned to accounts to make summaries for Balance Sheet
and Income Statement easier.
■ Management determines number of accounts based on information
needs.
■ May be several levels of detail.
■ Can view as building blocks summarized in various ways.

4-5
Chart of Accounts

ABC Company
Chart of Accounts

LO 3
DEBIT VS CREDIT
Left hand side
Right hand
of an account
side is credit
arbitrarily
side.
called debit
side.

To “credit” is
To “debit” is to record on
to record on right hand
left hand side. side.

4-8
The Account

DEBIT AND CREDIT PROCEDURES

Double-entry 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 at least one other account.
 DEBITS must equal CREDITS.

LO 1
 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 1
 Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, the account will have a credit balance.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

LO 1
 Basic Accounting Equation

Owner’s/Stockholders’
Owner’s/Stockholders’
Assets = Liabilities + Equity

1-12
 Basic Accounting Equation

Owner’s/Stockholders’
Owner’s/Stockholders’
Assets = Liabilities + Equity

Expanded Accounting Equation

Assets = Liabilities + Owner’s/Stockholders’

Owner’s/Stockholders’ Equity
Equity

Capital/Investments
Capital/Investments
by
by Owners
Owners - Drawings/Dividends
Drawings/Dividends + Revenues
Revenues - Expenses
Expenses

1-13
 Expanded Accounting Equation

Assets = Liabilities + Owner’s/Stockholders’

Owner’s/Stockholders’ Equity
Equity

Capital/Investments
Capital/Investments
by
by Owners
Owners - Drawings/Dividends
Drawings/Dividends + Revenues
Revenues - Expenses
Expenses

Dr Cr

1-14
 Expanded Accounting Equation

Assets = Liabilities + Owner’s/Stockholders’

Owner’s/Stockholders’ Equity
Equity

+ Drawings/Dividends
Drawings/Dividends

Capital/Investments
Capital/Investments
+ Revenues
Revenues
+ Expenses
Expenses by
by Owners
Owners

Dr Cr

1-15
 Dr Cr

1-16
 Dr Cr

1-17
 Dr Cr

1-18
 Dr Cr

1-19
 Dr Cr

Expenses
Expenses
Liabilities

Assets
Revenues/Income
Revenues/Income

Capital/Investments
Capital/Investments
Drawings/Dividends
Drawings/Dividends by
by Owners
Owners

1-20
Debits and Credits

 Assets - Debits should exceed

credits.
 Liabilities – Credits should
exceed debits.
 Normal balance is on the
increase side.

LO 1
Debits and Credits

 Owner’s investments and

revenues increase owner’s equity
(credit).
 Owner’s drawings and expenses
decrease owner’s equity (debit).

Helpful Hint Because

revenues increase
owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Capital account.
Expenses
have the opposite effect.

LO 1
Debits and Credits

 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 Owner’s Capital.
 Expenses have the opposite
effect: expenses decrease owner’s
equity.

LO 1
Debits/Credits Rules
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit

LO 1
 Analyze Analyze transactions.

Journalize original entries.

Journalize • Record chronologically in journal.

Summary of Post journal entries to ledger.

Accounting
Post • Organize by account.

Process Adjusting
Entries
Identify, journalize, and post adjusting entries.
• Per matching concept.

(Cycle)
Journalize and post closing entries.
Closing Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-25
Transaction Analysis

■ Determine dual effect on accounts.

• Assets = Liabilities + Owners’ Equity.
• dr. (debit) = cr. (credit).
■ Advice: Record half of entry that is more obvious.

t-26
 Analyze Analyze transactions.

Journalize Journalize original entries.

• Record chronologically in journal.

Summary of Post journal entries to ledger.

Accounting
Post • Organize by account.

Process Adjusting
Entries
Identify, journalize, and post adjusting entries.
• Per matching concept.

(Cycle)
Journalize and post closing entries.
Closing Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-27
JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, Ray Neal invested $15,000 cash in

the business, and Softbyte purchased computer equipment for
$7,000 cash.

GENERAL JOURNAL
General Journal

Sept. 1 Cash 15,000

Owner’s Capital 15,000

Equipment 7,000
Cash 7,000

LO 2
SIMPLE AND COMPOUND JOURNAL ENTRIES

Illustration: On July 1, Butler Company purchases a delivery truck

costing $14,000. It pays $8,000 cash now and agrees to pay the
remaining $6,000 on account.

GENERAL JOURNAL
General Journal

July 1 Equipment 14,000

Cash 8,000
Accounts payable 6,000

LO 2
 Analyze Analyze transactions.

Journalize original entries.

Journalize • Record chronologically in journal.

Summary of
Post Post journal entries to ledger.

Accounting • Organize by account.

Process Adjusting
Entries
Identify, journalize, and post adjusting entries.
• Per matching concept.

(Cycle)
Journalize and post closing entries.
Closing Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-30
Posting to the Ledger

 General Ledger contains all the asset, liability, and owner’s

equity accounts.

LO 3
The Ledger

STANDARD FORM OF ACCOUNT Illustration 2-16

Three-column form
of account

LO 3
 Ledger

POSTING
Transferring
journal entries
to the ledger
accounts.

LO 3
 The Recording Process 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.

Illustration 2-19

LO 3
Illustration 2-20
Purchase of office equipment LO 3
LO 3
Illustration 2-22
Payment of monthly rent LO 3
LO 3
LO 3
LO 3
Illustration 2-26
Withdrawal of cash by owner LO 3
Illustration 2-27
Payment of salaries LO 3
Illustration 2-28
Receipt of cash for services performed LO 3
Summary Journalizing and Posting
Illustration 2-29

LO 3
Illustration 2-29 LO 3
Illustration 2-30
LO 3
Trial Balance
■ Prepare after original entries are journalized
and then posted to ledger.
■ List of all accounts and their ending balance
(foot).
– Assets (debit balance).
– Liabilities (credit balance).
– Owners’ equity (credit balance).
– Revenues (credit balance).
– Expenses (debit balance).

4-47
Trial Balance
■ Why prepare?
– Shows equality of debits and credits (i.e.,
maintained integrity of accounting
equation).
■ But still could be errors.
– Convenient summary for making adjusting
entries and preparing financial statements.

4-48
Trial Balance
Pioneer Advertising
Trial Balance
October 31, 2017

LO 4
 Analyze Analyze transactions.

Journalize original entries.

Journalize • Record chronologically in journal.

Summary of Post journal entries to ledger.

Accounting
Post • Organize by account.

Process Adjusting Identify, journalize, and post adjusting entries.

Entries • Per matching concept.

(Cycle)
Journalize and post closing entries.
Closing Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-51
Adjusting Entries
■ Modifies account balances at end of period
to fairly reflect financial situation.
■ Types:
– Recorded costs related to two or more periods
(e.g., insurance, depreciation).
– Unrecorded expenses (e.g., employee wages,
bad debts).
– Recorded revenues related to two or more
periods (e.g., rent revenue).
– Unrecorded revenues (e.g., interest earned).
4-52
Adjusting Entry for Insurance
• Business purchases two year insurance policy on
Jan 1 for $1,600.
Prepaid Insurance Cash
Debit Credit Debit Credit
Original
Entry $1,600 $1,600

Insurance Expense Prepaid Insurance

Debit Credit $1,600
Debit Credit
Adjusting
Entry $800 $800
 Adjusting Entry for Depreciation

• Business purchases $10,000 of equipment on Jan 1.

Has useful life of 5 years, $0 salvage value.
Equipment Cash
Debit Credit Debit Credit
Original
Entry $10,000 $10,000

Depreciation Expense Accumulated

Debit Credit Depreciation
Debit Credit
Adjusting
Entry
$2,000 $2,000

4-54
 Adjusting Entry for Bad Debts

• Business makes $10,000 of sales on credit.

Estimates $300 will be uncollectible.
Accounts Receivable Sales Revenues
Debit Credit Debit Credit
Original
Entries $10,000 $10,000

Allowance for
Bad Debt Expense Doubtful Accounts
Debit Credit Debit Credit
Adjusting
Entry
$300 $300

4-55
 Analyze Analyze transactions.

Journalize original entries.

Journalize • Record chronologically in journal.

Summary of Post journal entries to ledger.

Accounting
Post • Organize by account.

Process Adjusting
Entries
Identify, journalize, and post adjusting entries.
• Per matching concept.

(Cycle)
Closing Journalize and post closing entries.

Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-56
Permanent Accounts

■ Also called real accounts or balance sheet accounts.

■ Reported on balance sheet.
■ Carried forward into next period:
– In this sense, they are permanent.

4-57
Temporary Accounts

■ Revenue and expense accounts.

■ Helps summarize operating activity.
■ Avoids cluttering retained earnings account.
■ Why temporary?
– At end of accounting period, balances are transferred to
retained earnings.
– Therefore, balances at beginning are zero.

4-58
Closing Entries
■ Temporary (i.e., income statement) accounts
are closed out to the Income Summary.
– Clearing account.
– Also called Profit & Loss, Expense and Revenue
Summary.
– Result is zero balance in temporary accounts.
■ Income summary account is then closed out to
Retained Earnings.
– Only permanent accounts will then have
balances.
4-59
 Analyze Analyze transactions.

Journalize original entries.

Journalize • Record chronologically in journal.

Summary of Post journal entries to ledger.

Accounting
Post • Organize by account.

Process Adjusting
Entries
Identify, journalize, and post adjusting entries.
• Per matching concept.

(Cycle)
Journalize and post closing entries.
Closing Entries • Close out temporary accounts.

Financial Prepare financial statements.

Statements

4-60
Financial Statement Preparation
■ Income Statement.
– Balances in temporary accounts prior to closing, or
– Debits and credits to Income Summary accounts.
■ Balance Sheet.
– Balances in permanent accounts.

4-61
Objectives of Accounting System

■ Process information efficiently (i.e., low cost).

■ Obtain reports quickly.
■ Ensure a high degree of accuracy.
■ Minimize possibility of theft or fraud.

4-62
Internal Accounting Controls
■ Basic principle: Make it difficult (as is
practical) for people to be dishonest or
careless.
■ Activities that reduce possibility of theft, or
intentional or unintentional mistakes.
– Accuracy checks (e.g., trial balance, bank
reconciliation).
– Segregation of duties (i.e., record keeping,
custody of assets, authorization of
transactions).
4-63