Horngren’s Accounting

Volume One, Eleventh Canadian Edition

Chapter 2
Recording Business
Transactions

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Learning Objective (1 of 5)
• Define and use key accounting terms

– What are the key terms used when recording transactions?

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The Accounting Cycle – Where It’s
Covered
CHP 2 1. Identify and analyze transactions as they occur
2. Record transactions in a journal
3. Post (copy) from the journal to the ledger accounts
4. Prepare the unadjusted trial balance
CHP 3 5. Journalize and post adjusting entries
6. Prepare an adjusted trial balance
7. Prepare the financial statements
CHP 4 8. Journalize and post the closing entries
9. Prepare the post-closing trial balance

Start with the balances in the ledger at the

beginning of the period

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The Account, the Journal, the Ledger
and the Trial Balance
• All accounting systems include:
– ACCOUNT – analyze the transaction to identify changes in
accounts; for example, an account is required for Cash (bank
account) transactions
– JOURNAL – accountants record transactions first in a journal;
chronological record of transactions
– LEDGER – copy (post) the data to the ledger; like a binder, with
each page in the binder representing one account
– TRIAL BALANCE – a list of all the ledger accounts and their
balances

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Chart of Accounts (1 of 2)
• List of all accounts used by the entity
• Account names are listed along with the account numbers
• The numbering system often follows a general structure
• Account numbers begin with:
– 1 = Assets
– 2 = Liabilities
– 3 = Owner’s Equity
– 4 = Revenues
– 5 = Expenses

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Chart of Accounts (2 of 2)

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Learning Objective (2 of 5)
• Apply the rules of debit and credit

– How do we track changes in accounts?

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Double-Entry Accounting
• Accounting uses the double-entry system
• Every transaction affects at least two accounts
• There is a receiving side and a giving side; examples:
• A cash purchase of supplies; what are the dual effects of
this transaction?
1. Increases supplies (the business received supplies)
2. Decreases cash (the business gave cash)

• A purchase of a truck (made with a bank loan):

1. Increases vehicles (the business received the truck)
2. Increases the bank loan payable (the business gave a promise to
pay in the future)

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The T-Account
• T-account is a quick way to
Account Title
show the effect of
Debit Credit
(Dr) (Cr) transactions on a particular
account
LEFT RIGHT
SIDE SIDE • A useful shortcut or tool
Debits are not “good” or • Not part of the formal
“bad.” Neither are credits.
accounting records
Debits are not always
increases, and credits are • Debit = left side
not always decreases. Debit
simply means left side, and • Credit = right side
credit means right side.

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The Accounting Equation and the Rules
of Debit and Credit

• The type of an account (asset, liability, owner’s equity)

determines how we record increases and decreases
– Assets – increase on Debit side; decrease on Credit side
– Liabilities and Owner’s Equity – increase on Credit side; decrease
on Debit side

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An Example (1 of 2)
• Lisa Hunter invested $250,000 cash to start her business
• The company received cash, and gave owner’s equity

Assets = Liabilities + Owner’ Equity

Cash L. Hunter, Capital
Debit for Blank Blank Credit for
increase, increase,
$250,000 $250,000

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An Example (2 of 2)
• Lisa Hunter invested $250,000 cash to begin HES
• $100,000 cash purchase of land

Assets = Liabilities + Owner’ Equity

Cash L. Hunter, Capital
250,000 100,000 Blank 250,000
Balance Blank
150,000

Land
100,000 Blank

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Expanding the Rules of Debit and
Credit: Revenues and Expenses

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Normal Balance of an Account
• The normal balance appears
on the side of the account-
debit or credit – where
increases are recorded
• Depending on the account, this
could be a debit or credit
• The normal balances are:
– Asset accounts = debit
– Liability accounts = credit
– Capital accounts = credit
– Revenue accounts = credit
– Expense accounts = debit
– Withdrawal accounts = debit
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One way to memorize this is to
use an acronym, such as AWE
ROL. In this case, the (A)sset,
(W)ithdrawal, and (E)xpense
accounts all have debit
balances,while the (R)evenue,
(O)wner’s Equity, and (L)iability
accounts all have credit balances.
Or memorize which side has the
“+” (increase), and then all the “−”
(decreases) are the opposite. This
way you only
have to memorize half of them!
Try DR. AWE—the debits
(dr) belong with the (A)sset,
(W)ithdrawal, and (E)xpense
accounts.
2 - 14
Learning Objective (3 of 5)
• Analyze and record transactions in the journal

– How do we record business transactions?

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Source Documents – The Origin of
Transactions
• Source documents are the evidence of a transaction
• Bank deposit slip – shows amount of money received by
the business and deposited in the bank
• Purchase invoice – Document that tells the business how
much to pay and when to pay the vendor.
• Bank cheque – Document that tells the amount and the
date of cash payments.
• Sales invoice – Document sent to the customer when a
business sells goods or services and tells the business
how much revenue to record

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Recording Transactions in the Journal
• Journalizing a transaction is the chronological record of the
entity’s transaction
• Process of journalizing transactions is as follows:
– Transaction: identify the transaction from the source documents
– Analysis: identify each account affected by the transaction;
determine increase / decrease in accounts affected and apply the
rules of debit and credit
– Accounting Equation: Verify that the accounting equation is still in
balance
– Journal Entry: record the transaction in the journal with an
explanation or description; total debits must = total credits

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Journal Entries include….
• The date of the transaction
• The title of the account debited and the dollar amount
• Title of the account credited and the dollar amount
• A short explanation of the transaction

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Learning Objective (4 of 5)
Post from the journal to the ledger

• What is the next step after recording the transaction?

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Posting (Transferring Information) from
the Journal to the Ledger
• Posting is the transferring (copying) of the data from the
journal to the ledger
• The ledger tracks all transactions related to an account
• A T-Account can be used as short form for a ledger

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Learning Objective (5 of 5)
Prepare and use a trial balance

• How can we check if the records are in balance?

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The Trial Balance (1 of 3)
• A trial balance summarizes the ledger by listing all
accounts with their balances
• Assets first, followed by liabilities and then owner’s equity,
revenues and expenses
• Before computers, the trial balance provided a check on
accuracy by showing whether total debits equal total
credits
• The trial balance is still useful as a summary of all the
accounts and their balances

Do not confuse the Trial Balance with the Balance Sheet

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The Trial Balance (2 of 3)
Exhibit 2–12 Trial Balance
HUNTER ENVIRONMENTAL CONSULTING
Unadjusted Trial Balance
April 30, 2019
Blank Blank Balance Blank
Account Number Account Debit Credit
1100 Cash $172,000 Blank
1200 Accounts receivable 10,000 Blank
1400 Office supplies 7,000 Blank
1900 Land 100,000 Blank
2100 Accounts payable Blank $ 2,000
3000 Lisa Hunter, capital Blank 250,000
3100 Lisa Hunter, withdrawals 6,000 Blank
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The Trial Balance (3 of 3)
Exhibit 2–12 Trial Balance
HUNTER ENVIRONMENTAL CONSULTING
Unadjusted Trial Balance
April 30, 2019
Blank Blank Balance Blank

Account Number Account Debit Credit

4000 Service revenue Blank 55,000
5100 Rent expense 4,000 Blank
5200 Salaries expense 6,500 Blank
5300 Utilities expense 1,500 _______
Blank Total $307,000 $307,000

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Correcting Trial Balance Errors
• Search for missing accounts
• Search the journal for the amount of the difference
• Divide the difference between total debits and total credits
by 2 – when you mix a debit and credit, you double the
impact of the error
• Divide the out-of-balance amount by 9 – helps to identify
slide errors ($610 instead of $61) or transposition errors
($16 instead of $61)

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