c2 - 1 recording business transactions chapter 2

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Recording Business Transactions

Chapter 2

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Objective 1

Describe the role of accounts in summarizing business

transactions

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Account

• Basic summary device– Describes a category of asset, liability, or

expense– Example: land, cash, office supplies

• After posting is completed, an account it becomes a detailed record of increases and decreases in these categories of assets, liabilities, or owner’s equity during a period

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Recording Transactions in the Journal

• This is when you write down (in a list) the accounts that will be increased and decreased.

• Example– Increase (Debit) the Cash Account and

• Increase (Credit) the Service Revenue Account

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Posting

• This is when you go through your list of transactions, (the journal), and you record them in the accounts.

• After posting is completed, an account it becomes a detailed record of increases and decreases in these categories of assets, liabilities, or owner’s equity during a period

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Posting Example• Journal entry

– Increase (debit) cash $2,000– Increase (credit) bank note $2,000

$2,000

Bank Note

$2,000

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Ledger

• Book or printout holding all the accounts

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Chart of Accounts

A list of accounts in the ledger is called a chart of accounts.

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Smart Touch LearningChart of Accounts

Balance Sheet Income Statement

1. Assets101 Cash111 Accounts Receivable121 Notes Receivable141 Supplies151 Furniture171 Building

191 Land

2. Liabilities201 Accounts Payable211 Salary Payable 221Interest Payable231 Notes Payable3. Owner’s Equity301 Sheena Bright, Capital311 Sheena Bright, Withdrawal

4. Revenue401Service Revenue402 Interest Revenue

5. Expenses501 Rent Expense, Comp.502 Rent Expense, Office505 Salary Expense510 Depreciation Expense520 Utilities Expense530Advertising Expense540 Supplies Expense

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Objective 2

Explain double entry accounting

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Double Entry System• Record transactions in a way that keeps the profit

equation in balance. – Assets = Liabilities + Owner’s Equity

• Each transaction affects at least two accounts – (This is why it is called “double entry”)

– Each transaction is recorded with at least• One debit

• One credit

• Total debits must equal total credits

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Total debits = Total credits

• Increase asset (debit) and then– Decrease asset (credit)– Increase liability (credit)– Increase owner’s equity (credit)

• Decrease asset (credit) and then– Increase asset (debit)– Decrease liability (debit)– Decrease liability (debit)

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• Increase liability (credit) and then– Increase asset (debit)– Decrease liability (debit)– Decrease owner’s equity (debit)

• Decrease liability (debit) and then– Decrease asset (credit)– Increase liability (credit)– Increase owner’s (credit)

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• Increase owner’s equity (credit) and then– Increase asset (debit)– Decrease liability (debit)– Decrease owner’s equity (debit)

• Decrease owner’s equity (debit) and then– Decrease asset (credit)– Increase liability (credit)– Increase owner’s (credit)

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Account Name

(Left Side) Debit

(Right Side) Credit

Tool for analyzing and determining the balance in a given account

T-Account

Assets are normally debit

Liabilities and owner’s equity are normally

credit

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+ + --

AssetsDebit CreditDebit Credit

Rules of Debit and Credit

Liabilities Equity== ++Debit CreditDebit Credit - +- +

Debit CreditDebit Credit - +- +

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Liabilities EquityAssets == ++Normal Balances

Debit CreditDebit Credit

+ -+ -Debit CreditDebit Credit

- +- +Debit CreditDebit Credit

- +- +

NormalNormalBalanceBalance

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3,750 8504,300 1,400

2,900 7002,900 1,000

10,950 6,850

Total Debits - Total Credits

Balance 4,100

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Sheena Bright deposits $30,000 in a bank account for her business

Business TransactionsBusiness Transactions

General Journal

receiveDebit

giveCredit

Smart Touch Learning(investee)

Sheena Bright(investor)

giveCredit

Entry 1.

Date Description Debit Credit

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Sheena Bright Deposits $30,000 in a bank account for her business

General Journal

receiveDebit

giveCredit

Smart Touch Learning(investee)

Sheena Bright (investor)

giveCredit

Apr 1.

Apr 1 Cash 30,000

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Sheena Bright deposits $20,000 in a bank account for her business.

General Journal

Apr 1 Cash 30,000 Sheena Bright, Capital 30,000

receiveDebit

giveCredit

Smart Touch Learning (investee)

Cash A promiseto the owner

Sheena Bright (investor)

giveCredit

Apr 1.

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Smart Touch buys Land for $20,000.

receiveDebit

giveCredit

Smart Touch(buyer)

Land Owner (seller)

giveCredit

Apr 2.

General Journal

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Smart Agency buys Land for $20,000.

receiveDebit

giveCredit

Smart Touch(buyer)

Land Owner (seller)

giveCredit

Apr 2.

General Journal

Apr 2 Land 20,000

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Smart Touch buys Land for $20,000.

receiveDebit

giveCredit

Smart Touch(buyer)

Land Cash

Land Owner (seller)

giveCredit

Apr 2.

General Journal

Apr 2 Land 20,000 Cash 20,000

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Smart Touch purchased Supplies on account for $500

receiveDebit

giveCredit

Smart Touch(borrower)

Supplier (granter of credit)

giveCredit

Apr 3.

General Journal

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Purchased supplies on account for $500

receiveDebit

giveCredit

Supplier (Granter of credit)

giveCredit

Apr 3.

General Journal

Apr 3 Supplies 500

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Purchased supplies on account of $500

receiveDebit

giveCredit

Supplier (Granter of credit)

giveCredit

Apr 3.

General Journal

Apr 3 Supplies 500 Accounts Payable 500

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Smart Touch LearningTrial BalanceApril 30, 2010

Cash 10,000 Supplies 500 Land 20,000 Accounts Payable 500 Sheena Bright, Capital 30,000

30,500 30,500

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RevenuesRevenues ExpensesExpensesOwner’s Owner’s CapitalCapital

Owner’sOwner’s WithdrawalsWithdrawals

__ ++ __

Expanding the Rules of Debit and Credit

Owner’s Equity

Debit CreditDebit Credit - +- +

Debit CreditDebit Credit + + --

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Owner’s EquityNormal Balances

+ -+ -Debit Debit CreditCredit- +- +

- +- +

RevenuesRevenuesRevenuesRevenues ExpensesExpensesExpensesExpensesOwner’s Owner’s CapitalCapital

Owner’s Owner’s CapitalCapital

Owner’s Owner’s WithdrawalsWithdrawals

____ ____Debit CreditDebit Credit

+ -+ -

NormalNormalBalanceBalance

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Smart Touch received $5,500 cash for services provided.

receiveDebit

giveCredit

Smart Touch(seller)

Customer (buyer)

giveCredit

Apr 8.

General Journal

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Smart Touch received $5,500 cash for services provided.

receiveDebit

giveCredit

Smart Touch(seller)

Customer (buyer)

giveCredit

Apr 8.

General Journal

Apr 8 Cash 5,500

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Smart Touch received $5,500 cash for services provided

receiveDebit

giveCredit

Smart Touch(seller)

Customer (buyer)

giveCredit

Apr 8.

Services

General Journal

Apr 8 Cash 5,500 Service Revenue 5,500

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Smart Touch provided $3,000 of services on credit

receiveDebit

giveCredit

Smart Touch(seller)

Customer (buyer)

giveCredit

Apr 10.

General Journal

Apr 10

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Smart Touch provided $3,000 of services on credit.

receiveDebit

giveCredit

Smart Touch(seller)

Accounts Receivable

Customer (buyer)

giveCredit

Apr 10.

General Journal

Apr 10 Accounts Receivable 3,000

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Smart Touch provided $3,000 of services on credit.

receiveDebit

giveCredit

Smart Touch(seller)

Accounts Receivable

Customer (buyer)

giveCredit

Apr 10.

Services

General Journal

Apr 10 Accounts Receivable 3,000 Service Revenue 3,000

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Smart Touch paid: rent, comp. $600, rent, office $1,000, salaries, $1,200, utilities, $400.

General Journal

receiveDebit

giveCredit

Smart Touch(buyer)

Various suppliers

giveCredit

Apr 15.

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Apr 15 Rent Expense: Comp 600Rent Expense: Office 1,000Salary Expense 1,200Utilities Expense 400

Smart Touch paid: rent, comp.$600; rent, office, $1,000; salaries, $1,200; Utilities, $400;

General Journal

receiveDebit

giveCredit

Smart Touch(buyer)

Services,benefits

Various suppliers

giveCredit

Apr 15

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Apr 15 Rent Expense: Comp 600Rent Expense: Office 1,000Salary Expense 1,200Utilities Expense 400

Cash 3,200

Smart Touch paid: rent, comp.$600; rent, office, $1,000; salaries, $1,200; Utilities, $400;

General Journal

receiveDebit

giveCredit

Smart Touch(buyer)

Services,benefits

Various suppliers

giveCredit

Apr 15

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Smart Touch paid $300 of the $500 owed to a supplier.

receiveDebit

giveCredit

Smart Touch(payor)

Reduction in obligation

Supplier (payee)

giveCredit

Apr 21

General Journal

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receiveDebit

giveCredit

Smart Touch(payor)

Supplier (payee)

giveCredit

Apr 21

General Journal

Apr 21 Accounts Payable 300

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receiveDebit

giveCredit

Smart Touch(payor)

Supplier (payee)

giveCredit

Apr 21.

General Journal

Apr 21 Accounts Payable 300 Cash 300

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Smart Touch received $2,000 from the client billed on the 10th.

General Journal

receiveDebit

giveCredit

Reduction in account rec.

(buyer)

Receive cash from client

giveCredit

Apr 22.

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Date Description Debit CreditApr 22 Cash 2,000

General Journal

receiveDebit

giveCredit

(buyer)

giveCredit

Apr 22.

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Date Description Debit CreditApr 22 Cash 2,000 Accounts Receivable 2,000

General Journal

receiveDebit

giveCredit

(buyer)

giveCredit

Apr 22.

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Smart Touch received $9,000 for the sale of land.

General Journal

receiveDebit

giveCredit

Purchase land(buyer)

Receive cash for land sale

giveCredit

Apr 24.

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Date Description Debit CreditApr 24 Cash 9,000

Smart Touch received $9,000 for the sale of land.

General Journal

receiveDebit

giveCredit

Purchase land(buyer)

Receive cash for land sale

giveCredit

Apr 24.

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Date Description Debit CreditApr 24 Cash 9,000 Land 9,000

Smart Touch received $9,000 for sale of land

General Journal

receiveDebit

giveCredit

Purchase of land

(buyer)

Receive cash or land sale

giveCredit

Apr 24.

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Smart Touch received utility bill to be paid next month. $100

receiveDebit

giveCredit

Smart Touch(buyer)

Supplier (utility Co. )

giveCredit

Apr 30.

General Journal

Apr 30

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receiveDebit

giveCredit

Smart Touch(buyer)

Supplies

Supplier (Utility Co.)

giveCredit

Apr 30.

General Journal

Apr 30 Utilities Expense 100

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receiveDebit

giveCredit

Smart Touch (buyer)

Supplies

Supplier (Utility Co.)

giveCredit

Apr 30.

A promiseto pay later

General Journal

Apr 30 Utilities Expense 100 Accounts Payable 100

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Sheena Bright withdrew $2,000 for personal use.

receiveDebit

giveCredit

Smart Touch(payor)

Sheena Bright(payee)

giveCredit

Apr 30.

General Journal

Apr 30

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Sheena Bright withdrew $2,000 for personal use.

SreceiveDebit

giveCredit

Smart touch(payor)

giveCredit

Apr 30.

General Journal

Apr 30 Sheena Bright, Withdrawals 2,000

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Withdrew $2,000 for

personal use.

receiveDebit

giveCredit

Smart Touch(payor)

giveCredit

Apr 30.

General Journal

Apr 30 Sheena Bright, Withdrawals 2,000 Cash 2,000

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Smart Touch LearningTrial BalanceApril 30, 2010

Cash 21,000 Accounts Receivable 1,000 Supplies 500 Land 11,000 Accounts Payable 300 Sheena Bright, Capital 30,000 Sheena Bright, Withdrawals 2,000 Service Revenue 8,500 Rent Expense, Computer 600 Rent Expense, Office 1,000 Salary Expense 1,200

Utilities Expense 500 38,800 38,800

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Smart Touch LearningIncome Statement

Month Ended April 30, 2010

Service Revenue $8,500 Expenses: Salary expense $1,200 Rent Expense, Office 1,000 Rent Expense, Computer 600 Utilities Expense 500 Total expenses 3,300Net income $5,200

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Sheena Bright, capital, April 1, 2010 $ 0Add: Investment by owner $30,000Net income 5,200Subtotal $35,200Less withdrawals 2,000 Sheena Bright, Capital April 30, 2010$33,200

Smart Touch LearningStatement of Owners Equity Month Ended April 30, 2010

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Smart Touch LearningBalance Sheet April 30, 2010

Assets Liabilities

$21,00

0 Accounts payable $ 300

Accounts receivable 1,000

Office Supplies 500 Owner’s Equity

Land 11,000 Sheena Bright, Capital 33,200

Total assets 33,500 Total liabilities & owner’s equity

33,500

c2 - 1 recording business transactions chapter 2

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