recording business transactions
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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter 2
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Explain accounts, journals, and ledgers as they relate to recording transactions and describe common accounts
Define debits, credits, and normal account balances and use double-entry accounting and T-accounts
List the steps of the transaction recordingprocess
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Journalize and post sample transactions to the ledger
Prepare the trial balance from the T-accounts
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Explain accounts, journals, and ledgers as they relate to recording transactions and describe
common accounts
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Recordtransactions
in the journal
Copy (post) tothe ledger
Prepare thetrial balance
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Basic summary deviceDetailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equityCovers a specific period of timeGrouped in three broad categories
AssetsLiabilitiesStockholders’ Equity
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JournalChronological record of transactionsOrganized by date
LedgerThe book holding all the accounts and their balancesOrganized by account
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Listing of all accounts and their balances
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ASSETS LIABILITIES EQUITY
EconomicResources
Claims to EconomicResources
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Economic resources that will benefit the business in the future:
CashAccounts receivableNotes receivablePrepaid expensesLandBuildingEquipment, Furniture, Fixtures
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A debt (something owed):Accounts payableNotes payableAccrued liabilities
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Owners’ claim to the assets:Common stockRetained earningsDividendsRevenues Expenses
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Asset, Liability, and Stockholders’ equity Accounts
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List of all accounts used by a company
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Define debits, credits, and normal account balances and use double-entry accounting and
T-accounts
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2
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Record dual effects of each transactionEach transaction has a:
Receiving sideGiving side
Examples:Company purchases supplies (receiving) with cash (giving)Company issues stock (giving) and receives cash (receiving)
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Tool for analyzing and determining the balance in a given account
DrDebit
CrCredit
CrCredit
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Whether an account is increased by debit or a credit is determined by the account type
Asset, liability, or equity
Debits are not good or badNeither are credits
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The account category governs the increase side or decrease side
Increases are recorded on one sideDecreases are recorded on the opposite side
Rules of debits and credits
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The first transaction involves receiving $30,000 cash and issuing common stock The second transaction is a $20,000 purchase of land for cash
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Match the accounting terms on the left with the corresponding definitions on the right.
1. _____Posting2. _____ Receivable3. _____ Debit4. _____ Journal5. _____ Expense6. _____ Net Income7. _____ Normal Balance8. _____ Ledger9. _____ Payable10._____ Equity
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A. Using up assets in the course of operating a business
B. Book of accountsC. An assetD. Record of transactionsE. Left side of an accountF. Side of an account where
increases are recordedG. Copying data from the journal to
the ledgerH. Always a liabilityI. Revenues – Expenses =J. Assets – Liabilities =
GCEDAIFBHJ
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Margaret Alves is tutoring Timothy Johnson, who is taking introductory accounting. Margaret explains to Timothy that debits are used to record increases in accounts and credits record decreases. Timothy is confused and seeks your advice.1.When are debits increases?
When are debits decreases?
2. When are credits increases?
When are credits decreases?
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Debits are increases in the Assets, Dividends, and Expenses.
Debits are decreases in the Liabilities, Stockholders’ equity, Retained earnings and Revenues.
Credits are decreases in the Assets, Dividends, and Expenses.
Credits are increases in the Liabilities, Stockholders’ equity, Retained earnings and revenues.
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List the steps of the transaction recording process
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3
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Use the rules of debit and
credit
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Journalize the first transaction of Smart Touch—the receipt of $30,000 cash and issuance of common stock
Step 1: The accounts affected are Cash and Common stock. Cash is an asset. Common stock is equity.Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits.
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Four parts:a) Date of transactionb) Title of account debited with dollar amountc) Title of account credited with dollar amountd) Brief explanation of transaction
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Journal Page 1
Date Description Debit Credit
Apr 1 Cash 30,000
Common stock 30,000
Issued stock.
Transaction date Accounts affected
Dollar amounts of debits and credits
Explanation of transaction
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Ned Brown opened a medical practice in San Diego, California.1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation.
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Jan 1 The business received $29,000 cash and issued common stock.
2 Purchased medical supplies on account, $14,000.
2 Paid monthly office rent of $2,600.
3 Recorded $8,000 revenue for service rendered to patients on account.
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Jan 1: The business received $29,000 cash and issued common stock
Cash received indicates cash increasesCash is an Asset; Assets increase with debits
Issued common stock; indicates equity is increasingIncrease equity with credits
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Cash 29,000
Common Stock 29,000
Issued stock.
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Jan. 2: Purchased medical supplies on account, $14,000
Medical Supplies, an asset, is increasingAssets increase with debits
On account, increases accounts payable, a liabilityIncrease liabilities with credits
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 2 Medical supplies 14,000
Accounts payable 14,000
Purchased supplies on account.
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Jan. 2: Paid monthly office rent of $2,600Paid rent, an expense, expense is increasing
Expenses increase with debits
Paid cash, cash is an assetIncrease assets with debits
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 2 Rent Expense 2,600
Cash 2,600
Paid office rent.
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Jan. 3: Recorded $8,000 revenue for service rendered to patients on account
On account indicates Accounts receivable increaseAccounts receivable is an Asset, Assets increase with debits
Rendered services, services are revenues, indicates revenues are increasing
Increase revenues with credits
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 3 Accounts receivable 8,000
Service revenue 8,000
Performed service on account.
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Copying amounts from the journal to the ledger
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Assets
Liabilities Liabilities Stockholders’ equity
Stockholders’ equity
+ Common stock + Retained earnings+ Revenues – Expenses– Dividends
+ Common stock + Retained earnings+ Revenues – Expenses– Dividends
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Origin of accounting transactionsExamples:
Bank deposit ticketsInvoicesChecksStock certificates
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Journalize and post sample transactions to the ledger
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Cash Common stock
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash 30,000
Common stock 30,000
Issued stock.
30,000 30,000
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Cash Common stockLand
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Land 20,000
Cash 20,000Received payment on account.
30,000 30,00020,000 20,000
10,000
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Cash Accounts payableOffice supplies
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Office supplies 500
Accounts payable 500Received payment on account.
30,000 20,000
Cash
30,000 20,000
10,000
500500
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Cash Service revenue
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash 5,500
Service revenue 5,500Received payment on account.
30,000 20,000
Cash
30,000 20,000
5,500
5,500
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Oakland Floor Coverings, Inc. reported the following summarized data at December 31, 2012. Accounts appear in no particular order.
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Revenues $34,000 Other liabilities $18,000
Equipment 45,000 Cash 12,000
Accounts payable 2,000 Expenses 19,000
Common stock 22,000
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Oakland Floor Coverings, Inc.
Trial Balance
December 31, 2012
Cash
Equipment
Accounts Payable
Other Liabilities
Common Stock
Revenues
Expenses
$ 12,000 45,000 $ 2,000
18,000 22,000 34,000 19,000 $76,000 $76,000
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Use the January transaction data for Ned Brown, M.D., P.C. given in Short Exercise 2-5.2. After making the journal entries in Short Exercise 2-5, post to the T-accounts. No dates or posting references are required. Compute the balance of each account, and denote it as Bal
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Jan 1 The business received $29,000 cash and issued common stock.
2 Purchased medical supplies on account, $14,000.
2 Paid monthly office rent of $2,600.
3 Recorded $8,000 revenue for service rendered to patients on account.
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Cash 29,000
Common Stock 29,000
Issued stock.
Cash Common stock
29,000 29,000
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 1 Medical supplies 14,000
Accounts payable 14,000
Purchased supplies on account.
Medical supplies Accounts payable
14,000 14,000
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 2 Rent Expense 2,600
Cash 2,600
Paid office rent.
Cash Rent expense
2,600 2,60029,000
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GENERAL JOURNALDATE DESCRIPTION RE
FDEBIT CREDIT
Jan 3 Accounts receivable 8,000
Service revenue 8,000
Performed service on account.
Accounts receivable Service revenue8,000 8,000
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Service revenue
8,000
Cash
29,000 2,600
Accounts receivable
8,000
Accounts payable
14,000
Common stock
29,000
Medical supplies
14,000
Rent expense
2,600
Bal 26,400 Bal 14,000
Bal 8,000 Bal 8,000
Bal 14,000 Bal 2,600
Bal 29,000
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Ned Brown, M.D., P.C.
Trial Balance
January 3, 2012
Cash
Accounts receivable
Medical supplies
Accounts payable
Common stock
Service revenue
Rent expense
Total
$ 26,400 8,000 14,000
$ 14,000 29,000 8,000 2,600 $51,000 $51,000
S2-9: PREPARE THE TRIAL BALANCE
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Prepare the trial balance from the T-accounts
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Summary of the ledgerLists all accounts with their balancesAccuracy check
Debits should equal credits
NOT a balance sheet
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Search for missing accountDivide the difference between total debits and total credits by two
Is there a debit/credit balance for this amount posted in the wrong column?
Divide out-of-balance amount by nine Slide–Adding or dropping a zero ($100 instead of $1,000)Transposition–Reversing two digits ($2,100 instead of $1,200)
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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Think of the account, journal, ledger (T-account), and chart as matching tools. Businesses are just matching the business transaction to the account description that best captures the specific event that occurred.The accounting equation must always balance after each transaction is recorded. To achieve this balance, we record transactions using a double entry accounting system. In that system, debits are on the left and credits are on the right. Debits always equal credits.
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A transaction occurs and is recorded on a source document. Then, we identify the account names affected by the transaction and determine whether the accounts increased or decreased using the rules of debit and credit for the six main account types. Next, we record the transaction in the journal, listing the debits first. We then post all transactions to the ledger (T-account).
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Once the ledger (T-account) balances are calculated, the ending balance for each account is transferred to the trial balance. Recall that the trial balance is a listing of all accounts and their balances on a specific date. Total debits must always equal total credits on the trial balance. If they do not, then review the correcting trial balance errors section on Page 81 of the textbook.
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Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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