Chapter 2
Explain accounts, journals, and ledgers as they relate to recording transactions and
describe common accounts
2Copyright (c) 2009 Prentice Hall. All rights reserved.
Record Transactions in the Journal
Copy (post) to the Ledger
Prepare the Trial Balance
3Copyright (c) 2009 Prentice Hall. All rights reserved.
Basic summary device Detailed record of increases and decreases
in specific assets, liabilities, or owner’s equity during a period
4Copyright (c) 2009 Prentice Hall. All rights reserved.
Journal◦ Chronological record of transactions◦ Organized by date
Ledger◦ Book (or computer record) of all account activity◦ Organized by account
5Copyright (c) 2009 Prentice Hall. All rights reserved.
Listing of all accounts and their balances
6Copyright (c) 2009 Prentice Hall. All rights reserved.
Accounts are grouped in 3 broad categories:
7
LiabilitiesLiabilitiesOwner’sequity
Owner’sequity
AssetsAssets = +
Copyright (c) 2009 Prentice Hall. All rights reserved.
Cash Accounts receivable Notes receivable Prepaid expenses Land Building Equipment, Furniture, Fixtures
8Copyright (c) 2009 Prentice Hall. All rights reserved.
Economic resources that will benefit the business in the future
Accounts payable Notes payable Accrued liabilities
9Copyright (c) 2009 Prentice Hall. All rights reserved.
Creditors’ claims to assets (debt)
Owner’s claim to the assets Capital
◦ Net worth invested by the owner Withdrawals
◦ Owner takes business assets for personal use Revenues Expenses
10Copyright (c) 2009 Prentice Hall. All rights reserved.
11
Ledger
Cash
All Individual Accounts Combined Make Up the Ledger
Accounts payable
Common stock
Asset accounts
Liability accounts
Equity acc
ounts
Copyright (c) 2009 Prentice Hall. All rights reserved.
List of all accounts used by a company along with the account numbers
12
Acct. # Account title
101 Cash
111 Accounts receivable
150 Equipment
201 Accounts payable
301 Common stock
305 Retained earnings
401 Service revenue
501 Rent expense
525 Advertising expense
Copyright (c) 2009 Prentice Hall. All rights reserved.
A _______ is a record of transaction
A. ledger B. journal C. trial balance D. posting
Copyright (c) 2009 Prentice Hall. All rights reserved. 13
A journal is a record of transaction
A. ledgerB. journal C. trial balance D. posting
Copyright (c) 2009 Prentice Hall. All rights reserved. 14
Accounts Receivable is a(n) _____ account.
A. asset B. liability C. capital D. revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 15
Accounts Receivable is a(n) _____ account.
A. assetB. liabilityC. capitalD. revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 16
Notes Payable is a(n) _____ account.
A. asset B. liability C. capital D. revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 17
Notes Payable is a(n) _____ account.
A. asset
B. liabilityC. capitalD. revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 18
19
Define debits, credits, and normal account balances.
Use double entry accounting and T-accounts.
Copyright (c) 2009 Prentice Hall. All rights reserved.
Father of Accounting
Wrote First book written on double-entry accounting.
used journals and ledgers, a person should not go to sleep at night
until the debits equaled the credits! His ledger included assets (including
receivables and inventories), liabilities, capital, income, and expense accounts.
Demonstrated year-end closing entries and proposed a trial balance
Copyright (c) 2009 Prentice Hall. All rights reserved. 21
Record dual effects of each transaction Each transaction has a:
◦Receiving side◦Giving side
Examples:◦Company purchases supplies (receiving) with cash (giving)
22Copyright (c) 2009 Prentice Hall. All rights reserved.
23
Simple tool for analyzing and determining the balance in a given account
Account Name
(Left Side) Debit
(Right Side) Credit
Abbreviated dr
Abbreviated cr
Copyright (c) 2009 Prentice Hall. All rights reserved.
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 bad◦ Neither are credits
24Copyright (c) 2009 Prentice Hall. All rights reserved.
25
Debit CreditDebit Credit
AssetsAssets
+ + --
LiabilitiesLiabilitiesOwner’sOwner’s
equityequity== ++Debit CreditDebit Credit - +- +
Debit CreditDebit Credit - +- +
Copyright (c) 2009 Prentice Hall. All rights reserved.
26
LiabilitiesLiabilities EquityEquityAssetsAssets == ++Debit CreditDebit Credit
+ -+ -Debit CreditDebit Credit
- +- +Debit CreditDebit Credit
- +- +
NormalNormalBalanceBalance
NormalNormalBalanceBalance
NormalNormalBalanceBalance
Copyright (c) 2009 Prentice Hall. All rights reserved.
27
RevenuesRevenues
- +- +Debit CreditDebit Credit
Owner’s Owner’s CapitalCapital
Debit CreditDebit Credit - +- +
WithdrawalsWithdrawals
Debit CreditDebit Credit + + --
ExpensesExpenses
Debit CreditDebit Credit
+ + --
Copyright (c) 2009 Prentice Hall. All rights reserved.
28
Owner’s equity
Debit Debit CreditCredit- +- +
NormalNormalBalanceBalance
Owner’s Owner’s CapitalCapital
Owner’s Owner’s CapitalCapital
____ ____Debit CreditDebit Credit
++++Debit CreditDebit Credit
+ -+ -Debit CreditDebit Credit
- +- +
NormalNormalBalanceBalance
NormalNormalBalanceBalance
RevenuesRevenuesRevenuesRevenues ExpensesExpensesExpensesExpensesWithdrawalsWithdrawalsWithdrawalsWithdrawals
+ -+ -
NormalNormalBalanceBalance
Copyright (c) 2009 Prentice Hall. All rights reserved.
Assets Withdrawals Expenses
Liabilities Capital Revenues
29
This indicates the normal balance of each account group.
The normal balance is also what increases the account.
Copyright (c) 2009 Prentice Hall. All rights reserved.
30
Cash
$20,000 $12,000
$8,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
The left side of an account is used to record:
A. DebitsB. IncreasesC. CreditsD. Decreases
Copyright (c) 2009 Prentice Hall. All rights reserved. 31
A. DebitsB. IncreasesC. CreditsD. Decreases
Copyright (c) 2009 Prentice Hall. All rights reserved. 32
List the steps of the transaction recording process
33Copyright (c) 2009 Prentice Hall. All rights reserved.
34
Use the rules of debit and
credit
Copyright (c) 2009 Prentice Hall. All rights reserved.
Four parts:◦ Date of transaction◦ Title of account debited with dollar amount◦ Title of account credited with dollar amount◦ Brief explanation of transaction
35Copyright (c) 2009 Prentice Hall. All rights reserved.
36
Journal Page 1
Date Description Debit Credit
Jul 1 Cash 45,000
Josie Smith, Capital 45,000
Owner investment
Accounts AffectedAccounts Affected
Dollar amount of debits and credits
Dollar amount of debits and credits
Explanation of transaction
Explanation of transaction
Transaction Date
Transaction Date
Copyright (c) 2009 Prentice Hall. All rights reserved.
Copying amounts from the journal to the ledger
37Copyright (c) 2009 Prentice Hall. All rights reserved.
March 22: “On account” indicates Accounts receivable Accounts receivable is an asset account Increase an asset with a debit
38
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Mar 22 Accounts receivable 4,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 22: “Performed services” indicates revenue has
been earned Revenues are increased by credits
39
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Mar 22 Accounts receivable 4,000
Service revenue 4,000
Performed services on account
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 30: Cash is received
◦ Increase cash, an asset◦ Assets are increased by debits
The payment is “on account”◦ Decrease Accounts receivable with a credit
40
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Accounts receivable 3,000
Received payment on account
Mar 30 Cash 3,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 31: A utility bill is an expense
◦ Expenses are increased by debits The bill will be paid later – creating an
account payable◦ Liabilities are increase by credits
41
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Received utility bill
Mar 31 Utilities expense 130
Accounts payable 130
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 31: Salaries to employees are an expense
◦ Expenses are increased by debits The salary was paid in cash
◦ Cash, an asset, decreases◦ Assets are decreased by credits
Rent Expense is an expense account Increase an expense with a debit
42
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Cash 2,300
Paid salaries
Mar 31 Salaries expense 2,300
Copyright (c) 2009 Prentice Hall. All rights reserved.
March 31: Advertising is another expense Cash is paid
43
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Mar 31 Advertising expense 400
Cash 400
Paid advertising
Copyright (c) 2009 Prentice Hall. All rights reserved.
Origin of accounting transactions Examples:
◦ Bank deposit tickets◦ Invoices◦ Checks◦ Stock certificates
44Copyright (c) 2009 Prentice Hall. All rights reserved.
A. Journalize the transactions, post to the
accounts, and prepare a trial balance.
B. Journalize the transactions; prepare a trial
balance and post to the accounts.C. Post to the accounts, journalize
transactions, prepare a trial balance.
Copyright (c) 2009 Prentice Hall. All rights reserved. 45
A. Journalize the transactions, post to the
accounts, and prepare a trial balance.
B. Journalize the transactions; prepare a trial
balance and post to the accounts.C. Post to the accounts, journalize
transactions, prepare a trial balance.
Copyright (c) 2009 Prentice Hall. All rights reserved. 46
Journalize and post sample transactions to the ledger
47Copyright (c) 2009 Prentice Hall. All rights reserved.
48
Cash Service revenueAccounts receivable
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Accounts receivable 9,000
Service revenue 9,000Performed legal services on account
Copyright (c) 2009 Prentice Hall. All rights reserved.
49
Cash Service revenueAccounts receivable
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Accounts receivable 9,000
Service revenue 9,000Performed legal services on account
9,000 9,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
50
Cash Service revenueAccounts receivable
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash 5,400
Accounts receivable 5,400Received payment on account
9,000 9,000
Copyright (c) 2009 Prentice Hall. All rights reserved.
51
Cash Service revenueAccounts receivable
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash 5,400
Accounts receivable 5,400Received payment on account
9,000 9,0005,400 5,400
3,600
Copyright (c) 2009 Prentice Hall. All rights reserved.
When you make a sale on account, your entry is
A. Debit to CashB. Debit to Accounts Receivable
C. Debit to Sales Revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 52
When you make a sale on account, your entry is
A. Debit to CashB. Debit to Accounts Receivable
C. Debit to Sales Revenue
Copyright (c) 2009 Prentice Hall. All rights reserved. 53
When you make a purchase an equipment on account, your entry is
A. Credit to CashB. Credit to PurchaseC. Credit to Accounts PayableD. Credit to Equipment
Copyright (c) 2009 Prentice Hall. All rights reserved. 54
When you make a purchase an equipment on account, your entry is
A. Credit to CashB. Credit to PurchaseC. Credit to Accounts PayableD. Credit to Equipment
Copyright (c) 2009 Prentice Hall. All rights reserved. 55
Prepare the trial balance from the T-Accounts
56Copyright (c) 2009 Prentice Hall. All rights reserved.
Summary of the ledgerLists all accounts with their balances
Accuracy check◦Debits should equal credits
NOT a balance sheet
57Copyright (c) 2009 Prentice Hall. All rights reserved.
Search for missing account Divide the difference between debits and
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 – inverting two digits ($459 instead of $495)
58Copyright (c) 2009 Prentice Hall. All rights reserved.
59
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Jan 2 Cash 1,000
Josie Smith, Capital 1,000
Date of transactio
n
Accounts debited and credited
Amounts debited and credited
Posting reference
Copyright (c) 2009 Prentice Hall. All rights reserved.
60
GENERAL JOURNAL Page 1DATE DESCRIPTION POST
REFDEBIT CREDIT
Jan 2 Cash 101 1,000
Josie Smith, Capital 301 1,000
Cash Account No. 101Date Jrnl. Ref. Debit Date Jrnl. Ref. Credit2-Jan J.1. 1,000
Josie Smith, Capital Account No. 301Date Jrnl. Ref. Debit Date Jrnl. Ref. Credit
2-Jan J.1. 1,000
11
55
44
33
22
Copyright (c) 2009 Prentice Hall. All rights reserved.
61
CASH Acct No. 101 Balance
Date ItemJrnl Ref Debit Credit Debit Credit
1-Apr J.1 20,000 20,000 3-Apr J.1 9,000 11,000 5-Apr J.1 3,000 14,000 6-Apr J.1 10,000 4,000
Alternative to the T-Account
Copyright (c) 2009 Prentice Hall. All rights reserved.
Income statement accounts are:
a) assets and liabilitiesb) revenues and withdrawalsc) revenues and expensesd) assets and withdrawals
Copyright (c) 2009 Prentice Hall. All rights reserved. 62
a) assets and liabilitiesb) revenues and withdrawals
c) revenues and expensesd) assets and withdrawals
Copyright (c) 2009 Prentice Hall. All rights reserved. 63
A. ASSETS – LIABILITIESB. ASSETS – EQUITYC. SALES REVENUE + EXPENSESD. SALES REVENUE – EXPENSESE. CASH - EXPENSES
Copyright (c) 2009 Prentice Hall. All rights reserved. 64
A. ASSETS – LIABILITIESB. ASSETS – EQUITYC. SALES REVENUE + EXPENSESD. SALES REVENUE – EXPENSESE. CASH - EXPENSES
Copyright (c) 2009 Prentice Hall. All rights reserved. 65