hum 211: principles of accounting

HUM 211: Principles of Accounting

Lecture 03: The Recording Process

Masud

Jahan

Department of Science and Humanities Military Institute of Science and Technology

2011

Chapter

2Chapter

2

2/74HUM 211: Principles of Accounting

Learning Objective

To identify the steps in the bookkeeping cycle and discuss the role of accounting records in

an organization.

LO1


The Bookkeeping Process

Date Debit Credit6/30 Cash 2,000

Paid-in Capital 2,000 To record an investmentby the owners.

Description

Recorded in the Journal

Account NameDebit Credit

Posted to the Ledger

Transactions

Source Documents


The Role of Accounting Records

Establishes accountability for assets and transactions.

Establishes accountability for assets and transactions.

Keeps track of routine business activities.

Keeps track of routine business activities.

Obtains detailed information about a particular transaction. Obtains detailed information

about a particular transaction.

Evaluates efficiency and performance within company.

Evaluates efficiency and performance within company.

Maintains evidence of a company’s business activities.

Maintains evidence of a company’s business activities.


Learning Objective

To describe a ledger account and a ledger.

LO2


A detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each important asset, liability, and equity item.

A detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses.Separate accounts are maintained for each important asset, liability, and equity item.

The Account


The Ledger

The entire group of accounts is kept

together in an accounting record

called a ledger.

The entire group of accounts is kept

together in an accounting record

called a ledger.

Cash

Accounts Payable

Capital Stock

Accounts are individual records showing increases

and decreases.

Accounts are individual records showing increases

and decreases.


LiabilityAccountsLiabilityAccounts

EquityAccountsEquity

AccountsAsset

AccountsAsset

Accounts = +

Owner’s Capital A/c Owner’s

Capital A/cRevenues

A/c Revenues

A/cExpenses

A/c Expenses

A/c

Owner’s Withdrawals

A/c


A/c+ – –

Expanding the Accounting Equation


Categories of Account

AssetsLiabilitiesOwner’s Capital

4. Expenses5. Revenues6. Owner’s Withdrawals

Accounts are arranged into six categories using

the expanded accounting equation as bellow:

Accounts are arranged into six categories using

the expanded accounting equation as bellow:


CashAccount ReceivableNotes ReceivableInventory

Office SuppliesEquipment Buildingland

Assets Accounts


Liability Accounts

Accounts PayableNotes PayableAccrued Expenses


Owner’s Capital

1. Sole-proprietor:X’s Capital

2. Partnership:X’s CapitalY’s capital

3. Corporation:Share Capital/ Capital Stock



1. Sole-proprietor:X’s Withdrawals

2. Partnership:X’s WithdrawalsY’s Withdrawals

3. Corporation:Dividend


Revenues Accounts

Sales RevenuesService RevenuesRent ReceivedDividend Received


Expenses Accounts

Salary ExpensesWages ExpensesRent ExpensesUtility ExpensesDepreciation Expenses


Account Format

Tabular Summary

$8000(2500)(2000)

75(150)750(50)4125

(+) (-)

$8000 $250075 2000

750 15050

8825 4700(4700)4125


Learning Objective

To explain the double-entry system

of accounting.

LO3


A T-account is a tool used to represent an account.

Account Name(Left) (Right)

T-Account


The left side of the T-account is always the

debit side.

Account NameLeft Right

Debit

The right side of the T-account is always the

credit side.

Credit

T-Account


The Use of T-Accounts

Increases are recorded on one

side of the T- account, and decreases are

recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of the Account


Debits and Credits

Whether a debit is an increase or a decrease

depends on the account.

Whether a credit is an increase or a decrease

depends on the account.


The Expanded Accounting Equation:Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses

The accounts on the left:

• Increase with Debits

• Decrease with Credits

The accounts on the right:

• Increase with Credits

• Decrease with Debits

Rearranged:Assets + Withdrawals + Expenses = Liabilities + Capital + Revenues

Adding Debits & Credits to the Expanded Accounting Equation


Debit and Credit Rules

For Assets, Expenses, Withdrawals Accounts:

Debit for Increase

Credit for Decrease


Debit and Credit Rules

For Capital, Liabilities, Revenues Account:

Debit for Decrease

Credit for Increase


Learning Objective

To understand how balance sheet accounts

are increased and decreased.

LO4


Let’s record selected

transactions for S.A’s Lawn

Care Service in the accounts.


May 1: S. Ahmed invested $8,000 in S.A’s Lawn Care Service.





Will Cash increase or decrease?

Will S. Ahmed’s Capital increase or

decrease?


S. Ahmed’s Capital May 1 8,000

CashMay 1 8,000

May 1: S. Ahmed invested $8,000 in S.A’s Lawn Care Service and received 800 shares of stock.

May 1: S. Ahmed invested $8,000 in S.A’s Lawn Care Service and received 800 shares of stock.

Cash increases $8,000 with a debit.

S. Ahmed’s Capital increases $8,000

with a credit.


May 2: S.A’s purchased a riding lawn mower for $2,500 cash.






Will Tools & Equipment increase

or decrease?




Tools & EquipmentMay 2 2,500

CashMay 1 8,000 May 2 2,500

Cash decreases $2,500 with a credit.

Tools & Equipment increases $2,500

with a debit.


May 8: S.A’s purchased a $15,000 truck. S.A’s paid $2,000 in cash and issued a note payable for the remaining $13,000.





Will Truck increase or decrease?

Will Cash and Notes Payable

increase or decrease?




TruckMay 8 15,000

CashMay 1 8,000 May 2 2,500

May 8 2,000

Notes PayableMay 8 13,000

Truck increases $15,000 with a debit.

Cash decreases $2,000 with a credit.

Notes Payable increases $13,000

with a credit.


May 11: S.A’s purchased some repair parts for $300 on account.






or decrease?

Will Accounts Payable increase or

decrease?




Tools & Equipment increases $300 with

a debit.

Accounts Payable increases $300 with

a credit.

Tools & EquipmentMay 2 2,500

May 11 300

Accounts PayableMay 11 300


May 18: S.A’s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A’s cost. ABC Lawns agrees to pay S.A’swithin 30 days.

May 18: S.A’s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A’s cost. ABC Lawns agrees to pay S.A’swithin 30 days.


May 18: S.A’s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A’scost. ABC Lawns agrees to pay S.A’s within 30 days.



or decrease?

Will Accounts Receivable increase

or decrease?




Tools & Equipment decreases $150 with

a credit.

Accounts Receivable increases $150 with

a debit.

Tools & EquipmentMay 2 2,500 May 18 150

May 11 300

Accounts ReceivableMay 18 150


Learning Objective

To apply the realization and matching principles

in recording revenue and expenses.

LO25


Revenue and Expenses

Inflow of assets resulting from the sale of goods or the rendering of services to customers.

Increases owners’ equity.

The costs of assets and services used up in the process of earning revenue.

Decreases owner’s equity.






Realization Principle

Revenues should be recognized when

they are earned or realized (i.e., at the time goods are sold

or services are rendered.

The Realization Principle: When to Record Revenue


Matching Principle

Expenses should be recorded in the same accounting period as the revenues that are earned as a result of

these expenses.

The Matching Principle: When to Record Expenses


Learning Objective

To understand how revenue and expense

transactions are recorded in an

accounting system.

LO6


Let’s analyze the revenue and expense transactions for S.A’s

Lawn Care Service for the month of May.

We will also analyze a withdrawal transaction.

Let’s analyze the revenue and expense transactions for S.A’s

Lawn Care Service for the month of May.

We will also analyze a withdrawal transaction.


May 29: S.A’s provided lawn care services for a client and received $750 in cash.






Will Service Revenue increase or decrease?


Service RevenueMay 29 750



Cash increases $750 with a debit.

Service Revenue increases $750 with

a credit.

CashMay 1 8,000 May 2 2,500

May 29 750 May 8 2,000


May 31: S.A’s paid this month’s gasoline bill for the lawn mower and the truck for $50 cash.

May 31: S.A’s paid this month’s gasoline bill for the lawn mower and the truck for $50 cash.


May 31: May 31: S.A’s paid this month’s gasoline bill for the lawn mower and the truck for $50 cash.

May 31: May 31: S.A’s paid this month’s gasoline bill for the lawn mower and the truck for $50 cash.


Will Gasoline Expense increase or

decrease?


Gasoline ExpenseMay 31 50

May 31: S.A’s purchased gasoline for the lawn mower and the truck for $50 cash.

May 31: S.A’s purchased gasoline for the lawn mower and the truck for $50 cash.

Cash decreases $50 with a credit.

Gasoline Expense increases $50 with a

debit.

CashMay 1 8,000 May 2 2,500

May 29 750 May 8 2,000 May 31 50


May 31: S. Ahmed withdrew $200 from business for personal purpose.






Will S. Ahmed’s Withdrawals increase or decrease?


S. Ahmed’s WithdrawalsMay 31 200



Cash decreases $200 with a credit.

S. Ahmed’s Withdrawals

increase $200 with a debit.

CashMay 1 8,000 May 2 2,500

May 29 750 May 8 2,000 May 31 50 May 31 200


Let’s see how to find the balance in the Cash account

for S.A’s Lawn Care Service.

Let’s see how to find the balance in the Cash account



May 1 8,000 May 2 2,500 May 29 750 May 8 2,000

May 31 50 May 31 200

Total 8,750 Total 4,750 (4,750)

Balance 4,000

CASHMay 1 8,000 May 2 2,500

May 29 750 May 8 2,000 May 31 50 May 31 200

Total 8,750 Total 4,750 (4,750)

Balance 4,000

CASH

Receipts are on

the debit side.

Payments are on the

credit side.

The balance is the difference between the debit and credit

entries in the account.

The balance is the difference between the debit and credit

entries in the account.

Debit and Credit Entries


Learning Objective

To explain the purpose of a journal and its relationship to the

ledger.

LO7


In an actual accounting system, transactions are initially recorded in the journal.

In an actual accounting system, transactions are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit2007

May 1 Cash 8,000S. Ahmed’s Capital 8,000

To record an investment by the owner.

The Journal


A typical journal entry might look like this.

Journal Entry Format

Date Debit Credit2007

May 1 Cash 8,000 S. Ahmed’s Capital 8,000

To record an investmentby the owners.

Account Titles & Explation


Date Debit Credit2007

May 1 Cash 8,000 S. Ahmed’s Capital 8,000

To record an investmentby the owners.

Account Titles & Explation

Provide a referencedate for each transaction.

Debits are written first.

Credits are indented andwritten after debits.

Total debits must equaltotal credits.

Journal Entry Format


Making Entries involves

recording information of

individual transaction from source documents.

Making Entries to the Journal Book


Posting involves copying

information from the

journal to the ledger

accounts.

Posting Journal Entries to the Ledger Accounts


GENERAL JOURNAL


May 1 Cash 8,000Capital Stock 8,000

Owners invest cash in the business.General LedgerCash

Date Debit Date Credit2007 2007

May 1 8,000 May



GENERAL JOURNAL


May 1 Cash 8,000S. Ahmed’s Capital 8,000

Owners invest cash in the business.General LedgerS. Ahmed’s Capital

Date Debit Date Credit2007 2007

May May 1 8,000



GENERAL JOURNAL


May 2 Tools & Equipment 2,500Cash 2,500

Purchased lawn mower.

Let’s see what the cash account looks like after posting the cash portion of these transactions


Let’s see what the cash account looks like after posting the cash portion of these transactions




General LedgerCash

Date Debit Date Credit2007

May 1 8,000 May 2 2,500

This ledger format is referred to as a T-Account.

This ledger format is referred to as a T-Account.

Ledger Accounts After Posting


General LedgerCash

Date Debit Credit Balance2007

May 1 8,000 8,000 2 2,500 5,500

This ledger format is referred to as a running balance.

This ledger format is referred to as a running balance.

Ledger Accounts After Posting


Learning Objective

To prepare a trial balance and explain its

uses and limitations.

LO8


Trial Balance

A trial Balance is a list of accounts and their balances at a given time.Customarily, a trial Balance is prepared at the end of an accounting period.The primary purpose of a trial balance is to prove (check) that the total of all debit balances equal the total of all credit balances of all the accounts in ledger after posting.


Now, let’s look at the Trial Balance for S.A’s Lawn

Care Service for the month of May.

Now, let’s look at the Trial Balance for S.A’s Lawn

Care Service for the month of May.


S.A's Lawn Care ServiceUnadjusted Trial Balance

May 31, 2007Account Debit CreditCash 4,000$ Accounts receivable 150 Tools & equipment 2,650 Truck 15,000 Notes payable 13,000$ Accounts payable 300 S. Ahmed’s Capital 8,000 S. Ahmed’s Withdrawals 200 Service revenue 750 Gasoline expense 50 Total 22,050$ 22,050$

Proves equality of debits and

credits.

All balances are taken from the

ledger accounts on May 31.

Trial Balance

End of Lecture 03 THANK YOU ALL…