Transcript Slide 1 of 23

Chapter 2
Recording
Business
Transactions
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 1 of 23
The Accounting Process
Record
transactions
in the journal
Copy (post) to
the ledger
Prepare the
trial balance
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 2 of 23
The Account
• Basic summary device
• Detailed record of all changes that have
occurred in a particular asset, liability, or
stockholders’ equity
• Covers a specific period of time
• Grouped in three broad categories
– Assets
– Liabilities
– Stockholders’ Equity
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 3 of 23
The Journal and The Ledger
• Journal
– Chronological record of transactions
– Organized by date
• Ledger
– The book holding all the accounts and their
balances
– Organized by account
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Trial Balance
• Listing of all accounts and their balances
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Assets
Economic resources that will benefit the business
in the future:
• Cash
• Accounts receivable
• Notes receivable
• Prepaid expenses
• Land
• Building
• Equipment, Furniture, Fixtures
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Liabilities
A debt (something owed):
• Accounts payable
• Notes payable
• Accrued liabilities
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Stockholders’ Equity
Owners’ claim to the assets:
• Common stock
• Retained earnings
• Dividends
• Revenues
• Expenses
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Ledger
• Asset, Liability, and Stockholders’ equity
Accounts
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Double Entry System
• Record dual effects of each transaction
• Each transaction has a:
– Receiving side
– Giving side
• Examples:
– Company purchases supplies (receiving) with
cash (giving)
– Company issues stock (giving) and receives
cash (receiving)
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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T-Account
Tool for analyzing and determining the
balance in a given account
Account Name
(Left Side)
(Right Side)
Dr
Debit
Cr
Credit
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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Increases and Decreases in
Accounts
• 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
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 12 of 23
Rules of Debit and Credit
The account category governs the increase side
or decrease side
Increases are recorded on one side
Decreases are recorded on the opposite side
Rules of debits and credits
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 13 of 23
Illustrate Debits and Credits
• The first transaction involves receiving $30,000
cash and issuing common stock
• The second transaction is a $20,000 purchase of
land for cash
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 14 of 23
S2-2: EXPLAINING ACCOUNTS AND THE RULES OF
DEBITS AND CREDITS
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?
Debits are increases in the Assets, Dividends, and Expenses.
When are debits decreases?
Debits are decreases in the Liabilities, Stockholders’ equity,
Retained earnings and Revenues.
2. When are credits increases?
Credits are increases in the Liabilities, Stockholders’ equity,
Retained earnings and revenues.
When are credits decreases?
Credits are decreases in the Assets, Dividends, and Expenses.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 15 of 23
Steps in the Transaction
Recording Process
Identify each
account affected
and its type
Determine if each
account is
increased or
decreased
Record
transaction in the
journal
Use the rules
of debit and
credit
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 16 of 23
Illustrating a Journal Entry
• 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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 17 of 23
Illustrating a Journal Entry
• Four parts:
a)
b)
c)
d)
(continued)
Date of transaction
Title of account debited with dollar amount
Title of account credited with dollar amount
Brief explanation of transaction
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 18 of 23
S2-5: JOURNALIZING TRANSACTIONS
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.
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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 19 of 23
JOURNALIZING TRANSACTIONS
Jan 1: The business received $29,000 cash
and issued common stock
– Cash received indicates cash increases
• Cash is an Asset; Assets increase with debits
– Issued common stock; indicates equity is
increasing
• Increase equity
with credits
GENERAL
JOURNAL
DATE
Jan
DESCRIPTION
1 Cash
Common Stock
Issued stock.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
REF
DEBIT
CREDIT
29,000
29,000
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JOURNALIZING TRANSACTIONS
Jan. 2: Purchased medical supplies on
account, $14,000
– Medical Supplies, an asset, is increasing
• Assets increase with debits
– On account, increases accounts payable, a
liability
• Increase liabilities
with JOURNAL
credits
GENERAL
DATE
Jan
DESCRIPTION
2 Medical supplies
Accounts payable
Purchased supplies on account.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
REF
DEBIT
CREDIT
14,000
14,000
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JOURNALIZING TRANSACTIONS
Jan. 2: Paid monthly office rent of $2,600
– Paid rent, an expense, expense is increasing
• Expenses increase with debits
– Paid cash, cash is an asset
• Increase assets with debits
GENERAL JOURNAL
DATE
Jan
DESCRIPTION
2 Rent Expense
Cash
Paid office rent.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
REF
DEBIT
CREDIT
2,600
2,600
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JOURNALIZING TRANSACTIONS
Jan. 3: Recorded $8,000 revenue for service
rendered to patients on account
– On account indicates Accounts receivable increase
• Accounts receivable is an Asset, Assets increase
with debits
– Rendered services, services are revenues, indicates
revenues are increasing
• Increase revenues with credits
GENERAL JOURNAL
DATE
Jan
DESCRIPTION
3 Accounts receivable
Service revenue
Performed service on account.
REF
DEBIT
CREDIT
8,000
8,000
23
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 23 of 23
Posting from the Journal to the
Ledger
• Copying amounts from the journal to the
ledger
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 24 of 23
Expanding Debit/Credit Rules to
Include Revenues and Expenses
Stockholders’
equity
Liabilities
Assets
+ Common stock
+ Retained earnings
+ Revenues – Expenses
– Dividends
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 25 of 23
Complete Rules of Debit and
Credit
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 26 of 23
Normal Balance of an Account
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 27 of 23
Flow of Accounting Data from
the Journal to the Ledger
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 28 of 23
Source Documents
• Origin of accounting transactions
• Examples:
– Bank deposit tickets
– Invoices
– Checks
– Stock certificates
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 29 of 23
Transaction 1
Common stock
30,000
Cash
30,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Common stock
DEBIT
CREDIT
30,000
30,000
Issued stock.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 30 of 23
Practice Journalizing and
Posting Transaction 2
Land
Cash
30,000 20,000
Common stock
30,000
20,000
10,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Land
Cash
DEBIT
CREDIT
20,000
20,000
Received payment on account.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 31 of 23
Practice Journalizing and
Posting Transaction 3
Cash
30,000 20,000
Office supplies
500
Accounts payable
500
10,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Office supplies
Accounts payable
DEBIT
CREDIT
500
500
Received payment on account.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 32 of 23
Practice Journalizing and
Posting Transaction 4
Cash
30,000 20,000
Service revenue
5,500
5,500
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Service revenue
DEBIT
CREDIT
5,500
5,500
Received payment on account.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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The Ledger Accounts After
Posting
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 34 of 23
S2-10 : PREPARING A TRIAL BALANCE
• Oakland Floor Coverings, Inc. reported the
following summarized data at December 31,
2012. Accounts appear in no particular order.
Revenues
$34,000 Other liabilities
Equipment
45,000 Cash
Accounts payable
2,000 Expenses
Common stock
22,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
$18,000
12,000
19,000
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S2-10 : PREPARING A TRIAL BALANCE
Oakland Floor Coverings, Inc.
Trial Balance
December 31, 2012
Cash
Equipment
Accounts Payable
$ 12,000
45,000
$ 2,000
Other Liabilities
Common Stock
Revenues
18,000
22,000
34,000
19,000
$76,000 $76,000
Expenses
36
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver,
3rd
ed. Pearson
Slide 36 of 23
S2-9: POSTING, BALANCING T-ACCOUNTS, AND
PREPARING A TRIAL BALANCE
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
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.
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 37 of 23
GENERAL JOURNAL
DATE
Jan
DESCRIPTION
1 Cash
Common Stock
Issued stock.
Cash
29,000
REF
DEBIT
CREDIT
29,000
29,000
Common stock
29,000
38
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 38 of 23
GENERAL JOURNAL
DATE
Jan
DESCRIPTION
1 Medical supplies
Accounts payable
Purchased supplies on account.
Medical supplies
14,000
REF
DEBIT
CREDIT
14,000
14,000
Accounts payable
14,000
39
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 39 of 23
GENERAL JOURNAL
DATE
Jan
DESCRIPTION
2 Rent Expense
REF
DEBIT
CREDIT
2,600
Cash
Paid office rent.
Rent expense
Cash
29,000
2,600
2,600
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
2,600
Slide 40 of 23
GENERAL JOURNAL
DATE
DESCRIPTION
Jan 3 Accounts receivable
Service revenue
Performed service on account.
Accounts receivable
8,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
RE
F
DEBIT
CREDIT
8,000
8,000
Service revenue
8,000
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S2-9: COMPUTE THE BALANCE OF EACH ACCOUNT,
AND DENOTE IT AS Bal
Accounts payable
Cash
29,000
2,600
Bal 26,400
Common stock
14,000
Bal 14,000
Accounts receivable
29,000
Bal 29,000
Service revenue
8,000
8,000
Bal 8,000
Bal 8,000
Medical supplies
Rent expense
14,000
2,600
Bal 14,000
Bal 2,600
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 42 of 23
S2-9: PREPARE THE TRIAL BALANCE
Ned Brown, M.D., P.C.
Trial Balance
January 3, 2012
Cash
Accounts receivable
Medical supplies
Accounts payable
$ 26,400
8,000
14,000
$ 14,000
29,000
8,000
Common stock
Service revenue
Rent expense
Total
2,600
$51,000 $51,000
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 43 of 23
Trial Balance
• Summary of the ledger
• Lists all accounts with their balances
• Accuracy check
– Debits should equal credits
• NOT a balance sheet
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 44 of 23
Trial Balance
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 45 of 23
Detecting Trial Balance Errors
• Search for missing account
• Divide 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)
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 46 of 23
Details of the Journal
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
Slide 47 of 23
Four-Column Account
Financial & Managerial Accounting by C. Horngren, W. Harrison & M. S. Oliver, 3rd ed. Pearson
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