Transcript Chapter 2

Chapter 2
Analyzing transactions
Account
Accounting systems are designed to
show the increases and decreases in
each accounting equation element
as a separate record.
This record is called an account.
LO 1
Using Accounts to Record Transactions
Accounting “Language”
Instead of saying “increase” and “decrease”,
accountants use the terms
“Debit” and “Credit”
LO 1
The T Account
Title
The T account
has a title.
LO 1
The T Account
Title
Debit
The left side of
the account is
called the debit
side.
LO 1
The T Account
Title
Debit
Credit
The right side of
the account is
called the credit
side.
Balance of T-account
Total the side with the increases to the account
Total the side with the decreases to the account
Subtract the totals, the difference goes on the side
with the larger total
the difference = the account balance
LO 1
The T Account
Cash
(a)
(d)
25,000
7,500
Debit
Side of
Account
Balance
Balance of the account
(b)
(e)
(f)
(h)
20,000
3,650
950
2,000
Credit
Side of
Account
LO 1
Chart of Accounts
• A group of accounts for a business entity
is called a ledger.
• A list of the accounts in the ledger is
called a chart of accounts.
Chart of Accounts
• Lists the accounts in the general ledger
• Accounts are listed in the order they
appear on the financial statements
Balance sheet accounts are shown first
then, Income Statement accounts are
shown
Chart of Accounts
Account numbers are assigned to each account
Standard numbering system:
Asset account #s begin with ‘1’ ex.: 112, 1143
Liability account #s begin with ‘2’ ex.: 263, 2542
Stockholder’s Equity account #s begin with ‘3’
Revenue account #s begin with ‘4’
Expense account #s begin with ‘5’
Asset accounts
• Resources owned
• Include physical resources: cash, supplies
• Include intangible resources: patents,
copyrights
• Are listed in the chart of accounts in the
order of liquidity
– So, Cash is always first, followed by Accounts
Receivable, then usually Supplies, Prepaid
Expenses
Liability Accounts
• Debts owed to creditors
• Accounts with the word “Payable” in the
account title are liability accounts
• Unearned revenues:
customer pays before service is delivered
the company owes services to the customer
Stockholders’ Equity
• Stockholder’s right to assets
• Stockholders’ equity (corporation)
– Accounts include:
Capital Stock
Retained Earnings
Dividends: distribution of earnings to
stockholders
Revenue
• Increases in Stockholders’ Equity as a
result of selling services or products
Expenses
• Using up assets or consuming services in
the process of generating revenues
LO 1
Chart of Accounts
Accounting “Language”
• The account classification:
– determines whether the account should have
a normal balance of Debit or Credit
– determines if the account is increased with a
debit or credit
Rules for debits and credits
• Assets, Expenses and Dividends have a
normal balance of debit
• Liabilities, Capital Stock, Retained
Earnings and Revenues have a normal
balance of credit
Rules for debits and credits
• To increase an account, go in the same
direction as its normal balance
Ex: Assets have a normal debit balance, so to
increase an asset, you will debit the account
Liabilities have a normal credit balance, so to
increase a liability, you will credit the account
Stockholder’s equity has a credit balance, so
it follows the same rules as liabilities
Rules for debits and credits
• To decrease an account, go in the
opposite direction of its normal balance
Ex: Assets have a normal debit balance, so to
decrease an asset, you will credit the account
Liabilities have a normal credit balance, so to
decrease a liability, you will debit the account
Stockholders’ equity has a credit balance, so
it follows the same rules as liabilities
LO 2
Normal Balances
Increases
(Normal Bal.)
Balance sheet accounts:
Asset
Liability
Stockholders’ Equity:
Capital Stock
Dividends
Income statement accounts:
Revenue
Expense
Decreases
Debit
Credit
Credit
Debit
Credit
Debit
Debit
*
Credit
Debit
Debit **
Credit**
**The Dividends account is credited only in the case of an error correction.
** Revenues and Expenses only increase in normal, everyday transactions.
Revenue accounts
• Revenue accounts increase Retained
Earnings, so they have the same rules as
the Stockholder’s equity accounts
• Revenue normal balance = Credit
Revenue
Dr.
Cr.
+
.
.
Expense accounts
• Expense accounts decrease Retained
Earnings, so they have the opposite rules
as the Stockholder’s equity accounts
• Expense normal balance = debit
Expense
Dr.
Cr.
+
.
.
Dividends account
• Dividends account decrease Retained
Earnings, so they have the opposite rules
as the Stockholder’s equity accounts
• Dividend normal balance = debit
Dividend
Dr.
Cr.
+
.
.
Accounting for business
transactions
1) Decide which accounts are involved
2) Does the account increase or decrease?
3) Translate into accounting language:
A, E, D: normal balance = Dr.
so, + = Dr. And - = Cr.
L, SE, R: normal balance = Cr.
so, + = Cr. And - = Dr.
T-accounts
• Short-cut method of recording transactions
• Used informally – not in the actual
accounting records
• Formal process: record transactions in
General Journal
General Journal
• Simplest journal
• Used to record transactions in a format
called a journal entry
General Journal
Date
Description
Post.
Ref.
Debit
Credit
To enter the date, enter the year on top with the
month and day underneath
General Journal
Date
2011
Mar 2
Description
Post.
Ref.
Debit
Credit
General Journal
Date
Description
Post.
Ref.
Debit
Credit
2011
Mar 2
For subsequent journal entries occurring in the same
month, just enter the day in the date column
General Journal
Date
2011
Mar 2
5
Description
Post.
Ref.
Debit
Credit
General Journal
Date
Description
Post.
Ref.
Debit
Credit
2011
Mar 2
In the description column, enter the name of the accounts
Involved in the transaction
List the account being debited first
The account being credited is listed underneath, with the
account name indented
General Journal
Date Description
2011
Mar 2
Post.
Ref.
Ex: Paid wages of $500 on Mar. 2.
Debit
Credit
General Journal
Date
Description
Post.
Ref.
Debit
2011
Mar 2
Write explanation underneath journal entry.
Credit
General Journal
Compound entry: has more than one debit or more
than one credit
list all the accounts to be debited first
then, list all the accounts to be credited, with
account names indented
General Journal
Date
Description
Post.
Ref.
Debit
Credit
Post. Ref. Column is used as part of the posting
process
Posting
• Process of transferring the information
from the journal entry to the General
Ledger
General Ledger
Account name
Date
Item
Post
Ref. Debit
Account #
Balance
Debit Credit
.
Credit
2011
Mar 1
Enter the date the same way as in the General Journal
.
General Ledger
Account name
Date
Item
2011
Mar 1
Balance
Post
Ref. Debit
Account #
Balance
Debit Credit
.
Credit
The item column is left blank unless it involves a special
transaction, such as entering the beginning balance
.
General Ledger
Account name
Date
2011
Mar 31
Item
Post
Ref. Debit
Account #
Balance
Debit Credit
.
Credit
Adjusting
The item column is left blank unless it involves a special
transaction, such as entering the beginning balance
posting adjusting entries
.
General Ledger
Account name
Date
Item
2011
Mar 31
Closing
Post
Ref. Debit
Account #
Balance
Debit Credit
.
Credit
The item column is left blank unless it involves a special
transaction, such as entering the beginning balance
posting adjusting entries, or
posting closing entries
.
General Journal
Date
Description
2011
Mar 2 Wages expense
Cash
Post.
Ref.
Debit
Page 1
Credit
500
500
General Ledger
Cash
Date
Item
2011
Mar. 1
2
Balance
Post
Ref. Debit
• Enter the day in the date column
Account #11
Balance
Debit Credit
.
Credit
10,000
.
General Ledger
Cash
Date
Item
2011
Mar. 1
2
Balance
Post
Ref. Debit
Account #11
Balance
Debit Credit
.
Credit
10,000
500
Enter the amount of the debit or credit from the general
journal
.
General Ledger
Cash
Date
Item
2011
Mar. 1
2
Balance
Post
Ref. Debit
Account #11
Balance
Debit Credit
.
Credit
10,000
1
500
Enter the page number from the general journal that the
journal entry you are posting is on
.
General Ledger
Cash
Date
Item
2011
Mar. 1
2
Balance
Post
Ref. Debit
Account #11
Balance
Debit Credit
.
Credit
10,000
1
500
• Calculate the new balance in the account
.
General Journal
Date
Description
2011
Mar 2 Wages expense
Cash
Post.
Ref.
Debit
Page 1
Credit
500
500
In the Post Ref. Column of the General Journal, enter the
account # where the amount was posted to
Trial Balance
Company Name
Trial Balance
Date
(column 1)
Account Name
(column 2)
debit balances
(column 3)
credit balances
Under account name, list each account that has a balance
Drop the account balance in either column 2 or 3
Total of column 2, the debit balances, must = the total of
column 3, the credit balances, for the ledger to be “in
balance
Discovery of Errors
• Watch out for:
transposition: digits of # are reversed
slide: # if moved one or more spaces to
the right or left ex.: 267 is 2670 or 26.70
putting a debit balance in the credit column or
vice versa