Chapter 2. Use accounting terms. Learning Objectives. Objective 1. Recording business transactions

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1 PowerPoint to accompany Chapter 2 Recording business transactions Learning Objectives 1. Use accounting terms 2. Apply the rules of debit and credit 3. Record transactions in the journal 4. Post from the journal to the ledger 5. Prepare and use a trial balance Objective 1 Use accounting terms.

2 Accounting Terms Account Journal T-account Ledger Assets Liabilities Owners equity Double-entry accounting Trial balance Accounting Terms Cash Paula Lee, Capital Individual asset accounts Accounts Payable Individual liability accounts All individual accounts combined make up the ledger. Ledger Individual owners equity accounts Classification of Accounts What are some asset accounts? Cash at Bank Accounts Receivable Bills Receivable Inventories Prepaid Expenses Land Buildings Plant and Equipment

3 Classification of Accounts What are some liability accounts? Accounts Payable Bills Payable Accrued Liabilities (for expenses incurred but not paid) Long-term (Non-Current) Liabilities (mortgages and debentures) Classification of Accounts What are some owners equity accounts? Capital (or owners interest in the business) Drawings Revenues Expenses Jan s Petrol Station Example Assume that the business sold $5,000 worth of petrol on a given day and performed $3,000 of repair services. How much revenue did the business earn that day? $8,000 Revenues increase Jan s equity in the business.

4 Jan s Petrol Station Example The business had to pay mechanics and suppliers $3,750 for the work performed that day. Expenses decrease Jan s equity in the business. How much was the net increase in Jan s equity that day? $4,250 Double-Entry Accounting Double-entry bookkeeping means to record the dual effects of each business transaction. Assets = Liabilities + Owners Equity Assets are on the left (debit) side. Liabilities and Equity are on the right (credit) side. The T-Account (Ledger Account) Account Title Debit Credit LEFT SIDE

5 The T-Account Account Title Debit Credit RIGHT SIDE Objective 2 Apply the rules of debit and credit. The Rules of Debit and Credit

6 The Double-Entry System Each transaction is recorded with at least: One debit AND One credit Total debits must equal total credits. Jan s Petrol Station Example On June 30, Jan invested $500,000 in cash and the business obtained a $300,000 loan (bill payable) to open a petrol station. How much was the initial increase in cash? $800,000 Which accounts were affected? Jan s Petrol Station Example Cash (asset) Bills Payable (liability) Jan, Capital (owners equity)

7 Jan s Petrol Station Example Cash 500,000 Bal.800,000 Jan, Capital 800,000 Bal. 500,000 Bills Payable 300,000 Bal. 300,000 Jan s Petrol Station Example Jan s Petrol Station Balance Sheet June 30, 2010 Assets Liabilities Cash $800,000 Bills payable $300,000 Owners Equity Jan, capital 500,000 Total liabilities Total assets $800,000 and owners equity $800,000 Objective 3 Record transactions in the journal.

8 Journals What is a journal? It is a list in chronological order of all the transactions for a business. 1. Identify transaction from source documents. 2. Specify accounts affected. 3. Apply debit / credit rules. 4. Record transaction (with description). Journals What does a journal entry include? date of the transaction title of the account debited title of the account credited d amount of the debit and credit (description of the transaction) dollar signs are omitted Recording Transactions On June 1, Paula Lee invested $30,000 in Paula Lee etravel. What is the journal entry? June 1 Cash 30,000 Paula Lee, Capital 30,000 Received initial investment from owner

9 Objective 4 Post from the journal to the ledger. Posting What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger. The first transaction was Cash 30,000 Capital 30,000 This can be posted as Cash (1) 30,000 Bal. 30, Paula Lee, Capital (1) 30,000 Bal. 30,000 See pages for more examples

10 Liabilities and Owners Equity Accounts After Posting Accounts Payable (4) 300 (3) 500 Bal. 200 Paula Lee, Drawings (6) 2,000 Bal. 2,000 Paula Lee, Capital (1) 30, Bal. 30,000 Details of Journals and Ledgers Journal Page 1 Date Accounts and Explanation Debit Credit June 1 Cash 30,000 Paula Lee, Capital 30,000 Received initial investment from owner Details of Journals and Ledgers Posting Account: Cash Account: 101 Balance Date Ref. Debit Credit Debit Credit June 1 jrl 30,000 30,000 Insert the number of the journal page.

11 Details of Journals and Ledgers Journal Page 1 Date Account and Post Explanation Ref. Debit Credit June 1 Cash ,000 Paula Lee, Capital ,000 Initial investment from owner Insert the ledger account in the journal. The Four-Column Account Format Account: Cash Account No. 101 Balance Date Item Ref. Debit Credit Debit Credit June 1 jr1 30,000 30,000 Expanding the Accounting Equation to Account for Revenues and Expenses Assets = Liabilities + Owners Equity Capital contributions and Revenues increase Owners Equity. Drawings and Expenses decrease Owners Equity. So: Assets = Liabilities + Capital Drawings + Revenue Expenses

12 Recording Revenue and Expense Transactions Performed services for a client and collected $3,000 cash Cash 3,000 Service Revenue 3,000 Paid office rent $900 Rent Expense 900 Cash 900 Normal Account Balances Assets = Liabilities + Owners Equity Debits = Credits The side where we expect increases to be recorded is the normal balance side. So assets usually have a Dr balance. But cash could be Dr or perhaps Cr, why? Objective 5 Prepare and use a trial balance.

13 Trial Balance What is a trial balance? It is an internal document. It is a listing of all the accounts with their related balances. Before computers, it provided a check on accuracy by showing whether total debits equal total credits. Computerised accounting programs usually prohibit out-of-balance entries. Paula Lee etravel Trial balance Locating Trial Balance Errors Are the additions correct? Are all accounts listed? Are the balances listed correctly? Divide the difference by two - is there a debit / credit balance for this amount posted in the wrong column? Check journal postings. Review accounts for reasonableness.

14 PowerPoint to accompany End of Chapter 2

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