Recording Business Transactions pot

John’s Gas Station ExampleRevenues increase John’s equity in the business.. John’s Gas Station ExampleExpenses decrease John’s equity in the business... Contributed CapitalRetained Earni

Recording Business Transactions

Chapter 2

Use accounting

terms

Objective 1

Accounting Terms

Account Ledger Assets

Owner’sequityDouble-entryaccounting

Cash

Accounts Payable

Accounts Payable

Individual liability accounts

Accounting Terms

Classification of Accounts

What are some owner’s equity accounts?

– Capital or owner’s interest in the business

John’s Gas Station Example

Assume that the business sold $5,000 worth

of gasoline on a given day and performed

$3,000 of repair services

How much revenue did the business earn

that day?

$8,000

John’s Gas Station Example

Revenues increase John’s equity in the business

The business had to pay mechanics and vendors $3,750 for the work performed that day

John’s Gas Station Example

Expenses decrease John’s equity in the business

How much was the net increase in John’s equity that day?

$4,250

Contributed Capital

Retained Earnings

Classification of Accounts

In a corporation, the owner’s equity account

is called Stockholders’ Equity

Double-Entry Accounting

Double entry bookkeeping means to record the dual effects of each business

transaction

Assets = Liabilities + Owner’s Equity

Assets are on the left (debit) side

Liabilities and Equity are on the right

(credit) side

The T-Account

Account Title

Left Side

The T-Account

Account Title

Right Side

Apply the Rules

of Debit and Credit.

Objective 2

Owner’s Equity Assets Liabilities

One debit One creditEach transaction is recorded with at least:

Total debits must equal total credits

The Double-Entry System

John’s Gas Station Example

On July 1, John invested $500,000 in cash and obtained a $300,000 loan to open a gas station

How much was the initial increase in cash?

$800,000

Which accounts were affected?

John’s Gas Station Example

CashLiabilitiesOwner’s Equity

John’s Gas Station Example

John’s Gas StationBalance SheetJuly 1, 2002

Record Transactions

in the Journal.

Objective 3

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

What does a journal entry include?

– date of the transaction

– title of the account debited

– title of the account credited

– amount of the debit and credit

– description of the transaction

Recording Transactions

On April 2, Gay Gillen invested $30,000

in Gay Gillen eTravel

What is the journal entry?

April 2

Gay Gillen, Capital

30,000 Received initial investment from

Post from the

Journal

to the Ledger.

Objective 4

Computerprintout

What is posting?

It is the transfer of information from the journal to the appropriate accounts in the ledger

Normal Account Balances

Assets = Liabilities + Owner’s Equity

Debits = Credits

The side where we expect increases to be recorded is the normal balance side

Cash(1) 30,000 (2) 20,000

(4) 300 (6) 2,100

Bal

7,600

Office Supplies(3) 500

Land (2) 20,000

Bal 20,000

Asset Accounts After Posting

Accounts Payable

Gay Gillen, Withdrawals

(1) 30,000 Bal 30,000

(3) 500 (4) 300

Bal 200 Gay Gillen, Capital

(6) 2,000

Liabilities and Owner’s Equity Accounts After Posting

Details of Journals and Ledgers

Received initialinvestment from owner

Details of Journals and Ledgers

BalanceDate Ref Debit Credit Debit Credit

Insert the number of the journal page

Posting

Details of Journals and Ledgers

Journal Page 1

Explanation Post Ref Debit Credit

Initial investment

from owner

Account: Cash Account No 101

Date Item Ref Debit Credit Debit Credit

The Four-Column Account

Format

Prepare and use a Trial Balance.

Objective 5

Locating Trial Balance Errors

What if it doesn’t balance ?

Is the addition correct?

Are all accounts listed?

Are the balances listed correctly?

Locating Trial Balance Errors

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

Computerized accounting programs usually prohibit out-of-balance entries

Analyze Transactions without a Journal.

Objective 6

John’s Gas Station

John is considering either purchasing a

garage for $70,000 or renting one for

$10,000 per year

John does not need to record in the journal all of the transactions that would affect his decision

Why?

John’s Gas Station

John has not completed a transaction yet

However, John can visualize how the ledger accounts will be affected

Rent the garage

Buy the garageCash

70,000

Building70,000

John’s Gas Station

Rent ExpenseCash

End of Chapter 2