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CHAPTER 2
Study Objectives
1. Explain what an account is and how it helps in the recording process.
2. Define debits and credits and explain their use in recording business transactions. 3. Identify the basic steps in the recording process. 4. Explain what a journal is and how it helps in the recording process. 5. Explain what a ledger is and how it helps in the recording process. 6. Explain what posting is and how it helps in the recording process. 7. Prepare a trial balance and explain its purposes.
Chapter 2-3
The Account
The Trial Balance Limitations of a trial balance Locating errors Use of dollar signs
Ledger
Chapter 2-4
The Account
Account
Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.
Debit = Left Credit = Right
Account Name
Debit / Dr. Credit / Cr.
Chapter 2-5
Chapter 2-6
LO 2 Define debits and credits and explain their use in recording business transactions.
Transaction #1
Transaction #3 Balance
$10,000
8,000 $15,000
$3,000
Transaction #2
Chapter 2-7
LO 2 Define debits and credits and explain their use in recording business transactions.
Transaction #1
$10,000
$3,000
8,000
Transaction #2
Transaction #3
Balance
$1,000
Chapter 2-8
LO 2 Define debits and credits and explain their use in recording business transactions.
Debit / Dr.
Credit / Cr.
Normal Balance
Credit / Cr.
Expense
Debit / Dr. Credit / Cr.
Chapter 3-25
Revenue
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter 3-27
Chapter 3-26
Chapter 2-9
LO 2
Revenue - Expense
Credit
Chapter 2-10
LO 2 Define debits and credits and explain their use in recording business transactions.
Review Question
Debits:
a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.
Chapter 2-11
LO 2 Define debits and credits and explain their use in recording business transactions.
Discussion Question
Q4. Maria Alvarez, a beginning accounting
student, believes debit balances are favorable and credit balances are unfavorable. Is Maria
correct? Discuss.
LO 2 Define debits and credits and explain their use in recording business transactions.
Assets - Debits should exceed credits. Liabilities Credits should exceed debits.
Normal Balance
Chapter 3-23
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-24
Chapter 2-13
LO 2 Define debits and credits and explain their use in recording business transactions.
Owners Equity
Owners Equity
Debit / Dr. Credit / Cr.
Owners investments and revenues increase owners equity (credit). Owners drawings and expenses decrease owners equity (debit).
Normal Balance
Chapter 3-25
Owners Capital
Debit / Dr. Credit / Cr.
Owners Drawing
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter 3-25
Chapter 3-23
Chapter 2-14
LO 2 Define debits and credits and explain their use in recording business transactions.
The purpose of earning revenues is to benefit the owner(s). The effect of debits and credits on revenue accounts is the same as their effect on Owners Capital. Expenses have the opposite effect: expenses decrease owners equity.
LO 2 Define debits and credits and explain their use in recording business transactions.
Normal Balance
Chapter 3-26
Expense
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-27
Chapter 2-15
Review Question
Accounts that normally have debit balances are:
a. assets, expenses, and revenues. b. assets, expenses, and owners capital. c. assets, liabilities, and owners drawings. d. assets, owners drawings, and expenses.
Chapter 2-16
LO 2 Define debits and credits and explain their use in recording business transactions.
The equation must be in balance after every transaction. For every Debit there must be a Credit.
Chapter 2-17
LO 2 Define debits and credits and explain their use in recording business transactions.
Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.
Chapter 2-18
The Journal
Book of original entry (General Ledger).
Chapter 2-19
Journalizing
Journalizing - Entering transaction data in the journal.
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency. Oct. 1 Pete Hanshew begins business as a real estate agent with a cash investment of $15,000. 3 Purchases office furniture for $1,900, on account. 6 Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided. 27 Pays $700 on balance related to transaction of Oct. 3. 30 Pays the administrative assistant $2,500 salary for Oct. E2-5 Instructions - Journalize the transactions for E2-4.
Chapter 2-20
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 1
Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.
General Journal
Account Title 1 Cash Hanshew, Capital (Owners investment) Ref. Debit 15,000 15,000 Credit
Date Oct.
Chapter 2-21
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 3
Oct. 3
Chapter 2-22
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 6
Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.
General Journal
Date Account Title Accounts Receivable Service Revenue (Realty services provided) Ref. Debit 3,200 3,200 Credit
Oct. 6
Chapter 2-23
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 27 Pays $700 on balance related to transaction of
Oct. 3.
General Journal
Date Oct. 27 Account Title Accounts Payable Cash (Payment on account) Ref. Debit 700 700 Credit
Chapter 2-24
Journalizing
E2-4 (Facts) Presented below is information related to Hanshew Real Estate Agency.
Oct. 30 Pays the administrative assistant $2,500
General Journal
Date Oct. 30 Account Title Salary Expense Cash (Payment for salaries) Ref. Debit 2,500 2,500 Credit
Chapter 2-25
Journalizing
Simple Entry Two accounts, one debit and one credit. Compound Entry Three or more accounts.
Example On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).
General Journal
Date June 15 Account Title Equipment Cash Accounts Payable (Purchased equipment)
Chapter 2-26
Ref.
Debit 15,000
The Ledger
A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, owners equity, revenue and expense accounts.
Chapter 2-27
Chart of Accounts
Accounts and account numbers arranged in sequence in which they are presented in the financial statements.
Hanshew Real Estate Agency
Chart of Accounts Assets
101 112 126 130 150 158 Cash Accounts receivable Advertising supplies Prepaid insurance Office equipment Accumulated depreciation 300 306 350
Owner's Equity
Hanshew, Capital Hanshew, Drawing Income summary
Revenues
400 Service revenue
Liabilities
200 201 209 212 230 Accounts payable Notes payable Unearned revenue Salaries payable Interest payable 631 711 722 726 729 905
Expenses
Advertising supplies expense Depreciation expense Insurance expense Salaries expense Rent expense Interest expense
Chapter 2-28
No. 101
Debit
15,000 700 2,500
Explanation
Ref.
Credit
Balance
15,000 14,300 11,800
Chapter 2-29
Posting
Posting the process of transferring amounts from the journal to the ledger accounts.
General Journal
Date Oct. 1 Account Title Cash Hanshew, Capital (Owner's investment in business) Ref. Debit 15,000 15,000
J1
Credit
101
Oct. 1
J1
15,000
15,000
Chapter 2-30
Posting
Review Question
Posting:
a. normally occurs before journalizing. b. transfers ledger transaction data to the
journal.
c. is an optional step in the recording process. d. transfers journal entries to ledger accounts.
Chapter 2-31
Cash Accounts receivable Office furniture Accounts payable Hanshew, Capital Service revenue Salaries expense
2,500 $ 19,400
$ 19,400
Chapter 2-33
posting, or
amount of a transaction.
Chapter 2-34
Review Question
A trial balance will not balance if:
a. a correct journal entry is posted twice. b. the purchase of supplies on account is debited to
Chapter 2-35
Recording Process
Discussion Question
Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
Is Jim correct? If not, indicate to Jim the proper flow of the information. See notes page for discussion
Chapter 2-36
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 2-37