Accounting Transactions Process

4-2

The Bookkeeping/Accounting
Process
Transactions are economic
interchanges between entities that are
accounted for and reflected in financial
statements.

Borrow cash

from the bank

4-3

The Balance Sheet EquationA

Mechanical Key

A = L + OE
The basic accounting equation can be
expanded to include revenues and
expenses.

A = L + PIC + RE + R - E
BEG

4-4

Transaction
a
b
c
d
e
f

Cash

Assets
Accounts
Receivable +

=
Equipment =

Liabilities
Notes
Payable

+
+

Paid-in
Capital

Owners' Equity
Retained
Earnings + Revenues

- Expenses

Total

Lets see how

some
transactions
effect the
operation of
this equation.

4-5

Transaction
a
b
c
d
e
f
Total

Cash
+
2,000
6,000
(2,000)

Assets
Accounts
Receivable +

3,000
8,000
(2,000)
12,000 +

=
Equipment =

10,000
(3,000)

Liabilities
Notes
Payable

+
+

Paid-in
Capital
+
2,000

Owners' Equity
Retained
Earnings + Revenues

- Expenses

6,000
8,000
8,000

3,000 +

7,000 =

14,000 +

2,000 +

0 +

8,000

6,000

Transactions
a. The owners invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and
signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be
received within 30 days.
e. The company provided services for $8,000 and received cash.
f.

Wages of $2,000 were paid in cash.

2,000
2,000

4-6

Transaction
a
b
c
d
e
f
Total

Cash
+
2,000
6,000
(2,000)

Assets
Accounts
Receivable +

=
Equipment =

3,000
8,000
(2,000)
12,000 +

Liabilities
Notes
Payable

+
+

Paid-in
Capital
+
2,000

Owners' Equity
Retained
Earnings + Revenues

- Expenses

6,000
8,000

10,000
(3,000)

8,000
3,000 +

7,000 =

14,000 +

2,000 +

0 +

8,000

2,000
2,000

6,000

Statement of Changes in
Retained Earnings
Beginning Balance
$
Add: Net Income
6,000
Less: Dividends
Ending Balance
$
6,000

Income Statement
Revenues
$
8,000
Expenses
2,000
Net Income
$
6,000
Balance Sheet
Assets
Cash
$
Accounts Receivable
Equipment

12,000
3,000
7,000

Total Assets

22,000

Liabilities
Notes Payable
$
Owners' Equity
Paid-in Capital
Retained Earnings
Total Liabilities &
Owners' Equity
$

14,000
2,000
6,000
22,000

4-7

Bookkeeping Jargon

Transactions are initially recorded in

a journal.

Cash

Inventory

Equipment

Notes
Payable

Transactions are then recorded

posted toindividual accounts in
the ledger.

4-8

T-Account

A T-account is a tool used to represent

an account.

Account Name
Left

Right

4-9

T-Account
The left side of the
T-account is always the
debit side.

The right side of the

T-account is always the
credit side.

Account Name
Left

Right

Debit

Credit

4-10

Debits and Credits

Debits
Debits and
and credits
credits affect
affect the
the accounting
accounting
equation
equation as
as follows:
follows:

A = L + OE
ASSETS

LIABILITIES

EQUITIES

Debit
Credit
for
for
Increase Decrease

Debit
Credit
for
for
Decrease Increase

Debit
Credit
for
for
Decrease Increase

4-11

Debits and Credits

A = L + OE
ASSETS

LIABILITIES

EQUITIES

Debit
Credit
for
for
Increase Decrease

Debit
Credit
for
for
Decrease Increase

Debit
Credit
for
for
Decrease Increase

Remember that Owners Equity

includes Paid-in Capital and
Retained Earnings.

Paid-in
Capital

Retained
Earnings

4-12

Revenue and Expenses

Increases in
owners equity.

Increases with
a credit.

Decreases in
owners equity.

Increases with
a debit.

4-13

Debits and Credits

A = L + OE
Account Name
Debit side
Credit side
Normal balance for:
Normal balance for:
Assets
Liabilities
Expenses
Owners' equity
Revenues
Debit entries increase: Credit entries increase:
Assets
Liabilities
Expenses
Owners' equity
Revenues
Debit entries decrease: Credit entries decrease:
Liabilities
Assets
Owners' equity
Expenses
Revenues

4-14

Journal Entry Format

A typical journal entry might look like this.
Date
6/30

Description
Cash
Paid-in Capital
To record an investment
by the owners.

Debit
2,000

Credit
2,000

4-15

Journal Entry Format

Provide a reference
date for each transaction.

Date
6/30

Description
Cash

Debits are written first.

Debit
2,000

Credit

Paid-in Capital
2,000
To record an investment
Total debits must equal
by the owners.
Credits are indented and
written after debits.

total credits.

4-16

The Bookkeeping Process

Transactions

Recorded in the Journal

Date
6/30

Description

Debit
2,000

Cash
Paid-in Capital
To record an investment
by the owners.

Credit
2,000

Source Documents

Posted to the Ledger

Account Name
Debit

Credit

4-17

Transaction Analysis Illustrated

Lets prepare some journal entries for
and post them to the ledger.
Transactions
a. The owners invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and
signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be
received within 30 days.
e. The company provided services for $8,000 and received cash.
f.

Wages of $2,000 were paid in cash.

4-18

The owners invested $2,000.

(a)

Cash
2,000

2,000

Paid-in Capital
2,000 (a)

2,000

4-19

The company borrowed $6,000 from a bank.

(a)
(b)

Cash
2,000
6,000

8,000

Notes Payable
6,000 (b)

6,000

4-20

Equipment costing $10,000 was purchased

for $2,000 cash and signing a note payable
for $8,000.

Lets see how to post this entry . . .

4-21

Equipment costing $10,000 was purchased

for $2,000 cash and signing a note payable
for $8,000.
(c)

Equipment
10,000

10,000

(a)
(b)

Cash
2,000
6,000

6,000

2,000 (c)

Notes Payable
6,000 (b)
8,000 (c)

14,000

4-22

Equipment that cost $3,000 was sold for

$3,000. The $3,000 will be received within 30
days.

Accounts Receivable
(d)
3,000

3,000

(c)

Equipment
10,000
3,000 (d)

7,000

4-23

The company provided services for $8,000

and received cash.

(a)
(b)
(e)

Cash
2,000
6,000
8,000

14,000

Revenue
2,000 (c)

8,000 (e)

8,000

4-24

Wages of $2,000 were paid in cash.

(a)
(b)
(e)

Cash
2,000
6,000
8,000

12,000

2,000 (c)
2,000 (f)

(f)

Wages Expense
2,000

2,000

At the end of the

period, we need to
make adjusting entries
to get the accounts up
to date for the financial
statements.

4-25

4-26

Adjustments/Adjusting Entries
Adjusting
entries are
needed whenever
revenue or expenses
affect more than one
accounting
period.

Every
adjusting
entry involves a
change in either a
revenue or expense
and an asset
or liability.

4-27

Types of Adjusting Entries

Accruals
Accruals

Reclassifications
Reclassifications

Transactions
Transactionsfor
forwhich
which
cash
cashhas
hasNOT
NOTyet
yet been
been
received
receivedor
orpaid,
paid,but
but the
the
effect
effect of
of which
whichmust
mustbe
be
recorded
recordedin
inthe
theaccounts
accounts
in
in order
orderto
toaccomplish
accomplishaa
matching
matching of
of revenues
revenues
and
andexpenses.
expenses.

The
Theinitial
initialrecording
recordingof
ofaa
transaction
transactiondoes
doesnot
not
result
resultin
in assigning
assigning
revenues
revenuesto
to the
theperiod
period in
in
which
whichthey
theywere
wereearned
earned
or
or expenses
expensesto
tothe
the
period
periodin
in which
whichthey
they
were
wereincurred..
incurred..

4-28

Accruing Expenses
Hey, when do
we get paid?
Examples Include:
Interest
Wages and Salaries
Property Taxes

4-29

Accruing Expenses
$3,000 Wages
Expense

Monday,
May 29

Wednesday,
May 31

Friday,
June 2

On
On May
May 31,
31, Webb
Webb Co.
Co. owes
owes wages
wages of
of
$3,000.
$3,000. Pay
Pay day
day is
is Friday,
Friday, June
June 2.
2.

4-30

Accruing Expenses
Initially,
Initially, an
an expense
expense and
and aa liability
liability are
are
recorded.
recorded.
GENERAL JOURNAL
Date

Account Titles and Explanation

May 31 Wages Expense

Wages Payable
To accrue wages owed to employees.

P
R Debit

Credit

3,000
3,000

4-31

Accruing Unpaid Expenses

Balance
Balance Sheet
Sheet

Income
Income Statement
Statement

Liability
Liability to
to be
be
paid
paid in
in aa future
future
period.
period.

Cost
Cost incurred
incurred this
this
period
period to
to generate
generate
revenue.
revenue.

Wages Payable
5/31 3,000

Wages Expense
5/31 3,000

4-32

Accruing Expenses
$5,000 Weekly Wages
$3,000 Wages
Expense

Monday,
May 29

$2,000 Wages
Expense

Wednesday,
May 31

Friday,
June 2

Lets
Lets look
look at
at the
the entry
entry for
for June
June 2.
2.

4-33

Accruing Expenses
The
The liability
liability is
is extinguished
extinguished when
when the
the debt
debt is
is
paid.
paid.
GENERAL JOURNAL
Date

Account Titles and Explanation

June 2 Wages Expense (for June)

Wages Payable (accrued in May)
Cash
Weekly payroll for May 29-June 2.

P
R Debit

Credit

2,000
3,000
5,000

4-34

Accruing Revenues

Examples Include:
Interest Earned
Work Completed But Not
Yet Billed to Customer

4-35

Accruing Revenues
$170 Interest
Revenue

Saturday,
Jan. 15

Monday,
Jan. 31

Tuesday,
Feb. 15

On
On Jan.
Jan. 31,
31, the
the bank
bank owes
owes Webb
Webb Co.
Co.
th
interest
of
$170.
Interest
is
paid
on
the
15
interest of $170. Interest is paid on the 15 th
day
day of
of each
each month.
month.

4-36

Accruing Revenues
Initially,
Initially, the
the revenue
revenue is
is recognized
recognized and
and aa
receivable
receivable is
is created.
created.
GENERAL JOURNAL
Date

Account Titles and Explanation

Jan. 31 Interest Receivable

Interest Revenue
To recognize interest revenue.

P
R Debit

Credit

170
170

4-37

Accruing Revenues
Balance
Balance Sheet
Sheet
Receivable
Receivable to
to
be
be collected
collected in
in aa
future
future period.
period.
Interest Receivable
1/31
170

Income
Income Statement
Statement
Revenue
Revenue earned
earned
this
this period.
period.

Interest Revenue
1/31
170

4-38

Accruing Revenues
$320 Monthly Interest
$170 Interest
Revenue

Saturday,
Jan. 15

$150 Interest
Revenue

Monday,
Jan. 31

Tuesday,
Feb. 15

Lets
Lets look
look at
at the
the entry
entry for
for February
February 15.
15.

4-39

Accruing Revenues
The
The receivable
receivable is
is collected
collected in
in aa future
future period.
period.

GENERAL JOURNAL
Date

Account Titles and Explanation

Feb. 15 Cash

P
R Debit

Credit

320

Interest Revenue (for February)

150

Interest Receivable (accrued Jan. 31)

170

To record interest received.

4-40

Reclassifying Assets to Expenses

Examples Include:
Supplies
Expiring Insurance Policies

4-41

Reclassifying Assets to Expenses

$2,400 Insurance Policy
Coverage for 12 Months
$200 Monthly Insurance Expense

Jan. 1

Dec. 31

On
On January
January 1,
1, Webb
Webb Co.
Co. purchased
purchased aa oneoneyear
year insurance
insurance policy
policy for
for $2,400.
$2,400.

4-42

Reclassifying Assets to Expenses

Initially,
Initially, costs
costs that
that benefit
benefit more
more than
than one
one
accounting
accounting period
period are
are recorded
recorded as
as assets.
assets.
GENERAL JOURNAL
Date
Jan.

Account Titles and Explanation

1 Unexpired Insurance
Cash
Purchase a one-year insurance policy.

P
R Debit

Credit

2,400
2,400

4-43

Reclassifying Assets to Expenses

The
The costs
costs are
are expensed
expensed as
as they
they are
are used
used to
to
generate
generate revenue.
revenue.
GENERAL JOURNAL
Date

Account Titles and Explanation

P
R Debit

Credit

Monthly Adjusting Entry for Insurance

Jan. 31 Insurance Expense
Unexpired Insurance
Insurance expense for January.

200
200

4-44

Reclassifying Assets to Expenses

Balance
Balance Sheet
Sheet

Income
Income Statement
Statement

Cost
Cost of
of assets
assets
that
that benefit
benefit
future
future periods.
periods.

Cost
Cost of
of assets
assets
used
used this
this period
period to
to
generate
generate revenue.
revenue.

Unexpired Insurance
1/1 2,400 1/31
200
Bal. 2,200

Insurance Expense
1/31
200

4-45

Reclassifying Liabilities to
Revenues

Examples Include:
Airline Ticket Sales
Sports Teams Sales of
Season Tickets

4-46

Reclassifying Liabilities to
Revenues
$6,000 Rental Contract
Coverage for 12 Months
$500 Monthly Rental Revenue
Jan. 1

Dec. 31

On
On January
January 1,
1, Webb
Webb Co.
Co. received
received $6,000
$6,000 in
in
advance
advance for
for aa one-year
one-year rental
rental contract.
contract.

4-47

Reclassifying Liabilities to
Revenues
Initially,
Initially, revenues
revenues that
that benefit
benefit more
more than
than one
one
accounting
accounting period
period are
are recorded
recorded as
as liabilities.
liabilities.
GENERAL JOURNAL
Date
Jan.

Account Titles and Explanation

1 Cash
Unearned Rental Revenue
Collected $6,000 in advance for rent.

P
R Debit

Credit

6,000
6,000

4-48

Reclassifying Liabilities to
Revenues
Over
Over time,
time, the
the revenue
revenue is
is recognized
recognized as
as itit is
is
earned.
earned.
GENERAL JOURNAL
Date

Account Titles and Explanation

P
R Debit

Credit

Monthly Adjusting Entry for Rent Revenue

Jan. 31 Unearned Rental Revenue
Rental Revenue
Rental revenue for January.

500
500

4-49

Reclassifying Liabilities to
Revenues
Balance
Balance Sheet
Sheet

Income
Income Statement
Statement

Liability
Liability for
for
future
future periods.
periods.

Revenue
Revenue earned
earned
this
this period.
period.

Unearned Rental Revenue

1/31

500

1/1 6,000
Bal. 5,500

Rental Revenue
1/31
500

4-50

Closing the Books

The closing process simply transfers the year-end
balances of all income statement accounts (e.g.,
revenues, expenses, gains and losses) to the
retained earnings account.
In addition, the dividends account is also closed to
retained earnings.

4-51

Transaction Analysis
Methodology
Answer Five Questions:
1. Whats going on?
2. What accounts are affected?
3. How are they affected?
4. Does the balance sheet
balance? (Do the debits equal
the credits?)
5. Does my analysis make
sense?

4-52

Questions ?