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Chapter 2
Recording Business Transactions
Questions
- The basic summary device of accounting is the T-account. It resembles the letter T, and its left side is called the debit side and its right side the credit side.
- The statement is false because debit means left and credit means right. Debits and credits are used to record increases and decreases in accounts, so debits can be increases or decreases depending on the type of account involved and likewise for credits.
- Examples:
- A debit to an asset account indicates an increase in the asset.
- To record a decrease in a liability, the accountant should record a debit.
- Debit all asset accounts to record increases in them.
- The accountant should debit Cash to record a receipt of cash.
- The debit side of an account is the left side.
- It is customary to record the debit side of a journal entry before recording the credit side of the entry.
- The three basic types of accounts are ASSETS, LIABILITIES, and OWNER’S EQUITY. Two additional types of accounts are REVENUES and EXPENSES.
They are part of owner’s equity; revenues increase owner’s equity and expenses decrease owner’s equity.
- The dual effects of an owner’s investment in her business are (1) an increase in the entity’s cash and (2) an increase in the owner’s equity.
- Business Transaction Entry in Posting to Trial
Creates Source Document Journal Ledger Balance
- The normal balance of an account is the side of the account—debit or credit— that records increases. Also, an account’s normal balance is the side of the account that usually has the account’s balance.
- Account Type Normal Balance
Assets Debit
Liabilities Credit
Owner’s equity Credit
Revenues Credit
Expenses Debit
- Posting transfers amounts from the journal to the ledger. This is important because the transaction entries in the journal do not accumulate all the information related to each account. The accounts in the ledger hold that information. Therefore, the transfer of data to the accounts in the ledger—that is, posting from the journal to the ledger—makes it possible to determine the balance in each account. Posting comes after journalizing.
- + Investment by owner 0 e. Cash payment on account
+ b. Invoice customer for services – f. Withdrawal by owner
0 c. Purchase of supplies on credit 0 g. Borrowing money on a note payable
– d. Pay expenses + h. Sale of services on account
- Posting’s four steps are (1) copy the date of a transaction from the journal to the ledger, (2) copy the journal page number from the journal to the ledger, (3) copy (post) the dollar amounts of the debit and the credit from the journal to the ledger, and (4) copy the account numbers from the ledger back to the journal to indicate that the transaction amount has been posted to the ledger. Step 3, transferring the transaction amount to the account, is the fundamental purpose of posting.
- Cash Jane East, Capital
Accounts Receivable Sales Revenue
Note Payable Salary Expense
- ―Accounts Payable has a credit balance of $1,700‖ means that the entity owes $1,700 to its creditors on a debt that is not evidenced by a formal note payable.
- The two business transactions are (1) the cleaners providing laundry service and earning revenue and (2) Baylor’s paying cash to Campus Cleaners. The business’s earning of the revenue increases the owner’s equity in the company, and Baylor’s payment of cash increases the business’s cash.
- The ledger is the group of actual accounts in use. The chart of accounts is a list of all the accounts set up in the ledger with their account numbers.
- Accountants prepare a trial balance to check the accuracy of postings and determine whether the total debits equal the total credits. It is a useful summary of all the accounts and their balances and serves as an early error-detection tool.
- A compound journal entry is one that affects more than two accounts.
- This error does not cause the trial balance to be out of balance because both the total debits and the total credits are overstated by the same amount, $4,500 ($5,000 – $500).
- Collecting cash on account has no effect on total assets because the increase in cash, which increases total assets, is offset by the decrease in accounts receivable, which decreases total assets.
- Both systems depend on the accuracy of the initial analysis of the transaction and require that the journal entry be recorded correctly. Thereafter, a number of errors could occur in a manual system (such as slides, transpositions, errors in calculating account balances); these errors will affect a manual trial balance. Most computerized systems will not allow you to post a journal entry if it does not balance. Once the journal entry has been correctly recorded, the computerized accounting system performs much the same actions as accountants do in a manual system. These routine tasks are accomplished faster and with less risk of error with a computer. The computer does not recognize debits and credits, only increases and decreases by account type.
Starters
(10 min.) S 2-1
(5 min.) S 2-2
―The basic summary device in accounting is the account. The left side is called the debit side, and the right side is called the credit side. We record transactions first in a journal. Then we post (copy the data) to the ledger. It is helpful to list all the accounts with their balances on a trial balance.‖
(10 min.) S 2-3
E 1. Posting A. Record of transactions
D 2. Normal balance B. Always an asset
G 3. Payable C. Right side of an account
- Journal D. Side of an account where
increases are recorded
- Receivable E. Copying data from the
journal to the ledger
J 6. Capital F. Increasing equity from
providing goods and services
C 7. Credit G. Always a liability
F 8. Revenue H. Revenues – Expenses
(where expenses exceed revenue)
- Net loss I. Grouping of accounts
- Ledger J. Owner’s equity in the
business
(5-10 min.) S 2-4
Credits are increases in these types of accounts:
- Liabilities
- Capital
- Revenues
Credits are decreases in these types of accounts:
- Assets
- Withdrawals
- Expenses
Debits are increases in these types of accounts:
- Assets
- Withdrawals
- Expenses
Debits are decreases in these types of accounts:
- Liabilities
- Capital
- Revenues
(5-10 min.) S 2-5
| Normal Balance | ||
| Assets ………………………………………………….. | Debit | |
| Liabilities ………………………………………………. | Credit | |
| Owner’s Equity—overall …………………………. | Credit | |
| Capital ………………………………………. | Credit | |
| Withdrawals ………………………………. | Debit | |
| Revenues ………………………………….. | Credit | |
| Expenses ………………………………….. | Debit | |
(10 min.) S 2-6
| Journal | |||||||
| DATE | ACCOUNT TITLES AND EXPLANATIONS | POST. REF. | DEBIT | CREDIT | |||
| Sept. | 1 | Cash | 32,000 | ||||
| Liana Garcia, Capital | 32,000 | ||||||
| Received investment from owner. | |||||||
| 2 | Medical Supplies | 8,000 | |||||
| Accounts Payable | 8,000 | ||||||
| Purchased supplies on account. | |||||||
| 2 | Rent Expense | 4,100 | |||||
| Cash | 4,100 | ||||||
| Paid office rent. | |||||||
| 3 | Accounts Receivable | 6,000 | |||||
| Service Revenue | 6,000 | ||||||
| Performed service for patients on account. | |||||||
(10 min.) S 2-7
| Journal | |||||||
| DATE | ACCOUNT TITLES AND EXPLANATIONS | POST. REF. | DEBIT | CREDIT | |||
| Oct. | 22 | Accounts Receivable | 6,000 | ||||
| Service Revenue | 6,000 | ||||||
| Performed service on account. | |||||||
| 30 | Cash | 3,000 | |||||
| Accounts Receivable | 3,000 | ||||||
| Received cash on account. | |||||||
| 31 | Utilities Expense | 150 | |||||
| Accounts Payable | 150 | ||||||
| Received utility bill. | |||||||
| 31 | Salary Expense | 2,000 | |||||
| Cash | 2,000 | ||||||
| Paid salary expense. | |||||||
| 31 | Advertising Expense | 700 | |||||
| Cash | 700 | ||||||
| Paid advertising expense. | |||||||
(10-15 min.) S 2-8
Req. 1
| Journal | |||||
| DA | TE | ACCOUNT TITLES AND EXPLANATIONS | POST. REF. | DEBIT | CREDIT |
| Supplies | 10,000 | ||||
| Accounts Payable | 10,000 | ||||
| Purchased supplies on account. | |||||
| Accounts Payable | 5,000 | ||||
| Cash | 5,000 | ||||
| Paid cash on account. ($10,000½) | |||||
Req. 2
Accounts Payable
(10-15 min.) S 2-9
Req. 1
| Journal | |||||
| DA | TE | ACCOUNT TITLES AND EXPLANATIONS | POST. REF. | DEBIT | CREDIT |
| Accounts Receivable | 12,000 | ||||
| Service Revenue | 12,000 | ||||
| Performed service on account. | |||||
| Cash | 5,500 | ||||
| Accounts Receivable | 5,500 | ||||
| Received cash on account. | |||||
Req. 2
Cash Accounts Receivable Service Revenue
Req. 3
| a. | The business earned | $12,000: | Service Revenue | ||
| b. | Total assets | $12,000: | Cash | $5,500 | |
| Accounts receivable | 6,500 | ||||
| Total assets | $12,000 |
(10-15 min.) S 2-10
Reqs. 1 and 2
Cash Accounts Receivable
| 6,000 | |
| Bal. 6,000 |
| 32,000 | 4,100 | |
| Bal. 27,900
Medical Supplies |
|
|
| 8,000 | ||
| Bal. 8,000
Liana Garcia, Capital |
||
| 32,000 | ||
|
Rent Expense |
Bal. 32,000 | |
| 4,100 | ||
| 8,000 | |
| Bal. 8,000 |
| 6,000 | |
| Bal. 6,000 |
Accounts Payable
Service Revenue
Bal. 4,100
(continued) S 2-10
Req. 3
(10 min.) S 2-11
(10 min.) S 2-12
Incorrect Trial Balance
To correct this error,
- Take the difference between total debits and total credits:
$536,000 – $36,000 = $500,000
- Divide the error by 2:
$500,000 ÷ 2 = $250,000
- Locate $250,000 on the trial balance. The Capital account should have a credit balance.
(10 min.) S 2-13
Incorrect Trial Balance
To correct this error,
- Take the difference between total debits and total credits:
$285,100 – $286,000 = $900
- Divide the error by 9:
$900 ÷ 9 = $100
- Locate $100 on the trial balance. Utilities expense, at $100, holds the error. Trace the utilities’ balance back to the ledger account, which shows the correct amount.
Exercises
(10-15 min.) E 2-1
TO: Office Manager
FROM: Student Name
Each time Prairie Tours received cash, accountants recorded the transaction in the journal by debiting the Cash account. Accountants recorded cash payments by making a journal entry that included a credit to Cash. Debits in the journal were posted as debits to the Cash account in the ledger and credits were posted as credits. At the end of the period, accountants listed each account, along with its balance, on the trial balance. Cash had a balance of $57,800.
Instructional Note: Student responses may vary considerably.
(10-15 min.) E 2-2
(10-15 min.) E 2-3
| Req. 1 | ||||
| Debit | Credit | Credit | ||
| ASSETS | = | LIABILITIES | + | OWNER’S EQUITY |
| $75,500 | = | $46,300 | + | $28,500 |
($31,200 + $4,000
+ $300 + $40,000) ($1,300 + $45,000)
This accounting equation is out of balance because the complete equity balances are not shown. Net income or loss and withdrawals balances should be included in the equation.
Req. 2
Credit Debit Net Credit
REVENUES – EXPENSES = NET INCOME
$7,600 – $5,100 = $2,500
($400 + $1,500 + $3,000 + $200)
NET INCOME would represent a net credit because revenues (credit amounts) would exceed expenses (debit amounts).
NET LOSS would represent a net debit because expenses (debit amounts) would exceed revenues (credit amounts).
Req. 3
Jim Aylmer withdrew $1,800 during the month.
Withdrawals are a debit amount.
(continued) E 2-3
Req. 4
Increase in owner’s equity (credit amount)
Net income $2,500
Decrease in owner’s equity (debit amount)
Withdrawals 1,800
Net increase in owner’s equity (credit amount) $ 700
| (10-20 min.) E 2-4 | |||||
| Date | Analysis of Transactions and Journal Entries | ||||
| Dec. | 4 | The asset Cash is increased; therefore, debit Cash. | |||
| The liability Note Payable is increased; therefore, | |||||
| credit Note Payable. | |||||
| Cash ………………………………………………………………… | 20,000 | ||||
| Note Payable …………………………………………….. | 20,000 | ||||
| 8 | The asset Equipment is increased; therefore, | ||||
| debit Equipment. | |||||
| The liability Accounts Payable is increased; therefore, | |||||
| credit Accounts Payable. | |||||
| Equipment………………………………………………………… | 4,000 | ||||
| Accounts Payable ………………………………………. | 4,000 | ||||
| 12 | The asset Accounts Receivable is increased; therefore, | ||||
| debit Accounts Receivable. | |||||
| The revenue Service Revenue is increased; therefore, | |||||
| credit Service Revenue. | |||||
| Accounts Receivable …………………………………………. | 6,000 | ||||
| Service Revenue ………………………………………… | 6,000 | ||||
| 19 | The asset Cash is increased; therefore, debit Cash. | ||||
| The asset Land is decreased; therefore, credit Land. | |||||
| Cash ………………………………………………………………… | 24,000 | ||||
| Land …………………………………………………………. | 24,000 | ||||
| 22 | The asset Supplies is increased; therefore, debit | ||||
| Supplies. | |||||
| The asset Cash is decreased; therefore, | |||||
| credit Cash. | |||||
| Supplies …………………………………………………………. | 1,200 | ||||
| Cash …………………………………………………………. | 1,200 | ||||
| 27 | The liability Accounts Payable is decreased; therefore, | ||||
| debit Accounts Payable. | |||||
| The asset Cash is decreased; therefore, credit Cash. | |||||
| Accounts Payable ……………………………………………… | 4,000 | ||||
| Cash …………………………………………………………. | 4,000 | ||||
Req. 1 and 2 (10-20 min.) -5
Cash Accounts Receivable
|
|
|||||||||||||||||||||
Dec. 22 1,200 Dec. 8 4,000
Land Accounts Payable 4,000 Dec.
| Notes Payable | R. Jackson, Capital | ||||||
| Dec. | 4 | 20,000 | Dec. 1 | 30,000 | |||
| Service Revenue |
|
Utilities Expense | |||||
| Dec. | 12 | 6,000 | Dec. 1 | 200 | |||
Req. 3
Total debits = Total credits
$56,000 = $56,000
Req. 1 (20-30 min.) -7
Cash Accounts Receivable 800 Mar.
Studio Supplies Accounts Payable
|
|
Yula Gregore, Capital Service Revenue
Rent Expense Utilities Expense
