ch02
TRANSCRIPT
2 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Business Transactions
Chapter 2
2 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Define and use keyaccounting terms.
Objective 1
2 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounting Terms
Account
Ledger
Assets
Liabilities
Owner’sequity
Double-entryaccounting
T-account
2 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash
AccountsPayable
Gay Gillen,Capital
Ledger
All individualaccountscombinedmake up
the ledger.
Individual asset accounts
Individual liability accounts
Individual owner’s equity accounts
Accounting Terms
2 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Classification of Accounts
What are some asset accounts?– Cash– Notes Receivable– Accounts Receivable– Prepaid Expenses– Land– Building– Equipment
2 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Classification of Accounts
What are some liability accounts?– Notes Payable– Accounts Payable– Accrued Liabilities (for expenses incurred
but not paid)– Long-term Liabilities (bonds)
2 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Classification of Accounts
What are some owner’s equity accounts?– Capital or owner’s interest in the business– Withdrawals– Revenues– Expenses
2 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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
2 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
2 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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
2 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Contributed Capital
Retained Earnings
Classification of Accounts
In a corporation, the owner’s equity account is called Stockholders’ Equity.
2 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
2 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The T-Account
Account Title
Debit Credit
LEFT SIDE
2 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The T-Account
Account Title
Debit Credit
RIGHT SIDE
2 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Apply the rules ofdebit and credit.
Objective 2
2 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Owner’s EquityAssets Liabilities
Debit+
Debit–
Credit–
Debit–
Credit+
Credit+
= +
Rules of Debit and Credit
2 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
One debit One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
The Double-Entry System
2 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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?
2 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
John’s Gas Station Example
Cash
Liabilities
Owner’s Equity
2 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
John’s Gas Station Example
John’s Gas StationBalance SheetJuly 1, 2002
Assets LiabilitiesCash $800,000 Notes payable $300,000
Owner’s EquityJohn, capital 500,000
Total liabilitiesTotal assets $800,000 and owner’s equity $800,000
2 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record transactionsin the journal.
Objective 3
2 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
2 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Journals
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– dollar signs are omitted
2 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Transactions
On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel.
What is the journal entry? April 2
Cash 30,000 Gay Gillen, Capital 30,000 Received initial investment from owner
2 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Post from the journalto the ledger.
Objective 4
2 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Boundbooks
Computerprintout
Cards
Loose leafpages
Ledger
What is a ledger? It is a digest of all accounts utilized by an
entity during an accounting period.
2 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Posting
What is posting? It is the transfer of information from the
journal to the appropriate accounts in the ledger.
2 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash(1) 30,000 (2) 20,000
(4) 300 (6) 2,100
Bal. 7,600
Office Supplies(3) 500
Bal. 500
Land (2) 20,000
Bal. 20,000
Asset Accounts After Posting
2 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounts Payable
Gay Gillen, Withdrawals
(1) 30,000
Bal. 30,000
(3) 500(4) 300
Bal. 200 Gay Gillen, Capital
(6) 2,100
Bal. 2,100
Liabilities and Owner’s Equity Accounts After Posting
2 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Details of Journals and Ledgers
Date Accounts and Explanation Debit CreditApril 2 Cash 30,000
Gay Gillen, Capital 30,000Received initialinvestment from owner
Journal Page 1
2 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Details of Journals and Ledgers
BalanceDate Ref. Debit Credit Debit CreditApril 2 jrl 30,000 30,000
Account: Cash Account: 101
Insert the number of the journal page.
Posting
2 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Details of Journals and Ledgers
Journal Page 1
Date Account and Explanation Post Ref. Debit Credit
April 2 Cash 101 30,000 Gay Gillen, Capital 301 30,000
Initial investment from owner
Insert the ledger account in the journal.
2 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
BalanceAccount: Cash Account No. 101
Date Item Ref. Debit Credit Debit Credit
April 2 jr1 30,000 30,000
The Four-Column Account Format
2 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Prepare and use a trial balance.
Objective 5
2 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
2 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
DEBITS CREDITS
Locating Trial Balance Errors
What if it doesn’t balance ? Is the addition correct? Are all accounts listed? Are the balances listed correctly?
2 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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.
2 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Set up a chart of accountsfor a business.
Objective 6
2 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Chart of Accounts in the Ledger
This is a listing of all the accounts and related account numbers used by a business.
Each account should have its own assigned number.
The numbering system should allow flexibility for changing business needs.
2 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Assets101 Cash111 Accounts Receivable141 Office Supplies151 Office Furniture191 Land
Gay Gillen eTravelChart of Accounts
2 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Liabilities201 Accounts Payable231 Notes PayableOwner’s Equity301 Capital311 WithdrawalsRevenues401 Service Revenue
Gay Gillen eTravelChart of Accounts
2 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Expenses501 Rent Expense503 Utilities Expense502 Salary Expense
Gay Gillen eTravelChart of Accounts
2 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Normal Account Balances
Assets = Liabilities + Owner’s Equity Debits = Credits The side where we expect increases to be
recorded is the normal balance side.
2 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Analyze transactionswithout a journal.
Objective 7
2 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
John’s Gas Station
John is considering either purchasing a garage for $600,000 or renting one for $60,000 per year.
John does not need to record in the journal all of the transactions that would affect his decision.
Why?
2 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
John’s Gas Station
John has not completed a transaction yet. However, John can visualize how the ledger
accounts will be affected.
2 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Rent the garage
Buy the garageCash
600,000Building
600,000
John’s Gas Station
Rent ExpenseCash60,000 60,000
2 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 2