Transcript
Chapter 2
Recording theTransaction
Prepared byBrooke C. W. Barker
Copyright © 2010 by Nelson Education Limited
Chapter 2: The Accounting Equation
Chapter Objectives
After completing this chapter, you will be able to:
define “debit” and “credit” as used in bookkeeping apply the accounting equation to solve for missing values
and to ensure balanced transactions analyze transactions for the purpose of recording them record typical bookkeeping transactions in a General
Journal
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Chapter 2: The Accounting Equation
Balancing the books means maintaining equality in the books.
The accounting equation is
Assets = Liabilities + Owner's Equity
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Chapter 2: The Accounting Equation 2-4
Example: The owner invests $150,000 cash to
start his business.
Assets = Liabilities + Owner's Equity
150,000 = Ø + 150,000
Chapter 2: The Accounting EquationCopyright © 2010 by Nelson Education Limited
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He then buys on account a new truck worth $20,000.
The accounting equation must always balance.
Assets = Liabilities + Owner's Equity
150,000 = Ø + 150,000+ 20,000 + 20,000170,000 = 20,000 + 150,000
Chapter 2: The Accounting Equation
The balance sheet is the formal representation of the accounting equation. For example,
Copyright © 2010 by Nelson Education Limited
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Assets = Liabilities + Owner's Equity
150,000 = 50,000 + 100,000
Chapter 2: Debit and Credit
Debit = left side of the equation
Credit = right side of the equation
Chapter 2: Debit and Credit
Debit = left side of the equation
Credit = right side of the equation
Chapter 2: Debit and Credit
Assets are on the debit (left) side.
Liabilities and Owner's Equity are on the credit (right) side.
Chapter 2: Rules for Debit and Credit
Debit CreditAssets increase Assets decreaseLiabilities decrease Liabilities increaseEquities decrease Equities increaseRevenues decrease Revenues increaseExpenses increase Expenses decrease
Chapter 2: Rules for Debit and Credit
Debit CreditAssets increase Assets decreaseLiabilities decrease Liabilities increaseEquities decrease Equities increaseRevenues decrease Revenues increaseExpenses increase Expenses decrease
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Furniture?
Kind of account:
Increases on:
Decreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Furniture?
Kind of account: AssetIncreases on:
Decreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Furniture?
Kind of account: Asset
Increases on: DebitDecreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Furniture?
Kind of account: Asset
Increases on: Debit
Decreases on: Credit
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Sales?
Kind of account:
Increases on:
Decreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Sales?
Kind of account: RevenueIncreases on:
Decreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Sales?
Kind of account: Revenue
Increases on: CreditDecreases on:
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Rules for Debit and Credit
What are the rules for the account called Sales?
Kind of account: Revenue
Increases on: Credit
Decreases on: Debit
Debit CreditA + A -L - L +
OE - OE +R - R +E + E -
Chapter 2: Analyzing a Transaction
Before a transaction is recorded, these questions must be answered:
1. What was received or given through the transaction?2. What account is used for the item received or given?3. What kind of account is it?4. Will the account increase or decrease because of this
transaction?5. Will the account be debited or credited? For what
value?6. Is the entry balanced?
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Chapter 2: Analyzing a Transaction
Example #1:
Merchandise was sold for cash, $525.
Copyright © 2010 by Nelson Education Limited
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Chapter 2: Analyzing a Transaction
Example #1: Merchandise was sold for cash, $525.
1. What was received or given through the transaction?Cash was received. Merchandise was given.
2. What account is used for the item received or given?Bank (or Cash) is used for money.Sales is used when merchandise is sold.
3. What kind of account is it?Bank is an asset. Sales is a revenue.
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Chapter 2: Analyzing a Transaction
Example #1: Merchandise was sold for cash, $525.
4. Will the account increase or decrease because of this transaction?
Bank will increase because we have more money.Sales will increase because we have recorded more sales.
5. Will the account be debited or credited? For what value?Assets increase on the debit, so Bank will be debited for $525.Revenues increase on the credit, so Sales will be credited for
$525.
6. Is the entry balanced?Yes, $525 is on both debit and credit sides.
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Chapter 2: Analyzing a Transaction
Example #1: Merchandise was sold for cash, $525.
The result of the analysis is:
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Accounts Debit Credit
Bank 525.00 Sales 525.00
Analyzing a Transaction
Example #2:
A cheque for $48.95 was issued to pay this month’s phone bill.
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Chapter 2: Analyzing a Transaction
Example #2: A cheque for $48.95 was issued to pay this month’s phone bill.
1. What was received or given through the transaction?Phone bill was received. A cheque was given.
2. What account is used for the item received or given?Telephone Expense is used to record the phone bill.Bank (or Cash) is used to record cheques issued.
3. What kind of account is it?Telephone Expense is an expense. Bank is an asset.
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Chapter 2: Analyzing a Transaction
Example #2: A cheque for $48.95 was issued to pay this month’s phone bill.
4. Will the account increase or decrease because of this transaction?
Telephone Expense will increase. It is an additional operating cost.Bank will decrease because we paid out money (by cheque).
5. Will the account be debited or credited? Expenses increase on the debit, so Telephone Expense will be debited. Assets decrease on the credit, so Bank will be credited.
6. Is the entry balanced?Yes, $48.95 is on both debit and credit.
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Chapter 2: Analyzing a Transaction
Example #2: A cheque for $48.95 was issued to pay this month’s phone bill.
The result of the analysis is:
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Accounts Debit Credit
Telephone Expense 48.95
Bank 48.95
Chapter 2: General Journal
General Journal
The General Journal is where you will first learn to record all your transactions.
In later chapters, you will learn to use other kinds of journals.
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Chapter 2: General Journal
Let's look at the 10 steps of recording journal entries...
Step 1: Analyze the transaction (as already demonstrated).
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Chapter 2: General Journal
Step 2: Enter the date of the transaction.
The year date is required at the top of every journal page.
The month may be abbreviated when necessary.
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Chapter 2: General Journal
Step 3: Enter the account that will be debited.
The debit is always recorded first. The amount is then entered in the Debit column.
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Chapter 2: General Journal
Step 4: Enter the account that will be credited.
The account credited is always indented about 1 inch (2.5 cm).
The amount is then entered in the Credit column.
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Chapter 2: General Journal
Step 5: Enter an explanation of the transaction.
Invoice numbers, cheque numbers, due dates, etc. If necessary, the explanation can be many lines long.
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Chapter 2: General Journal
Note: In a compound entry, all debits are recorded before the credits.
Take extra care that the compound entry is balanced.
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Chapter 2: General Journal
Step 6: Leave a blank line before starting the next transaction.
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Chapter 2: General Journal
Step 7: Do not split a transaction between two pages.
If you cannot write the entire transaction on the same page, start it at the top of the next page.
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Chapter 2: General Journal
Step 8: Journal pages are numbered sequentially.
General Journal pages are numbered GJ1, GJ2, GJ3, etc.
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Chapter 2: General Journal
Step 9: Dollar signs, decimal points, and commas are not required in journal entries.
Use '00' or '–' when the amount has no cents.
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Chapter 2: General Journal
Step 10: Record journal entries in a “permanent” form.
Use ink, not pencil.
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Chapter 2: General JournalExample 1
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Start a new journal page by giving it a page number.
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GJ1
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Enter the date of the transaction (including the year date).
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GJ120--
Feb 1
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Enter the account that is debited in this transaction.
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GJ120--
Feb 1 Bank
Debits are written at the left margin
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Enter the amount in the Debit column.
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GJ120--
Feb 1 Bank 5 0 0 0 --
Write all amounts neatly. No $ signs, no decimal
points, no commas. Use 00 or '--' for no cents.
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
On the next line, enter the account that is credited.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon
Always indent about 1 inch (2.5 cm) for the
credit account.
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Enter the amount in the Credit column.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Check that the entry is balanced.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Enter an explanation of the transaction.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
Chapter 2: General Journal
On February 1, 20--, the owner of the business, Marcel Palon, invested $5,000 cash into his new business.
Leave a blank line before starting the next entry.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
Chapter 2: General Journal Example 2
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
Enter the date.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
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Chapter 2: General Journal
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
Enter the first account debited and the amount.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
4 Furniture 1 5 0 0 --
Chapter 2: General Journal
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
Enter the second account debited and the amount.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
4 Furniture 1 5 0 0 --Equipment 8 0 0 --
Chapter 2: General Journal
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
Enter the account credited and the amount.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
4 Furniture 1 5 0 0 --Equipment 8 0 0 --
Bank 2 3 0 0 --
Chapter 2: General Journal
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
Enter the explanation.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
4 Furniture 1 5 0 0 --Equipment 8 0 0 --
Bank 2 3 0 0 --Bought furniture and equipment. Issued Chq #1.
Chapter 2: General Journal
On February 4, bought furniture, $1,500, and equipment, $800. Paid with Cheque #1.
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GJ120--
Feb 1 Bank 5 0 0 0 --Capital, M. Palon 5 0 0 0 --
Owner's investment.
4 Furniture 1 5 0 0 --Equipment 8 0 0 --
Bank 2 3 0 0 --Bought furniture and equipment. Issued Chq #1. This is a compound entry.
Record all debits before recording credits.
Be sure the entry balances.
Chapter 2: The Accounting Equation
End of Chapter 2
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