1

Chapter 2
Recording Business Transactions
 2
Announcement

 Mid term date changed to Oct 23rd, Wed, 7:00 - 9:00 pm

 Homework due before Sept 15th 11:00 am
 3
Recap of Chapter 1

 What is Accounting? Major categories? Different users?

 Three forms of business organizations (Pros and Cons)
 Different business activities
 Accounting standards
 Different Financial Statements (Accounting Equation)
 4
Different Financial Statements
Financial Statement Purpose Structure Relationship with other statements

Balance Sheet
Reports the financial position Assets
Balance Sheet
(economic resources and sources =
(Statement of
of financing) of an accounting Liabilities
Financial Position)
entity at a point in time. +
Stockholders’ Equity

Reports the accountant’s primary Income Statement

Income Statement (Statement of
measure of economic Revenue
Income, Statement of Earnings,
performance during the – Expenses
Statement of Operations)
accounting period. = Net Income

Statement of
Reports changes in the Stockholders’ Equity
Statement of Stockholders’
company’s common stock and Beginning Balance
Equity
retained earnings during the + Increases
accounting period. – Decreases
= Ending Balance

Reports inflows (receipts) and Statement of Cash Flows

Statement of Cash Flows outflows (payments) of cash +/- CFO
(Cash Flow Statement) during the accounting period in +/- CFI
the categories of operating, +/- CFF
investing, and financing. = Change in Cash
 5
Progress

Recording Accrual Financial

Introduction
Transactions Accounting Statements

Receivables Non-current
Inventory Liabilities
and cash Assets

Financial
Statement of
Equity Statement
Cash Flow
Analyses
 6
The Accounting Cycle

• Analyze transactions from source documents

Analyze
Chapter 2
• Journalize transactions, Post amounts to the general ledger
Record • Prepare unadjusted trial balance

• Journalize adjusting entries

Chapter 3
Adjust • Prepare adjusted trial balance

• Prepare financial statements

Report
Chapter 4
• Journalize closing entries
Close • Prepare post-closing trial balance
 7
Agenda

 Different Accounts in Financial Statements

 Analyzing Business Transactions
 Recording Business Transactions
 Trial Balance
 8
Accounts

 The basic summary device of accounting. It is the record of all the changes
in a particular asset, liability, or shareholders’ equity during a period.
 Accounts provide an efficient method to categorize transactions
 Structure of an Account:
▪ Beginning Balance
▪ Increases/Decreases
▪ Ending Balance
 A group of accounts for a business entity is called a ledger.
 9
Accounts – Try find typical accounts
within each type.

 Assets (A)
 Liabilities (L)
 Equity (E)
 Income (I)
 Expenses(Exp)
 10
Accounts – Typical Titles

The Balance Sheet The Income Statement

Assets Liabilities Revenues Expenses

Cash Accounts Payable Sales Revenue Cost of Goods Sold
Accounts Receivable Notes Payable Service Revenue Salary Expense
Notes Receivable Accrued Expenses Interest Income Rent Expense
Inventory (to be sold) (Liability) Rent Revenue Interest Expense
Supplies Taxes Payable Depreciation Expense
Prepaid Expenses Unearned Revenue Advertising Expense
Short-Term Investments Insurance Expense
Long-Term Investments Stockholders’ Equity Utility Expense
Property, Plant and Share Capital Income Tax Expense
Equipment (PPE) Retained Earnings
Intangibles Dividends ×
 11
Classifying Accounts – Useful Hints

 “Receivable” in the title Asset

 “Payable” in the title Liability
 “Prepaid” in the title Asset
 “Unearned” in the title Liability
 12
Quick Question 1

Which of the following accounts does not require a future cash payment?
A. Accounts payable.
B. Unearned revenues.
C. Taxes payable.
D. Notes payable.
 13
Accounts – Group Exercise

 Classify each of the following accounts as it would be reported on a balance sheet.

CA = Current Asset CL = Current Liability SE = Stockholders’ Equity
NCA = Noncurrent Asset NCL = Noncurrent liability

1. Accounts Payable CL 9. Long-term Investments NCA

2. Accounts Receivable CA 10. Notes Payable (due in 3 years) NCL
3. Buildings NCA 11. Notes Receivable (due in 6 mo.) CA
4. Cash CA 12. Prepaid Rent CA
5. Contributed Capital SE 13. Retained Earnings SE
6. Land NCA 14. Supplies CA
7. Merchandise Inventory CA 15. Utilities Payable CL
8. Income Taxes Payable CL 16. Wages Payable CL
 14
Agenda

 Different Accounts in Financial Statements

 Analyzing Business Transactions
 Recording Business Transactions
 Trial Balance
 15
How to reflect transactions in F/S?
 16
Business Transaction

 Economic events that has a financial impact on the business; and can be
measured reliably (expressed in monetary terms).
 External Events - Exchanges of assets and liabilities between the business and
one or more other parties
▪ Purchase of a machine from a supplier.
▪ Sale of merchandise to customers
▪ Borrowing cash from a bank
 Internal Events - Do not involve other parties, but do have direct and
measurable effects on the company
▪ Using building and equipment over several years
▪ Using up insurance paid for in advance
 17
Group Exercise: Business Transactions

For each of the following events, which one should be recorded for Dittman Company?

1) Dittman purchased a machine that it paid for by signing a note payable.

2) 6 investors in Dittman company sold their stock to another investor.

3) The company lent $150,000 to a member of the board of directors.

4) Dittman company ordered supplies from Staples to be delivered next week.

5) The founding owner, Megan Dittman, purchased additional stock in another company.

6) The company borrowed $1,000,000 from a local bank.

7) Dittman hired more employees during last quarter.

 18
Analysing Transactions

 Transaction analysis.
1. Whether it is an accounting transaction or not?
2. If yes in 1, how does it affect Assets, Liabilities, Revenue, Expense, Equity? Is it a decrease
or an increase?
3. Which items (accounts) does the transaction affect?
 A source document, such as a sales slip, a check, a bill, or a cash register document
provides evidence of the transaction.
 Double Entry Bookkeeping:
Each transaction has a DUAL EFFECT on the accounting equation. That is, at least two elements of the
accounting equation are affected.
(The accounting equation must always balance at any point in time!)
 19
Analysing Transactions

Assets = Liabilities + Stockholders’ Equity

Owners’ interest (what
What the company owns What the company owes the company owes to
to creditors owner/investor)
Retained Earnings Share Capital

Revenue – Expenses – Dividends

Types of Transactions A = L + SE
1. Acquire assets with credit
2. Acquire assets with stock
3. Exchange assets
4. Pay off liability
5. Distribute assets to owners
 20
Quick Question 2

The dual effects concept states that:

A. Both the income statement and balance sheet are impacted by every transaction.
B. Every transaction has an impact on assets and stockholders' equity.
C. There are only two accounts involved in every transaction.
D. Every transaction has at least two effects on the accounting equation.
 21
Quick Question 3

If an asset account such as cash is increased by $5,000, which one of the following
financial events must also occur to keep the accounting equation in balance?
A. Another asset, such as Accounts Receivable, must decrease by $5,000
B. A liability, such as Notes Payable, must increase by $5,000
C. Stockholders’ equity, such as Common Stock, must increase by $5,000
D. Each of the above is correct
 22
Group Exercise

Is the following event an accounting transaction? If so, what accounts (name and value) are involved?
Example: (1) On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock

Received: Cash (A) +10,000; Gave: Common Stock(SE) +10,000

2) On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable

3) On October 2, Sierra purchased equipment by paying $5,000 cash to Superior Equipment Sales Co

4) On October 2, Sierra received a $1,200 cash advance from R. Knox, a client

5) On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed

6) On October 3, Sierra Corporation paid its office rent for the month of Sept in cash, $900

7) On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30

8) On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500

9) On October 9, Sierra hired four new employees to begin work on October 15

10) On October 20, Sierra paid a $500 dividend

11) Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26
Assets = Liabilities + Common Stock + Retained Earnings
Revenue – Expenses – Dividends
Assets = Liabilities + Shareholders’ Equity
23
1) +10,000 (Cash) +10,000 (Common Stock)

2) +5,000(Cash) +5,000(Notes Payable)

-5,000(Cash)
3)
+5000 (Equipment)

4) +1,200 (Cash) +1,200 (Unearned Revenue)

5) +10,000 (Cash) +10,000 (Revenue)

6) -900 (Cash) -900 (Expense)

-600 (Cash)
7)
+600 (Prepaid Insurance)

8) +2,500 (Supplies) +2,500 (Accounts Payable)

10) -500 (Cash) -500 （Dividend）

11) -4000 (Cash) -4000 (Salary Expenses)

 24
Recording Business Transactions
 25
T Accounts

 T-account: A simplified form of an account; resemble the letter “T”.

Account Name (1)
(2) Debit / Dr. (3) Credit / Cr.

Three parts: (1) account name; (2) A left/debit side; and (3) A right/credit side.
 Use proper account titles for T accounts, and in journal entries. (DO NOT
use generic phrases such as “paid cash”, “bought supplies”, etc.)
 Debit is abbreviated as Dr. and Credit is abbreviated as Cr.
 Summarizes the effects of a period’s transactions on an individual account
Cash Accounts Payable
Dr. Cr. Dr. Cr.
500 300 3,000 5,000
Bal. 200 Bal. 2000
 26
T Accounts
“Credre” and “Debere”

Assets = Liabilities + Common Stock + Retained Earnings + Revenues – Expenses - Dividends

Assets + Expenses + Dividends = Liabilities + Common Stock + Retained Earnings + Revenues
Common Retained
Assets Expense Dividends Liabilities Stock Earnings Revenues
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - + - + - - + - + - + - +

▪ “DEAD” = Debits Increase Expenses Assets Dividends

 27
Typical Balance

Assets + Expenses + Dividends = Liabilities + Common Stock + Retained Earnings + Revenues

Account Type Normal Balance
Land A Dr.
Retained Earnings SE Cr.
Taxes Payable L Cr.
Prepaid Expenses A Dr.
Contributed Capital SE Cr.
Long-term Investments A Dr.
Machinery & Equipment A Dr.
Accounts Payable L Cr.
Short-term Investments A Dr.
Notes Payable (due in 3 years) L Cr.
 28
Quick Exercise: T-Accounts

Required: For each of the following transactions, record the effects of the
transaction in the appropriate T-Accounts. Assume beginning balances are zero.

Parillo Service Company Inc. was organized by James Parillo and five other investors.
The following activities occurred for during the year:

1) Received $60,000 cash from investors; each was issued 1,000 shares of capital
stock.
2) Purchased equipment for use in the business at a cost of $12,000; one-fourth
was paid in cash and the company signed a note for the balance (due in six
months).
3) Loaned $2,000 to one of the investors who signed a note due in six months.
 29
Quick Exercise: T-Accounts

Cash Note Receivable Equipment

(a) 60,000 (b) 3,000 (c) 2,000 (b) 12,000

(c) 2,000

Note Payable Contrib. Capital

(b) 9,000 (a) 60,000

1)
2) Received
Purchased$60,000 cash for
equipment fromuseinvestors; each was
in the business at aissued
cost 1,000
of sharesone-fourth
$12,000; of capital stock.
3) Loaned $2,000 to one of the investors who signed a note due in six months. was paid
in cash and the company signed a note for the balance (due in six months).
 30
Quick Question 4

Which of the following accounts is not increased with a debit?

A. Land
B. Unearned Revenue
C. Prepaid Insurance
D. Depreciation Expense
 31
Agenda

 Different Accounts in Financial Statements

 Analyzing Business Transactions
 Recording Business Transactions
 Trial Balance
 32
Recording Business Transactions
 33
Recording Transactions - Journal Entries

T-Accounts

Journal Entries

Summarize the effects of

individual transactions on two
or more accounts.
Summarize the effects of a
period’s transactions on an
individual account.
 34
Recording Transactions - Journal Entries

• Whenever we see a transaction, think about the corresponding journal entry (or entries)
• Journalizing provides a chronological record of all business activities
 35
Recording Transactions - Journal Entries

 Date of the transaction

 Pick out account titles – stick with it for all subsequent transactions involving
the account
 A brief explanation of the transaction
 There can be more than one account in the Debit or Credit block
 Total Amount Debited = Total Amount Credited
 36
Recording Transactions - Journal Entries

1. What accounts are involved? ( ≥ 2; start from easily identified ones such as
cash…)

2. For each account, increase or decrease?

3. For each account, debited or credited?

4. For each account, how much will it change?

5. Does the accounting equation remain in balance?

 37
Quick Question 5

A company purchases a delivery van by paying $11,000 cash and by signing a $31,000
note payable. Which of the following correctly describes the recording of the delivery
van purchase?
A. Notes payable is debited for $31,000.
B. The delivery van account is debited for $42,000.
C. Cash is debited for $11,000.
D. The delivery van account is debited for $31,000.
 38
Group Exercise

Is the following event an accounting transaction? If so, what accounts (name and value) are involved?

1) On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock
Oct 1 Dr. Cash $10,000
2) On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable
Cr. Common Stock $10,000
3) Issue
On October 2, stock
Sierrafor cash equipment by paying $5,000 cash to Superior Equipment Sales Co
purchased

4) On October 2, Sierra received a $1,200 cash advance from R. Knox, a client

6) On October 3, Sierra received $10,000 in cash from Copa Company for guide services performed

7) On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900

8) On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30

9) On October 5, Sierra purchased an estimated three months of supplies on account from Aero Supply for $2,500

10) On October 9, Sierra hired four new employees to begin work on October 15

11) On October 20, Sierra paid a $500 dividend

12) Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26
 39
Recording Transactions - Journal Entries
General Journal
Date Account Titles and Explanation Debit Credit
2017
Oct. 1 Dr. Cash 10,000
Cr. Common Stock 10,000
Issue stock for cash
Oct. 1 Dr. Cash 5,000
Cr. Notes Payable 5,000
Issue 3-month, 12% notes payable for cash
Oct. 2 Dr. Equipment 5,000
Cr. Cash 5,000
Purchase equipment using cash
Oct. 2 Dr. Cash 1,200
Cr. Unearned Service Revenue 1,200
Receive advance from R. Knox for future services
Oct. 3 Dr. Cash 10,000
Cr. Service Revenue 10,000
Received cash for service revenue
 40
Recording Transactions - Journal Entries

Oct. 3 Dr. Rent Payable 900

Cr. Cash 900
Paid cash for October office rent
Oct. 4 Dr. Prepaid Insurance 600
Cr. Cash 600
Paid 1-year policy, effective date Oct. 1
Oct. 5 Dr. Supplies 2,500
Cr. Accounts Payable 2,500
Purchase supplies on account from Aero Supplies
Oct. 20 Dr. Dividends 500
Cr. Cash 500
Declared and paid cash dividends
Oct. 26 Dr. Salaries & Wage Expense 4,000
Cr. Cash 4,000
Paid salaries to date
 41
Question

 Could we obtain the accumulated impact of all

transactions on a specific account based on journal
entries?
 42
Recording Transactions- Ledger
 43
Recording Transactions- Ledger
 44
Recording Transactions- Ledger

 General Ledger: The entire group of accounts maintained by a company

Exercise of posting: using the General Journal of Sierra Corporation

 45
Recording Transactions- Ledger
 46
Agenda

 Different Accounts in Financial Statements

 Analyzing Business Transactions
 Recording Business Transactions
 Trial Balance
 47
Trial Balance

 A list of all accounts in the general ledger and their balances.

 Purposes:
▪ Prove that Debits = Credits
▪ Catch some obvious errors in journalizing and posting
a) A transaction is not journalized
b) A journal entry is not posted
c) A journal entry is posted twice
d) Journal entries being posted to the wrong account.
▪ Useful in the preparation of financial statement
 48
Trial Balance - Example

This is NOT an
actual financial
statement!
 49
Quick Question 6

A company's January 1, 2019 balance sheet reported total assets of $114,000 and
total liabilities of $45,000. During January 2019, the following transactions
occurred: (A) the company issued stock and collected cash totaling $24,000; (B)
the company paid an account payable of $5,400; (C) the company purchased
supplies for $2,600 with cash; (D) the company purchased land for $44,000,
paying $15,000 with cash and signing a note payable for the balance. What is
total stockholders' equity after the transactions above?
A. $192,600.
B. $24,000.
C. $93,000.
D. $69,000.

Beginning Balance: 114,000-45,000=69,000

Ending Balance: 69,000+24,000=93,000
 50

Summary Problem