Chapter 2

Recording Business
Transactions

Transactions
Events that have a ____________on the
business and _____________reliably
Selling products
Paying expenses

Have two sides:

Giving
Receiving

Accounting records both sides of transactions

Often called ____________________
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The Account
Assets

Liabilities

Shareholders
Equity

An Account is a record of all the changes in __

_________ asset, liability and shareholders
equity element
Basic summary device of accounting
In class, we will use examples known as a
T-account
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Assets
Cash

Accounts &
Notes
Receivable

Inventory

Prepaid
Expenses

Land

Buildings

Equipment,
Furniture &
Fixtures
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Assets

Asset Name

Description

Cash

Money and any medium of exchange including bank account balances, paper
currency, coins, certificates of deposit, and checks.

Accounts Receivable

Companies sell their goods and services and receives a promise for future
collection of cash. The Accounts receivable account holds these amounts.
(from __________)

Notes Receivable

A note receivable is similar to an account receivable, but a note receivable is

more binding because the borrower signs a note, often with a specific interest
rate. (from __________)

Inventory

The products a company sells to customers. Other titles for this account
include __________ and ____________________.

Prepaid Expenses

A future expense that has already been paid. Examples: Prepaid rent, Prepaid
insurance, and Supplies.

Land

The Land account shows the cost of the land a company uses in its
operations.

Buildings

The costs of office buildings, manufacturing plants, etc.

Equipment, Furniture,
and Fixtures

These asset accounts includes items such as computers, office furniture and
store shelving.
(Land, Buildings, Equipment are commonly combined into PPE)
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Liabilities

Accounts
payable

Notes
payable

Accrued
liabilities

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Liabilities
Liability Name

Description

Accounts Payable

The direct opposite of Accounts receivable. A companys

promise to pay a debt arising from a credit purchase.

Notes Payable

A note payable is the opposite of a note receivable. The

Notes payable account includes the amounts a company
must pay because it signed notes promising to pay a
future amount, typically with interest.

Accrued Liabilities

An accrued liability is a liability for an _____ you have

not yet paid. Interest payable and Salary payable are
accrued liability accounts for most companies. Income
tax payable is another accrued liability.

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Shareholders Equity
Share
Capital

Retained
Earnings

Revenues

Dividends

Expenses

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Shareholders Equity
Equity Name

Description

Share Capital

The owners investment in the corporation. The corporation receives cash and
issues shares to its shareholders. A companys ordinary share capital (________
_____) is its most basic element of equity. All corporations have ordinary shares.

Retained Earnings

This account shows the _________________ earned by a corporation over its

lifetime, minus its cumulative net losses and dividends.

Dividends

Dividends are optional; they are declared by the board of directors and represent
a payment _____________________ back to shareholders

Revenues

the increase in shareholders equity from delivering goods or services to

customers: includes sales revenue, service revenue, interest revenue, rent
revenue, etc.

Expenses

the cost of operating a business. Expenses decrease shareholders equity, the

opposite effect of revenues. Examples include: Cost of goods sold, Salary
expense, Rent expense, Advertising expense, Insurance expense, Utilities
expense, and Income tax expense. Businesses strive to minimize expenses and
thereby maximize net income
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Learning Objective 1
Analyze transactions

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1-11

ShineBrite Car Wash, Inc

Transaction 1. Gray and a few friends invest $50,000 to open
ShineBrite Car Wash, and the business issues ordinary share capital to
the shareholders.
Transaction 2. ShineBrite purchases land for a new location and pays
cash of $40,000.
Transaction 3. The business buys supplies on account, agreeing to pay
$3,700 within 30 days.
Transaction 4. ShineBrite earns $7,000 of service revenue by
providing services for customers. The business collects the cash.
Transaction 5. ShineBrite performs $3,000 of service on account,
which means that ShineBrite lets some customers pay later.
Transaction 6. During the month, ShineBrite Car Wash pays $2,700
for the following expenses: equipment rent, $1,100; employee salaries,
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$1,200; and utilities, $400.

ShineBrite Car Wash, Inc

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1-13

ShineBrite Car Wash, Inc

Transaction 7. ShineBrite pays $1,900 on account, which
means to pay off an account payable.
Transaction 8. Van Gray, the major shareholder of
ShineBrite Car Wash, paid $30,000 to remodel his home.
Transaction 9. In transaction 5, ShineBrite performed
services on account. The business now collects $1,000. We
say that ShineBrite collects the cash on account.
Transaction 10. ShineBrite sells some land for $22,000,
which is the same amount that ShineBrite paid for the land.
Transaction 11. ShineBrite Car Wash declares a dividend
and pays the shareholders $2,100 cash.
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ShineBrite Car Wash, Inc

$57,000

$57,000
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Learning Objective Two

Understand how accounting works

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Double-Entry Accounting
Business transactions include two parts
Giving
Receiving

Accounting based on a double-entry system

Each transaction affects at least two accounts

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T-Account
Account Title
Left side

Right side

Debit

Credit

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Rules of Debit and Credit

Assets

Debit

Credit

Liabilities

Debit

Credit

Shareholders
Equity

Debit

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Credit

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Additional Shareholders Equity

Accounts: Revenues & Expenses
Liabilities
Share Capital

Assets

Beginning Retained Earnings

Shareholders
Equity

Revenues
Expenses
Dividends

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Rules of Debit and Credit

Shareholders Equity

Assets

Liabilities

Debit Credit

Debit Credit

Share Capital

Retained earnings

Debit Credit

Debit Credit

Dividends

Debit Credit
Revenue

Note: There is an error in the

textbook on page 79. Dividends and
Income have the reversed sign

Debit Credit

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Expenses

Debit

Credit

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Learning Objective Three

Record transactions in the journal

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The Journal
___________ record of transactions
Three steps
Specify each ______ affected by the transaction
and classify by type
Determine if each account is ___________
_________
Use debit credit rules

______ in journal (called an _____ or ______

_____)
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Journal Entry
JOURNAL
Date

Accounts and explanation

May 1

Cash

Debit

Credit

50,000

Share Capital

50,000

Issued ordinary shares

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The Ledger
Cash
Individual
asset
accounts

Ledger
Share
Capital
Individual
equity
accounts

Accounts
payable

Individual
liability
accounts

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Posting
JOURNAL
Date

Accounts and explanation

May 1

Cash

Debit

Credit

50,000

Share Capital

50,000

Issued ordinary shares

Transferring an amount
from the Journal to a
Ledger is called
______: Example: post
$50,000 to the cash
ledger

Cash

Share Capital
$50,000

$50,000

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Flow of Accounting Data

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Learning Objective Four

Construct a trial balance

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Trial Balance
Lists ________with their balances
Assets listed first, then liabilities and
shareholders equity
Shows that debits _____ credits
Usually prepared at the end of the period

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Analyzing Accounts
Cash (A)
Beginning balance
+Cash receipts

- Cash payments

Ending balance
Normal Balance

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Analyzing Accounts
Accounts receivable (A)
Beginning balance
Sales on account

Collections on account

Ending balance

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Analyzing Accounts
Accounts payable (L)
Beginning balance
Payments on account

Purchases on account
Ending balance
Normal Balance

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Correcting Accounting Errors

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Chart of Accounts
A Chart of Accounts shows what account number is used for which account and
is different for each company.
Balance Sheet Accounts
Assets

Liabilities

Shareholders Equity

101

Cash

201

Accts. payable

301

Share capital

111

Accts. receivable

231

Notes payable

311

Dividends

141

Office supplies

312

Retained earnings

151

Office furniture

191

Land

Income Statement Accounts

Revenues

Expenses

401

501

Service revenue

Rent expense

502 Salary expense

503 Utilities expense

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Normal Balances of Accounts

Assets
Liabilities
Shareholders Equity overall
Share capital
Retained earnings
Dividends
Revenues
Expenses

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Learning Objective 5
Analyze transactions using only T-Accounts

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Using T-Accounts
Decisions often are made without a complete
accounting system
T-Accounts allow managers to analyze
transactions quickly

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1-37

Short Exercise 2-13

Seventh Investments, Inc., began by issuing shares
for cash of $140,000. The company immediately
purchased computer equipment on account for
$100,000.
1. Set up the following T-accounts of Seventh
Investments, Inc.---Cash, Computer equipment,
Accounts payable, Share capital.
2. Record the first two transactions of the business
directly in the T-accounts without using a journal.
3.Show that total debits equal total credits.
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Short Exercise 2-13

Cash

Accounts Payable

Computer Equipment

Share Capital

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