Accounting

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Analyzing and Recording Transactions

CHAPTER 3
2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
1. 2.
3.
4.
Explain the accounting cycle. Describe an account, its use, and its relationship to the ledger. Define debits and credits and explain their role in double-entry accounting. Describe a chart of accounts and its relationship to the ledger.
Learning Objectives
5.
6.
7.
Analyze the impact of transactions on accounts. Record transactions in a journal and post entries to a ledger. Prepare and explain the use of a trial balance.
The Accounting Cycle

1 Analyze
transactions
9 Prepare
post-closing trial balance
2 Journalize
Close
3
Post
7 Prepare 4 Prepare
unadjusted trial balance statements
5
Adjust
6 Prepare
adjusted trial balance
The Account
A detailed record of increases and decreases in a specific asset, liability, or equity item.
Assets
Examples: Cash
Liabilities
Accounts Payable Notes Payable Unearned Revenues
Equity
Owner, Capital Owner, Withdrawals Service Revenue Rent Expense
Accounts Receivable Supplies Furniture
The Ledger
A record containing all accounts used by a business. May be computerized or maintained manually. Each company has its own unique set of accounts.

The T Account
Represents an account in the ledger. Used as a learning tool. The difference between the debit side credit side is the balance.

and
Accoun
(Left side)/Debit Debit balance (Right side)/ redit redit balance
lcul ting t e Account B l nce

Example:
Cash sale tal debits balance
Step : 1. Add t e mount on t e debit ide. 2. Add t e mount on t e credit ide. 3. lcul te t e difference between t e debit nd credit . 1 3
500 1500 725
325 Paid salary 450 Paid rent 775 Total redits

2
Ow ner's invest ent 1000
DoubleDouble-Entry Accounting

Transactions are recorded using debits and credits. Every transaction affects at least two accounts. Equal debits and credits will keep the accounting equation in balance.
Debits = Credits
Always !
Assets
Assets
Liabilities
Liabilities
Equity
Owners Equity
Debit
Credit
Debit
Credit
Debit
Credit
Equity Accounts
Capital Withdrawals Revenues Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
Normal Balances
An accounts normal balance is the debit or credit side where increases are recorded.
Assets
Assets
Debit for increase Normal balance Credit for decrease
Liabilities
Liabilities
Debit for decrease Credit for increase Normal balance
Equity
Owner's Capital
Debit for decrease Credit for increase Normal Balance
Remembering Debits and Credits ALCREW

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals
Step 1 Write down the account types using ALCREW.

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals
Normal Balance
Step 2 Write down the normal balance (debit) of A,E,W. The others are credits.

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Dr Dr
Normal Balance Step 2 Dr

Write down the normal balance, debit, of A,E,W. The others are credits.

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal Balance Step 2 Dr Cr Cr Cr Dr Dr
Write down the normal balance, debit, of A,E,W. The others are credits.

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3 Remember, increases are the same as the normal balances, decreases are the opposite.

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3 Remember, increases are the same as the normal balances, decreases are the opposite.
Dr Dr Dr

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr Dr Dr Dr Dr Dr Cr Cr
Mini-Quiz
Indicate whether a debit or credit is needed to: Increase Rent Expense Debit Debit Decrease Accounts Payable Decrease Accounts Receivable Credit Decrease Cash Credit Increase Withdrawals Debit
Chart of Accounts
A list of all accounts used in the ledger by a company. Unique for each company. Accounts are usually numbered.

Analyzing Transactions
Steps: 1. Determine which accounts are being affected. 2. Determine if account balances are increasing or decreasing. 3. Apply rules of debits and credits.
Example #1: The owner invests $10,000 in the business.
1
Accounts affected
Increase/ Decrease
Debit/ Credit
1
Accounts affected
Increase/ Decrease
Debit/ Credit
Cash Owner, capital
1
Accounts affected
Increase/ Decrease Increase Increase
Debit/ Credit
Cash Owner, capital
1
Accounts affected
Cash Owner, capital
Debit/ Credit Debit Credit

Debit cash for $10,000 Credit owner, capital for $10,000
Cash
10,000
Owner, Capital
10,000
Example #2: The company purchases supplies by paying $2,500 cash.
1
Accounts affected
Increase/ Decrease
Debit/ Credit
1
Accounts affected
Increase/ Decrease
Debit/ Credit
Supplies Cash
1
Accounts affected
Increase/ Decrease Increase Decrease
Debit/ Credit
Supplies Cash
1
Accounts affected
Increase/ Decrease Increase Decrease
Supplies Cash

Debit supplies for $2,500 Credit cash for $2,500
Supplies
2,500
sh
2,500
Example #3: The company purchases supplies for $1,100 on credit.
1
Accounts affected
Increase/ Decrease
Debit/ Credit
1
Accounts affected
Increase/ Decrease
Debit/ Credit
Supplies Accounts Payable

1
Accounts affected
Debit/ Credit
1
Accounts affected

Debit supplies for $1,100 Credit accounts payable for $1,100
Supplies
1,100
Accounts P y ble
1,100
The General Journal

Entries are originally recorded in the General Journal. This process is called journalizing.
GENERAL JOURNAL Date 2011 Jan. 1 A ount T tles and Explanation PR Debit
10 000 10 000
Pag 1 C edit
Cash Carol Finlay, Capital To record investment by owner Supplies Cash Purchased supplies for cash Supplies Accounts Payable Purchased supplies on credit
Jan.
500 2 500
Jan.
10
100 1 100
Posting Journal Entries

General Journal information is transferred to the General Ledger. Account balances are updated. This process is called posting.

The Posting Process Posting

GENERAL JOURNAL Date
Jan. 1
Page 1 Debit
10 000 10 000
Account Titles and Explanation
Ca h Caro Fin a , Capita In e tment b o ner
PR
1 1 301
Credit
General journal information is transferred to the general ledger
1 2
h

X I
Jan. 1
G1
10 0 0 0
Steps: 1. Identify the account.

2. Enter date DATE

Jan . 1 3. Enter amount
Carol Finlay, Capital

EX ANATION PR DEBIT
CREDIT
G1
10 0 0 0
4. Calculate new account balance 5. Enter posting references

BI
10 0 0 0
ACCOUNT NO. 30
BALANCE
10 0 0 0

3 5 5
. 0
Trial Balance
A list of accounts and their balances at a point in time. Used to determine if total debits equals total credits. Also used to prepare financial statements.

T rial B alan ce
Finlay Interiors Trial Balance January 31, 2011 Cash Accounts receivable Prepaid insurance Supplies Equipment Accounts payable Unearned consulting revenue Notes payable Carol Finlay, Capital Carol Finlay, Withdrawals Consulting revenue Rental revenue Rent expense Salaries expense Utilities expense Total $ Debits 8,070 2,400 3,600 6,000 $ Credits
200 3,000 6,000 10,000 3,800 300
600
1,000 1,400 230 23,300
23,300
Review
What is journalizing? What is posting? What is the purpose of a trial balance?
End of chapter

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Electronic Presentations in Microsoft PowerPoint

Analyzing and Recording Transactions

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

The Accounting Cycle

Accounts Receivable Supplies Furniture

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

lcul ting t e Account B l nce

500 1500 725

325 Paid salary 450 Paid rent 775 Total redits

Ow ner's invest ent 1000

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

Remembering Debits and Credits ALCREW

Step 1 Write down the account types using ALCREW.

Remembering Debits and Credits ALCREW

Remembering Debits and Credits ALCREW

Normal Balance Step 2 Dr

Remembering Debits and Credits ALCREW

Remembering Debits and Credits ALCREW

2007 McGraw-Hill Ryerson Ltd.

Remembering Debits and Credits ALCREW

2007 McGraw-Hill Ryerson Ltd.

Remembering Debits and Credits ALCREW

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

Cash Owner, capital

2007 McGraw-Hill Ryerson Ltd.

Increase/ Decrease Increase Increase

Cash Owner, capital

2007 McGraw-Hill Ryerson Ltd.

Increase/ Decrease Increase Increase

Cash Owner, capital

Debit/ Credit Debit Credit

2007 McGraw-Hill Ryerson Ltd.

Debit cash for $10,000 Credit owner, capital for $10,000

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

Increase/ Decrease Increase Decrease

2007 McGraw-Hill Ryerson Ltd.

Increase/ Decrease Increase Decrease

Debit/ Credit Debit Credit

2007 McGraw-Hill Ryerson Ltd.

Debit supplies for $2,500 Credit cash for $2,500

2007 McGraw-Hill Ryerson Ltd.

2007 McGraw-Hill Ryerson Ltd.

Supplies Accounts Payable

Increase/ Decrease Increase Increase

Supplies Accounts Payable

2007 McGraw-Hill Ryerson Ltd.

Increase/ Decrease Increase Increase