Recording Business Transactions

Recording Business Transactions

1. The Account, the Journal, and the Ledger

   • Account: The detailed record of all the changes that have occurred in a particular asset, liabilities, owner's equity
     • Accounting Equation: Assets= Liabilities+Owner's Equity
       • Assets
         • Something the business owns that has value
           • Notes Receivable
             • Is the right to receive cash and interest in the future
           • Prepaid Expenses
             • The company pays for the expense before it is used
           • Land
           • Building
           • Equipment, Furniture, and Fixtures
             • A business has a separate asset account for each type of equipment
         • Cash
           • The cash effects of transactions
         • Accounts Receivable
           • Is the right to receive cash in the near future
       • Liabilities
         • Is a debt that is, something you owe
           • Accounts payable
             • Is a obligation to pay cash in near future
           • Notes Payable
             • Is a obligation to pay cash and interest in the future
         • Accrued Liabilities
           • The business knows the amount owed
       • Owner's Equity
         • The owner's claim to the assets of the business
           • Capital
             • Represent the net investment of the owner in the business
           • Drawing
             • Mean less earning retained by the company for future growth
           • Revenues
             • Refer to earnings for work done or goods delivered by the company
           • Expenses
             • Are present or future payments of cash that are incurred to help the company earn revenues
   • Journal: The chronological record of transactions
   • Ledger: The book holding all the accounts with their balances
   • Trial balance: The list of all the ledger accounts with their balances
   • Chart of Accounts
     • List all their accounts along with the account numbers
       • Assets, liabilities, and Owner's Equity
       • Revenues and Expenses

2. Debits, Credits, and Double-Entry Accounting

   • Each business transactions has dual effects:
     • The receiving side
     • The giving side
     • The double-entry system: Means that we record the dual effects of each transaction
     • A cash purchase of supplies
       • Increases supplies (you received supplies)
       • Decreases cash (you gave cash)
     • A credit purchase of equipment
       • Increases equipment (you received equipment
       • Increases accounts payable (you gave your promise to pay in the future)
   • The T-Account
     • With form of letter T
       • The vertical line divides the account into its left and right sides, with the title at the top
         • Debit side: The left side
         • Credit side: Right side
   • Increases and Decreases in the Accounts
     • Whether an account is increased or decreased by a debit or a credit depends on the type of account.
       • In a computerized accounting information system, interprets debits and credits as increases or decreases, based on the account type

3. List the steps of the Transaction Recording Process

   • The journalizing
     • 3 Steps
       • 1. Identify each account affected and its type.
       • 2.Determine whether each account is increased or decreased. Use the rules of debit and credit
       • 3.Record the transaction in the journal, including a brief explanation. The debit side of the entry is entered first, the credit is indented.
     • The journal entry: Presents the full story for each transaction.
       • To help reinforce your learning of the account types and how they increase or decrease
         • Four parts
           • a. Date of the transaction
           • b. Title of the account debited, along with the dollar amount
           • c. Indented title of the account credited, along with the dollar amount
           • d. Brief explanation of the transaction
   • Posting
     • The process of copying from the journal to the ledger
   • Expanding the Rules of Debit and Credit: Revenues and Expenses
     • Revenues are earned
       • The accounting equation to include revenues and expenses
     • Expenses are incurred
   • The Normal Balance of an Account
     • Appears on the side either debit or credit, where we record an increase in the account's balance
   • Source Documents
     • The origin of the steps

4. Preparing the Trial Balance from the T-Accounts

   • Summarizes the ledger (T-accounts) by listing all the accounts with their balances-assets first, followed by liabilities, and then owner's equity
     • The Four-Column Account: An Alternative to the T-Account
       • The ledger accounts illustrated thus far appear as T-accounts, with the debits on the left and the credits on the right
   • Correcting Trial Balance Errors
     • Throughout the accounting process, total debits should always equal total credits. If they do not, there is an error
       • 3. Divide the out-of-balance amount by 9
     • 2. Divide the difference between total debits and total credits by 2.
     • 1. Search the trial balance for a missing account
   • Details of Journals and Ledgers
     • The journal and the ledger provide details to create a trail through the records