The Double-Entry System

1. The Double-Entry System

2. Measurement Issues

• Objective 1
– Explain, in simple terms, the generally
accepted ways of solving the measurement
issues of recognition, valuation, and
classification
2–2

3. Measuring Business Transactions

Once accountants have determined a
transaction has occurred, they must decide
• When the transaction occurred
– The recognition issue
• What value to place on the transaction
– The valuation issue
• How to categorize the components of the transaction
– The classification issue
2–3

4. Measurement Issues

Recognition issue
Valuation issue
Classification issue
• These issues underlie almost every major
decision in financial accounting
• Controversies exist; solutions are not cut and
dried
2–4

5. The Recognition Issue

• Recognition means the recording of a
transaction
• Refers to the difficulty of deciding when
a business transaction occurred
• Point of recognition is important
because it affects the financial
statements
2–5

6. Point of Recognition for Sales and Purchases

• Sales and purchases of products
– Usually recognized when title of property transfers
– Or, may set up a recognition point
• Predetermined time at which a transaction should be
recorded
• Sales and purchases of services
– Usually recognized when services have been
performed
– If services are performed over a long period of
time, may set up billing at specific points of time
• Transaction recorded at each billing
2–6

7. Business Event versus Business Transaction

• Business Event
– Any occurrence related to the course of
running a business
• Business Transaction
– Economic event that affects the financial
position of a business entity
2–7

8. Business Events That …

Are Not Transactions
• Customer inquires
about a service
• Ordering products
from suppliers
Are Transactions
• Customer buys a
service
• Receiving products
previously ordered
• Hiring new employees • Paying employees for
work performed
2–8

9. The Valuation Issue

• Focuses on assigning a monetary value
to a transaction
• Most controversial issue in accounting
• According to GAAP, use original cost
– Also called historical cost
• Practice of recording transactions at
cost follows the cost principle
2–9

10. Cost Principle

• The principle that a purchased asset should
be recorded at its actual cost
– Cost
• Exchange price associated with a business transaction at
the point of recognition
– Exchange price
• Amount a buyer is willing to pay and a seller is willing to
receive
• Is objective (not influenced by emotion or personal
feelings)
• Cost principle is used because cost is
verifiable
2–10

11. Applying the Cost Principle

1. Company A purchases building for $80,000
Company A
• Records purchase of building at original cost (exchange price) of $80,000
2. Company A offers same building for sale for $120,000
3. Company A sells building to Company B for $110,000
Company A
• Records sale of building at sales
price (exchange price) of $110,000
and profit or loss is recognized
Company B
• Records purchase of building at
cost (exchange price) of
$110,000
Company A
Company B
Building
Building
Original purchase price
Listed sales price
Valuation for real estate taxes
Valuation for insurance
Offer 1
Offer 2
Final sales price
$ 80,000
120,000
75,000
90,000
100,000
105,000
110,000
Only amounts involved in business
transactions (exchanges of value)
are recorded in the company books
Original purchase price
$110,000

12. Analyzing Information

• Recall - the cost principle requires that a purchased asset
is recorded at its actual cost, or the exchange price
• Exchange price
–The amount a buyer is willing to pay and a seller is willing to receive
for an exchange of value
–Is objective (not influenced by emotion or personal feelings)
Building
Original purchase price
Listed sales price
Valuation for real estate taxes
Valuation for insurance
Offer 1
Offer 2
Final sales price
$ 80,000
120,000
75,000
90,000
100,000
105,000
110,000
Exchange
of Value
Objective
Value
Exchange
Price
Yes
No
No
No
No
No
Yes
Yes
No
No
No
No
No
Yes
Yes
No
No
No
No
No
Yes
2–12

13. The Classification Issue

• Classification is the process of assigning
transactions to the appropriate accounts
• Proper classification depends on
– Correctly analyzing the effect of each transaction
on the business
– Maintaining a system of accounts that reflects that
effect
• The classification issue refers to the
uncertainties associated with assigning
transactions to the appropriate accounts
2–13

14. Discussion

Q. What three issues underlie most
accounting decisions?
1. The recognition issue
When a transaction should be recorded
2. The valuation issue
What value should be placed on the
transaction
3. The classification issue
How the components should be categorized
2–14

15. Accounts and the Chart of Accounts

• Objective 2
– Describe the chart of accounts and
recognize commonly used accounts
2–15

16. Accounts

• Used to record transaction data
– Record data in a usable form
– Data can be quickly retrieved
• Separate account used for each
– Asset
– Liability
– Component of owner’s equity (includes
revenues and expenses)
2–16

17. General Ledger

• Group of company accounts
• Sometimes simply referred to as the ledger
• Two types of systems
– Manual system
• Each account on separate page or card
• Pages or cards placed together in book or file
– Computerized system
• Accounts maintained on magnetic tapes or disks
2–17

18. Chart of Accounts

• List of account numbers with corresponding
account names
• Helps identify accounts in the ledger
First digit in account number refers to major
financial statement classification
–
–
–
–
–
Assets
Liabilities
Owner's equity
Revenues
Expenses
2–18

19. Example of Account Numbering

1000 - 1999: asset accounts
2000 - 2999: liability accounts
3000 - 3999: equity accounts
4000 - 4999: revenue accounts
5000 - 5999: cost of goods sold
6000 - 6999: expense accounts
7000 - 7999: other revenue (for example, interest income)
8000 - 8999: other expense (for example, income taxes)
2–19

20. Owner's Equity Accounts

• Revenue and expense accounts separated from
other owner's equity accounts
• Important for legal and financial reporting
purposes
– Owner's equity accounts represent how much interest
in the assets of a company the owner has
– Law requires that Capital and Withdrawal accounts be
separate from revenues and expenses for tax and
financial reporting
– Management needs a detailed breakdown of revenues
and expenses for budgeting and operating purposes
2–20

21. Account Titles

• Should describe what is recorded in the
account
• An account name can be analyzed to
understand its purpose
– Identify account’s classification as asset, liability,
owner's equity, revenue, or expense
– Identify the type of transaction that gave rise to the
account
• Different companies may use different
account names for the same account
2–21

22. Discussion

Q. What is an account?
A. Account
Means by which management accumulates
the effects of transactions
Basic storage unit for accounting data
Q. How is an account related to the
ledger?
A. The ledger is a file or book in which the
company’s accounts are kept
2–22

23. The Double-Entry System: The Basic Method of Accounting

• Objective 3
– Define double-entry system and state the
rules for double entry
2–23

24. Double-Entry System

• Based on principle of duality
– Every economic event has two aspects that
balance, or offset, each other
– The two aspects represent
• Effort and reward
• Sacrifice and benefit
• Source and use
Example:
Pay cash to purchase supplies
Cash paid = effort, sacrifice, source
Supplies received = reward, benefit, use
2–24

25. Principle of Duality

• Each transaction recorded with at least
one debit and one credit
• Total amount of debits = total amount of
credits
• Whole system always in balance
• All accounting systems based on
principle of duality
2–25

26. The T Account

Three parts
1. A title that describes the account
2. A left side, called the debit side
3. A right side, called the credit side
Title of Account
Debit
(left) side
Credit
(right) side
2–26

27. The T Account Illustrated

• In Chapter 1, Shannon Realty had several
transactions that affected the Cash account
• Transactions can be summarized in T
accounts
– Record cash receipts (increases) on debit (left) side
– Record cash payments (decreases) on credit (right)
side
Title of
Account
Cash
Debit
(left)Receipts
side
Cash
(+)
Credit
(right)
side
Cash
Payments
(–)
2–27

28. Shannon Realty

1. Deposited $50,000 in a bank account in the name of
Shannon Realty
2. Purchased a lot for $10,000 and a small building on a lot
for $25,000
3. Purchased office supplies for $500 on credit
4. Paid $200 of the $500 owed for supplies
5. Earned and received a commission of $1,500 in cash
Cash
(1) Debit 50,000
(left) side
(5)
1,500
Credit
35,000
(right) side
(4)
200
(2)
Transaction 3
does not affect
the Cash account

29. Shannon Realty (cont’d)

6. A $2,000 commission is earned, to be received later
7. Received $1,000 from client for commission earned
earlier in the month
8. Paid $1,000 to rent equipment for office
9. Paid $400 in wages to part-time helper
10. Liability of $300 for utilities expense is recorded
11. Owner withdrew $600 in cash for personal use
Cash
Credit
35,000
(right) side
(4)
200
(1) Debit 50,000
(left) side
(5)
1,500
(2)
(7)
(8)
1,000
(9)
400
(11)
600
1,000
Transaction 6
does not affect
the Cash account
Transaction 10
does not affect
the Cash account
2–29

30. Footings and the Account Balance

• Footings
– Working totals of columns
– Calculated at end of each month
• Account balance
– Difference between total debit footing and total
credit footing
– Also simply called the balance
– Debit balance recorded on left side of T account
– Credit balance recorded on right side of T account
2–30

31. Footings and the Account Balance (cont’d)

Total the debit side
of the T account
(1)
(5)
(7)
Cash
50,000 (2)
1,500 (4)
1,000 (8)
(9)
(11)
Total Debit
Footing
52,500
Bal.
Total the credit side
of the T account
35,000
200
1,000
400
600
37,200
Total Credit
Footing
15,300
Debit Account Balance
($52,500 - $37,200)
2–31

32. Analyzing and Processing Transactions

Rules of double-entry bookkeeping
1. Every transaction affects at least two
accounts
At least one account is debited and at least
one account is credited
2. Total debits must equal total credits
For each transaction
For whole system (all accounts as a group)
2–32

33. Keeping the Accounting Equation in Balance

Assets =
Liabilities + Owner's Equity
Cash
Capital
+500
+500
Cash
–250
=
Accounts Payable
–250
Wages Payable
Wages Expense
+100
–100
• For the accounting equation to stay in balance,
each transaction must
– Increase both sides of equal sign by same amount
– Decrease both sides of equal sign by same amount
– Increase and decrease one side of equal sign by
same amount
2–33

34. Accounts and the Accounting Equation

Assets
Credit
Debit
for
for
Increases Decreases
(–)
(+)
=
Liabilities
Debit
Credit
for
for
Decreases Increases
(–)
(+)
+
Owner's
Equity
Debit
for
Decreases
(–)
Credit
for
Increases
(+)
Assets increase with debits
Liabilities and owner's equity increase with credits
Assets decrease with credits
Liabilities and owner's equity decrease with debits
2–34

35. Accounts and the Accounting Equation (cont’d)

Assets
=
500
1,000
1,500
Liabilities
+
500
=
500
Owner's
Equity
1,000
+
1,000
If a debit increases assets
a credit must increase
liabilities or owner's equity
for the accounting equation to remain in balance
2–35

36. Accounts and the Accounting Equation (cont’d)

Assets
=
Liabilities
500
1,000
+
500
250
1,500
Owner's
Equity
=
750
250
1,250
1,000
750
+
250
250
If a credit increases liabilities
a debit must decrease
liabilities or owner's equity
for the accounting equation to remain in balance
2–36

37. Components of Owner's Equity

• Capital
• Withdrawals
• Revenues
• Expenses
2–37

38. Effects of Withdrawals, Revenues, and Expenses on Owner's Equity

Owner's Equity
Capital –– Withdrawals
Withdrawals + Revenues – Expenses
• Withdrawals and expenses decrease owner's
equity
– Transactions that increase withdrawals or expenses
decrease owner's equity
• Revenues increase owner's equity
– Transactions that increase revenues increase owner's
equity
2–38

39. Expanding the Accounting Equation

Now that the components of owner's equity have
been identified
Capital – Withdrawals + Revenues –– Expenses
And their effects on owner's equity are
understood
The accounting equation can be expanded to
include these components
Assets = Liabilities + Owner's Equity
2–39

40. Rearranging the Accounting Equation

Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses
Because Withdrawals and Expenses are deductions from
owner's equity, move them to the left side of the equation
Assets + Withdrawals + Expenses = Liabilities + Capital + Revenues
Accounts increased by debits = Accounts increased by credits
2–40

41. Analyzing and Processing Transactions

1. Analyze the transaction
– Transactions are supported by source documents
– Determine accounts to use and effects of
transaction on accounts
2. Apply the rules of double entry
– Debits increase assets and decrease liabilities and
owner's equity
– Credits decrease assets and increase liabilities
and owner's equity
2–41

42. Analyzing and Processing Transactions (cont’d)

3. Record the entry
– Record in chronological order in a journal
4. Post the entry
– Transfer dates and amounts from journal to
proper accounts in ledger
5. Prepare the trial balance
– Confirms that accounts are still in balance
2–42

43. Recording a Transaction in Journal Form

1. Date
2. Debit account and debit amount recorded
on one line
3. Credit account and credit amount recorded
on next line, indented
Dr.
June 1
Cash
Notes Payable
Cr.
100,000
100,000
2–43

44. Posting Journal Entry to Accounts

Journal
Dr.
June 1 Cash
Cr.
100,000
Notes Payable
100,000
Ledger
Cash
June 1
100,000
Notes Payable
June 1
100,000
2–44

45. Discussion

Q. Why do debits, which decrease owner's equity, also
increase withdrawals and expenses, which are
components of owner's equity?
A. Withdrawals and expenses are deductions from
owner’s equity
Owner's equity is decreased by debits
Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses
+ –
– +
+ –
– +
+ –
– +
Debit
Debit
Debit
Debit
↓ Cap
↓ OE
↑ Div
↓ OE
↓ Rev
↓ OE
↑ Exp
↓ OE
Transactions that increase withdrawals and expenses decrease owner's equity
2–45

46. Transaction Analysis Illustrated

• Objective 4
– Apply the steps for transaction analysis
and processing to simple transactions
2–46

47. Investment in Company

Business
July 1: Joan Miller invests $20,000 to start her own
Transaction advertising agency
Step 1
Analyze
Increase in assets
Increase in owner’s equity
Step 2
Apply rules
Debits increase assets (Cash)
Credits increase owner’s equity (Joan Miller,
Capital)
Step 3
Record
Dr.
July 1
Cash
Joan Miller, Capital
Cr.
20,000
20,000
2–47

48.

Cash
Accts. Receivable
Prepaid Insurance
Art Supplies
Art Equipment
Office Supplies
Office Equipment
Jul 1 20,000
Assets
Step 4
Post
Debit
Cash 20,000
Credit
Joan Miller,
Capital 20,000
Accts. Payable
Unearned Art Fees
Joan Miller, Capital
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
Owner's Equity
+
Liabilities
=
Prepaid Rent
Jul 1 20,000
Joan Miller, Withdrawals
2–48

49. Purchase Assets

Business
July 2: Rents office and pays two months’ rent in
Transaction advance, $1,600
Step 1
Analyze
Increase in assets
Decrease in assets
Step 2
Apply rules
Debits increase assets (Prepaid Rent)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 2
Prepaid Rent
Cash
Cr.
1,600
1,600
2–49

50.

Cash
Jul 1
20,000 Jul 2
Accts. Receivable
Prepaid Insurance
Art Supplies
Art Equipment
Office Supplies
Office Equipment
1,600
Assets
Step 4
Post
Prepaid Rent
1,600
=
Jul 2
Unearned Art Fees
Liabilities
Accts. Payable
Debit
Prepaid Rent 1,600
+
Credit
Cash
1,600
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–50

51. Purchases

Business
July 3: Purchases art equipment for cash, $4,200
Transaction
Step 1
Analyze
Increase in assets
Decrease in assets
Step 2
Apply rules
Debits increase assets (Art Equipment)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 3
Art Equipment
Cash
Cr.
4,200
4,200
2–51

52.

Cash
Jul 1
20,000 Jul 2
1,600
3
4,200
Accts. Receivable
Prepaid Insurance
Art Supplies
Art Equipment
Jul 3
Assets
Step 4
Post
Office Supplies
4,200
Office Equipment
Prepaid Rent
1,600
=
Jul 2
Unearned Art Fees
Liabilities
Accts. Payable
Debit
Art Equipment 4,200
+
Credit
Cash
4,200
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–52

53. Purchases

Business
July 4: Orders art supplies, $1,800, and office
Transaction supplies, $800
Step 1
Analyze
No entry because transaction has not occurred
Step 2
Apply rules
Step 3
Record
2–53

54. Purchases

Business
July 5: Purchases office equipment, $3,000. Pays
Transaction $1,500 in cash and the remaining amount on credit
Step 1
Analyze
Increase in assets
Decrease in assets
Increase in liabilities
Step 2
Apply rules
Debits increase assets (Office Equipment)
Credits decrease assets (Cash)
Credits increase liabilities (Accounts Payable)
Dr.
Step 3
Record
July 5
Office Equipment
Cash
Accounts Payable
Cr.
3,000
1,500
1,500
2–54

55.

Cash
Jul 1
20,000 Jul 2
3
1,600
4,200
5
1,500
Accts. Receivable
Prepaid Insurance
Art Supplies
Art Equipment
Jul 13
Assets
Step 4
Post
Office Supplies
4,200
Office Equipment
Jul 5 3,000
Prepaid Rent
1,600
=
Jul 2
Jul 5
Unearned Art Fees
1,500
+
Liabilities
Accts. Payable
Debit
Office Equipment 3,000
Credit
Cash
1,500
Accts. Payable 1,500
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–55

56. Purchases

July 6: Purchases art supplies, $1,800, and office
Business
Transaction supplies, $800, on credit
Step 1
Analyze
Increase in assets
Increase in liabilities
Step 2
Apply rules
Debits increase assets (Art Supplies and Office
Supplies)
Credits increase liabilities (Accounts Payable)
Dr.
Step 3
Record
July 6
Art Supplies
Office Supplies
Accounts Payable
Cr.
1,800
800
2,600
2–56

57.

Cash
Jul 1
20,000 Jul 2
Accts. Receivable
Prepaid Insurance
Art Supplies
Art Equipment
1,600
4,200
1,500
3
5
Jul 6
Assets
Step 4
Post
1,800
Office Supplies
Jul 6
800
Jul 13
4,200
Office Equipment
Jul 5
3,000
Prepaid Rent
1,600
=
Jul 2
Unearned Art Fees
Jul 5
1,500
6
2,600
+
Liabilities
Accts. Payable
Debit
Art Supplies 1,800
Office Supplies 800
Credit
Accts. Payable 2,600
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–57

58. Purchase Assets

July 8: Pays for one-year life insurance policy,
Business
Transaction effective July 1, $960
Step 1
Analyze
Increase in assets
Decrease in assets
Step 2
Apply rules
Debits increase assets (Prepaid Insurance)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 8
Prepaid Insurance
Cash
Cr.
960
960
2–58

59.

Assets
Step 4
Post
Cash
Jul 1
Accts. Receivable
20,000 Jul 2
3
5
1,600
4,200
1,500
8
960
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
1,800
Office Supplies
Jul 6
800
960
Art Equipment
Jul 13
4,200
Office Equipment
Jul 5
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 5
6
Unearned Art Fees
1,500
2,600
Credit
Cash 960
+
Liabilities
Accts. Payable
Debit
Prepaid Insurance 960
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–59

60. Partial Payment of Liability

Business
July 9: Pays Taylor Supply Company $1,000 of
Transaction amount owed
Step 1
Analyze
Decrease in liabilities
Decrease in assets
Step 2
Apply rules
Debits decrease liabilities (Accts. Payable)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 9
Accounts Payable
Cash
Cr.
1,000
1,000
2–60

61.

Cash
Accts. Receivable
20,000 Jul 2
Jul 1
Assets
Step 4
Post
3
5
8
1,600
4,200
1,500
960
9
1,000
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
1,800
Office Supplies
Jul 6
800
960
Art Equipment
Jul 13
4,200
Office Equipment
Jul 5
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Credit
Cash 1,000
+
Liabilities
Accts. Payable
Debit
Accts. Payable 1,000
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
20,000
Joan Miller, Withdrawals
2–61

62. Revenues

Business
July 10: Performs service by placing
Transaction advertisements and collects fee of $1,400
Step 1
Analyze
Increase in assets
Increase in owner’s equity
Step 2
Apply rules
Debits increase assets (Cash)
Credits increase owner’s equity (Advertising Fees
Earned)
Dr.
Step 3
Record
July 10 Cash
Advertising Fees Earned
Cr.
1,400
1,400
2–62

63.

Cash
Jul 1
10
Assets
Step 4
Post
Accts. Receivable
20,000 Jul 2
1,400
1,600
4,200
1,500
960
1,000
3
5
8
9
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Credit
Ad. Fees Earned 1,400
+
Liabilities
Accts. Payable
Debit
Cash 1,400
Owner's Equity
Joan Miller, Capital
Jul 1
20,000
Joan Miller, Withdrawals
Advertising Fees Earned
Jul 10
Wages Expense
1,400
Utilities Expense
Telephone Expense
2–63

64. Expenses

Business
July 12: Pays secretary two weeks’ wages, $1,200
Transaction
Step 1
Analyze
Decrease in owner’s equity (increase in expenses)
Decrease in assets
Step 2
Apply rules
Debits decrease owner’s equity (increase Wages
Expense)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 12 Wages Expense
Cash
Cr.
1,200
1,200
2–64

65.

Cash
Jul 1
10
Accts. Receivable
20,000 Jul 2
1,400
3
1,600
4,200
1,500
960
1,000
1,200
5
8
9
12
Assets
Step 4
Post
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Credit
Cash 1,200
+
Liabilities
Accts. Payable
Debit
Wages Expense 1,200
Owner's Equity
Joan Miller, Capital
Jul 1
20,000
Joan Miller, Withdrawals
Advertising Fees Earned
Jul 10
1,400
Utilities Expense
Wages Expense
Jul 12
1,200
Telephone Expense
2–65

66. Revenue

July 15: Accepts advance fee for artwork to be
Business
done for another agency, $1,000
Transaction
(Payment received for future services)
Step 1
Analyze
Increase in assets
Increase in liabilities
Step 2
Apply rules
Debits increase assets (Cash)
Credits increase liabilities (Unearned Art Fees)
Dr.
Step 3
Record
July 15 Cash
Unearned Art Fees
Cr.
1,000
1,000
2–66

67.

Cash
Jul 1
10
15
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
1,600
4,200
1,500
960
1,000
1,200
8
9
12
Assets
Step 4
Post
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
Debit
Cash
1,000
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Jul 15
1,000
Credit
Unearned Art Fees 1,000
+
Liabilities
Accts. Payable
Owner's Equity
Joan Miller, Capital
Jul 1
20,000
Joan Miller, Withdrawals
Advertising Fees Earned
Jul 10
1,400
Utilities Expense
Wages Expense
Jul 12
1,200
Telephone Expense
2–67

68. Revenue

July 19: Performs advertising service for which
Business
payment will be collected at later date, $4,800
Transaction
(Revenue earned, to be received later)
Step 1
Analyze
Increase in assets
Increase in owner's equity (revenues)
Step 2
Apply rules
Debits increase assets (Accounts Receivable)
Credits increase owner's equity (Advertising Fees
Earned)
Dr.
Step 3
Record
July 19 Accounts Receivable
Advertising Fees Earned
Cr.
4,800
4,800
2–68

69.

Cash
Jul 1
10
15
Assets
Step 4
Post
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
8
9
12
1,600
4,200
1,500
960
1,000
1,200
Jul 19
Prepaid Insurance
Jul 8
4,800
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Jul 15
1,000
Credit
Ad. Fees Earned 4,800
+
Liabilities
Accts. Payable
Debit
Accts. Receivable 4,800
Owner's Equity
Joan Miller, Capital
Jul 1
20,000
Joan Miller, Withdrawals
Advertising Fees Earned
Jul 10
19
1,400
4,800
Utilities Expense
Wages Expense
Jul 12
1,200
Telephone Expense
2–69

70. Expenses

Business
July 26: Pays secretary two more weeks’ wages,
Transaction $1,200
Step 1
Analyze
Decrease in owner's equity (increase in expenses)
Decrease in assets
Step 2
Apply rules
Debits decrease owner's equity (increase Wages
Expense)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 26 Wages Expense
Cash
Cr.
1,200
1,200
2–70

71.

Cash
Jul 1
10
15
Assets
Step 4
Post
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
8
9
12
1,600
4,200
1,500
960
1,000
1,200
26
1,200
Jul 19
4,800
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
1,500
2,600
Jul 15
1,000
Credit
Cash 1,200
+
Liabilities
Accts. Payable
Debit
Wages Expense 1,200
Owner's Equity
Joan Miller, Capital
Jul 1
20,000
Joan Miller, Withdrawals
Advertising Fees Earned
Jul 10
19
1,400
4,800
Utilities Expense
Wages Expense
Jul 12
1,200
26
1,200
Telephone Expense
2–71

72. Expenses

Business
July 29: Receives and pays utility bill, $200
Transaction
Step 1
Analyze
Decrease in owner's equity (increase in expenses)
Decrease in assets
Step 2
Apply rules
Debits decrease owner's equity (increase Utilities
Expense)
Credits decrease assets (Cash)
Dr.
Step 3
Record
July 29 Utilities Expense
Cash
Cr.
200
200
2–72

73.

Cash
Jul 1
10
15
Assets
Step 4
Post
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
8
9
12
26
1,600
4,200
1,500
960
1,000
1,200
1,200
29
200
Jul 19
4,800
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
6
Unearned Art Fees
Jul 15
1,500
2,600
1,000
Credit
Cash 200
+
Liabilities
Accts. Payable
Debit
Utilities Expense 200
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Jul 10
19
20,000
Joan Miller, Withdrawals
1,400
4,800
Utilities Expense
Jul 29
Wages Expense
Jul 12
26
1,200
1,200
Telephone Expense
200
2–73

74. Expenses

July 30: Receives (but does not pay) telephone
Business
bill, $140
Transaction
(Expense incurred, to be paid later)
Step 1
Analyze
Decrease in owner's equity (increase in expenses)
Increase in liabilities
Step 2
Apply rules
Debits decrease owner's equity (increase
Telephone Expense)
Credits increase liabilities (Accts. Payable)
Dr.
Step 3
Record
July 30 Telephone Expense
Accts. Payable
Cr.
140
140
2–74

75.

Cash
Jul 1
10
15
Assets
Step 4
Post
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
8
9
12
26
29
1,600
4,200
1,500
960
1,000
1,200
1,200
200
Jul 19
4,800
Prepaid Insurance
Jul 8
Art Supplies
Jul 6
Art Equipment
Jul 13
1,800
Office Supplies
Jul 6
960
4,200
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Jul 2
Jul 9
1,000 Jul 5
Unearned Art Fees
6
1,500
2,600
30
140
Jul 15
1,000
140
Credit
Accts. Payable
140
+
Liabilities
Accts. Payable
Debit
Telephone Exp.
Owner's Equity
Joan Miller, Capital
Jul 1
Advertising Fees Earned
Jul 10
19
20,000
Joan Miller, Withdrawals
1,400
4,800
Utilities Expense
Jul 29
200
Wages Expense
Jul 12
26
1,200
1,200
Telephone Expense
Jul 30
140
2–75

76. Withdrawals

July 31: Joan Miller withdraws $1,400 from the
Business
Transaction business for personal living expenses
Step 1
Analyze
Decrease in owner's equity
Decrease in assets
Step 2
Apply rules
Debits decrease owner's equity (increase Joan
Miller, Withdrawals)
Credits decrease assets (Cash)
Step 3
Record
Dr.
July 31 Joan Miller, Withdrawals
Cash
Cr.
1,400
1,400
2–76

77.

Cash
Jul 1
10
15
Accts. Receivable
20,000 Jul 2
1,400
3
1,000
5
8
9
12
26
29
31
Assets
Step 4
Post
1,600
4,200
1,500
960
1,000
1,200
1,200
200
1,400
Jul 19
4,800
Jul 8
Art Supplies
Jul 6
Jul 13
Office Supplies
Jul 6
Office Equipment
Jul 5
800
3,000
Prepaid Rent
1,600
=
Liabilities
1,000 Jul 5
6
30
4,200
Unearned Art Fees
Jul 15
1,500
2,600
140
1,000
Debit
Joan Miller,
Withdrawals 1,400
Credit
Cash 1,400
+
Jul 9
960
Art Equipment
1,800
Jul 2
Accts. Payable
Prepaid Insurance
Owner's Equity
Joan Miller, Capital
Jul 1
1,400
Jul 10
19
20,000
Joan Miller, Withdrawals
Jul 31
Advertising Fees Earned
1,400
4,800
Utilities Expense
Jul 29
200
Wages Expense
Jul 12
26
1,200
1,200
Telephone Expense
Jul 30
140
2–77

78. Discussion

Q. Why does Joan Miller record the
expense for the telephone bill even
though she hasn’t paid it yet?
– An expense has been incurred for
telephone services used
– An obligation to pay exists
– Joan Miller records the expense and the
liability for the telephone service
2–78

79. The Trial Balance

• Objective 5
– Prepare a trial balance and describe its
value and limitations
2–79

80. The Trial Balance

• For every amount debited, an equal
amount must be credited
– Result: The total of debits and credits for
all the T accounts must be equal
• Trial balance is prepared to test this
– Usually prepared at the end of a month or
an accounting period
– Can be prepared anytime
2–80

81. Normal Account Balances

• Normal balance means usual balance
• Refers to whether increases in the accounts
are made with debits or credits
– Accounts that are increased with debits have a
normal debit balance
– Accounts that are increased with credits have a
normal credit balance
• An account may have an “abnormal” balance
– Copy into the trial balance as it stands
2–81

82. Normal Account Balances and the Accounting Equation

Recall the basic accounting equation:
Assets = Liabilities + Owner's Equity
Debit Credit
(+)
(–)
Debit Credit
(–)
(+)
Debit Credit
(–)
(+)
• Assets are increased by debits
• Liabilities and owner's equity are increased
by credits
2–82

83. Normal Account Balances and the Accounting Equation (cont’d)

However, when the basic accounting equation
is expanded to include all the components of
owner's equity,
Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses
+ –
– +
– +
+ –
– +
+ –
We see that Withdrawals and expense accounts
reduce owner's equity
2–83

84. Normal Account Balances and the Accounting Equation (cont’d)

Withdrawals and expenses can be moved to the
left side of the equation so that
Assets + Withdrawals + Expenses
+ –
+ –
+ –
=
Liabilities + Capital + Revenues
– +
– +
– +
Accounts increased by
debits
Accounts increased by
credits
Accounts with a
normal debit balance
Accounts with a
normal credit balance
2–84

85. Steps in Preparing a Trial Balance

1. List each T account that has a balance
– Record debit balances in the left column
– Record credit balances in the right column
– List accounts in the order that they appear
in the ledger
2. Add each column
3. Compare the column totals
– Total debits should equal total credits
2–85

86. Joan Miller Advertising Agency

1. Determine the T account balances for
Joan Miller Advertising Agency
– Use footings
2. Transfer account balances to the trial
balance
3. Total each column
4. Compare column totals
2–86

87.

Cash
Assets
20,000 Jul 2
3
1,400
1,000
5
8
9
12
26
29
31
1,600
4,200
1,500
960
1,000
1,200
1,200
200
1,400
22,400
13,260
9,140
Jul 19
4,800
Jul 9
Art Supplies
Jul 6
Jul 13
1,800
Office Supplies
Jul 6
1,500
2,600
140
1,000
4,240
Bal.
Office Equipment
Jul 5
800
Jul 2
1,600
Jul 15
1,000
1. Determine
account
balances
Advertising Fees Earned
Jul 10
19
20,000
Joan Miller, Withdrawals
1,400
3,000
Prepaid Rent
Bal.
Jul 31
4,200
3,240
Joan Miller, Capital
Jul 1
960
Art Equipment
Unearned Art Fees
1,000 Jul 5
6
30
+
Liabilities
Accts. Payable
Prepaid Insurance
Jul 8
=
Bal.
Owner's Equity
Joan Miller Advertising Agency
Jul 1
10
15
Accts. Receivable
1,400
4,800
200
Jul 12
26
6,200 Bal.
Utilities Expense
Jul 29
Wages Expense
1,200
1,200
2,400
Telephone Expense
Jul 30
140
2–87

88. Trial Balance

Joan Miller Advertising Agency
Trial Balance
July 31, 20xx
Cash
Accounts Receivable
Art Supplies
Office Supplies
Prepaid Rent
Prepaid Insurance
Art Equipment
Office Equipment
Accounts Payable
Unearned Art Fees
Joan Miller, Capital
Joan Miller, Withdrawals
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
$ 9,140
4,800
1,800
800
1,600
960
4,200
3,000
Record debit
balances in the
left column
Record credit
balances in the
right column
$ 3,240
1,000
20,000
1,400
Add each
column
6,200
2,400
200
140
$30,440
The trial balance
proves the ledger
is in balance
$30,440
Total debits = Total credits
2–88

89. Trial Balance (cont’d.)

• The trial balance proves whether or not the
ledger is in balance
– Total of all debits recorded = Total of all credits
recorded
• What it does not do
– Prove that all transactions were analyzed correctly
– Prove that amounts were recorded in the proper
accounts
– Detect whether transactions have been omitted
– Detect errors of the same amount made in both a
debit and a credit
2–89

90. Detecting Errors in the Trial Balance

• If the debit and credit columns are not
equal, look for the following errors
– A debit entered as a credit, or visa versa
– An incorrectly computed account balance
– Error in carrying the account balance to the
trial balance
– Trial balance summed incorrectly
2–90

91. Detecting Errors in the Trial Balance (cont’d)

• If trial balance is out of balance by an
amount divisible by 2
– Caused by recording an account with a
debit balance as a credit, or visa versa
• If trial balance is out of balance by an
amount divisible by 9
– Caused by transposing two numbers when
transferring an amount to the trial balance
2–91

92. Discussion

Q. Does the trial balance detect whether
transactions have been omitted?
A. No. The trial balance proves whether or not the
ledger is in balance (total debits = total credits).
It does not
1) Prove that all transactions were analyzed correctly
2) Prove that amounts were recorded in the proper
accounts
3) Detect whether transactions have been omitted
4) Detect errors of the same amount made in both a debit
and a credit
2–92

93. Recording and Posting Transactions

• Objective 6
– Record transactions in the general journal
and post transactions from the general
journal to the ledger
2–93

94. The General Journal

• Why aren’t transactions entered directly into
the accounts?
– Since the debit is recorded in one account and the
credit in another, it would be very difficult to
• Identify individual transactions
• Find errors
• Solution
– Record all transactions chronologically in a journal
2–94

95. Journalizing

… is the process of recording transactions
• General journal is the simplest and most
flexible
– Also called book of original entry
• Separate journal entry records each
transaction
2–95

96.

Journalizing Transactions
Business
July 6: Purchase art supplies, $1,800, and office
Transaction supplies, $800, on credit
Record in
Journal
1. The date
2. Names of accounts debited and dollar amounts on
same lines in debit column
3. Names of accounts credited (indented) and dollar
amounts on same lines in credit column
4. Explanation of transaction
5. Account identification numbers, if appropriate
General Journal
Date
Description
20xx
July 6 Art Supplies
Office Supplies
Accounts Payable
Purchase of art and office
supplies on credit
Page 1
Post.
Ref.
Debit
Credit
1,800
800
2,600
15–96

97. Journalizing Transactions (cont.)

Business July 8: Pays for one-year life insurance policy,
Transaction effective July 1, $960
General Journal
Skip a line
between
each entry
Date
Description
20xx
July 6 Art Supplies
Office Supplies
Accounts Payable
Purchase of art and office
supplies on credit
8
Prepaid Insurance
Cash
Paid one-year life insurance
premium
Page 1
Post.
Ref.
Debit
Credit
1,800
800
2,600
960
960
• A compound entry has more than one debit or credit entry
• The July 6 entry is a compound entry because it has two
debit entries
2–97

98. General Ledger

• Used to record the details of each transaction
• Used to update each account
• T account is a simple, direct form
• In practice, the ledger account form is used
• Advantage of ledger account form over T
account is that current balance of account is
always available
2–98

99. Ledger Account Form

General Ledger
Accounts Payable
Date
Item
Post.
Ref.
Debit
Credit
Account No. 212
Balance
Credit
Debit
• Account title and number appear at top of account form
• The date appears in the first two columns (as in the journal)
• Item column is rarely used because explanations already appear
in the journal
• Post. Ref. column used to note journal page where the original
entry for the transaction can be found
• Dollar amount of entry is entered in appropriate debit or credit
column
• New account balance computed in final two columns after each
entry
2–99

100. Posting to the Ledger

General Journal
Date
20xx
July
Page 2
Post.
Ref.
Description
30 Telephone Expense
Accounts Payable
Received bill for telephone
expense
Debit
Credit
2. Enter date of transaction
140
513
140
Enter journal page number
in Post. Ref. column
General Ledger
Accounts Payable
Date
20xx
July
Item
5
6
9
Post.
Ref.
J1
J1
J1
Debit
Credit
Account No. 212
Balance
Debit
Credit
1,500
2,600
1,500
4,100
3,100
1,000
General Ledger
Telephone Expense
Date
Item
Post.
Ref.
Debit
Credit
Account No. 513
Balance
Debit
Credit
20xx
July
30
J2
1. Locate debit account in the
ledger
3. Enter in Debit column
amount of debit from
journal
4. Calculate account balance
and enter in appropriate
Balance column
5. In journal Post. Ref.
column enter account
number to which amount
was posted
140
140
6. Repeat for credit entry
2–100

101. Posting to the Ledger (cont.)

General Journal
Date
20xx
July
Page 2
Post.
Ref.
Description
30 Telephone Expense
Accounts Payable
Received bill for telephone
expense
Debit
Credit
140
513
212
140
Accounts Payable
Date
20xx
July
Item
5
6
9
30
J1
J1
J1
Debit
Credit
Account No. 212
Balance
Debit
Credit
1,500
2,600
1,500
4,100
3,100
140
3,240
1,000
J2
2. Enter date of transaction
Enter journal page number
in Post. Ref. column
General Ledger
Post.
Ref.
1. Locate credit account in the
ledger
3. Enter in Credit column
amount of credit from
journal
4. Calculate account balance
and enter in appropriate
Balance column
General Ledger
Telephone Expense
Date
Item
Post.
Ref.
Debit
Credit
Account No. 513
Balance
Debit
Credit
5. In journal Post. Ref. column
enter account number to
which amount was posted
20xx
July
30
140
140
J2
2–101

102.

Some Notes on Presentation
Dollar signs
are required
and are
placed before
the first
amount in
each column
Joan Miller Advertising Agency
Trial Balance
July 31, 20xx
Cash
Accounts Receivable
Art Supplies
Office Supplies
Prepaid Rent
Prepaid Insurance
Art Equipment
Office Equipment
Accounts Payable
Unearned Art Fees
Joan Miller, Capital
Joan Miller, Withdrawals
Advertising Fees Earned
Wages Expense
Utilities Expense
Telephone Expense
$ 9,140
4,800
1,800
800
1,600
960
4,200
3,000
$ 3,240
1,000
20,000
1,400
A ruled line
appears
before each
subtotal or
total
6,200
2,400
200
140
$30,440
$30,400
A double line
appears
under a final
total that has
been verified
2–102