Accounting Principles

1
CAPTURING ECONOMIC EVENTS
STUDY OBJECTIVES After studying this chapter,
you should understand
Accounts Ledgers
Debits and credits Posting
The recording process Trial balance
Journals
2
STUDY OBJECTIVE 1THE ACCOUNT

• An account is an individual record of increases
  and decreases in a specific asset, liability, or
  owners equity item.
• Commonly referred to as T-Accounts.

3
STUDY OBJECTIVE 2 DEBITS AND CREDITS

• Debit means left
• Credit means right
• When the debit amounts exceed the credits, an
  account has a debit balance when the reverse is
  true, the account has a credit balance.

4
DOUBLE-ENTRY SYSTEM

• In a double-entry system, equal debits and
  credits are made in the accounts for each
  transaction.
• Thus, the accounting equation will always stay in
  balance.

5
DEBIT CREDIT EFFECTS ON ASSETS LIABILITIES
Debits
Credits

• Increase assets Decrease assets
• Decrease liabilities Increase liabilities

6
REVIEW QUESTION DEBIT CREDIT EFFECTS ON ASSETS
LIABILITIES

• Which accounts below are decreased by debits?
• Inventory
• Accounts Payable
• Dividends
• Cash
• Notes payable

Answer Accounts payable and Notes payable Why?
Both are liabilities, which are increased by
credits and decreased by debits.
7
NORMAL BALANCE OF ASSET LIABILITY ACCOUNTS

• Normal
  Balance
• 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
• Normal
  
  
  
  
  Balance

8
DEBIT CREDIT EFFECTS ON STOCKHOLDERS EQUITY
COMMON STOCK/RETAINED EARNINGS
Debits
Credits

• Decrease equity Increase equity

9
NORMAL BALANCE OF STOCKHOLDERS EQUITY
COMMON STOCK/RETAINED EARNINGS
Decrease Increase




Debit Credit

• Normal Balance

10
DEBIT CREDIT EFFECTS ON DIVIDENDS
DIVIDENDS
Increase Decrease




Debit Credit

• Normal Balance

11
DEBIT CREDIT EFFECTS ON REVENUES
Debits
Credits

• Decrease revenues Increase revenues
• Increase expenses Decrease expenses

12
NORMAL BALANCES OF REVENUES EXPENSES
Revenues
Decrease Increase




Debit Credit
NormalBalance
NormalBalance
13
EXPANDED ACCOUNTING EQUATION




-

-
14
STUDY OBJECTIVE 3 THE RECORDING PROCESS
Illustration 2-13
1. Analyze each transaction
2. Enter transactions in a journal
3. Transfer journal information to the ledgers
15
STUDY OBJECTIVE 4 JOURNALS

• Transactions are initially recorded in
  chronological order in a journal before being
  transferred to the accounts.
• The journal records the complete effect of each
  transactions, making errors easy to locate
• Every company has a general journal which
  contains
• Transaction dates
• Account titles
• References
• Two amount columns

16
SIMPLE JOURNAL ENTRY

• If an entry involves only two accounts, one debit
  and one credit, it is considered a simple entry.

GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Ref.
Debit
Credit
2007
July 1
Cash
20,000
K. Browne, Capital
20,000
(Invested cash in the
business)
17
COMPOUND JOURNAL ENTRY

• When three or more accounts are required in one
  journal entry, the entry is referred to as a
  compound entry.

GENERAL JOURNAL
J1
1
2

with balance on account)









3

18
STUDY OBJECTIVE 5 THE LEDGER

• The general ledger contains all the assets,
  liabilities, and stockholders equity accounts
  for a given company

Individual Assets
Individual Stockholders Equity
Individual Liabilities
Equipment
Interest Payable
Dividends
Fees Earned
Land
Salaries Payable
Common Stock
Supplies
Accounts Payable
Retained Earnings
Cash
Notes Payable
19
STUDY OBJECTIVE 6 POSTING
Posting is the process of transferring entries
from the journals to specific accounts in the
General Ledger

20
POSTING A JOURNAL ENTRY

GENERAL JOURNAL

J1

• In the ledger, enter in the appropriate columns
  of the account(s) debited the date, journal page,
  and debit amount shown in the journal.

Date

Account Titles and Explanation

Ref.

Debit

Credit


2007






Sept. 1

Cash

10

15,000




Common Stock

25


15,000



(invested cash in business)












GENERAL LEDGER


CASH


NO.
10

Date

Explanation

Ref.

Debit

Credit

Balance

2007






Sept. 1


J1

15,000


15,000









Transaction information is transferred to the
individual ledger accounts affected.
21
CHART OF ACCOUNTS

• Most companies have a chart of accounts that
  lists the accounts and the account numbers which
  identify their location in the ledger.

22
INVESTMENT OF CASH BY STOCKHOLDERS
23
INVESTMENT OF CASH BY STOCKHOLDERS
JOURNAL ENTRY
Date

Account Titles and Explanation

Ref.

Debit

Credit

Oct. 1

Cash

101

10,000




Common Stock

311


10,000




(
Issued shares of stock for



cash
)







POSTING

Common Stock

311
Cash
101


Oct. 1

10,000

Oct. 1
10,000





24
PURCHASE OF OFFICE EQUIPMENT
25
PURCHASE OF OFFICE EQUIPMENT
JOURNAL ENTRY
Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 1
Office Equipment
157
5,000
Notes Payable
200
5,000
(Issued 3-month, 12 note
for office equipment)
POSTING

Notes Payable

200

Office Equipment
157


Oct. 1

5,000

Oct. 1
5,000





26
RECEIPT OF CASH FOR FUTURE SERVICES
27
RECEIPT OF CASH FOR FUTURE SERVICES
JOURNAL ENTRY
POSTING
Unearned Fees
209
Cash
101
Oct. 1
10,000
Oct. 2
1,200
2
1,200
28
PAYMENT OF MONTHLY RENT
29
PAYMENT OF MONTHLY RENT
JOURNAL ENTRY
Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 3
Rent Expense
729
900
Cash
101
900
(Paid October rent)
POSTING
Cash
101
Rent Expense
729
Oct. 3
900
Oct. 1
10,000
Oct. 3
900
2
1,200
30
PAYMENT FOR INSURANCE
31
PAYMENT FOR INSURANCE
JOURNAL ENTRY

POSTING
Prepaid Insurance
130

Cash
101
Oct. 4
600
Oct. 1
10,000
Oct. 3
900
2
1,200
4
600
32
PURCHASE OF SUPPLIES ON CREDIT
33
PURCHASE OF SUPPLIES ON CREDIT
JOURNAL ENTRY
Date

Account Titles and Explanation

Ref.

Debit

Credit

Oct. 5

Advertising Supplies

126

2,500



Accounts Payable

201


2,500


(Purchased supplies on





account from Aero Supply)










POSTING
Accounts Payable
201
Advertising Supplies
126
Oct. 5
2,500
Oct. 5
2,500
34
REVIEW QUESTION PURCHASE OF SUPPLIES FOR CASH
What are the journal/ledger entries if the 2,500
of advertising supplies was purchased with cash?

35
HIRING EMPLOYEES
36
DECLARATION AND PAYMENT OF DIVIDEND
37
DECLARATION AND PAYMENT OF DIVIDEND
JOURNAL ENTRY
Date
Account Titles and Explanation
Ref.
Debit
Credit
Dividends
Oct. 20
332
500
Cash
101
500
(Withdrew cash for personal
use)
POSTING
Dividends
332
Cash
101
Oct. 20
500
Oct. 1
10,000
Oct. 3
900
2
1,200
4
600
20
500
38
PAYMENT OF SALARIES
39
PAYMENT OF SALARIES
JOURNAL ENTRY
Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 26
Salaries Expense
726
4,000
Cash
101
4,000
(Paid salaries to date)
POSTING
Salaries Expense
726
Cash
101
Oct. 26
4,000
Oct. 1
10,000
Oct. 3
900
2
1,200
4
600
20
500
26
4,000
40
RECEIPT OF CASH FOR SERVICES PROVIDED
41
RECEIPT OF CASH FOR SERVICES PROVIDED
JOURNAL ENTRY
Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 31
Cash
101
10,000
Fees Earned
400
10,000
(Received cash for fees
earned)
POSTING
Cash
101
Fees Earned
400
Oct. 1
10,000
Oct. 3
900
Oct. 31
10,000
2
1,200
4
600
31
10,000
20
500
26
4,000
42
STUDY OBJECTIVE 7 THE TRIAL BALANCE

• A trial balance is a list of accounts and their
  balances at a given time.
• The primary purpose of a trial balance is to
  prove (check) that the debits equal the credits
  after posting.
• If the debits and credits do not agree, the trial
  balance can be used to uncover errors in
  journalizing and posting.
• The procedures for preparing a trial balance
  consist of
• 1 List the account titles and their balances.
• 2 Total the debit and credit columns.
• 3 Prove the equality of the two columns.

43
TRIAL BALANCE

• The total debits must equal the total credits.

28,700

28,700