Recording Transactions
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The Double-Entry Accounting System
• In the double-entry system, every transaction
affects at least two accounts
• After each transaction, the balance sheet
equation must always remain in balance
Assets = Liabilities + Stockholders’ Equity
• This balance sheet format is too bulky for
recording each and every transaction
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Ledger Accounts
• The elements of transactions are organized into
accounts that group similar items together
• In a double-entry system, a ledger contains the
records for a group of related accounts
• A general ledger is the collection of accounts
that accumulate the amounts reported in the
financial statements
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Ledger Accounts
• A T-account is a simplified version of accounts
used in practice
Cash
Left side Right side
(Increases in cash) (Decreases in cash)
• The vertical line in the T divides the account into
left and right sides for recording increases and
decreases
• The account title is on the horizontal line
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Ledger Accounts
• The T-accounts for the first three Biwheels
Company transactions are as follows
Assets = Liabilities + Stockholders’
Equity
Increases CashDecreases Decreases Note Payable
Increases
(1) 400,000 (3) 150,000 (2) 100,000
(2) 100,000
Merchandise Inventory Paid-in Capital
Increases Decreases Decreases Increases
(3) (1) 400,000
150,000
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Ledger Accounts
• Each transaction affects at least two accounts
• The process of creating a new T-account in
preparation for recording a transaction is called
opening the account
• An account balance is the difference between
the total left-side and right-side amounts at any
particular time
Cash
10,000
6,000
Balance 4,000 66of
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Ledger Accounts
• Asset accounts have left-side balances
– Entries on the left side increase asset account
balances
– Entries on the right side decrease them
• Liabilities and owners’ equity accounts have
right-side balances
– Entries on the right side increase their balances
– Entries on the left side decrease them
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Debits and Credits
• Accountants use the terms
– Debit (abbreviated Dr.) to denote an entry on the left
side of any account
– Credit (abbreviated Cr.) to denote an entry on the
right side of any account
• Some accountants use the word “charge”
instead of debit
Cash
Dr. Cr.
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The Recording Process
• The sequence of five steps in recording and
reporting transactions is as follows:
Trial Financial
Transactions Documentation Journal Ledger
Balance Statements
• Source documents are the original records of
any transaction
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The Recording Process
• The general journal is a formal chronological
listing of each transaction and how it affects the
balances in the accounts
• Transactions are entered into the ledger
• The trial balance is a simple listing of the
accounts in the general ledger together with their
balances
• Preparation of financial statements occurs at
least once a quarter for publicly traded
companies
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Chart of Accounts
• A chart of accounts is a • Account numbers are
numbered or coded list of used as references in the
all account titles Post Ref. column of the
journal
Account Account Account Account
Title Number Title
Number
100 Cash 202 Note payable
120 Accounts receivable 203 Accounts payable
130 Merchandise inventory 300 Paid-in capital
140 Prepaid rent 400 Retained earnings
170 Store equipment 500 Sales revenues
170A Accumulated 600 Cost of goods sold
depreciation, 601 Rent expense
store equipment 602 Depreciation expense
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Journalizing Transactions
• Journalizing is the process of entering
transactions into the general journal
• A journal entry is an analysis of all the effects
of a single transaction on the various accounts,
usually accompanied by an explanation
• A compound entry means that a single
transaction affects more than two accounts
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Journalizing Transactions
• The following conventions
Entry Post.
are used for recording in Date No. Accounts and Explanation Ref. Debit Credit
the general journal 20X1
12/31 1 Cash 100 400,000
Paid-in capital 300 400,00
– The title of the account or Capital stock issued to Smith
accounts to be debited are
placed at the left margin 12/31 2 Cash
Note Payable
100
202
100,000
100,000
– The title of the account or Borrowed at 9% interest on a one year note
accounts to be credited are
20X2
indented in a consistent 1/2 3 Merchandise Inventory 130 150,000
way Cash 100 150,000
Acquired inventory for cash
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Journalizing Transactions
• The following conventions
are used for recording in
the general journal Entry Post.
Date No. Accounts and Explanation Ref. Debit Credit
– The journal entry is 20X1
12/31 1 Cash 100 400,000
followed by the narrative Paid-in capital
Capital stock issued to Smith
300 400,00
explanation of the
12/31 2 Cash 100 100,000
transaction Note Payable 202 100,000
Borrowed at 9% interest on a one year note
– The Post. Ref. column
contains an identifying 20X2
1/2 3 Merchandise Inventory 130 150,000
number that is assigned to Cash
Acquired inventory for cash
100 150,000
each account and is used
for cross-referencing to the
ledger accounts
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Journalizing Transactions
• The following conventions
are used for recording in
the general journal Entry Post.
Date No. Accounts and Explanation Ref. Debit Credit
20X1
– The debit and credit 12/31 1 Cash
Paid-in capital
100
300
400,000
400,00
columns are for recording Capital stock issued to Smith
the amounts that are 12/31 2 Cash 100 100,000
Note Payable 202 100,000
debited or credited for each Borrowed at 9% interest on a one year note
account 20X2
1/2 3 Merchandise Inventory 130 150,000
Cash 100 150,000
Acquired inventory for cash
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Posting Transactions to the Ledger
• Posting is the transferring of amounts from the
journal to the appropriate accounts in the ledger
• The following example shows
– How the debit to merchandise inventory and the credit
to cash are posted
– Columns for dates, explanations, journal references,
and amounts in the ledger
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Posting Transactions to the Ledger
Entry Post.
Date No. Accounts and Explanation Ref. Debit Credit
20X1
12/31 1 Cash 100 400,000
Paid-in capital 300 400,00
Capital stock issued to Smith
12/31 2 Cash 100 100,000
Note Payable 202 100,000
Borrowed at 9% interest on a one year note
20X2
1/2 3 Merchandise Inventory 130 150,000
Cash 100 150,000
Acquired inventory for cash
CASH Account No . 100
Journ. Journ.
Date Explanation Ref. Debit Date Expanation Ref. C redit
20X1 20X2
12/31 1 400,000 1/2 3 150,000
12/31 2 100,000
MERCHANDISE INVENTORY Account No. 130
Journ. Journ.
Date Explanation Ref. Debit Date Expanation Ref. Credit
20X2
1/2 3 150,000
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Posting Transactions to the Ledger
• Cross-referencing is the process of using
numbering, dating, and/or some other form of
identification to relate each ledger posting to the
appropriate journal entry
• A single transaction from the journal might be
posted to several different ledger accounts
• Cross-referencing allows users to find all the
components of the transactions in the ledger no
matter where they start
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Revenue and Expense Transactions
• Ignoring dividends, T-accounts can be grouped
as follows:
Assets = Liabilities + Paid-in Capital + Retained Earnings
+ - - + - + - +
Debit Debit Credit Debit Credit Debit Credit
Credit
Expenses Revenues
+ +
Debit Credit
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Revenue and Expense Transactions
• Revenue and expense information is
accumulated separately to prepare a more
meaningful income statement
• Expense and revenue accounts are part of
Retained Earnings
– A revenue account increases retained earnings
– An expense account decreases retained
earnings
• Although a debit entry increases expenses, it
results in a decrease in retained earnings
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Revenue and Expense Transactions
Transaction: Sales on credit, Rs.160,000
Analysis : The asset account Accounts Receivable increases
The stockholders’ equity account Sales Revenues increases
Journal Entry: Accounts receivable……….160,000
Sales revenues………… 160,000
Posting:
Accounts Receivable Sales Revenues
160,000 160,000
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Revenue and Expense Transactions
Transaction: Cost of merchandise sold, Rs. 100,000
Analysis : The asset Merchandise Inventory decreases
Stockholders’ equity decreases because an expense account, Cost
of Goods Sold (a negative stockholders’ account) increases
Journal Entry: Cost of Goods Sold………………..100,000
Merchandise Inventory…………
100,000
Posting:
Merchandise Inventory Cost of Goods Sold
100,000 100,000
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Prepaid Expenses and
Depreciation Transactions
Transaction: Paid rent for 3 months in advance, Rs. 6,000
Analysis: The asset Cash decreases
The asset Prepaid Rent increases
Journal Entry: Prepaid rent………………..6,000
Cash……………………
6,000
Posting:
Cash Prepaid Rent
6,000 6,000
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Prepaid Expenses and
Depreciation Transactions
Transaction: Recognized expiration of rental services, Rs. 2,000
Analysis : The asset Prepaid Rent decreases
The negative stockholders’ equity account Rent Expense increases
Journal Entry: Rent expense………………..2,000
Prepaid Rent…………….. 2,000
Posting:
Prepaid Rent Rent Expense
6,000 2,000 2,000
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Prepaid Expenses and
Depreciation Transactions
Transaction: Recognized depreciation, Rs.100
Analysis : The asset reduction account Accumulated Depreciation, Store
Equipment increases
The negative stockholders’ equity account Depreciation Expense
increases
Journal Entry: Depreciation expense…………………………………………...100
Accumulated depreciation, store equipment……………..100
Posting:
Accumulated Depreciation,
Store Equipment Depreciation Expense
100 100
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Prepaid Expenses and
Depreciation Transactions
Asset: Store Equipment Rs14,000
Contra Asset: Accumulated depreciation, equipment 100
Net asset: Book value Rs13,000
• The book value or carrying value is the
balance of an account minus the value
of any contra accounts
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Preparing the Trial Balance
• A trial balance is a list of all the accounts with
their balances
• The purpose of the trial balance is twofold:
– Proving whether the total debits equal the total credits
in the ledger
– Summarizing the balances in the ledger
accounts in preparation to construct the financial
statements
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Preparing the Trial Balance
Debits Credits
Cash Rs 336,700
Accounts receivable 160,300
Merchandise Inventory 59,200
Prepaid Rent 4,000
Store equipment 14,000
Accumulated depreciation,
store equipment Rs
100
Note payable 100,000
Accounts payable 16,200
Paid-in capital 400,000
Retained earnings 0*
Sales revenues 160,000
Cost of goods sold 100,000
Rent expense 2,000
Depreciation expense 100
Total Rs 676,300 Rs 676,300
*Retained earnings in the trial balance does not yet reflect the income for the period
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Preparing the Trial Balance
• The trial balance is prepared with the accounts
in the following order:
– Asset accounts
– Liability accounts
– Stockholders’ equity accounts
– Revenue accounts
– Expense accounts
• The trial balance is the springboard for preparing
the balance sheet and the income statement
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Deriving Financial Statements
from the Trial Balance
Debits Credits
Cash Rs 336,700
Accounts receivable 160,300
Merchandise Inventory 59,200
Prepaid Rent 4,000
Store equipment 14,000 Balance
Accumulated depreciation, Sheet
store equipment Rs 100
Note payable 100,000
Accounts payable 16,200
Paid-in capital 400,000
Retained earnings 0
Sales revenues 160,000
Cost of goods sold 100,000 Income
Rent expense 2,000 Statement
Depreciation expense 100
Total Rs 676,300 Rs 676,300
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Closing the Accounts
• Closing the accounts has two purposes:
– It transfers the balances of the “temporary”
stockholders’ equity accounts (revenues and
expenses) to the “permanent” stockholders’ equity
account (retained earnings)
– It makes the revenues and expense accounts have a
zero balance, which readies them for the next period’s
transactions
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Closing the Accounts
Cost of Goods Sold
There are three closing entries:
Bal. 100,000 C2 100,000 C1: Close all revenue accounts
0 C2: Close all expense
accounts
C3: Close the Income Summary
Rent Expense account
Income Summary Sales
Bal. 2,000 C2 2,000 C2 102,100 C1 160,000 C1 160,000 Bal. 160,000
C3 57,900
0 0
0
Depreciation Expense Retained Income
Bal. 100 C2 100 Bal 0
C3 57,900
0
New bal. 57,900
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Closing the Accounts
C1. Transaction: Clerical procedure of transferring the ending balances of revenue
accounts to the Income Summary account
Analysis : The stockholders' equity account Sales decreases to
zero
The stockholders’
Journal Entry: equity account Income Summary increases
Sales………………………160,000
Income Summary……
160,000
C2. Transaction: Clerical procedure of transferring the ending balances of expense
accounts to the Income Summary account
Analysis : The negative stockholders’ equity (expense) accounts Cost of Goods
Sold, Rent Expense, etc. decrease to zero
The stockholders’ equity account Income Summary decreases
Journal Entry: Income Summary……………102,100
Cost of goods sold………. 100,000
Rent expense……………. 2,000
Depreciation 100
expense……
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Closing the Accounts
C3. Transaction: Clerical procedure of transferring the ending balance of Income
Summary account to the Retained Earnings account
Analysis : The stockholders' equity account Income Summary decreases to zero
The stockholders’ equity account Retained Earnings increases
Journal Entry: Income summary…………57,000
Retained earnings……
57,000
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Effects of Errors
• If an error is detected after posting to the ledger
accounts, a correcting entry must be made
• The following is an example of a correcting
entry:
CORRECT ENTRY 12/27 Repair Expense 500
Cash 500
ERRONEOUS ENTRY 12/27 Equipment 500
Cash 500
CORRECTING ENTRY 12/31 Repair Expense 500
Equipment 500
• The correcting entry cancels or offsets the
erroneous debit to Equipment
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Some Errors are Temporary Errors—
Others Persist Until Corrected
• Some errors in one period are automatically
corrected in the next period
• Such errors misstate net income in both
periods
• By the end of the second period the errors
counterbalance or cancel each other out
• They affect the balance sheet of only the first
period—not the second
• Some errors will keep subsequent balance
sheets in error until correcting entries are made
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Data Processing and
Accounting Systems
• Data processing refers to the procedures used
to record, analyze, store, and report on chosen
activities
• In an accounting data processing system, a
computer can automatically carry out steps such
as ledger postings and financial statement
preparation
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Data Processing and
Accounting Systems
• The cash register may be linked to a computer
that also records a decrease in inventory
• It may also
– Activate an order to a supplier
– Check a credit limit
– Update the accounts receivable
– Prepare monthly statements
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Data Processing and
Accounting Systems
• Computers also reduce the time it takes to close
the books and prepare financial statements
• The most recent advance in data processing for
financial reporting is the use of XBRL
• XBRL is an XML-based computer language that
allows easy comparisons across companies
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