HUM 211: Principles of Accounting Lecture 03: The Recording Process

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1 Chapter 2 HUM 211: Principles of Accounting Lecture 03: The Recording Process Masud Jahan Department of Science and Humanities Military Institute of Science and Technology 2011

2 Learning Objective To identify the steps in the bookkeeping cycle and discuss the role of accounting records in an organization. LO1 2/74

3 The Bookkeeping Process Transactions Source Documents Recorded in the Journal Date Description Debit Credit 6/30 Cash 2,000 Paid-in Capital 2,000 To record an investment by the owners. Posted to the Ledger Account Name Debit Credit 3/74

4 The Role of Accounting Records Establishes accountability for assets and transactions. Keeps track of of routine business activities. Obtains detailed information about a particular transaction. Evaluates efficiency and performance within company. Maintains evidence of of a company s business activities. 4/74

5 Learning Objective To describe a ledger account and a ledger. LO2 5/74

6 The Account A detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each important asset, liability, and equity item. 6/74

7 The Ledger Cash Accounts Payable Capital Stock Accounts are individual records showing increases and decreases. The entire group of accounts is is kept together in in an accounting record called a ledger. 7/74

8 Expanding the Accounting Equation Asset Accounts Liability Accounts Accounts = + Equity Accounts Owner s Capital A/c A/c Revenues A/c A/c Expenses A/c A/c + Owner s Withdrawals A/c A/c 8/74

9 Categories of Account Accounts are arranged into six categories using the expanded accounting equation as bellow: Assets Liabilities Owner s Capital 4. Expenses 5. Revenues 6. Owner s Withdrawals 9/74

10 Assets Accounts Cash Account Receivable Notes Receivable Inventory Office Supplies Equipment Building land 10/74

11 Liability Accounts Accounts Payable Notes Payable Accrued Expenses 11/74

12 Owner s Capital 1. Sole-proprietor: X s Capital 2. Partnership: X s Capital Y s capital 3. Corporation: Share Capital/ Capital Stock 12/74

13 Owner s Withdrawals 1. Sole-proprietor: X s Withdrawals 2. Partnership: X s Withdrawals Y s Withdrawals 3. Corporation: Dividend 13/74

14 Revenues Accounts Sales Revenues Service Revenues Rent Received Dividend Received 14/74

15 Expenses Accounts Salary Expenses Wages Expenses Rent Expenses Utility Expenses Depreciation Expenses 15/74

16 Account Format Tabular Summary (+) (-) $8000 (2500) (2000) 75 (150) 750 (50) 4125 $8000 $ (4700) /74

17 Learning Objective To explain the double-entry system of accounting. LO3 17/74

18 T-Account A T-account is a tool used to represent an account. Account Name (Left) (Right) 18/74

19 T-Account The left side of the T-account is always the debit side. The right side of the T-account is always the credit side. Account Name Left Right Debit Credit 19/74

20 The Use of T-Accounts Increases are recorded on one side of the T- account, and decreases are recorded on the other side. Title of the Account Left or Debit Side Right or Credit Side 20/74

21 Debits and Credits Whether a debit is an increase or a decrease depends on the account. Whether a credit is an increase or a decrease depends on the account. 21/74

22 Adding Debits & Credits to the Expanded Accounting Equation The Expanded Accounting Equation: Assets = Liabilities + Capital Withdrawals + Revenues Expenses Rearranged: Assets + Withdrawals + Expenses = Liabilities + Capital + Revenues The accounts on the left: Increase with Debits Decrease with Credits The accounts on the right: Increase with Credits Decrease with Debits 22/74

23 Debit and Credit Rules For Assets, Expenses, Withdrawals Accounts: Debit for Increase Credit for Decrease 23/74

24 Debit and Credit Rules For Capital, Liabilities, Revenues Account: Debit for Decrease Credit for Increase 24/74

25 Learning Objective To understand how balance sheet accounts are increased and decreased. LO4 25/74

26 Let s record selected transactions for S.A s Lawn Care Service in the accounts. 26/74

27 May 1: S. Ahmed invested $8,000 in S.A s Lawn Care Service. 27/74

28 May 1: 1: S. S. Ahmed invested $8,000 in in S.A s Lawn Care Service. Will Cash increase or decrease? Will S. Ahmed s Capital increase or decrease? 28/74

29 May 1: 1: S. S. Ahmed invested $8,000 in in S.A s Lawn Care Service and received 800 shares of of stock. Cash increases $8,000 with a debit. S. Ahmed s Capital increases $8,000 with a credit. Cash May 1 8,000 S. Ahmed s Capital May 1 8,000 29/74

30 May 2: S.A s purchased a riding lawn mower for $2,500 cash. 30/74

31 May 2: 2: S.A s purchased a riding lawn mower for $2,500 cash. Will Cash increase or decrease? Will Tools & Equipment increase or decrease? 31/74

32 May 2: 2: S.A s purchased a riding lawn mower for $2,500 cash. Cash decreases $2,500 with a credit. Tools & Equipment increases $2,500 with a debit. Cash May 1 8,000 May 2 2,500 Tools & Equipment May 2 2,500 32/74

33 May 8: S.A s purchased a $15,000 truck. S.A s paid $2,000 in cash and issued a note payable for the remaining $13, /74

34 May 8: 8: S.A s purchased a $15,000 truck. S.A s paid $2,000 in in cash and issued a note payable for the remaining $13,000. Will Truck increase or decrease? Will Cash and Notes Payable increase or decrease? 34/74

35 May 8: 8: S.A s purchased a $15,000 truck. S.A s paid $2,000 in in cash and issued a note payable for the remaining $13,000. Truck increases $15,000 with a debit. Truck May 8 15,000 Cash decreases $2,000 with a credit. Notes Payable increases $13,000 with a credit. Cash May 1 8,000 May 2 2,500 May 8 2,000 Notes Payable May 8 13,000 35/74

36 May 11: S.A s purchased some repair parts for $300 on account. 36/74

37 May 11: S.A s purchased some repair parts for $300 on account. Will Tools & Equipment increase or decrease? Will Accounts Payable increase or decrease? 37/74

38 May 11: S.A s purchased some repair parts for $300 on account. Tools & Equipment increases $300 with a debit. Accounts Payable increases $300 with a credit. Tools & Equipment May 2 2,500 May Accounts Payable May /74

39 May 18: S.A s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A s cost. ABC Lawns agrees to pay S.A s within 30 days. 39/74

40 May 18: S.A s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A s cost. ABC Lawns agrees to pay S.A s within 30 days. Will Tools & Equipment increase or decrease? Will Accounts Receivable increase or decrease? 40/74

41 May 18: S.A s sold half of the repair parts to ABC Lawns for $150, a price equal to S.A s cost. ABC Lawns agrees to pay S.A s within 30 days. Tools & Equipment decreases $150 with a credit. Accounts Receivable increases $150 with a debit. Tools & Equipment May 2 2,500 May May Accounts Receivable May /74

42 Learning Objective To apply the realization and matching principles in recording revenue and expenses. LO25 42/74

43 Revenue and Expenses Inflow of assets resulting from the sale of goods or the rendering of services to customers. Increases owners equity. The costs of assets and services used up in the process of earning revenue. Decreases owner s equity. 43/74

44 The Realization Principle: When to Record Revenue Realization Principle Revenues should be recognized when they are earned or realized (i.e., at the time goods are sold or services are rendered. 44/74

45 The Matching Principle: When to Record Expenses Matching Principle Expenses should be recorded in the same accounting period as the revenues that are earned as a result of these expenses. 45/74

46 Learning Objective To understand how revenue and expense transactions are recorded in an accounting system. LO6 46/74

47 Let s analyze the revenue and expense transactions for S.A s Lawn Care Service for the month of May. We will also analyze a withdrawal transaction. 47/74

48 May 29: S.A s provided lawn care services for a client and received $750 in cash. 48/74

49 May 29: S.A s provided lawn care services for a client and received $750 in in cash. Will Cash increase or decrease? Will Service Revenue increase or decrease? 49/74

50 May 29: S.A s provided lawn care services for a client and received $750 in in cash. Cash increases $750 with a debit. Service Revenue increases $750 with a credit. Cash May 1 8,000 May 2 2,500 May May 8 2,000 Service Revenue May /74

51 May 31: S.A s paid this month s gasoline bill for the lawn mower and the truck for $50 cash. 51/74

52 May 31: May 31: S.A s paid this month s gasoline bill for the lawn mower and the truck for $50 cash. Will Cash increase or decrease? Will Gasoline Expense increase or decrease? 52/74

53 May 31: S.A s purchased gasoline for the lawn mower and the truck for $50 cash. Cash decreases $50 with a credit. Gasoline Expense increases $50 with a debit. Cash May 1 8,000 May 2 2,500 May May 8 2,000 May Gasoline Expense May /74

54 May 31: S. Ahmed withdrew $200 from business for personal purpose. 54/74

55 May 31: S. Ahmed withdrew $200 from business for personal purpose. Will Cash increase or decrease? Will S. Ahmed s Withdrawals increase or decrease? 55/74

56 May 31: S. S. Ahmed withdrew $200 from business for personal purpose. Cash decreases $200 with a credit. Cash May 1 8,000 May 2 2,500 May May 8 2,000 May May S. Ahmed s Withdrawals increase $200 with a debit. S. Ahmed s Withdrawals May /74

57 Let s see how to find the balance in the Cash account for S.A s Lawn Care Service. 57/74

58 Debit and Credit Entries Receipts are on the debit side. CASH May 1 8,000 May 2 2,500 May May 8 2,000 Payments are on the May credit May side. Total 8,750 Total 4,750 (4,750) Balance 4,000 The balance is is the difference between the debit and credit entries in in the account. 58/74

59 Learning Objective To explain the purpose of a journal and its relationship to the ledger. LO7 59/74

60 The Journal In an actual accounting system, transactions are initially recorded in the journal. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2007 May 1 Cash 8,000 S. Ahmed s Capital 8,000 To record an investment by the owner. 60/74

61 Journal Entry Format A typical journal entry might look like this. Date Account Titles & Explation Debit Credit 2007 May 1 Cash 8,000 S. Ahmed s Capital 8,000 To record an investment by the owners. 61/74

62 Journal Entry Format Provide a reference date for each transaction. Debits are written first. Date Account Titles & Explation Debit Credit 2007 May 1 Cash 8,000 S. Ahmed s Capital 8,000 To record an investment by the owners. Credits are indented and written after debits. Total debits must equal total credits. 62/74

63 Making Entries to the Journal Book Making Entries involves recording information of individual transaction from source documents. 63/74

64 Posting Journal Entries to the Ledger Accounts Posting involves copying information from the journal to the ledger accounts. 64/74

65 Posting Journal Entries to the Ledger Accounts GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2007 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash General in the business. Ledger Cash Date Debit Date Credit May 1 8,000 May 65/74

66 Posting Journal Entries to the Ledger Accounts GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2007 May 1 Cash 8,000 S. Ahmed s Capital 8,000 General Ledger S. Ahmed s Capital Date Debit Date Credit May May 1 8,000 Owners invest cash in the business. 66/74

67 Posting Journal Entries to the Ledger Accounts GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2007 May 2 Tools & Equipment 2,500 Cash 2,500 Purchased lawn mower. Let s see what the cash account looks like after posting the cash portion of these transactions for S.A s Lawn Care Service. 67/74

68 Ledger Accounts After Posting General Ledger Cash Date Debit Date Credit 2007 May 1 8,000 May 2 2,500 This ledger format is referred to as a T-Account. 68/74

69 Ledger Accounts After Posting General Ledger Cash Date Debit Credit Balance 2007 May 1 8,000 8, ,500 5,500 This ledger format is referred to as a running balance. 69/74

70 Learning Objective To prepare a trial balance and explain its uses and limitations. LO8 70/74

71 Trial Balance A trial Balance is a list of accounts and their balances at a given time. Customarily, a trial Balance is prepared at the end of an accounting period. The primary purpose of a trial balance is to prove (check) that the total of all debit balances equal the total of all credit balances of all the accounts in ledger after posting. 71/74

72 Now, let s look at the Trial Balance for S.A s Lawn Care Service for the month of May. 72/74

73 Trial Balance S.A's Lawn Care Service Unadjusted Trial Balance May 31, 2007 Account Debit Credit Cash $ 4,000 Accounts receivable 150 Tools & equipment 2,650 Truck 15,000 Notes payable $ 13,000 Accounts payable 300 S. Ahmed s Capital 8,000 S. Ahmed s Withdrawals 200 Service revenue 750 Gasoline expense 50 Total $ 22,050 $ 22,050 All balances are taken from the ledger accounts on May 31. Proves equality of debits and credits. 73/74

74 End of Lecture 03 THANK YOU ALL