Principles of Accounting-wk2&3-Business Transaction

Principles of Accounting
BPA 11403
Prepared by:
Nur Aniza Quantaniah binti Jusoh
Fakulti Pengurusan Teknologi dan Perniagaan
Universiti Tun Hussein Onn Malaysia
Room:J-701-13
Tel : 07-4533930
E-mail: nuraniza@uthm.edu.my
RECORDING BUSINESS
TRANSACTION
OBJECTIVES
Define and use key accounting
terms.
Define double-entry system and
state the rules for double entry.
Apply the rules of debit and
credit.
Record transactions in the
journal.
RECORDING BUSINESS
TRANSACTION
OBJECTIVES
Post from the journal to the
ledger.
Set up a chart of accounts for a
business.
Analyze transactions without a
journal.
Prepare and use a trial balance.
ACCOUNTING TERMS
Double-entry
accounting
Account
T-account
Ledger
Journal
Trial Balance
ACCOUNTING TERMS
detailed record of the
changes in a particular asset,
liability or owners equity
Ledger the record holding all
accounts
Journal the chronological record
of transactions
Trial Balance the list of all
accounts with their balances
Account
The Accounting Cycle

Accounting process - set of activities
involved in converting information about
transactions
into financial statements.

1.
2.
3.
4.
Examining source documents

Recording transactions
Posting transactions
Preparing financial statements
The end results of the accounting
process are a series of financial
statements.

1.
2.
3.
4.
5.
Transaction or event occurs
Could simply be the passage of time.

Recorded in the Journal using a Journal
Entry.
event is translated into accounting

language.
Journal is posted to Ledger
the information from all the journal

entries in the period is aggregated.
Ledger accounts are totalled.
Financial statements are prepared.
Accounting Process and Preparation of

Financial Statements (Cont.)
a. Using the accounting equation.
Accounting Equation:
Assets = Liabilities + Stockholders Equity
b. Using the double-entry system

-the process includes the recording of
Journal entries, posting Journal entries
to ledger accounts, work sheet (including
adjustments), prepare financial
statements and closing entries)
Processing Accounting Information
10
Accounting Process and

Preparation of Financial Statements
How do accountants prepare

financial statements?
Identify,
measure and record

business transactions for business
entities
Using the accounting equation
Using the double-entry
11
The basic elements

The two basic elements of any organisation are what
it owns and what it owes.
What it owns are the organisations economic resources. These
economic resources are used to help the organisation generate
revenues. In accounting, these economic resources are called
ASSETS.
What it owes are the organisations sources of financing for the
economic resources.
The main source of financing usually comes from EQUITY.
Equity indicates the amount of financing provided by owners of
the organisation.
The next source of financing comes from debt. Debt is the
result of the organisation purchasing goods, services or assets
on credit. Debt also results from loan borrowings. Debt is given
the term LIABILITIES.
The Framework
The accounting equation can be said to be the
framework for the entire accounting process.
The accounting equation is an essential building block of
accounting.
The accounting equation is the basis of all accounting
systems.
The accounting equation can be used to illustrate simply
the double entry system of accounting.
The two sides of the equation must be equal.

The accounting equation is also called the balance sheet
equation.
The accounting equation

what it owns = what it owes
The equation shows the relationship among items
of value a business has and the financial rights
to the item.
Assets = Liabilities + Equity

A Balance Sheet (Statement of Financial Position) shows that
the assets of an organisation should equal to its liabilities plus
equity.
This is why the accounting equation is also called a balance

sheet equation.
The Accounting Equation
The relationship between assets,

liabilities, and owners equity
Assets
Things of
value that
a firm
owns
Liabilities
A firms
debts and
obligations
Owners Equity
The difference
between a firms
assets and its
liabilities
THE ACCOUNTING
EQUATION
Assets
L + O.E
Liabilities + Owners
Equity
Basic Accounting Equation

Always maintained in double
entry accounting
Assets will always equal liabilities
plus equity
Different versions of the

accounting equation
The accounting equation can be expressed
in a number of different ways:
Asset emphasis:
Liability emphasis:
Liabilities = Assets Equity
Equity emphasis:
Equity = Assets - Liabilities
Expanded accounting equation

The accounting equation can be expanded to
include Revenue and Expenses.
We begin with:
We bring in the profit element:
Assets = Liabilities + Equity + Profit
Note: Profit = Revenue (Income) Expenses
Expanded we have:
Assets = Liabilities + Equity + Revenue (Income) Expenses

Which can also be written as:
Assets + Expenses = Liabilities + Equity + Revenue (Income)
Accounting Equation Example

Assets =
(a)
$70,000
Liabilities +
Owners Equity
$50,000
$20,000
$10,000
(b)
$30,000
$20,000
(c)
$40,000
$15,000
$25,000
1-20
The Account
Account - A group of items having
common characteristics
A separate record used to summarize
changes in each asset, liability, and
owners equity of a business
Types of Accounts
Asset
Liability
Income
Expense
Equity
Definitions of Accounts on Financial

Statements
Assets: economic resources owned by the

business that benefit the business in the
future
Must be owned not rented
Doesnt have to be paid off, could still be
making payments on it.
Characterized as current and non-current(fixed, tangible and intangible)

Statements -Classification of Assets
Current assets have less than

twelve months of future use
Fixed assets have over twelve
months of future use
Tangible assets are physical such
as land, buildings and equipment
Intangible assets are non physical
and examples include goodwill,
brands, patents and copyrights
Element structures
Assets
Current assets
Cash
Cash on hand
Bank accounts
Accounts receivable
Accounts receivable customer 1

Accounts receivable customer 2
Inventory
Raw materials
Work in process
Finished goods
Element structures
Assets
Long-term assets
Buildings
Vehicles
Cars
Trucks
Equipments
Fixture & Fittings
Furniture
Definitions of Accounts on
Financial Statements
Assets includes:
Cash: in all forms: (coins, currency, checking

accounts,)
Account receivable: an oral promise for future cash
receipt as a result of sales. The amount of money owed
to the business by its customers as a result of making
sales on account or on credit. Simply, customers
who have promised to pay sometime in the future
Inventory (or merchandise): goods for sale.
Note receivable: a written promissory note that the

customer will pay a fixed amount by a certain date.
26
Financial Statements (contd.)
Assets includes:
Prepaid expenses: expenses paid in
advance.
Land: recorded at cost of land.
Buildings: record at cost, subject to
depreciation.
Motor vehicle,equipment, furniture and
fixture: record at cost, subject to
depreciation.
27

Statements (contd.)
Liabilities otherwise known as claims that

others have against the assets, normally
arise on behalf of suppliers of goods,
services and loans, (debts and accruals) but
they may include an obligation to provide a
service that has been paid for in advance
(deferral)
Probable future outflow of Assets as a result
of a past transaction or event debts/obligations of the business that can be
paid with cash,goods or services
Also current and non current
Element structures
Liabilities
Current liabilities
Accounts payable
Accrued liabilities
Long-term liabilities
Bank loans
Loan from RBC

Loan from Scotiabank
Notes payable
Bonds payable
Liabilities: legal obligations.
Note Payable: a written promissory note

that the business promises to pay.
Account payable: an oral promise to pay,
arising from credit purchases of inventory
and other goods. Referred to as making a
purchase on account or on credit
Accrued liabilities: liabilities that have
occurred but have not been paid. For
example: salary payable, interest payable,
etc.
30

Statements (contd.)
Equity is the ownership interest, the

claims that the owner has against the
assets.This is normally in the form of
investment in shares of a business
Equity is the difference between value of
assets and liabilities
Equity is also called Net Worth or Capital
The Accounting concept of entity
stipulates that the owners of the
business are a separate legal entity from
the business itself
Element structures
Owners equity
Capital stock (direct investment)
Retained earnings (indirect investment)
Revenue
Expenses
Although revenue and expenses are not subpieces of Retained earnings the way Current
assets are a sub-piece of Total assets, for the
purposes of understanding how they fit in to the
equation, this representation is helpful.
Dividends
Equity/Capital: the owners claims to

the assets of a corporation including:
Common stock: represents the owners

investment.
Retained earnings: the cumulative net
income earned by the corporation over its
lifetime , minus cumulative losses and
dividends.
Dividends: distribution of earnings to
stockholders.
33
Shareholders Equity
Paid-in capital
Amounts invested by stockholders

Common stock
Drawings
Withdrawal is an asset taken out of a

business for owners personal use.
1-34
Shareholders Equity
Retained Earnings
Amounts earned and kept for use in the company

Increased by Revenues
Decreased by Expenses
Revenues
Earned by delivering goods or services
increase or inflow of assets; will eventually
increase stockholders equity (i.e., sales revenue)
Expenses
Costs of doing business
Rent, utilities, insurance
decrease or outflow of assets; will eventually
decrease stockholders equity.
1-35
REVENUE AND EXPENSE

ACCOUNTS
Revenues minus expenses equal net

income
If expense are greater then revenues, a net

loss occurs
Revenue and expense accounts are not

considered owners equity accounts-even though they effectively increase or
decrease equity!
They are called income statement
accounts, often called temporary or
nominal accounts.
Dividends
Distributions of assets (usually

cash) to shareholders
Decrease Retained Earnings
Do NOT impact net income
1-37
CLASSIFICATION OF ASSET, LIABILITY,

EQUITY, REVENUE, EXPENSES
Next to each item, indicate whether it is an
Asset, Liability, Equity, Revenue or Expense.
_____
Cash
Asset
_____
Common Stock ($1 par)
Equity
_____
Depreciation Expense
Expense
_____
Insurance Expense
Expense
_____
Interest Receivable
Asset
_____
Interest Earned
Revenue
_____
Investment in Govt. Bonds
Asset
CLASSIFICATION OF ASSET, LIABILITY,

EQUITY, REVENUE, EXPENSES
_____
Miscellaneous Expense
Expenses
_____
Prepaid Insurance
Asset
_____
Rent Revenue
_____
Retained Earnings
_____
Salaries Expense
_____
Salaries Payable
_____
Service Revenue
_____
Supplies Used
_____
Unearned Rent
Revenue
Equity
Expense
Liability
Revenue
Expenses
Liability
Business Transactions
Business activities that change the accounting

equation are called transactions.
An economic event that has a direct impact
on the business
Usually requires an exchange with an outside
entity
Must be able to measure this exchange in
dollars
All transactions affect the accounting equation
through specific accounts
After each transaction the accounting equation
must remain in balance.
Business Transactions
Transactions dont always affect both sides of

the equation
The increases and decreases caused by
business transactions are recorded in specific
accounts.
Accounts may be classified as either assets,
liabilities, or owners equity
When analyzing transactions, always
Read the transaction
Identify the accounts
Classify the accounts (Asset, Liability or
Owners Equity
EXAMPLES OF TRANSACTIONS
Exchanging Asset for Asset

Purchasing Equipment, Supplies or
Inventory for Cash
Exchanging Asset for Liability
Purchasing Equipment, Supplies or
Inventory for Credit
Using Cash to Repay Creditors
EXAMPLES OF TRANSACTIONS
Exchanging Asset for Equity

Receiving Cash from
Owner/Investors
Extending Credit to Customers who
purchase Goods or Services
Exchanging Liability for Equity
Incurring Expenses on Account
Effects of Business Transactions

on the Accounting Equation
Analyzing business transactions:
Business Transaction
1. Identify the accounts affected.
Classify 2. Classify the accounts affected.
+/3. Determine the amount of increase
or decrease for each account.
Balance 4. Make sure the accounting
equation remains in balance.
ANALYSIS Identify
Analyzing Business Transactions
THREE QUESTIONS:
Questions to ask
Questions #1
WHAT HAPPENED?
Make certain you understand the event that
has taken place.
Questions #2
WHICH ACCOUNTS ARE AFFECTED?
Identify the accounts that are affected.

Classify these accounts as assets, liabilities, or
owners equity.
Questions to ask
Questions #3
HOW IS THE ACCOUNTING

EQUATION AFFECTED?
Determine which accounts have increased or
decreased.
Make certain that the accounting equation
remains in balance after the transaction has
been entered.
EXAMPLE
Lets analyze the effect of transactions on the
accounting equation for Mary Adams Consulting
EXAMPLE:
MARY ADAMS, THE OWNER, INVESTED
$25,000 IN THE BUSINESS
QUESTION #1
What happened?
Mary took $25,000 from her
personal bank account and deposited it
in a new account in the business name
QUESTION #2a
Identify accounts that are

affected
CASH
M. A.
CAPITAL
QUESTION #2b
Classify these accounts

CASH
ASSET
M. A.
CAPITAL
OWNERS
EQUITY
QUESTION #3a
Determine whether the accounts
have increased or decreased
CASH
INCREASED
M. A.
CAPITAL
INCREASED
QUESTION #3b
Does accounting equation balance?
ASSETS = LIABILITIES
CASH =
+$25,000 =
It Balances!
Assets of $25,000 = Liab. of $0
plus Owners Equity of $25,000
OWNERS EQUITY
M. A.,CAPITAL
+$25,000
EXAMPLE:
PURCHASED OFFICE
SUPPLIES FOR $800 CASH
QUESTIONS #1 & #2
Understand the transaction,
Identify and Classify the
affected accounts
OFFICE
SUPPLIES
ASSET
CASH
ASSET
QUESTION #3a
Increase or Decrease?
OFFICE
SUPPLIES
CASH
ASSET
ASSET
INCREASED
DECREASED
QUESTION #3b
Lets look at the accounting equation
ASSETS
CASH + OFF. SUPPLIES
-$800
+$800
= LIAB.
O. E.
=
=
Right hand side
of equation is
not affected
QUESTION #3b
Does transaction balance?
ASSETS
CASH + OFF. SUPPLIES
-$800
+$800
= LIAB.
=
=
Yes!
Total Assets stayed the same.
One Asset increased, the other
decreased. No change in
Liabilities or Owners Equity
O. E.
DRAWING EXAMPLE:
MARY WITHDREW $1,500 FOR
PERSONAL EXPENSES
QUESTIONS #1 & #2
affected accounts
Mary is withdrawing some of her
equity in the business by taking home an
asset (Cash). This will reduce the Assets &
reduce her Owners Equity.
QUESTIONS #1 & #2
affected accounts
M. A.,
DRAWING
O.E.
DRAWING
CASH
ASSET
QUESTION #3a
M. A.,
DRAWING
INCREASE
CASH
DECREASE
QUESTION #3a
M. A.,
DRAWING
CASH
BE CAREFUL! Just like Expenses,

Drawing account will increase in this situation,
but it will cause an overall
DECREASE IN OWNERS EQUITY.
QUESTION #3b
Does transaction balance?
ASSETS
CASH
M.A.,
DRAWING
-$1,500
+$1,500
= LIAB.
OWNERS EQUITY
It Balances!
Assets decreased by $1,500 =
Owners Eq. decreased by $1,500
Introduction of the Double-Entry

System and Journal Entries
A. Double-entry system
B. The T- accounts
C. Increases and decreases in the
accounts
D. Examples of journalizing and posting

transactions
66
Double vs Single Entry

Accounting
Single One account entry for each

transaction
Double Two account entries for
each transaction
One debit and one credit
THE DOUBLE-ENTRY SYSTEM: THE BASIC

METHOD OF ACCOUNTING
Evolved
during the
Renaissance.
Described by Fra Luca Pacioli,
Italy, 1494.
THE DOUBLE ENTRY

SYSTEM
Each transaction is recorded with at least:
One debit
One credit
Total debits must equal total credits.
FEATURES OF THE DOUBLE

ENTRY SYSTEM
Principle of duality.
Each transaction must be
recorded with at least one debit
and one credit so that monetary
value of debits and credits are
equal.
The whole system is always in
balance.
All accounting systems are based
on the principle of duality.
HOW DOES THIS DEBIT/CREDIT

STUFF WORKS
DEBIT means LEFT side
CREDIT means RIGHT side
We can represent an account with a T, where
one side is the place where we put the increases
and the other side is for decreases.
The left side is always called the debit side.
When we put something on the left side of an account,
we are debiting the account.
The right side is always called the credit side.
When we put something on the right side of an account,
we are crediting the account.
A. Double-Entry System
Each transaction affects at least

two accounts and the balance of
the accounting equation must be
maintained.
Example: Purchases inventory and
charges to accounts payable
Assets =
Inventory
Liabilities
Equity
Accounts Payable
+
72
A. Double-Entry System (contd.)

ASSET = LIABILITY + EQUITY
+-
REVENUE EXPENSES
+
+
-
+
-
RULES OF DEBIT AND CREDIT

Assets
Debit
+
Credit
Expenses
Debit
+
Credit
-
Liabilities
Debit
Credit
+
Owners Equity
Debit
Revenue
Debit
Credit
+
Credit
+
THE CHEAT SHEET

Account
Type
Asset
Increase
Decrease
Debit
Credit
Liability
Credit
Debit
Owner
Equity
Credit
Debit
Revenue
Credit
Debit
Expense
Debit
Credit
SUMMARY:
DOUBLE-ENTRY ACCOUNTING
Each account can be increased or

decreased.
Debit means left side
Credit means right side
Asset, drawings and expense accounts
are increased with debits and
decreased with credits.
Liability, equity-capital, and revenue
accounts are increased with credits
and decreased with debits.
Record transactions
in the journal.
The Recording Process

The
sequence of steps in
recording transactions:
Transactions
Financial
Statements
Documentation
Journal
Trial
Balance
Ledger
Journals
Journals - Books of Original Entry

Record transactions or events
i.e, Journal entries
In chronological order
A diary of all events (transactions) in an
entitys life.
Only basic information is contained in the
journal.
Complete record of effects of transaction
on accounts
Accounts and amounts debited /credited
Journal Entries
All journal entries have two sides:
Debit and Credit
For every journal entry, the total debits
must equal the total credits -equal
dollar amounts of debits and credits
This ensures that the fundamental
accounting equation (A = L + OE) is
always in balance.
The basic journal entry:
Debit Account name1 $amount
Credit
Account name2 $amount
To record
Journal Entries
Debit and Credit are just accounting-speak for

increase and decrease
Debit means increase for some elements and
decrease for other elements. Likewise for credit.
For example, a company pays its $500 utility bill:
Thus, the company has incurred an expense (the
amount of expense has increased) and the amount of
cash in the company has decreased.
An expense (Utilities) has increased
An asset (Cash) has decreased
In Journal entry:
Debit
Utility expense
$500
Credit Cash
$500
To record the payment of utility bill
Recording transaction in
journal
What does a journal entry include?

date of the transaction
title of the account debited
title of the account credited
amount of the debit and credit
description of the transaction
dollar signs are omitted
Anatomy of a Journal Entry

Account
Debited
Amount
Debited
Amount
Credited
GENERAL JOURNAL
DATE
ACCOUNT TITLES
12/1/97 Merchandise Inventory
Accounts Payable
To record the purchase of Inventory
Date of
Transaction
Explanation of
Transaction
P.R. DEBIT
150
2500
210
Account
Credited
Page 1
CREDIT
2500
General
Ledger
Account
Number
Sample Transaction
Paid $1,000 on Account to XYZ
Supplies on 3rdJuly 2012
Journal Entry
3/7 Dr. Accounts Payable

Cr. Cash
Paid accounts payable
1,000
1,000
Introduction of the Taccount
Title of Account
Debit
Credit
(left) side
(right) side
Introduction of the T- account

Assets
Debit(+)
Revenue
Credit(-)
Debit(+)
Liabilities
Debit(-)
Credit(-)
Expenses
Credit(+)
Debit(-)
Credit(+)
Owners Equity
Debit(-)
Credit(+)
86
Increases and Decreases in the

Accounts
Asset
Debit
Revenue
Credit
Liabilities
Debit
Credit
O.Equity
Debit
Credit
Debit
Credit
Expenses
Debit
Credit
Journal Entries
To increase an Asset or Expense: Debit

To increase a Liability, Revenue, or
Owners Equity: Credit
To decrease an Asset or Expense: Credit
To decrease a Liability, Revenue, or
Owners Equity: Debit
Journal Entries
The Basic Accounting Elements:
Debit
Credit
Balance
Sheet
Income
Statement
Asset
Expense
Balance Sheet/
Stmt of Retained
Earnings
Owners
Liability Revenue
Equity
Journal Entries
Going back to the Fundamental

Accounting Equation:
Assets = Liabilities + Owners Equity

Debit
Credit
Credit
Journal Entries
On April 2, Gay Gillen invested $30,000
in Gay Gillen eTravel.
What is the journal entry?
Date :
2 April 20XX
Accounts affected:
Capital-Gay Gillen, (O.E),$30,000
(Increase,Credit)
Cash (Asset),$30,000
(Increase,Debit)
Journal Entries
On April 2, Gay Gillen invested $30,000

in Gay Gillen eTravel.
What is the journal entry?
Date
April 2
Accounts and Explanation Debit Credit

Cash
30,000
Gay Gillen, Capital
30,000
Received initial
investment from owner
Post from the journal

to the ledger.
Ledgers
Ledgers - Contain Accounts

General Ledger
Contains accounts for financial
statement elements
THE LEDGER
What is a ledger?
It is a digest of all accounts utilized by
an entity during an accounting period.
Loose leaf
pages
Computer
printout
Bound
books
Cards
An Example of the Journal and A

Ledger Account (cash):
Journal
Date Accounts and
Debit
Explanation..
Apr 2 Cash.
50,000
Common stock..
Issued common stock to
owners
Apr 3. Land ..
40,000
Cash ..
Paid Cash for Land
Page 1
Credit
50,000
40,000
96
An Example of the Journal and A

Ledger Account (cash): (contd.)
Account: Cash
Date
20xx
Apr: 2
3
Jrnl.
Item
Ref.
J.2
J.1
Account No. 101

Balance
Debit
Credit
Debit Credit
50.000
50.000
40.000 10.000
The Ledger: all individual accounts (assets, liability, and

stockholders equity accounts) combined make up the ledger.
97
Ledger Accounts
Account
Number
Account
Name
Accounts Payable
Date
Explanation
PR Debit
12/1/97
G1
Indicates Page in
General Journal
Amount from
Journal Entry
Account No.150
Credit Balance
2500
2500
Running
Account
Balance
Posting
What
is posting?
It is the transfer of information
from the journal to the
appropriate accounts in the
ledger.
Details of Journals and

Ledgers
Journal
Page 1
Date
Accounts and Explanation
Debit
April 2
Cash
Gay Gillen, Capital
Received initial
investment from owner
30,000
Credit
30,000
Details of Journals and Ledgers

Journal
Date
April 2
Page 1
Account and
Explanation
Post Ref. Debit Credit
Cash
101
30,000
Gay Gillen, Capital
301
30,000
Initial investment
from owner
Insert the ledger account in the journal.
Details of Journals and Ledgers

Posting to the ledger
Account: Cash
Date
April 2
Ref. Debit
Credit
jrl
30,000
Account: 101
Balance
Debit
Credit
30,000
Insert the number of the

journal page.
The Four-Column Account Format

Account: Cash
Date
April 2
Item
Account No. 101
Ref. Debit
jr1
30,000
Credit
Balance
Debit
Credit
30,000
Asset Accounts After Posting

Cash
(1) 30,000
(2) 20,000
Land
(4) 300
(6) 2,100
Bal.c/d 7,600
Bal.b/d 7,600
(2) 20,000 Bal.c/d 20,000

Bal.b/d 20,000
Office Supplies
(3) 500
Bal.b/d 500
Bal. c/d 500
The Four-Column Account Format

Account: Cash
Date
Item
Account No. 101
Ref. Debit
Credit
30,000
Balance
Debit
April 2
01
30,000
02
20,000
10,000
18
04
300
9,700
26
06
2,100
7,600
Credit
Liabilities and Owners Equity

Accounts After Posting
Accounts Payable
(4) 300
(3) 500
Gay Gillen, Capital
Bal.c/d 200
Bal. b/d 200 Bal. c/d 30,000
(1) 30,000
Bal. b/d 30,000
Gay Gillen, Withdrawals

(6) 2,100
Bal. b/d 2,100
Bal. c/d 2,100
The Normal Balance of an Account

Assets
Liabilities
Stockholders Equity
(overall)
Common Stock
Retained Earnings
Dividends
Revenues
Expenses
Debit
Debit
Debit
Credit
Credit
Credit
Credit
Credit
107
Summary: Steps in Analyzing

and Processing Transactions
1. Analyze the transaction to
determine its effect on assets,
liabilities, and S/E.
- Supported by a source
document.
2. Apply the rules of double entry.
- Dr. increases an asset.
- Cr. Increases a liability.
Summary: Steps in Analyzing and

Processing Transactions (continued)
3. Record the entry.
Enter in chronological order in a journal.
Enter the date/debit account/debit
amount on one line.
Enter the credit account/credit amount
indented on the next line.
Dr.
Cr.
June 1 Cash
100,000
Notes Payable
100,000
This form is called journal form and
usually is followed by an explanation.
Summary: Steps in Analyzing and

Processing Transactions (continued)
4.Post the entry.
Post the entry to the general ledger
by transferring the date and amount
to the proper account.
5.Prepare the trial balance to confirm the
balance of the accounts.
Confirm that the accounts are still in
balance after recording and posting
transactions.
The Trial Balance

What is a trial balance?
It is an internal document.
It is a listing of all the accounts with their
related balances.
Before computers, it provided a check on
accuracy by showing whether total debits
equal total credits before continuing with
the recording process.
Used to establish a convenient summary
of balances in all accounts for the
preparation of formal financial statements
The Trial Balance
Lists All Accounts and Their

Balances in Two-Column Format
Proves that Debits Equal Credits
Forces Accountant to Find Errors
Before Preparing Statements
Provides a Starting Point for
Adjustments, Statements and
Closing Entries
The Trial Balance

The total of debits and credits
in the accounts must be equal
A trial balance is prepared
periodically (usually on the
last day of the month) to test
this equality.
The Trial Balance
Steps in preparing a trial balance:

1. List each ledger account that
has a balance, debit balances in
the right column, credit balances
in the left column.
2. Add (foot) each column.
3. Compare the totals of the two
columns.
Preparing the Trial Balance
The trial balance is usually prepared with the

balance sheet accounts first, followed by the
income statement accounts.
An example of a short trial balance:
Account
Number
100
130
202
300
Account Title
Cash
Merchandise inventory
Note payable
Paid-in capital
Debit
$350,000
150,000
Credit
$100,000
400,000
$500,000
$500,000
==============
The Trial Balance
An account may have a balance

other than its normal balance.
An asset account may have a
credit balance.
A liability account may have a
debit balance.
The trial balance proves whether or
not the total of all debits recorded
equals the total of all credits
recorded.
The Trial Balance
It does not prove that the

transactions were analyzed
correctly or recorded for the
correct amounts or in the
proper accounts.
Locating Trial Balance Errors

What if it doesnt balance ?
Is the addition correct?
Are all accounts listed?
Are the balances listed
correctly?
DEBITS
CREDITS
Locating Trial Balance Errors
Divide the difference by two.

Is there a debit/credit balance for
this amount posted in the wrong
column?
Check journal postings.
Review accounts for
reasonableness.
Computerized accounting programs
usually prohibit out-of-balance
entries.
Common Trial Balance Errors
Posting incorrectly
Mathematical errors
Transposition means digits are
written in the wrong order. (For
example, instead of $567, the
number is written as $657.) A
transposition error is always
evenly divisible by 9 ($657 $567 = $90, which is divisible by
9).
Common Trial Balance Errors
Mathematical errors
A slide means that one or more
zeroes are added to, or left off, a
number ($1,000 is written as
$100). A slide is always evenly
divisible by 9.
Omitting or entering account
balances in the wrong column of
the trial balance
Summary: The Recording

Process
The
sequence of steps in recording

transactions:
Transactions
Financial
Statements
Documentation
Journal
Trial
Balance
Ledger
Summary: The Recording

Process
1.Transaction
2.Analysis
3.Rules
4.Entry
Examples of Journalizing and

Posting Transactions
1.
Transaction: Air & Sea Travel, Inc.,

received $50,000 cash from the business
and in turn issued common stock to them.
Journal Entry:
Cash
50,000
Common Stock
Issued common stock to owners.
Ledger Accounts:
Cash
50,000
50,000
Common Stock
50,000
124
Examples of Journalizing and Posting

Transactions (contd.)
2. Transaction: The business paid $40,000
cash for land as a future office location.
Journal Entry:
Land
Cash
Paid cash for land.
Ledger Accounts:
Cash
50,000 40,000
40,000
40,000
Land
40,000
125

Transactions(contd.)
3. Transaction: The business purchased $500
office supplies on account.
Journal Entry:
Office Supplies
Accounts Payable
500
500
Credit purchase of office supplies
Ledger Accounts:
Office Supplies
500
Accounts Payable
500
126

4. Transaction: The business performed travel
service for clients and received cash of
$5,500.
Journal Entry:
Cash
5,500
Service Revenue
5,500
Cash received for services performed

Ledger Accounts:
Cash
50,000
5,500
40,000
Service Revenue
5,500
127

5. Transaction: The business performed service
for clients who did not pay immediately. Air &
Sea Travel billed the clients for $3,000 on
account.
Journal Entry:
Accounts Receivable
3,000
Service Revenue
Services rendered on account
Ledger Accounts:
Accounts Receivable
3,000
3,000
Service Revenue
5,500
3,000
8,500
128

6. Transaction: The business paid $2,700 for
the following expenses: office rent, $1,100;
employee salary; $1,200; and utilities,
$400.
Journal Entry:
Rent Expense
Salary Expense
Utilities Expense
Cash
Being expenses paid
1,100
1,200
400
2,700
Ledger Accounts:
Cash
50,000
5,500
Rent Expense
40,000
2,700
Salary Expense
1,200
1,100
Utilities Expense
400

7. Transaction: The business paid $400 on the
account payable created in Transaction 3.
Journal Entry:
Accounts Payable
Cash
Paid creditors on account
Ledger Accounts:
Cash
50,000
5,500
400
400
Accounts Payable
40,000
2,700
400
400
500
100
130

8. Transaction: The Lyons remodeled
their personal residence. This is not a
transaction of the travel agency, so
no journal entry is made.
131

9. Transaction: The business collected
$1,000 cash on account from the
clients in transaction 5.
Journal Entry:
Cash
Accounts Receivable
Received cash on account
1,000
1,000
Ledger Accounts:
Cash
50,000
5,500
1,000
40,000
2,700
400
Accounts Receivable
3,000
1,000
2,000
132

10. Transaction; The business sold land for its
cost of $22,000, receiving cash
Journal Entry:
Cash
Land
Cash sale of land
22,000
Ledger Accounts:
Cash
50,000
5,500
1,000
22,000
22,000
Land
40,000
2,700
400
40,000
22,000
18,000
133

11. Transaction: Air & Sea Travel, Inc.,
paid the Lyons cash dividends of
$2,100.
Journal Entry:
Dividends
2,100
Cash
2,100
Paid dividends to shareholder
Ledger Accounts:
Cash
50,000
5,500
1,000
22,000
33,300
40,000
2,700
400
2,100
Dividends
2,100
134

The followings are examples of Taccounts, trial balance and financial

statements of the above
transactions.
135

ASSETS
= LIABILITIES + STOCKHOLDERS EQUITY
A/P
Cash
(1) 50,000 (2)40,000 (7) 400 (3) 500
Bal. 100
(4) 5,500 (6) 2,700
(9) 1,000 (7) 400
(10) 22,000 (11) 2,100
Bal. 33,300
A/R
(5) 3,000 (9) 1,000
Bal. 2,000
Office Supplies
(3)
500
Bal.
500
Land
(2) 40,000 (10)22,000
Bal. 18,000
EXPENSES
Comm Stock
(1) 50,000
Rent Exp.
Bal. 50,000 (6) 1,100
Bal.1,100
Dividends
(11) 2,100
Bal.2,100
REVENUE
Service Rev.
(4) 5,500
(5) 3,000
Bal. 8,500
Salary Exp.
(6) 1,200
Bal.1,200
Utilities Exp.
(6) 400
Bal. 400
136
136
TRIAL BALANCE
AIR & SEA TRAVEL, INC.
Trial Balance
4/30/19x1
Account Title
Cash
Accounts receivable
Office supplies
Land
Accounts payable
Common Stock
Dividends
Service revenue
Rent expense
Salary expense
Utilities expense
Total
Balance
Debit
Credit
$33,300
2,000
500
18,000
$ 100
50,000
2,100
8,500
1,100
1,200
400
$58,600 $58,600
137
137
FINANCIAL STATEMENTS
Income Statement
Month Ended April 30, 20xx
Revenue:
Service revenue ($5,500+$3,000) ...
Expenses:
Salary expense
Rent expense ..
Utilities expense ..
Total expenses
Net income ..
$ 8,500
$1,200
1,100
400
2,700
$5,800

Statement of Retained Earnings
Retained earnings, April 1, 19x1 ...
Add: Net income for the month ..
Less: Dividends .
Retained earnings, April 30, 19x1
0
5,800
5,800
2,100
$3,700
138
138
FINANCIAL STATEMENTS(contd.)
Statement of Retained Earnings
Retained earnings, April 1, 19x1 ...
Add: Net income for the month ..
Less: Dividends .
Retained earnings, April 30, 19x1
0
5,800
5,800
2,100
$3,700

Balance Sheet
April 30, 20xx
Assets
Liabilities
Cash ... $33,300 Accounts payable ... $ 100
A/R ..
2,000
Office supplies ..
500
Stockholders Equity
Land ... 18,000 Common stock . 50,000
Retained earnings ... 3,700
Total stockholders
equity .. 53,700
Total liabilities and
Total assets . $53,800 stockholders equity... $53,800
139
139
FINANCIAL STATEMENTS(contd.)
Balance Sheet, April 30, 20xx
Assets
Cash . $33,300
A/R ...
2,000
Office supplies ...
500
Land .
18,000
Total assets .
$53,800
Liabilities
Accounts payable ...
100
Stockholders Equity
Common stock ....
50,000
Retained earnings ..
3,700
Total stockholders equity ..
53,700
Total liabilities and
stockholders equity.. $53,800
Statement of Cash Flows, Month Ended April 30, 20xx

Cash flows from operating activities:
Receipts:
Collections fm customers ($5,500+1,000) ..
$ 6,500
Payments:
To suppliers and employees ($2700+400) .
(3,100)
Net cash inflow fm operating activities ...
3,400
Cash flows from investing activities:
Acquisition of land .. $(40,000)
Sale of land .. 22,000
Net cash outflow from investing activities...
(18,000)
Cash flows from financing activities:
Issuance (sale) of stock to owners .. $50,000
Dividends . (2,100)
Net cash inflow from financing activities.
47,900
Net increase in cash ..
$33,300
Cash balance, April 1, 19x1 .
0
Cash balance, April 30, 19x1 ...
$33,300
140
140
The Flows of Accounting Data

Transaction
Transaction Source Analysis Transaction Amounts
Entered in Posted to
Occurs Documents Takes
Prepared Place
Journal
Ledger
141
Accounting Cycle
Transactions
Events
Record
Inputs
Source
Docs
Accumulate
in Accounts
Outputs
Financial
Statements
During the Accounting Period

1
2
3
Identify transactions & events to

record
Journalize transactions & events
Post from journals to ledgers
At the end of the accounting period

4
5
6
7
8
9
Prepare Unadjusted Trial Balance

Journalize & Post adjusting entries
Prepare Adjusted Trial Balance
Prepare Financial Statements
Journalize & Post closing entries
Prepare Post Closing Trial Balance
At beginning of next accounting

period
10 Journalize & Post reversing entries

Principles of Accounting-wk2&3-Business Transaction

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Principles of Accounting

The Accounting Cycle

The Accounting Cycle

The Accounting Cycle

Examining source documents

The Accounting Cycle

Transaction or event occurs

Could simply be the passage of time.

event is translated into accounting

the information from all the journal

Accounting Process and Preparation of

b. Using the double-entry system

Accounting Process and

How do accountants prepare

measure and record

Processing Accounting Information

The basic elements

The two sides of the equation must be equal.

The accounting equation

Assets = Liabilities + Equity

This is why the accounting equation is also called a balance

The Accounting Equation

The relationship between assets,

Basic Accounting Equation

Different versions of the

Expanded accounting equation

Assets = Liabilities + Equity + Revenue (Income) Expenses

Accounting Equation Example

Definitions of Accounts on Financial

Assets: economic resources owned by the

Definitions of Accounts on Financial

Current assets have less than

Accounts receivable customer 1

Cash: in all forms: (coins, currency, checking

Inventory (or merchandise): goods for sale.

Note receivable: a written promissory note that the

Processing Accounting Information

Processing Accounting Information

Definitions of Accounts on Financial

Liabilities otherwise known as claims that

Loan from RBC

Liabilities: legal obligations.

Note Payable: a written promissory note

Definitions of Accounts on Financial

Equity is the ownership interest, the

Equity/Capital: the owners claims to

Common stock: represents the owners

Processing Accounting Information

Amounts invested by stockholders

Withdrawal is an asset taken out of a

Amounts earned and kept for use in the company

REVENUE AND EXPENSE

Revenues minus expenses equal net

If expense are greater then revenues, a net

Revenue and expense accounts are not

Distributions of assets (usually

CLASSIFICATION OF ASSET, LIABILITY,

Common Stock ($1 par)

Investment in Govt. Bonds

CLASSIFICATION OF ASSET, LIABILITY,

Business activities that change the accounting

Transactions dont always affect both sides of

Exchanging Asset for Asset