Chapter 3 recording transtion

OPEN UNIVERSITY HCMC
MBA PREPARATORY COURSE

Principles of Financial
Accounting

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Chapter 3

Recording
Transactions
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Learning Objectives
After studying this chapter, you should be able to:








Use double-entry accounting.
Analyze and journalize transactions.
Post journal entries to the ledgers.
Prepare and use a trial balance.
Close revenue and expense accounts and
update retained income.

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Learning Objectives
After studying this chapter, you should be able to:


Correct erroneous journal entries and describe how errors affect accounts.



Use T-accounts to analyze accounting relationships.



Explain how computers have transformed processing of accounting data.

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The Double-Entry
Accounting System


Some businesses enter into thousands of transactions daily or even hourly.




Accountants must carefully keep track of and record these transactions in a
systematic manner.

Accountants use a double-entry accounting system in which at least two accounts are always affected by each transaction.

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The Double-Entry
Accounting System



Each transaction must still be analyzed to determine which accounts are involved, whether the accounts increase or decrease, and how
much the balance will change.



The balance sheet equation can be used for this analysis, but with so many transactions, this is not realistic.


In practice, accountants use ledgers.

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Ledger Accounts


Ledger - a group of related accounts kept current in a
systematic manner
 Think of a ledger as a book with
one page for each account.
 The ledger is a company’s “books.”



General ledger - the collection of accounts that
accumulates the amounts reported in the major
financial statements
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Ledger Accounts


A simplified version of a ledger account is called
the T-account.




They allow us to capture the essence of the accounting process
without having to worry about too many details.
The account is divided into two sides for recording increases and
decreases in the accounts.

Account Title
Left Side
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Right Side

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Ledger Accounts


Balance - difference between total left-side
amounts and total right-side amounts at any
particular time


Assets have left-side balances.





Increased by entries to the left side
Decreased by entries to the right side

Liabilities and Owners’ Equity have right-side balances.



Decreased by entries to the left side
Increased by entries to the right side

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Ledger Accounts


T-accounts and the balance sheet equation:

Assets = Liabilities + Owners’ Equity

Assets
Increases

Decreases

Liabilities
Decreases

Increases

Owners’ Equity
Decreases

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Increases

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Debits and Credits


Debit (dr.) - an entry or balance on the left side of an account



Credit (cr.) - an entry or balance on the right side of an account



Remember:


Debit is always the left side!



Credit is always the right side!

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The Recording Process


The sequence of steps in recording transactions:

Transactions

Financial
Statements

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Documentation

Journal

Trial
Balance

Ledger

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The Recording Process


The process starts with source documents, which are the supporting original records of any transaction.


Examples are sales slips or invoices, check stubs, purchase orders,
receiving reports, and cash receipt slips.

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The Recording Process


In the second step, an analysis of the transaction is placed in the book of original entry, which is a chronological record of how the
transactions affect the balances of applicable accounts.


The most common example is the
general journal a diary of all events
(transactions) in an entity’s life.

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The Recording Process


In the third step, transactions are entered into the ledger.




Remember that a transaction is not entered in just one place; it
must be entered in each account that it affects.
Depending on the nature of the organization, analysis of the
transactions could occur continuously or periodically.

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The Recording Process


The fourth step includes the preparation of the trial balance, which is a simple listing of all accounts in the general ledger with
their balances.




Aids in verifying accuracy and
the financial statements

in preparing

Prepared periodically as necessary

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The Recording Process


In the final step, the financial statements are prepared.




Financial statements are prepared each quarter of the year for
publicly traded companies.
Other companies prepare financial statements at various other
intervals to
meet the needs of
their users.

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Journalizing Transactions


Journalizing - the process of entering transactions into the journal



Journal entry - an analysis of the effects of a transaction on the accounts, usually accompanied by an explanation of the
transaction


This analysis identifies the accounts to be debited and credited.

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Journalizing Transactions


The conventional form for journal entries includes the
following:
 The date and identification number of the entry
 The accounts affected and an explanation of the
transaction
 The posting reference, which is the number assigned
to each account affected by the transaction
 The amounts that the accounts are to be debited and
credited
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Journalizing Transactions


The conventional form for recording in the general journal:

Date
2001
31/12

31/12
2002
2/1

Entry No.

1

2

3

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Accounts and Explanations

Debit

Cash
Paid-in capital

400,000

Cash
Note payable

100,000

Merchandise inventory
Cash

150,000

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Credit

400,000

100,000

150,000

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Chart of Accounts


Chart of accounts - a numbered or coded list of all
account titles used to record transactions

Account
Number

Account
Title

Account
Number

Account
Title

111
131

156
142
211
214

Cash
311
Notes payable
Accounts receivable
331
Accounts payable
Inventory
411
Paid-in capital
Prepaid rent
421
Retained income
Equipment
511
Revenue
Accumulated
632
Cost of goods sold
depreciation
641
Rent expense
642
Depreciation expense

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Posting Transactions
to the Ledger


Posting - transferring of amounts from the journal to the appropriate accounts in the ledger


Dates, explanations, and journal references are provided in detail on paper
formatted with special columns.

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Posting Transactions
to the Ledger


Cross-referencing - the process of numbering or
otherwise specifically identifying each journal entry and
each posting

 Transactions are often posted to several different
accounts, but cross-referencing allows users to find
all components of a transaction in the ledger no
matter where they start.
 Cross-referencing also allows auditors to find and
correct errors.
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Running Balance Column



Ledgers do not always look like T-accounts.
One format is much like the check register in
your checkbook and provides columns for:







The date
An explanation
A journal reference

Debits
Credits
The balance
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Running Balance Column


The running balance provides a status report for an
account at a glance at any given point in time.
CASH

Date

Explanation

2001
31/12
31/12
2002
2/1

Account No. 111
Journal
Ref.

Debit

1
2

400,000
100,000

3

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Credit

Balance

400,000
500,000
150,000

350,000

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