ACCT 1110 005 Winter 2025 Accounting Lecture Slides PDF

ACCT 1110 005 Winter 2025 Chapter 2 Recording Business Transactions Copyright © 2023 Pearson Canada Inc. 2-1 Learning Objective 1 Define and use key accounting terms What are the key terms used when recording transactions? Copyright © 2023 Pearson...

ACCT 1110 005 Winter 2025 Chapter 2 Recording Business Transactions Copyright © 2023 Pearson Canada Inc. 2-1 Learning Objective 1 Define and use key accounting terms What are the key terms used when recording transactions? Copyright © 2023 Pearson Canada Inc. 2-2 The Accounting Cycle – 9 Steps Copyright © 2023 Pearson Canada Inc. 2-3 The Accounting Cycle – Where It’s Covered CHP 2 1. Identify and analyze transactions as they occur 2. Record transactions in a journal 3. Post (copy) from the journal to the ledger accounts 4. Prepare the unadjusted trial balance CHP 3 5. Journalize and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare the financial statements CHP 4 8. Journalize and post the closing entries 9. Prepare the post-closing trial balance Start with the balances in the ledger at the beginning of the period Copyright © 2023 Pearson Canada Inc. 2-4 The Account, the Journal, the Ledger and the Trial Balance All accounting systems include: – ACCOUNT – analyze the transaction to identify changes in accounts; for example, an account is required for Cash (bank account) transactions – JOURNAL – accountants record transactions first in a journal; chronological record of transactions – LEDGER – copy (post) the data to the ledger; like a binder, with each page in the binder representing one account – TRIAL BALANCE – a list of all the ledger accounts and their balances Copyright © 2023 Pearson Canada Inc. 2-5 All the accounts combined make up the ledger Copyright © 2023 Pearson Canada Inc. 2-6 Chart of Accounts (1 of 2) List of all accounts used by the entity Account names are listed along with the account numbers The numbering system often follows a general structure Account numbers begin with: – 1 = Assets – 2 = Liabilities – 3 = Owner’s Equity – 4 = Revenues – 5 = Expenses Copyright © 2023 Pearson Canada Inc. 2-7 Chart of Accounts (2 of 2) Copyright © 2023 Pearson Canada Inc. 2-8 Learning Objective 2 Apply the rules of debit and credit How do we track changes in accounts? Copyright © 2023 Pearson Canada Inc. 2-9 Double-Entry Accounting Accounting uses the double-entry system Every transaction affects at least two accounts There is a receiving side and a giving side; examples: A cash purchase of supplies; what are the dual effects of this transaction? 1. Increases supplies (the business received supplies) 2. Decreases cash (the business gave cash) A purchase of a truck (made with a bank loan): 1. Increases vehicles (the business received the truck) 2. Increases the bank loan payable (the business gave a promise to pay in the future) Copyright © 2023 Pearson Canada Inc. 2 - 10 The T-Account T-account is a quick way to Account Title Debit Credit show the effect of (Dr) (Cr) transactions on a particular LEFT RIGHT account SIDE SIDE A useful shortcut or tool Debits are not “good” or “bad.” Neither are credits. Not part of the formal Debits are not always accounting records increases, and credits are not always decreases. Debit Debit = left side simply means left side, and credit means right side. Credit = right side Copyright © 2023 Pearson Canada Inc. 2 - 11 The Accounting Equation and the Rules of Debit and Credit The type of an account (asset, liability, owner’s equity) determines how we record increases and decreases – Assets – increase on Debit side; decrease on Credit side – Liabilities and Owner’s Equity – increase on Credit side; decrease on Debit side Copyright © 2023 Pearson Canada Inc. 2 - 12 An Example (1 of 2) Lisa Hunter invested $250,000 cash to start her business The company received cash, and gave owner’s equity Assets = Liabilities + Owner’ Equity Cash L. Hunter, Capital Debit for Blank Blank Credit for increase, increase, $250,000 $250,000 Copyright © 2023 Pearson Canada Inc. 2 - 13 An Example (2 of 2) Lisa Hunter invested $250,000 cash to begin HES $100,000 cash purchase of land Assets = Liabilities + Owner’ Equity Cash L. Hunter, Capital 250,000 100,000 Blank 250,000 Balance Blank 150,000 Land 100,000 Blank Copyright © 2023 Pearson Canada Inc. 2 - 14 Debits and Credits for the First Two Transactions Copyright © 2023 Pearson Canada Inc. 2 - 15 Expanding the Rules of Debit and Credit: Revenues and Expenses Copyright © 2023 Pearson Canada Inc. 2 - 16 Normal Balance of an Account The normal balance appears on One way to memorize this is to the side of the account-debit or use an acronym, such as AWE ROL. In this case, the (A)sset, credit – where increases are (W)ithdrawal, and (E)xpense recorded accounts all have debit Depending on the account, this balances,while the (R)evenue, could be a debit or credit (O)wner’s Equity, and (L)iability accounts all have credit The normal balances are: balances. Or memorize which – Asset accounts = debit side has the “+” (increase), and – then all the “−” (decreases) are Liability accounts = credit the opposite. This way you only – Capital accounts = credit have to memorize half of them! – Revenue accounts = credit Try DR. AWE—the debits – Expense accounts = debit (dr) belong with the (A)sset, – (W)ithdrawal, and (E)xpense Withdrawal accounts = debit accounts. Copyright © 2023 Pearson Canada Inc. 2 - 17 Learning Objective 3 Analyze and record transactions in the journal How do we record business transactions? Copyright © 2023 Pearson Canada Inc. 2 - 18 Source Documents – The Origin of Transactions Source documents are the evidence of a transaction Bank deposit slip – shows amount of money received by the business and deposited in the bank Purchase invoice – Document that tells the business how much to pay and when to pay the vendor. Bank cheque – Document that tells the amount and the date of cash payments. Sales invoice – Document sent to the customer when a business sells goods or services and tells the business how much revenue to record Copyright © 2023 Pearson Canada Inc. 2 - 19 Recording Transactions in the Journal Journalizing a transaction is the chronological record of the entity’s transaction Process of journalizing transactions is as follows: – Transaction: identify the transaction from the source documents – Analysis: identify each account affected by the transaction; determine increase/decrease in accounts affected and apply the rules of debit and credit – Accounting Equation: Verify that the accounting equation is still in balance – Journal Entry: record the transaction in the journal with an explanation or description; total debits must = total credits Copyright © 2023 Pearson Canada Inc. 2 - 20 Journal Entries include…. The date of the transaction The title of the account debited and the dollar amount Title of the account credited and the dollar amount A short explanation of the transaction Copyright © 2023 Pearson Canada Inc. 2 - 21 Learning Objective 4 Post from the journal to the ledger What is the next step after recording the transaction? Copyright © 2023 Pearson Canada Inc. 2 - 22 Posting (Transferring Information) from the Journal to the Ledger Posting is the transferring (copying) of the data from the journal to the ledger The ledger tracks all transactions related to an account A T-Account can be used as short form for a ledger Copyright © 2023 Pearson Canada Inc. 2 - 23 Why It’s Done This Way The financial statements produced by a company are the result of the accounting cycle. The starting point, is to properly record transactions. The first question is whether the transaction represents a financial event that should be recorded in the company’s ledger. If the answer is yes, then we say it is recognized. If the transaction is recognized, then we use the elements of the financial statements—the accounts— to record information in a way that is understandable to everyone. Copyright © 2023 Pearson Canada Inc. 2 - 24 Posting to the Three-Column Ledger (1 of 2) Copyright © 2023 Pearson Canada Inc. 2 - 25 Posting to the Three-Column Ledger (2 of 2) Copyright © 2023 Pearson Canada Inc. 2 - 26 Learning Objective 5 Prepare and use a trial balance How can we check if the records are in balance? Copyright © 2023 Pearson Canada Inc. 2 - 27 The Trial Balance (1 of 2) A trial balance summarizes the ledger by listing all accounts with their balances Assets first, followed by liabilities and then owner’s equity, revenues and expenses Before computers, the trial balance provided a check on accuracy by showing whether total debits equal total credits The trial balance is still useful as a summary of all the accounts and their balances Do not confuse the Trial Balance with the Balance Sheet Copyright © 2023 Pearson Canada Inc. 2 - 28 The Trial Balance (2 of 2) Copyright © 2023 Pearson Canada Inc. 2 - 29 Correcting Trial Balance Errors Search for missing accounts Search the journal for the amount of the difference Divide the difference between total debits and total credits by 2 – when you mix a debit and credit, you double the impact of the error Divide the out-of-balance amount by 9 – helps to identify slide errors ($610 instead of $61) or transposition errors ($16 instead of $61) Copyright © 2023 Pearson Canada Inc. 2 - 30