Recording Transactions
Recording Transactions
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The Double-Entry Accounting System
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Ledger Accounts
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Ledger Accounts
• A T-account is a simplified version of accounts
used in practice
Cash
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Ledger Accounts
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Ledger Accounts
10,000
6,000
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Debits and Credits
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The Recording Process
Trial Financial
Transactions Documentation Journal Ledger
Balance Statements
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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
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Journalizing Transactions
• The following conventions
Entry Post.
are used for recording in Date No. Accounts and Explanation Ref. Debit Credit
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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
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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
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
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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
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
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Revenue and Expense Transactions
+ - - + - + - +
Debit Debit Credit Debit Credit Debit Credit
Credit
Expenses Revenues
+ +
Debit Credit
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Revenue and Expense Transactions
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:
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:
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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
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Preparing the Trial Balance
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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
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Preparing the Trial Balance
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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
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Closing the Accounts
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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
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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
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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
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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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