CHAPTER 4

Rules of Double Entry,

Accounting Cycle &
Record Keeping
 Learning Objective 1

Understand the
process of
transforming
transaction
data into useful
accounting
information.
 What Are the Different Exchange
Transactions?
Borrow and
invest money.
Buy and sell Purchase land,
goods or buildings, and
services. equipment.
Exchange
Transactions
Pay wages to Pay taxes to the
employees. government.
Distribute
earnings to
owners.
 Business Documents
Examples: Sales invoice, purchase
order, check stub.
Business documents are used
to confirm that an arm’s-length
transaction has occurred.
to establish the amounts
to be recorded.
to facilitate the analysis
of business events.
These documents must be
analyzed.
 What is the Sequence of the
Accounting Cycle?
Step 1 Analyze transactions.

Step 2 Record the effects of the transactions.

Summarize the effects of transactions.

Step
3 1. Posting journal entries.
2. Preparing a trial balance.

Prepare reports.
Step
4 1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
 Learning Objective 2

Analyze transactions
and determine how
those transactions
affect the accounting
equation (step one of
the accounting
cycle).
 Step 1: Analyze Transactions

Transaction analysis framework

• What accounts are

involved? • Transaction analysis:
• Did each account • breaks down complex
increase or decrease? transactions into
• By how much? manageable pieces.
• provides a self-checking
mechanism.
 What Is the Accounting
Equation?

Assets = Liabilities + Owners’ Equity

Requires
Resources Financing
= resources
+ repayment
and
requiring
represents
repayment
ownership
 Describe Effect of the Following
Transactions on a Company
A = L + OE
Borrow money

Invest in company

Pay off a note

Purchase
equipment

Borrow funds to
settle a debt
 What Is the Rule of Double-Entry
Accounting?

The debits must always equal the

credits.
Debits = Credits
 Using Accounts

Accounts provide an efficient method

to categorize transactions.
A T-account is a simplified depiction
of an account.
Name of Account

Debit Credit
 Using a T-Account

The cash account has a beginning balance

of $35. A check for $12 is written to pay
for supplies. Using a T-account, what is
the ending balance of the cash account?
Cash
35 12

23
 Debits and Credits

Remember:
Debits are Credits are
simply simply
entries on entries on
the left. the right.
 Explain How Debits and
Credits Work
Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR
(+) (-) (-) (+) (-) (+)

Asset accounts: Liabilities and owners’

Debit is an increase. equity accounts:
Credit is a decrease. Debit is a decrease.
Credit is an increase.
 Expanding the Equation
Revenues
Increases in a company’s resources
from the sale of goods or the
performance of services.
Expenses
Decreases in a company’s resources
incurred in the normal course of
business to generate revenues.
Dividends
Distributions to owners, which reduce
Owners’ Equity.
 Draw the Expanded Accounting
Equation
Assets Liabilities Owners’ Equity
= +
DR CR DR CR DR CR
+ – – + – +

Capital Stock Retained Earnings

DR CR DR CR
– + – +

Expenses Dividends Revenues

DR CR DR CR DR CR
+ – + – – +
 Learning Objective 3

Record the
effects of
transactions
using journal
entries (step two
of the
accounting
cycle).
 Step 2: Record Transactions

Record the results of the transactions in a

journal.
Journalizing provides a chronological
record of all business activities.
What is another name for the journal?

Journal --
book of
original entry
 Step 2: Record Transactions

Record the results of the transactions in a

journal.
Journalizing provides a chronological
record of all business activities.

General Journal Entry Format:

Date Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
 Journal Entries

What is the three-step process?

1 Identify which accounts are involved.
2 For each account, determine if
it is increased or decreased.

3 For each account, determine

by how much it will change.
 Example 1: Journal Entry
Supplies purchased for $25 are
purchased “on account.”
Prepare the correct journal entry. What
do we mean by purchased “on
account?”
Jan. 1 Supplies . . . . . . . . . . . . . . . . . . 25
Accounts Payable . . . . . . . . 25
Purchased supplies on account.

We purchase on credit and use accounts payable

 Example 2: Journal Entry

A check for $100 is received in

payment for services rendered.
Make the correct journal entry.

Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100

Services Revenue . . . . . . . . . . 100
Received cash for services.
 Example 3: Journal Entry
Merchandise is sold to a customer
on account for $75. The cost of the
product was $60.
Make the journal entries.
Mar. 1 Accounts Receivable. . . . . . . . 75
Sales Revenue . . . . . . . . . . . 75
Sold merchandise on account.

Mar. 1 Cost of Goods Sold . . . . . . . . . 60

Inventory. . . . . . . . . . . . . . . . 60
To record cost and reduce inventory.
 Journal 1 Page 1

Date Transaction Ref. Debits Credits

Jan. 1 Supplies 25
Accounts Payable 25
Purchased supplies on account.

Feb. 1 Cash 101 100

Service Revenue 100
Received cash for services.

Mar. 1 Accounts Receivable 75

Sales Revenue 75
Sold merchandise on account.

Entered when posted to ledger.

 Learning Objective 4

Summarize the
resulting journal
entries through
posting and
prepare a trial
balance (step
three of the
accounting
cycle).
 Step 3: Posting Journal Entries and
Preparing a Trial Balance
Define the Following Terms

Posting
transferring amounts from the journal to the
ledger.
Ledger
a book of accounts where journal transactions
are posted and thereby summarized.
Posting reference
a cross-reference number between the general
journal and the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a
company.
 General Ledger

ACCOUNT: Cash Account No. 101

Date Explanation Ref. Debits Credits Balance

Jan. 1 Balance 100
2 Issued 100 shares of capital
stock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ1 300 800
4 Sold inventory GJ1 60 860
5 Monthly payment on loan GJ1 230 630
6 Revenue GJ1 2,500 3,130
 Chart of Accounts
ASSETS (100-199):
Current Assets (100-150):
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets (151-199):
151 Land
152 Buildings
LIABILITIES (200-299):
Current Liabilities (200-219):
201 Notes Payable
202 Accounts Payable
Long-Term Liabilities (220-239):
222 Mortgage Payable
OWNERS’ EQUITY (300-399):
301 Capital Stock
330 Retained Earnings
SALES (400-499):
400 Sales Revenue
EXPENSES (500-599):
500 Cost of Goods Sold
501 Sales Salaries and
Commissions
523 Rent Expense
528 Advertising Expense
573 Utilities Expense
579 Accounting and Legal Fees
 Determining Account Balances
Name of Account

Debit Credit
An account’s
balance is usually
Accounts with Accounts with
on the side that typical debit typical credit
increases the balances are? balances are?
account. It is
Expenses Owners’ Equity
referred to as the Revenues or
Assets
“Normal Balance.” Dividends Income
Liabilities
Do you see the mnemonic memory device, DEAD COIL?
 Define The Trial Balance

A listing of all
account balances;
provides a means
to assure that
What is the Trial Balance debits equal
used for?
credits.
From the data in the trial
balance, the balance sheet
and income statement can
be prepared.
 Sample Trial Balance
The Example Company
Trial Balance
December 31, 2006
Debits Credits
Cash $ 21
Accounts Receivable
Inventory
The15 trial
12
Land balance
200 shows
Accounts Payable
Capital Stock
that debits $ 30
150
Retained Earnings equal credits. 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Miscellaneous Expenses 15 ______

Total $ 1,123 $ 1,123

 Learning Objective 5

Describe how
technology has
affected the first
three steps of
the accounting
cycle.
List Advantages of Computers

Large amounts of information

can be quickly processed
without (?) mathematical
errors.
More documents can be
produced than humanly
possible in the same amount
of time.
Common tasks can be
automated for increased
List Disadvantages of Computers

Computer hardware and

software require human
judgment and input.
GIGO (garbage in, garbage
out).
Once an error is identified,
fixing the problem may
require many adjustments.