ACCT 211 Chapter 3 - review sheet PDF

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Chapter 3: Recording Accounting Transactions Dual Nature of Accounting means that every accounting transaction must affect at least two accounts. Assets = Liabilities + Equity  When recording transactions, remember that the accounting equation must always remain in balance – if an entry creates an increase in assets, either liabilities or equity must also increase T-Accounts show how an account can be characterized/represented/  Account Name Debit | Credit  The term debit means the left side of the account while the credit means the right side of the account  When a transaction affects an account balance, the amount of the transaction is entered on the account’s debit or credit side, depending on the transaction – once all entries are made, the balance in an account is determined by separately adding up all debits and all credits and subtracting the small total from the larger, leaving the difference as the account balance  Normal balances mean that assets should normally have a debit balance, while liabilities and equity normally should have a credit balance  Remember DEA|LOR, where Dividends, Expenses, and Assets all have a normal balance of DEBIT (in order to increase DEA, you would debit the account), while Liabilities, Owner’s Equity and Revenue all have a normal balance of CREDIT (in order to increase LOR, you would credit the account)  DEBITS MUST ALWAYS EQUAL CREDITS  Type of Account | Normal | Increase w/ a | Decrease w/ a | Asset Debit Debit Credit Liability Credit Credit Debit Equity Credit Credit Debit Revenue Credit Credit Debit Expense Debit Debit Credit Dvidend Debit Debit Credit The Journal A journal is a chronological record of transaction – because the journal is where transactions are first recorded into the accounting system, it’s often called the book of original entry. Date of Transaction

Account(s) Debited Account(s) Credited

Amount Debited Amount Credited

The general journal is useful in that it contains in one place a chronological record of all the accounting transactions of a company. The Ledger The ledger is a collection of accounts and their balances. It is nothing more than a collection of T-accounts in the ledger – when an accounting transaction is recorded in the general journal ( when you make journal entries), the amounts recorded in the debit and credit columns are transferred to the debit credit columns of the respective T-accounts in the ledger – this process is called posting. The Trial Balance After accounting transactions are recorded in the journal and posted to the ledger, companies prepare a trial balance – a trial balance is a listing of accounts and their debit and credit balances at a specific point in time (REMEMBER – A TRIAL BALANCE IS NOT A BALANCE SHEET)

Here is an example of creating journal entries, posting them to T-accounts, and creating a trail balance. a) Prepare opening T-accounts for the month of February (part a = red, part c = black) Cash A/R 5600 | 150 12890 | 4500 4500 | 1895 2500 | | 1000 10890 | 2875 4180 Notes Payable | 15000 15000

Supplies 9235 | 560 | 9795

Common Stock | 25000 25000

Prepaid Rent 1500 | 1500

Equipment 30500 | 30500

Service Revenue Salaries Expense | 9650 2300 | | 2500 2100 | | 3500 4400 15650

Utilities Expense 650 | 775 | 1425

b) Prepare journal entries for transactions in the month of February Feb 1. Billed customers 2500 for services rendered Feb 1. Accounts Receivable (A/R) 2500 Service Revenue 2500 Feb 1. Paid 150 of interest on note from bank Feb 1. Interest Expense 150 Cash 150 Feb 4. Received 4500 from customers billed in January Feb 4. Cash 4500 A/R 4500 Feb 8. Bought 560 of office supplies on account Feb 8. Supplies 560 Accounts Payable (A/P) 560 Feb 12. Completed a 3500 service for which payment was received in January Feb 12 Unearned Revenue 3500 Service Revenue 3500 Feb 18. Paid 1895 towards a January purchase of supplies on account Feb 18. Accounts Payable 1895 Cash 1895 Feb 26. Paid 1000 of dividends to stockholders Feb 26. Dividends 1000 Cash 1000 Feb 27. Paid 2100 for February salaries and 775 for February utilities Feb 27. Salaries Expense 2100 Utilities Expense 775 Cash 2875 c) Post journal entries to the appropriate T-accounts d) Prepare a trial balance at February 28

A/P 1895 | 7625 | 560 6290

Unearned Revenue 3500 | 6400 2900

Dividends 1000 | 1000 | 2000

Cash Accounts Receivable Supplies Prepaid Rent Equipment Accounts Payable Unearned Revenue Notes Payable Common Stock Service Revenue Interest Expense Salaries Expense Utilities Expense Dividends Totals

SHIRTCRAFT, INC. TRIAL BALANCE FEBRUARY 28 Debit Credit $ 4,180 10,890 9,795 1,500 30,500 $ 6,290 2,900 15,000 25,000 15,650 150 4,400 1,425 2,000 _ $64,840 $64,840

Preparing the Financial Statements When the trial balance has been completed, you may begin creating the financial statements of a company. In order to create the Income Statement, you will need to categorize the relevant information into Revenues and Expenses. Using that information, you calculate net income, which will be used later on. When you find the net income, you may then create the Statement of Retained Earnings (remember RE (beginning) + net income – dividends = RE (ending)). When you figure out the retained earnings balance for the end of the month, you may then construct the balance sheet, as the ending retained earnings balance will be reported on the balance sheet....