business transactions- an overview
DESCRIPTION
Business Transactions- An Overview. Pyramid. Inverted. The Body of Accounting Knowledge. Tools of The Recording Process. Debits and Credits Journal Entries Ledger Accounts. First, however, let’s look at. The Accounting Cycle. Analyze source documents. - PowerPoint PPT PresentationTRANSCRIPT
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Business Transactions- Business Transactions- An OverviewAn Overview
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InvertedPyramid
The Body of Accounting Knowledge
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Tools of The Recording Process
Debits and Credits
Journal Entries
Ledger Accounts
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The The Accounting Accounting
CycleCycle
First, however, let’s look at...First, however, let’s look at...
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Analyze source
documents.
Journalize transactions in the general
journal.
Post entries to the accounts in the general
ledger.
Prepare financial statements.
Prepare a trial balance.
Steps in The Accounting Cycle
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Let’s start withThe General Ledger Account
A ledger account is a tool used for classifying and summarizing information about increases, decreases, and balances of financial statements items. Think of it as a storage
container like a bucket.
Dollars, which are used to measure economic transactions, are “poured” into and out of the container.
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General Ledger AccountT-Account Format
For the sake of simplicity, we often use this format in
teaching accounting even though it is no longer used in
practice.
Debit Credit
Account Name
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The T-Account
Increases to the T-account are
recorded on one side of the T-account, and decreases are
recorded on the other side.
Debit Credit
Account Name
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The T-Account
The side which increases and the side which decreases is
determined by the type of account.
Debit Credit
Account Name
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What Are Debits and Credits? Tools used for recording transactions
Debit (DR) Credit (CR)
Debit refers to the LEFTLEFT and Credit to the RIGHTRIGHT side of the T-Account.
Debit and Credit are neutral terms and do not connote value judgments. Neither is “good” or “bad”!
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What Are Debits and Credits? Tools used for recording transactions
Debit (DR) Credit (CR)
Debit refers to the LEFTLEFT and Credit to the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
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What Are Debits and Credits? Tools used for recording transactions
Debit (DR) Credit (CR)
Debit refers to the LEFTLEFT and Credit to the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
DEBIT SIDE
CREDIT SIDE
Used as Adjectives:
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What Are Debits and Credits? Tools used for recording transactions
Debit (DR) Credit (CR)
Debit refers to the LEFTLEFT and Credit to the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
DEBIT CREDITUsed as Verbs:
Synonym for Debit?
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Names of Ledger Accounts
There are no “magic” names for many accounts e.g., either “Heat, Light & Power” or
“Utilities Expense” could be used for an account name.
Other accounts have names which must be used e.g., “Cash”, “Accounts Receivable” and
“Accounts Payable”.
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Let’s see how debits and
credits affect the different
types of accounts.
Debit Credit
Account Name
Types of Ledger AccountsTypes of Ledger Accounts
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Assets
Liabilities
Stockholders’ Equity
Revenues
Expenses
Assets
Liabilities
Stockholders’ Equity
Revenues
Expenses
Types of Ledger AccountsTypes of Ledger Accounts
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Using Debits and Credits
Again, debits and credits are used to increase or decrease account balances.
Determining whether to use a debit or credit to record an increase or decrease depends on the type of account in question.
The Balance Sheet equation is the basis for the determination.
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Balance Sheet Model
A = L + SE
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Account Name
Debit Credit
Account Name
Debit Credit
Assign a T-Account to each element of the Balance Sheet Model
Assign a T-Account to each element of the Balance Sheet Model
A = L + SEAccount Name
Debit Credit
Balance Sheet Model
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Account Name
Debit Credit
Account Name
Debit Credit
Debits and credits affect the Balance Sheet Model as follows:
Debits and credits affect the Balance Sheet Model as follows:
A = L + SEAccount Name
Debit Credit
Balance Sheet Model
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Account Name
AA = L + SEAccount Name
Debit Credit Debit Credit
Debits and credits affect the Balance Sheet Model as follows:
Debits and credits affect the Balance Sheet Model as follows:
ASSETSASSETS
Debit for
Increase
Credit for
Decrease
Balance Sheet Model
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AA = LL + SEAccount Name
Debit Credit
Debits and credits affect the Balance Sheet Model as follows:
Debits and credits affect the Balance Sheet Model as follows:
LIABILITIESLIABILITIES
Debit for
Decrease
Credit for
Increase
ASSETSASSETS
Debit for
Increase
Credit for
Decrease
Balance Sheet Model
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AA = LL + SESE
Debits and credits affect the Balance Sheet Model as follows:
Debits and credits affect the Balance Sheet Model as follows:
ASSETSASSETS
Debit for
Increase
Credit for
Decrease
EQUITIESEQUITIES
Debit for
Decrease
Credit for
Increase
LIABILITIESLIABILITIES
Debit for
Decrease
Credit for
Increase
Balance Sheet Model
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Recall that Stockholders’ Equity consists of the following components:
Recall that Stockholders’ Equity consists of the following components:
+ Retained EarningsCapital Stock
C/S + R/E
Stockholders’ EquityA Closer Look
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Therefore, the Capital Stock and Retained Earnings accounts are affected in the
following manner by debits and credits because they are part of Stockholders’
Equity:
Therefore, the Capital Stock and Retained Earnings accounts are affected in the
following manner by debits and credits because they are part of Stockholders’
Equity:
CAPITAL STOCKCAPITAL STOCK
Debit for
Decrease
Credit for
Increase
RET. EARNINGSRET. EARNINGS
Debit for
Decrease
Credit for
Increase
Stockholders’ EquityA Closer Look
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Also, because RevenueRevenue accounts increase Stockholders’ Equity, they are affected by
debits and credits as follows:
Also, because RevenueRevenue accounts increase Stockholders’ Equity, they are affected by
debits and credits as follows:
REVENUESREVENUES
Debit for
Decrease
Credit for
Increase
Stockholders’ EquityA Closer Look
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And because ExpenseExpense accounts decrease Stockholders’ Equity, they are affected by
debits and credits as follows:
And because ExpenseExpense accounts decrease Stockholders’ Equity, they are affected by
debits and credits as follows:
EXPENSESEXPENSES
Debit for
Increase
Credit for
Decrease
Stockholders’ EquityA Closer Look
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Normal Balances
Each of the 5 account types also has a normalnormal balancebalance side. It is always the side which is used to record increases in the
account.
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Normal Balances
The normal balances for each of the FIVEFIVE types of accounts are as follows:
Account Name
Debit Balance Credit Balance AssetsAssets ExpensesExpenses
LiabilitiesLiabilities Stockholders’ Stockholders’ EquityEquity RevenuesRevenues
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Three Alternative ApproachesFor Learning Debits and Credits Alternative #1
The textbook approach on p. 59 Alternative #2
Expanded Accounting Equation This is Rice’s preferred approach
Alternative #3 “A L O R E” acronym
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Alternative Approach #1Textbook Approach
59
Check it out at top of page!
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Alternative Approach #2Expanded Accounting Equation
ASSETS + EXP. = LIAB. + S/H EQUITY + REV.
A + E = L + S/E + R Dr. Cr.
+ -Bal.
Dr. Cr.
+-Bal.
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Alternative Approach #3“A L O R E” Acronym
A (ssets)A (ssets)
L (iabilities)L (iabilities)
O (wners' equity)O (wners' equity)
R (evenues)R (evenues)
E (xpenses)E (xpenses)
Debit Credit
+ -
- +
- +
- +
+ -
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Categories of General Ledger Accounts
The five types of accounts fall into one of two categories
Real Accounts
Nominal Accounts
Real Accounts
Nominal Accounts
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Real Accounts
This category includes Assets, Liabilities, and Stockholders’ Equities (i.e., Balance Sheet accounts)
Accounts are permanent.
Account balances are carried forward from one fiscal year to the next.
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Nominal Accounts
Nominal accounts include revenues and expenses.
Nominal accounts are temporary.
Nominal account balances are closed out to zero at the end of the fiscal year.
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