cashlandn/po.e. dra w revexp +100,000+100,000 +200,000+200,000 -5,000+25,000+20,000 -500-500 700700...

CASHCASH LANDLAND N/PN/P O.E.O.E. DRADRAWW

REVREV EXPEXP

+100,000+100,000 +100,000+100,000

+200,000+200,000 +200,000+200,000

-5,000-5,000 +25,000+25,000 +20,000+20,000

-500-500 -500-500

700700 700700

-100-100 -100-100

295,100295,100 25,00025,000 220,000220,000 100,000100,000 -100-100 700700 -500-500

ASSETSASSETS LIABILITIESLIABILITIES CAPITALCAPITAL

ACCOUNT SIDE RULESACCOUNT SIDE RULES

ACCOUNTS INCREASE ON THE SIDE IN WHICH ACCOUNTS INCREASE ON THE SIDE IN WHICH THEY APPEAR IN THE ACCOUNTING THEY APPEAR IN THE ACCOUNTING EQUATIONEQUATION

ASSETS = LIABILITIES + CAPITALASSETS = LIABILITIES + CAPITAL LEFT = RIGHTLEFT = RIGHT ASSETS INCREASE LEFT SIDE OF THE ASSETS INCREASE LEFT SIDE OF THE

ACCOUNTACCOUNT LIABILITIES/CAPITAL INCREASE RIGHT SIDE LIABILITIES/CAPITAL INCREASE RIGHT SIDE

OF THE ACCOUNTOF THE ACCOUNT

ASSETS

=

LIABILITIES CAPITAL= +

LEFT RIGHT

+ + +- - -

INC DEC DEC INC DEC INC

ACCOUNT SIDE RULES

A BASIC T ACCOUNT HASA BASIC T ACCOUNT HAS

TITLE

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT

ASSETS

INCREASE ON THE LEFTSIDE OF THE ACCOUNT

DECREASE ON THE RIGHTSIDE SIDE OF THE ACCOUNT

LIABILITES

DECREASE ON THE LEFTSIDE OF THE ACCOUNT

INCREASE ON THE RIGHTSIDE SIDE OF THE ACCOUNT

CAPITAL

DECREASE ON THE LEFTSIDE OF THE ACCOUNT

INCREASE ON THE RIGHTSIDE SIDE OF THE ACCOUNT

RECORDING TRANSACTIONS RECORDING TRANSACTIONS DIRECTLY INTO THE DIRECTLY INTO THE

ACCOUNTSACCOUNTS The following reflects how we would The following reflects how we would

record the same transactions we have been record the same transactions we have been working with directly into the accountsworking with directly into the accounts

I have broken the major classifications I have broken the major classifications (assets, liabilities, and capital) down into (assets, liabilities, and capital) down into the specific accounts we must create as a the specific accounts we must create as a result of these transactionsresult of these transactions

Transaction 1Transaction 1

CASH

LEFT SIDE ACCOUNT100,000

RIGHT SIDE ACCOUNT


CAPITAL

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT100,000


CASH

LEFT SIDE ACCOUNT100,000200,000

RIGHT SIDE ACCOUNT


NOTES PAYABLE




RIGHT SIDE ACCOUNT

LAND


CASH


RIGHT SIDE ACCOUNT5,000


NOTES PAYABLE

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT200,000 20,000


EXPENSE

LEFT SIDE ACCOUNT500

RIGHT SIDE ACCOUNT


CASH


RIGHT SIDE ACCOUNT5,000 500


CASH

LEFT SIDE ACCOUNT100,000200,000 700

RIGHT SIDE ACCOUNT5,000 500


REVENUE

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT700


DRAWING


RIGHT SIDE ACCOUNT


CASH


RIGHT SIDE ACCOUNT5,000 500 100

T ACCOUNT FORMATT ACCOUNT FORMAT

Ok, cool, we have recorded those same transactions Ok, cool, we have recorded those same transactions directly into the accounts using the account side rules directly into the accounts using the account side rules given in the second slide.given in the second slide.

Now, we need to do the math to determine the “amount” or Now, we need to do the math to determine the “amount” or “resulting balance” that we report for each of the accounts.“resulting balance” that we report for each of the accounts.

We “foot” the account (which means we add up all the We “foot” the account (which means we add up all the amounts on the left and right side of the accounts).amounts on the left and right side of the accounts).

We then determine the “balance of the account” (since one We then determine the “balance of the account” (since one side represents increases and the other decreases, we side represents increases and the other decreases, we subtract opposite sides and report the balance on the side subtract opposite sides and report the balance on the side that was the largest.that was the largest.

CASH


RIGHT SIDE ACCOUNT5,000 500 100

300,700 5,600

295,100

This is aThis is afootingfooting

This is the balance of the accountThis is the balance of the account


RIGHT SIDE ACCOUNT

LAND

25,000

25,000

NOTES PAYABLE

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT200,000 20,000

220,000

220,000

CAPITAL


100,000

100,000

DRAWING


RIGHT SIDE ACCOUNT

100

100

REVENUE

LEFT SIDE ACCOUNT RIGHT SIDE ACCOUNT700

700

700

EXPENSE


RIGHT SIDE ACCOUNT

500

500

BEFORE WE GO ANY FURTHERBEFORE WE GO ANY FURTHER

THE LEFT HAND SIDE OF THE THE LEFT HAND SIDE OF THE ACCOUNT IS CALLED THE ACCOUNT IS CALLED THE

DEBITDEBITSIDE OF THE ACCOUNTSIDE OF THE ACCOUNT THE RIGHT HAND SIDE OF THE THE RIGHT HAND SIDE OF THE

ACCOUNT IS CALLED THE ACCOUNT IS CALLED THE

CREDITCREDIT SIDE OF THE ACCOUNTSIDE OF THE ACCOUNT WHY?WHY? WHY NOT?WHY NOT?

MEANINGS?MEANINGS?

DOES DEBIT MEAN GOOD/BAD?DOES DEBIT MEAN GOOD/BAD? NONO DOES CREDIT MEAN DOES CREDIT MEAN

INCREASE/DECREASE?INCREASE/DECREASE? NONO DEBIT MEANS LEFT SIDE AND DEBIT MEANS LEFT SIDE AND

CREDIT MEANS RIGHT SIDE CREDIT MEANS RIGHT SIDE AND AND NOTHING ELSENOTHING ELSE

IF YOU REALLY WANT A IF YOU REALLY WANT A LITTLE MORE INFOLITTLE MORE INFO

Debit is short for debtor (DR) – loosely translated Debit is short for debtor (DR) – loosely translated from Latin “to have”from Latin “to have”

Credit is short for creditor (CR) – loosely Credit is short for creditor (CR) – loosely translated from Latin “to owe”translated from Latin “to owe”

When this method was created in the 1400’s, the When this method was created in the 1400’s, the inventors personified the accounts and viewed inventors personified the accounts and viewed them as people, and since the assets and equities them as people, and since the assets and equities have opposing positions, they use the opposite have opposing positions, they use the opposite sides of the accounts to record the transactionssides of the accounts to record the transactions

The cool thing about this approach is that it has a The cool thing about this approach is that it has a built-in mechanism to “double-check” our built-in mechanism to “double-check” our mechanics (ie, debits must equal credits)mechanics (ie, debits must equal credits)

IS THIS THE PERFECT FORMAT? IS THIS THE PERFECT FORMAT? (RECORDING DIRECTLY INTO THE ACCOUNTS)(RECORDING DIRECTLY INTO THE ACCOUNTS)

WHAT WAS THE $5,000 CASH PAID OUT FOR? WHAT WAS THE $5,000 CASH PAID OUT FOR? – YOU KNOW BECAUSE THIS IS A SHORT PROBLEM WE YOU KNOW BECAUSE THIS IS A SHORT PROBLEM WE

HAVE WORKED REPEATEDLYHAVE WORKED REPEATEDLY WHAT IF WE HAD 100,000 CASH TRANSACTIONS WHAT IF WE HAD 100,000 CASH TRANSACTIONS

AND I ASKED YOU ON 12/31 WHY DID WE PAY AND I ASKED YOU ON 12/31 WHY DID WE PAY OUT $14,000 ON MARCH 25 – HOW WOULD YOU OUT $14,000 ON MARCH 25 – HOW WOULD YOU ANSWER THE QUESTION?ANSWER THE QUESTION?– THE ONLY WAY IS TO SEARCH FOR A CORRESPONDING THE ONLY WAY IS TO SEARCH FOR A CORRESPONDING

DEBIT OF $14,000 ON THAT DATE (AND YOU MAY NOT DEBIT OF $14,000 ON THAT DATE (AND YOU MAY NOT FIND ONE BECAUSE MAYBE WE BOUGHT AN ASSET FOR FIND ONE BECAUSE MAYBE WE BOUGHT AN ASSET FOR 30,000 PAYING DOWN 14, 000 AND PUTTING 16,000 ON A 30,000 PAYING DOWN 14, 000 AND PUTTING 16,000 ON A NOTE)NOTE)

ADJUST FORMATADJUST FORMAT

ONE MORE THING TO ADD – AND WE ONE MORE THING TO ADD – AND WE WILL BE THEREWILL BE THERE

PRIOR TO RECORDING PRIOR TO RECORDING TRANSACTIONS INTO ACCOUNT – TRANSACTIONS INTO ACCOUNT – WE FIRST RECORD IT IN THE WE FIRST RECORD IT IN THE JOURNAL JOURNAL

JOURNAL – BOOK (MEDIUM) IN JOURNAL – BOOK (MEDIUM) IN WHICH ALL TRANSACTIONS ARE WHICH ALL TRANSACTIONS ARE FIRST RECORDEDFIRST RECORDED

JOURNALJOURNALMECHANICS OF RECORDING ENTRY ORIGINALLY IN MECHANICS OF RECORDING ENTRY ORIGINALLY IN

THE JOURNAL AS OPPOSED TO THE LEDGERTHE JOURNAL AS OPPOSED TO THE LEDGER

DATEDATE ACCOUNTACCOUNT DEBITDEBIT CREDITCREDIT

1/1/021/1/02 CASHCASH 100,000100,000

OWNERS EQUITYOWNERS EQUITY 100,000100,000

OK, what is this and what does it mean? Its just a different format (thepaper looks differenct – no T account), the rules are the same. 1. We record the date. 2. We want to debit cash (remember debit means left sideso, we write the account title next to the left side of the column); and we want to credit owners equity (we indent the account title to the right side(credit) of the column). We write the amounts under the appropriateColumns (debit or credit).

EXERCISEEXERCISE

RECORD ALL THE TRANSACTIONS IN RECORD ALL THE TRANSACTIONS IN THIS JOURNEY ENTRY FORMATTHIS JOURNEY ENTRY FORMAT

Cash 100,000Cash 100,000

Owners Equity 100,000Owners Equity 100,000

OK, LETS REVIEW STEPS IN OK, LETS REVIEW STEPS IN THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE

1.1. TRANSACTIONTRANSACTION

2.2. RECORD IN THE JOURNAL BY RECORD IN THE JOURNAL BY MEANS OF A JOURNAL ENTRYMEANS OF A JOURNAL ENTRY

3.3. POST FROM THE JOURNAL TO THE POST FROM THE JOURNAL TO THE LEDGERLEDGER

• THE FOLLOWING SHOWS THE THE FOLLOWING SHOWS THE DETAILS OF STEPS 2 AND 3.DETAILS OF STEPS 2 AND 3.

Post. Date Description Ref. Debit Credit

1/1 Cash 100,000 Capital 100,000

Post. BalanceDate Item Ref. Debit Credit Debit Credit

1/1

Account: Cash Account No. 11

General Journal

General Ledger

Page 1

Recording and Posting an EntryRecording and Posting an Entry

1

1 Enter the transaction date in the ledger account.


1/1 Cash 100,000 Capital 100,000


1/1 100,000


General Journal

General Ledger

Page 1


2

2 Enter the debit amount in the ledger debit column.


1/1 Cash 100,000 Capital 100,000


1/1 100,000 100,000


General Journal

General Ledger

Page 1


3

3 Update the ledger account balance.


1/1 Cash 100,000 Capital 100,000


1/1 1 100,000 100,000


General Journal

General Ledger

Page 1


4

4 Enter the journal page in the ledger account.


1/1 Cash 11 100,000 Capital 100,000


1/1 1 100,000 100,000


General Journal

General Ledger

Page 1


5

5 Enter the ledger account number in the journal.



1/1 Cash 100,000 Capital 31 100,000


1/1 1 100,000 100,000

Account: Capital Account No. 31

General Journal

General Ledger

Page 1

1 5 2

3

4

All five parts of the credit posting are shown.

FUNCTION OF JOUNALFUNCTION OF JOUNAL

CRONOLOGICAL ORDERCRONOLOGICAL ORDER TO SEE THE ENTIRE TRANSACTION TO SEE THE ENTIRE TRANSACTION

ALL AT ONE TIMEALL AT ONE TIME TO IDENTIFY CAUSE/EFFECTTO IDENTIFY CAUSE/EFFECT EX. Q. WHY DID WE CREDIT CASH EX. Q. WHY DID WE CREDIT CASH

$1MM ON JUNE 29?$1MM ON JUNE 29? EX. A. LOOK IN THE JOURNAL – EX. A. LOOK IN THE JOURNAL –

DOWN PYMT ON TRACTOR.DOWN PYMT ON TRACTOR.

POST FROM THE JOURNAL POST FROM THE JOURNAL TO THE LEDGERTO THE LEDGER

POSTPOST COPY VERBATIMCOPY VERBATIM LEDGERLEDGER BOOK (MEDIUM) THAT CONTAINS BOOK (MEDIUM) THAT CONTAINS

ALL THE ACCOUNTS OF THE ALL THE ACCOUNTS OF THE BUSINESSBUSINESS

FUNCTION OF THE LEDGERFUNCTION OF THE LEDGER SUMMARIZATIONSUMMARIZATION DEPICTS THE FINAL ENDING DEPICTS THE FINAL ENDING

BALANCE OFALL THE FINANCIAL BALANCE OFALL THE FINANCIAL ITEMS (ACCOUNTS) WE ARE ITEMS (ACCOUNTS) WE ARE KEEPING TRACK OFKEEPING TRACK OF

ACCOUNT TOTALSACCOUNT TOTALS

NEXT STEP - PREPARE A NEXT STEP - PREPARE A TRIAL BALANCETRIAL BALANCE

LIST OF ALL THE ACCOUNTS IN THE LIST OF ALL THE ACCOUNTS IN THE LEDGER AND THEIR BALANCELEDGER AND THEIR BALANCE

PROVES THE EQUALITY OF DEBIT PROVES THE EQUALITY OF DEBIT AND CREDITSAND CREDITS

PREPARE A TRAIL BALANCE ON A PREPARE A TRAIL BALANCE ON A SHEET OF PAPER BASED UPON THE SHEET OF PAPER BASED UPON THE JOURNAL ENTRIES AND LEDGER JOURNAL ENTRIES AND LEDGER YOU HAVE PREPARED. YOU HAVE PREPARED. DON’T PEEK AT THE NEXT DON’T PEEK AT THE NEXT

PAGE UNTIL YOU’RE FINISHED – IT HAS THE ANSWER.PAGE UNTIL YOU’RE FINISHED – IT HAS THE ANSWER.

TRIAL BALANCETRIAL BALANCE

CASHCASH 295,100295,100

LANDLAND 25,00025,000

NOTES PAYNOTES PAY 220,000220,000

CAPITALCAPITAL 100,000100,000

DRAWDRAW 100100

REVENUEREVENUE 700700

EXPENSESEXPENSES 500500

320,700320,700 320,700320,700

ADJUSTMENT PROCESSADJUSTMENT PROCESS

REVIEW ALL THE ACCOUNTS IN THE REVIEW ALL THE ACCOUNTS IN THE LEDGERLEDGER

DO THESE ACCOUNTS AND ONLY THESE DO THESE ACCOUNTS AND ONLY THESE ACCOUNTS PROPERLY REPORT ALL THE ACCOUNTS PROPERLY REPORT ALL THE FINANCIAL ITEMS WE WANT?FINANCIAL ITEMS WE WANT?

DO THEY REPORT THE PROPER BALANCE?DO THEY REPORT THE PROPER BALANCE? IF NO – WE NEED TO CHANGE THEM SO IF NO – WE NEED TO CHANGE THEM SO

THEY DO – UPDATE THE ACCOUNTS – THEY DO – UPDATE THE ACCOUNTS – MAKE ADUSTMENTSMAKE ADUSTMENTS

ADJUSTMENTS ADJUSTMENTS NECESSARY?NECESSARY?

RARE – NO, BUT IN THIS CASE, NO RARE – NO, BUT IN THIS CASE, NO ADJUSTMENTS ARE MADEADJUSTMENTS ARE MADE

INCOME STATEMENTINCOME STATEMENT

REVENUES 700EXPENSE 500NET INCOME 200

CAPITAL STATEMENTCAPITAL STATEMENT

BEGINNING BALANCE 0OWNER INVESTMENT 100,000NET INCOME 200INCREASE IN CAPITAL 100,200DRAWING -100ENDING BALANCE 100,100

BALANCE SHEETBALANCE SHEET

CASH 295,100LAND 25,000TOTAL ASSETS 320,100

NOTES PAYABLE 220,000

CAPITAL 100,100TOTAL LIABILITIES & CAPITAL 320,100

cashlandn/po.e. dra w revexp +100,000+100,000 +200,000+200,000 -5,000+25,000+20,000 -500-500 700700...

Documents

account slide

account increase

account land slide

account decrease

account assets increase

right left

transactions slide

basic t account