Chapter 2

Recording business transactions

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 Learning objectives
• Explain accounts, journals and ledgers as they relate to recording
transactions, and describe common accounts
• Define debits, credits and normal account balances, and use
double-entry accounting and T-accounts
• List the steps of the transaction recording process
• Post transactions from the journal to the ledger
• Prepare the trial balance from the T-accounts

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 2.1. The account, the ledger and the
journal
• An account is the detailed record of all the changes that have
occurred in a particular asset, liability or owners’ equity during a
period
• The journal is the chronological record of the transactions
• The ledger is the record holding all accounts
• A list of all the ledger accounts, along with their balances, is
called a trial balance

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 2.1. The account, the ledger and
the journal

Prepare
Collect Record Copy the
source of transactions (post) to
documents in the journal the ledger trial
balance

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 2.1. The account, the ledger and the
journal
Assets
An asset is a resource controlled by an entity as a result of past
events that is expected to provide future economic benefits to the
entity in the future

• Cash • Prepaid expenses

• Accounts receivable • Land
• Bills receivable • Buildings
• Inventories • Plant and equipment

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 2.1. The account, the ledger and the
journal
Liabilities
A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits
• Accounts payable
• Bills payable
• Accrued liabilities (e.g. salary _______, interest _______,
electricity ______, etc.)

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 2.1. The account, the ledger and the
journal
Owners’ equity
The financial estimate of owners’ claims to the value in a business
is called owners’ equity. It is the residual interest in the assets of
an entity after deducting all liabilities
•Capital

•Drawings

•Income

•Service revenue/ sale revenue

•Expenses

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 2.1. The account, the ledger and the
journal
Chart of accounts

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 2.2. Debits, credits and double-entry
accounting
• Accounting is based on a double-entry system
• Each transaction affects at least two accounts
• A popular account format is called T-account

Debit Account Title Credit

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 2.2. Debits, credits and double-entry
accounting
• The account category determines how increases and
decreases in the account are recorded as debits and credits
• The pattern of recording debits and credits is based on the
accounting equation

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 Minigame

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 2.3. Recording transactions in the
journal

Specify Determine
each whether Enter the
Identify the account each transaction
transaction affected by account is in the
from the increased journal,
source transaction or including a
documents and decreased brief
classify it by the explanation
by type transaction

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2.3. Recording transactions in the journal
Eg: The Smart Touch business received of Sheena Bright’s
$30,000 cash investment in the business.
1. The source documents: ___(1)_________
2. The accounts affected: ____(2)_____________
3. The accounts increased/decreased: ____(3)_________
4. Date Accounts & Explanations Debit (Dr.) Credit (Cr.)

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 2.4. Transactions analysis, journalizing
and posting to the accounts
Copying information (posting) from the journal
to the ledger

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 2.4. Transactions analysis, journalizing
and posting to the accounts
The normal balance of an account
(Expanding the accounting equation to
account for revenues and expenses)

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 2.4. Transactions analysis, journalizing
and posting to the accounts

Summarise: Flow of accounting information

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 2.4. Transactions analysis, journalizing
and posting to the accounts

Eg: Practice journalizing and posting with specific examples:

Details of transactions occurred at Smart Touch business on May 20X2
(1) Sheena Bright invested $30,000 cash in the business.
(2) Paid $20,000 cash for land.
(3) Bought $500 of office supplies on credit.
(4) Received $5,500 cash from clients for service revenue earned.
(5) Performed training service for clients on credit, $3,000.
(6) Paid cash expenses: computer lease, $600; office rent, $1,100;
employee salary, $1,200; electricity and gas, $400.

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 2.4. Transactions analysis, journalizing
and posting to the accounts
E.G (Cont.) Practice journalizing and posting with specific
examples:
(7) Paid $300 on the account payable created in transaction 3.
(8) Remodelled Sheena Bright’s personal residence. This is not a
transaction of the business.
(9) Collected $1,000 on the account receivable created in transaction
5.
(10) Sold land for cash at its cost of $9,000.
(11) Withdrew $2,000 cash for personal expenses.

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 Record to the JOURNAL
Smart Touch Learning
May 20X2
Journal
No. Accounts & Explanation Debit Credit
(1)

(2)

(3)

(4)

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 Record to the JOURNAL (Cont.)
No. Accounts & Explanation Debit Credit
(5)

(6)

(7)

(8)
(9)

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 Record to the JOURNAL (Cont.)

No. Accounts & Explanation Debit Credit

(10)

(11)

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 Post to the LEDGERS

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 Post to the LEDGERS

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 2.5. The trial balance
• A trial balance summarises the ledger by listing all the
accounts with their balances
• Throughout the accounting process, total debits should
always equal total credits. If not, there is an error
• Errors can be detected by calculating the difference between
total debits and total credits on the trial balance

Eg: prepare the trial balance of Smart Touch as at 31 May 20X2

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 2.5. The trial balance
SMART TOUCH LEARNING
TRIAL BALANCE
AS AT 31 MAY 20X2
ACCOUNT TITLE BALANCE
DEBIT CREDIT
Cash $ $
Accounts Receivable
Capital, Sheena
Land
Office supplies
Accounts Payable
Service Revenue
Lease expense
Rent expense
Salary expense
Electricity & gas expense
$ $
Total
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 Summary: Chapter 2
• The accounting equation must always balance after each
transaction is recorded. To achieve this balance, we record
transactions using a double-entry accounting system
• A transaction occurs and is recorded on a source document
• Then, we identify the account names affected by the transaction and
determine whether the accounts increased or decreased using the
rules of debit and credit
• Next, we record the transaction in the journal, listing the debits first.
We then post all transactions to the ledger
• Once the ledger balances are calculated, the ending balance for
each account is transferred to the trial balance

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 Tasks in class
Textbook: Chapter 2
• Quick Check
• Starters
• Exercises

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 The end of Chapter 2
Recording business transactions

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