Financial Accounting

Module 3: Recording Business Transactions

Module Learning Outcomes

Understand double-entry accounting

3.1: Identify the basic reporting structure of accounting information

3.2: Identify the accounting books of record
3.3: Account for business transactions using double-entry bookkeeping
The Accounting Cycle

• Double-entry
bookkeeping allows all
stakeholders to get an
accurate picture of
operations 
• Accountants follow a
strict, well-defined
process to provide this
information
The Accounting Cycle (cont.)

In this module, we’ll cover the first four steps:

Double Entry Bookkeeping
Learning Outcomes: Double Entry Bookkeeping

3.1: Identify the basic reporting structure of accounting information

3.1.1: Define accounts as they are used in bookkeeping
3.1.2: Explain the role of accounts
3.1.3: List the general rules for debits and credits
Accounts

• An account is a part of the accounting system used to classify and summarize a specific set
of a business’s transactions.
• Firms set up accounts for each different business element, such as cash, accounts receivable,
and accounts payable.
• Accounts are categorized by type listed in this order:
• Assets
• Liabilities
• Equity, which is broken down into:
• Capital
• Withdrawals
• Revenue
• Expenses
The Role of Accounts

• We use accounts to track things that are

important to us (using the monetary
principle) and we try not to have more
accounts than we need.
• Each account then will have a running
total, called a “balance” that we, as
bookkeepers, keep up to date and
accurate.
Rules of Debits and Credits

• Double-entry bookkeeping is the foundation of accounting.

• In the double-entry system, every transaction affects at least two accounts, and sometimes
more.
• Instead of using negative and positive numbers, we record our transactions in terms of debit
and credit.
• Debits are on the left and credits are on the right.
Debits and Credits Example

On April 1, Cheyenne Houghton opened a bank account in the name of her business, Cheyenne
Creates, using $10,000 of her own money from her personal account.

Checking Account, Cheyenne Creates

Debit Credit
$10,000

Cheyenne Houghton, Capital

Debit Credit
$10,000
Debits and Credits and the Accounting Equation

• On the left side of the accounting

equation:
• Assets are increased by a debit, decreased by
a credit
• On the right side of the accounting
equation:
• Liabilities are increased by a credit, decreased
by a debit
• Equity is increased by a credit, decreased by a
debit
Practice Question 1

The Lazy Z company received an additional $20,000 in revenue in the last quarter from their
sales of sleepwear. Being their accountant, you would record the increase in company revenue
as a debit in ________ and a credit to ______ accounts.

A. checking : revenue
B. sales : cash
C. revenue : inventory
D. capital : accounts receivable
Journals and Ledgers
Learning Outcomes: Journals and Ledgers

3.2: Identify the accounting books of record

3.2.1: Identify a journal
3.2.2: Identify a ledger
3.2.3: Describe how a ledger is related to a T account
Journals

A shorthand chronological list of transactions

 JOURNAL Page 1
         
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
20XX        
Apr. 1 Checking   10,000.00  
      Cheyenne Houghton, Capital     10,000.00
To record initial investment by owner and deposit to bank
  account      

 Apr. 4 Materials Expenses   3,000.00  

      Checking     3,000.00
  To purchase materials to create pottery      
Ledgers

• A ledger is another book, similar to the journal, but organized by account. A general ledger is
the complete collection of all the accounts and transactions of a company. 
• This is a German ledger from 1828.
 GENERAL LEDGER
Account: Checking Account No. 1100
BALANCE
DATE ITEM POST. REF. DEBIT CREDIT

Ledgers (cont.) 20–

DEBIT CREDIT

Oct. 1 Balance a 199,846.33

Oct 9 J41 12,315.64 187,530.69
Oct 20 J41 474.55 187,056.14
• This is a modern ledger Oct 23 J41 12,376.89 174,679.25
Nov 4 J42 484.42 174,194.83
Nov 6 J42 32.00 174,162.83
Nov 6 J43 12,180.03 161,982.80
Nov 13 J43 1,494.06 160,488.74
Nov 16 J44 6,529.02 153,959.72
Nov 16 J44 1,212.21 152,747.51
Nov 16 J44 537.00 152,210.51
Nov 20 J44 9,425.15 142,785.36
Dec 3 J45 427.43 142,357.93
Dec 4 J45 10,970.92 131,387.01
Dec 9 J46 32.00 131,355.01
Dec 14 J46 2,194.72 129,160.29
Dec 15 J46 6,651.26 122,509.03
Dec 15 J46 1,219.11 121,289.92
Dec 18 J46 482.76 120,807.16
Dec 18 J46 14.70 120,792.46
Dec 18 J46 52,905.17 67,887.29
T Accounts

• A T account is just a simpler way to present a

ledger
• You remove everything but the debit and credit
columns
Recording Process
Learning Outcomes: Recording Process

3.3: Account for business transactions using double-entry bookkeeping

3.3.1: Analyze transactions and create journal entries
3.3.2: Post journal entries to a general ledger
3.3.3: Calculate the account balance
3.3.4: Prepare a trial balance
Create Journal Entries

Let’s take a look at a two transactions:

• On October 1, Nick opened a bank account in the name of NeatNiks using $20,000 of his
own money from his personal account.
• October 4, Nick rented a truck for $12,000 cash for October thru March (6 months).

Now, let’s journalize these transactions

Create Journal Entries (cont.)
JOURNAL Page 1

Date Description Post. Ref. Debit Credit

20–
Oct. 1 Checking 20,000.00
Oct. 1       Nick Frank, Capital 20,000.00
To record initial investment by owner and deposit to bank
Oct. 1
account

Oct. 4 Prepaid Rent 12,000.00

Oct. 4       Checking 12,000.00
Oct. 4 To record prepayment of rent on vehicle
Post to the Ledger

• This process is largely automated in computerized accounting systems.

• Each account needs its own ledger—all of these ledgers will come together to form the
general ledger.
• Take a look at this transaction again:
• On October 1, Nick opened a bank account in the name of NeatNiks using $20,000 of his own money
from his personal account.
• When we post from the journal to the ledger, we do exactly as the journal tells us. If we
think it’s wrong, we go back to whoever analyzed the transaction.
• When we post, we note the page of the journal so we can go back later and find our source if
we need to.
• We note the account number in the POST. REF. column of the journal. 
Post to the Ledger (cont.)
GENERAL LEDGER

Account: Checking Account No. 1100

BALANCE
DATE ITEM POST. REF. DEBIT CREDIT
DEBIT CREDIT

20–

Oct 1 Balance a 0.00

Oct 1 GJ1 20,000.00 20,000.00

GENERAL LEDGER

Account: Nick Frank, Capital Account No. 310

BALANCE
DATE ITEM POST. REF. DEBIT CREDIT
DEBIT CREDIT

20–

Oct 1 Balance a 0.00

Oct 1 GJ1 20,000.00 20,000.00

Calculate Account Balances

• Ledgers include columns for account balances

• You calculate these balances by combining the credit and debit entries within the ledger

GENERAL LEDGER
POST. BALANCE
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
20–
Oct 1 Balance a 0.00
Oct 20 GJ1 7,250.00 7,250.00
Oct 30 GJ2 1,600.00 5,650.00
Calculate Account Balances (cont.)

• The balance on October 31 is a debit of $5,650.00, calculated as follows:

Beginning balance $-
debit entry 7,250.00
credit entry (1,600.00)
Ending balance $5,650.00
 NeatNiks
Trial Balance (unadjusted)
For the month ended October 31, 20XX

Prepare a Trial Balance Ref No. Accounts Debits Credits

110 Checking 3,500.00
120 Accounts Receivable 5,650.00
• To prepare a trial balance, you’ll take 125 Supplies 2,600.00
all of the balances from your general 130 Prepaid Rent 12,000.00
ledgers and compile them into one
210 Account Payable 1,600.00
table.
220 Contractor Payable –
• Put all the debit balances in one
column, and all the credit balances in 310 Nick Frank, Capital Contributions 20,000.00
another, and compare the totals.
330 Nick Frank, Withdrawals 4,000.00
410 Service Revenue 8,750.00
510 Insurance Revenue 1,500.00
520 Rent Expense –
530 Supplies Expense –
540 Contractor Expense 1,100.00
Totals 30,350.00 30,350.00
Practice Question 2

A trial balance is:

A. A ledger where actions and events are placed in chronological order.

B. Where the debits and credits are in one column and calculated together.
C. Also known as a general journal where each type of account has its own section.
D. Where all of the balances are taken from the general ledgers and compiled into one
table.
Quick Review

• We went over the first four steps of the accounting cycle:

Quick Review

• What are the definitions of accounts as they are used in bookkeeping?

• Describe the role of accounts in financial accounting.
• How would you list the general rules for debits and credits?
• What is a journal?
• What is a ledger?
• How is a ledger related to a T account?
• How do you analyze transactions and create journal entries?
• What is the process of posting journal entries to a general ledger?
• How do you calculate the account balance?
• How do you prepare a trial balance?