Recording Business Transactions-2-9-2025 Lesson Slides

1

Horngren’s Financial & Managerial
Accounting

Sixth Edition

Chapter 2

Recording Business

Transactions

2

Learning Objectives (1 of 2)

2.1 Explain accounts as they
relate to the accounting equation
and describe common accounts

2.2 Define debits, credits, and
normal account balances using
double-entry accounting and
T-accounts

2.3 Record transactions in a
journal and post journal entries to
the ledger

3

Learning Objectives (2 of 2)

2.4 Prepare the trial balance and
illustrate how to use the trial
balance to prepare financial
statements

2.5 Use the debt ratio to evaluate
business performance

4

Multiple Choice

Cash is classified as a(n)

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Liabilities

Exhibit 2-2 Liability Accounts

Account Name

Explanation

Accounts Payable

A promise made by the business to pay a debt
in the future. Arises from a credit purchase.

Notes Payable

A written promise made by the business to pay
a debt, usually involving interest, in the future.

Accrued Liability

An amount owed but not paid. A specific type
of payable such as Taxes Payable, Rent
Payable, and Salaries Payable.

Unearned Revenue

Occurs when a company receives cash from a
customer but has not provided the product or
service. The promise to provide services or
deliver goods in the future.

6

Match

Match the following

Cash in Bank

Accounts Payable

Revenue

Asset

Liability

Owner's Equity

7

Multiple Choice

Accounts Payable, Supply Depot is classified as a(n)

1

Asset

2

Liability

3

Owner's Equity

4

Expense

8

Multiple Choice

A liability (Accounts Payable) is money the business owes to someone

1

True

2

False

9

Learning Objective 2.2

Define debits, credits, and
normal account balances
using double-entry
accounting and T-accounts

10

What Is Double-Entry Accounting?

• Transactions always involve at least two accounts.

• Accounting uses the double-entry system to record the

dual effects of each transaction.

– For example, office supplies are purchased for cash

requiring an increase in Office Supplies and a
decrease in Cash.

11

Multiple Choice

Planning, recording, analyzing, and interpreting financial information

1

Accounting

2

Asset

3

Liability

4

Owner's Equity

12

Multiple Choice

An amount recorded on the left side

1

T-Account

2

Debit

3

Credit

4

Chart of Accounts

13

Multiple Choice

The amount remaining after the value of all liabilities is subtracted from the value of all assets.

1

Accounting

2

Asset

3

Liability

4

Owner's Equity

14

Multiple Choice

Mrs. Smith bought $200 in supplies. Which of the following would be correct?

1

+ $200 Cash; + $200 Supplies

2

- $200 Cash; - $200 Supplies

3

+ $200 Cash; - $200 Supplies

4

- $200 Cash; + $200 Supplies

15

Multiple Choice

A delivery van would be considered

1

Non Current Liability

2

Non Current Asset

16

Multiple Choice

The listing of all of the accounts available for use in a company's accounting system is known as the __________.

1

Chart of Accounts

2

Journal

3

Ledger

4

Credit Ledger

17

Multiple Choice

Which term is associated with "left" or "left-side"?

1

Debit

2

Credit

3

Plus

4

Minus

18

Multiple Choice

Which term is associated with "right" or "right-side"?

1

Debit

2

Credit

3

Plus

4

Minus

19

Multiple Choice

What will usually cause an asset account to increase?

1

Debit

2

Credit

20

Multiple Choice

What will usually cause the liability account Accounts Payable to increase?

1

Debit

2

Credit

21

Multiple Choice

When $1,500 cash is received on account,

1

a. Sales is increased with credit and Cash is increased with a credit.

2

b. Accounts Receivable is increased with a debit and Cash is increased with a credit.

3

c. Accounts Receivable is decreased with a credit and Cash is increased with a debit.

4

d. Accounts Receivable is decreased with a debit and Cash is increased with a debit.

22

Multiple Choice

The purpose of the trial balance is to

1

check the "cash" t-account balance

2

ensure total debits and total credits equal

3

calculate the account balances to use on the balance sheet

4

double check the balance of the liability and owner's capital side of the accounting equation

23

Multiple Choice

Assets are $120,000. Owner's Equity is $95,000. What is the Liability?

1

$215,000

2

$25,000

3

None of the Choices

24

Multiple Choice

Mrs. Smith invests $20,000 in her new company. Which of the following would be correct?

1

+ $20,000 Cash; + $20,000 Mrs. Smith, Capital

2

- $20,000 Cash; - $20,000 Mrs. Smith, Capital

3

+ $20,000 Cash; - $20,000 Mrs. Smith, Capital

4

- $20,000 Cash; + $20,000 Mrs. Smith, Capital

25

Increases and Decreases in the Accounts (1 of 2)

How we record increases and decreases to an account is
determined by the account type.

26

Increases and Decreases in the Accounts (2 of 2)

• To increase the Cash

account, a business
would record a debit to
Cash.

• To decrease the Cash

account, a business
would record a credit to
Cash.

27

Expanding the Rules of Debit and Credit

The accounting equation is expanded to include the rules of
debits and credits for the elements of equity:

28

Multiple Choice

Advertising Expense

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

29

Multiple Choice

Rent Expense

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

30

Multiple Choice

Rent Expense

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

31

Multiple Choice

Rent Revenue

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

32

Multiple Choice

Accounting Fees

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

33

Multiple Choice

Grooming Equipment

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

34

Multiple Choice

Building

1

Asset

2

Liability

3

Owner's Equity

4

Revenue

5

Expense

35

Multiple Choice

An increase to Utilities Expense is a

1

Debit

2

Credit

3

Asset

4

Liability

36

Multiple Choice

An increase to Office Furniture is a

1

Debit

2

Credit

3

Expense

4

Liability

37

Multiple Choice

Water and electricity usage is an/a __________?

1

credit

2

asset

3

expense

4

income

38

Multiple Choice

Double entry in accounting means there must be at least ________ entries for every transaction?

1

two

2

three

3

four

4

one

39

Multiple Choice

Double entry in accounting means there must be at least ________ entries for every transaction?

1

two

2

three

3

four

4

one

40

Multiple Choice

What is the normal balance for liabilities?

1

DEBIT

2

CREDIT

41

Multiple Choice

The basic accounting equation is Assets=Liabilities + _______________________.

1

Income

2

Owner's Equity

3

Expenses

4

Profit

42

Multiple Choice

ACCOUNTS RECEIVABLE IS:

1

An Asset

2

A Liability

3

Owner's Equity

4

An Expense

43

Multiple Choice

An increase to Supplies is a

1

Debit

2

Credit

3

Asset

4

Liability

44

Multiple Choice

Apply the rules of Debit and Credit to the following accounts:

A decrease to cash is an _______?

1

Debit

2

Credit

3

Asset

4

Expense

45

The Normal Balance of an Account (1 of 2)

• All accounts are summarized on one side of the T-account,

called the normal balance.

• An account’s normal balance appears on the increase

side of the account.

– Assets increase with a debit, so the normal balance is

a debit.

– Liabilities and equity increase with a credit, so the

normal balance is a credit.

46

The Normal Balance of an Account (2 of 2)

Exhibit 2-5 Rules of Debits and Credits and Normal
Balances for Each Account Type

Account Type

Increases

Decreases

Normal Balance

Assets

Debit

Credit

Debit

Expenses

Debit

Credit

Debit

Dividends

Debit

Credit

Debit

Liabilities

Credit

Debit

Credit

Revenues

Credit

Debit

Credit

Common Stock

Credit

Debit

Credit

47

Determining the Balance of a T-Account

Use the T-account to determine the ending balance in an
account. The ending balance is shown on the side with the
larger number.

48

Learning Objective 2.3

Record transactions in a
journal and post journal
entries to the ledger

49

How Do You Record Transactions?

• Accountants use source documents to provide evidence

and data for recording transactions.

• The documents help businesses determine how to record

the transactions.

50

Source Documents—The Origin of the
Transactions

Exhibit 2-6 Flow of Accounting Data

• Other source documents used include:

– Purchase invoices
– Bank checks
– Sales invoices

51

Journalizing and Posting Transactions (1 of 26)

• After reviewing source documents, accountants record the

transactions.

• Transactions are recorded in a journal, the record of the

transactions in date order

• The data from the journal is then transferred to the ledger,

a process called posting.

52

Journalizing and Posting Transactions (2 of 26)

The journalizing and posting process has five steps:

• Step 1: Identify the accounts and the account types (asset,

liability, or equity).

• Step 2: Decide whether each account increases or

decreases, then apply the rules of debits and credits.

• Step 3: Record the transaction in the journal.

• Step 4: Post the journal entry to the ledger.

• Step 5: Determine whether the accounting equation is in

balance.

53

Journalizing and Posting Transactions (3 of 26)

Transaction 1—Stockholder Contribution

On November 1, the e-learning company received $30,000
cash from Sheena Bright, and the business issued common
stock to her.

54

Journalizing and Posting Transactions (4 of 26)

Transaction 1—Stockholder Contribution

55

Journalizing and Posting Transactions (5 of 26)

Transaction 1—Stockholder Contribution

56

Journalizing and Posting Transactions (6 of 26)

Transaction 2—Purchase of Land for Cash

On November 2, Smart Touch Learning paid $20,000 cash
for land.

57

Journalizing and Posting Transactions (7 of 26)

Transaction 2—Purchase of Land for Cash

58

Journalizing and Posting Transactions (8 of 26)

Transaction 2—Purchase of Land for Cash

59

Journalizing and Posting Transactions (9 of 26)

Transaction 3—Purchase of Office Supplies on Account

Smart Touch Learning buys $500 of office supplies on
account on November 3.

60

Journalizing and Posting Transactions (10 of 26)

Transaction 4—Earning of Service Revenue for Cash

On November 8, Smart Touch Learning collected cash of
$5,500 for service revenue that the business earned by
providing e-learning services for clients.

61

Journalizing and Posting Transactions (11 of 26)

Transaction 5—Earning of Service Revenue on Account

On November 10, Smart Touch Learning performed services
for clients, for which the clients will pay the company later.
The business earned $3,000 of service revenue on account.

62

Journalizing and Posting Transactions (12 of 26)

Transaction 6—Payment of Expenses with Cash

Smart Touch Learning paid the following cash expenses on
November 15: office rent, $2,000, and employee salaries,
$1,200.

Note: A compound journal entry is a journal entry with
multiple debits and/or credits.

63

Journalizing and Posting Transactions (13 of 26)

Transaction 6—Payment of Expenses with Cash

64

Journalizing and Posting Transactions

Transaction 7—Payment on Account (Accounts Payable)

On November 21, Smart Touch Learning paid $300 on the
accounts payable created in Transaction 3.

65

Journalizing and Posting Transactions (14 of 26)

Transaction 8—Collection on Account (Accounts
Receivable)

On November 22, Smart Touch Learning collected $2,000
cash from a client in Transaction 5.

66

Journalizing and Posting Transactions (15 of 26)

Transaction 9—Payment of Cash Dividend

On November 25, a payment of $5,000 cash was paid for
dividends.

67

Journalizing and Posting Transactions (16 of 26)

Transaction 10—Prepaid Expenses

On December 1, Smart Touch Learning prepays three
months’ office rent of $3,000.

68

Journalizing and Posting Transactions (17 of 26)

Transaction 11—Payment of Expense with Cash

On December 1, Smart Touch Learning paid employee
salaries of $1,200.

69

Journalizing and Posting Transactions (18 of 26)

Transaction 12—Purchase of Building with Notes
Payable

On December 1, Smart Touch Learning purchased a
$60,000 building in exchange for a note payable.

70

Journalizing and Posting Transactions (19 of 26)

Transaction 13—Stockholder Contribution

On December 2, Smart Touch Learning received a
contribution of furniture with a fair market value of $18,000
from Sheena Bright. In exchange, Smart Touch Learning
issued common stock.

71

Journalizing and Posting Transactions (20 of 26)

Transaction 14—Accrued Liability

On December 15, Smart Touch Learning received a
telephone bill for $100 and will pay this expense next month.

72

Journalizing and Posting Transactions (21 of 26)

Transaction 15—Payment of Expense with Cash

On December 15, Smart Touch Learning paid employee
salaries of $1,200.

73

Journalizing and Posting Transactions (22 of 26)

Transaction 15—Payment of Expense with Cash

74

Journalizing and Posting Transactions (23 of 26)

Transaction 16—Unearned Revenue

On December 21, a law firm engages Smart Touch Learning
to provide e-learning services and agrees to pay $600 in
advance.

75

Journalizing and Posting Transactions (24 of 26)

Transaction 16—Unearned Revenues

76

Journalizing and Posting Transactions (25 of 26)

Transaction 17—Earning of Service Revenue for Cash

On December 28, Smart Touch Learning collected cash of
$8,000 for Service Revenue that the business earned by
providing e-learning services for clients.

77