Ken Szulczyk's Lecture Notes for Accounting 1 - Recording Transactions
Lecture #2: Recording Transactions
provides quantitative information about economic entities.
Two types of transactions
Business transactions -
These transactions occur between the entity and an outside party.
2. Internal transactions - Transactions
that affect the financial statements, but does not result from an outside
documents that businesses use in the process of completing transactions.
These are evidence of business transactions and the basis for entry into
the accounting records.
These are verifiable records between your business and another business.
Business transactions must be recorded and stored in separate locations,
so they can be sorted and combined when the financial reports are prepared.
Purchase of law books
Legal fees earned
Purchase of office equipment
Collection of account receivable
Payment of salary
Payment of account payable
Withdrawal by owner
A business uses a number of accounts to record and store the effects of
Cash: Consists of money and any other medium of exchange.
Notes Receivable: A promissory note is an unconditional
written promise to pay a definite sum of money on demand at some specific
date in the future.
Accounts Receivable: Goods and services are commonly
sold to customers on the basis of oral or implied promises of future payment.
Prepaid Insurance: Fire, liability, and other types of insurance
protection are normally paid in advance.
Office Supplies: When stamps, stationary, paper, pencils,
and other items are bought for the office, they are assets that are recorded
here. When these assets are used up, then they are transferred to
Other Prepaid Expenses: When payments are made for economic benefits
that do not expire until some later time.
Equipment: Physical assets are recorded here, such as
computers, desks, chairs, and office machines.
Buildings: Buildings used by a business in carrying
on its operations, such as a store, garage, warehouse, or factory.
Land: Increases and decreases of land owned by the business
is recorded here. Land and buildings are separated, because buildings
deteriorate and depreciate over time, while land does not.
2. Liability Accounts -
They are present obligations to transfer assets or provide services to
other entities in the future.
Notes Payable: A formal written promise to pay a definite sum of
money at a fixed future date.
Accounts Payable: When purchases are made on the basis
of oral or implied promises to pay.
Unearned Revenue: Revenue cannot be recognized until
it is earned. If a company collects money before its products are
delivered, then this transaction must be recorded in an Unearned Revenue
account. When the products are delivered, then the amount earned
would be transferred to the revenue accounts.
Other Short-Term Payables: Wages payable, taxes payable, and interest
payable. Each account requires their own separate account.
3. Owner’s Equity Accounts -
The owner’s equity is broken-down into three accounts.
Capital Account.: When a person invests in his own business,
the investment is recorded in an account carrying the owner’s name and
the word capital. The capital account is used for any permanent additional
increases or decreases in owner’s equity.
Withdrawal Account: When the business earns net income, the equity
of the business increases. The owner needs money for living expenses
or for other personal uses, so he can withdraw some of the business’s assets,
which reduces owner’s equity.
Revenue and Expense Accounts: To prepare an income statement
for a business, you have to know the amount of each kind of revenue and
each kind of expense. Then you would have a number of expense and
Debit and Credit
The T-account has a left side and a right side. The left side is
called the debit side, while the right is called a credit side. The
difference between total debits and total credits is called the account
Illustrating the Rules of Debit and Credit.
We will be following the transactions for Jerry Dow’s law practice.
On Dec. 1, Jerry Dow invested $9,000 in a new law practice.
He purchased books for a law library, paying cash of $2,500.
He purchased office equipment for cash $5,600.
He purchased on credit from Equip-it Company law library items $380 and
office equipment $1,280.
He completed legal work for a client and immediately collected a $2,200.
He paid the office rent for Dec. $1,000.
He paid the secretary’s salary for the two weeks ended Dec. 12, $700.
He completed legal work for a client and billed the client $1,700 for the
The client paid the $1,700 legal fee billed in transaction 8.
He paid Equip-it Company $900 of the $1,660 owed for the items purchased
on credit in transaction 4.
Jerry Dow withdrew $1,100 from the law practice for personal use.
He signed a contract with Chemical Supply to do its legal work on a
fixed-fee basis for $500 per month. He received the fee for
the first six months in advance $3,000.
He paid a $2,400 premium for liability insurance protection that lasts
He purchased office supplies for cash $120.
He paid the Dec. utilities bill for electricity and water $230.
He paid the secretary’s salary for the two weeks ended on Dec. 26, $700.
You can test this equality be constructing a trial balance. To make
1. Determine the balance of each account in the ledger.
2. List the accounts with balances other than zero.
Jerry Dow, Attorney
December 31, 1990
Unearned Legal Fees
Jerry Dow, Capital
Jerry Dow, Withdrawals
Legal Fees Earned
We are using T-accounts to teach you accounting. They are not used
in the real world. Businesses use accounts that is illustrated below.
Account No. 111
Invested in business
Purchased law books
Purchased office equip.
Client paid legal services
Note: Because of the equation:
Assets = Liabilities + Owner’s Equity
The Normal Balance is:
Should be First Recorded in a Journal
It is possible to record transactions by entering debits and credits directly
in the accounts. If you make an error, the error will be difficult
to locate, using this method, because there is no link between the credit
and debit items in the ledger books.
To correct this problem, all transactions are first recorded in a journal,
called the General Journal. From the journal, the information of
the transactions is transferred to the accounts. This procedure reduces
the tendency to make errors. If an error is made, then the General
Journal makes it possible to locate the error.
The General Journal should contain the following information of each transaction.
The transaction date.
The names of the accounts involved.
The amount of each debit and credit.
An explanation of the transaction.
A column in which to mark the identifying number of the account
to which each debit or credit was copied.
Account Titles and Explanation
Jerry Dow, Capital
Investment by owner
law books for cash.
office equipment for cash.
supplies and equipment on credit.
All companies should follow a systematic method of assigning numbers to
Owner’s equity accounts:
Operating expense accounts:
When a trial balance does not balance, then an error has been made.
To find the error:
Recalculate the column totals in the trial balance.
Check to see if the account balances were correctly copied from the ledger.
Recalculate the account balances.
Refer to the General Journal to see if transactions were correctly
transferred from it to the ledger accounts.
When an error is discovered in either the journal or the ledger, it must
be corrected. Never erase the error, because this may indicate an
effort to conceal something.
An amount was posted to the wrong account.
record the purchase of office supplies.
You correct this error by using an entry in the journal.
To correct the entry on Oct. 14, where an error was made.