Measuring Business Transactions

1
Chapter 2

• Measuring Business Transactions

2
Double Entry System

• Two sides of every transaction to book
• Balance out each other
• Sum of all transactions is zero
• Is one side of a transaction better than the
  other?
• Is one side good and the other side evil?
• Is one side the light side and the other side the
  dark side?

3
Double Entry System Two Sides to Each
Transaction

• Principle of Duality
• Effort reward
• Sacrifice benefit
• Source use
• Duality is neutral
• Heads tails
• Right left
• Positively negatively charged particles
• Inherently NEITHER good or bad

4
Double Entry System

• One side neither more or less desirable
• Can represent EITHER an increase or decrease
  depending on Category of account
• Asset
• Liability
• Equity
• Revenue
• Expense

5
Double Entry System

• Left and Right side of transaction
• Special terms accountants use
• Debit left side of the transaction
• Credit right side of the transaction

6
Debits and Credits

• Are Credits good Debits bad?
• Abandon old mindset (paradigm)
• DEBIT IS NOTHING MORE THAN THE LEFT SIDE OF A
  TRANSACTION
• CREDIT IS NOTHING MORE THAN THE RIGHT SIDE OF A
  TRANSACTION

7
Debits and Credits

• Debits
• Left side
• Neither good nor bad
• Neither automatic increase or decrease

• Credits
• Right side
• Neither good nor bad
• Neither automatic increase or decrease

8
Debits and Credits

• In every transaction will always equal
• if not, error somewhere that must be corrected

9
The T Account

• Handy tool
• Substitute for general ledger accounts in
  classroom
• Useful in solving problems
• Graphic portrayal of what has transpired what
  need to happen
• Most accountants use them to figure out entries
  adjustments

10
The T Account
Account Title

• Looks like a upper case T
• Tool to represent an account
• Title on top
• Left side for Debits
• Right side for Credits
• Subtotal for each side
• Net of the subtotals is the Balance
• An account can have only ONE balance

Debit Trx 12,000
Credit Trx 2,000 1,000
Subtotal 12,000 3,000
Balance 9,000
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The T Account
Record April Mays portion of quarter end
Junes investment activity
Expenses
Acc Income Rec
Income
6499.91
7757.82
1057.91
Acc Income Rec
Income
Expenses
6499.91
6499.91 7757.87 1057.91
9888.25 11510.51 1622.26
9888.259888.25
Cash
Reverse entry at end of previous year
Record full quarters net income from investment
manager
Record receipt of quarterly net income from
investment manager
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More Debit Credit Stuff

• Automatically not associated with increases or
  decreases, BUT
• Debits can represent increases in some accounts
  and decreases in other accounts
• Credits can represent increases in some accounts
  and decreases in other accounts
• Confused?

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To Help Unconfuse
Assets Liabilities Equity
Equity made up of
W ithdrawlsBalance Sheet I nvestments
(capital)
R evenueIncome Statement E xpenses
W E are the outsiders and they have a negative
attitude I R are the insiders and they have
a very positive attitude
Restating Assets Liabilities
Insiders Outsiders Investments Revenues
- Withdrawls - Expenses
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To Further Help Unconfuse
Insiders Outsiders Investments Revenues
- Withdrawls - Expenses
Assets Liabilities
Outsiders defect to other side of the equation,
change signs, and thus the equation becomes
Assets Withdrawls Expenses Liabilities
Investments Revenues
In this form equation will determine when a
debit or credit represents an increase
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Assets Withdrawals Expenses Liabilities
Investments Revenues
For any account that falls into one of the
categories to the left of the equals
sign Increases are represented by
Debits Decreases are represented by
Credits Left (debit) side of Debits
mean increases
For any account that fall into one of the
categories to the right of the equals
sign Increases are represented by
Credits Decreases are represented by
Debits Right (credit) side of Credits
mean increase
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Transaction Analysis Sounds Worse Than It Is

• Determine which accounts are affected by the
  transaction and how (increase/decrease)
• Determine effects of transaction on Categories
  (increase/decrease)
• Apply the rules of Double Entry based on
  increases/decreases in the Category
• Record the entry
• Post the entry
• Prepare trial balance after all entries

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Determine Which Accounts are Affected by
Transaction How (increase/decrease)

• Example product is sold in a cash sale
• Increase in cash
• Increase in sales
• Into which category does each of these accounts
  fall?
• Cash is an asset account
• Sales is a revenue account

18
Determine Effect of Transaction on Categories
(increase/decrease)

• Increase an asset increase a liability
• Increase an expense increase a liability
• Increase an expense decrease an asset
• Decrease a liability decrease an asset
• Increase an asset increase owners equity
  (investment)
• Increase withdrawl of capital decrease an asset
• Increase an asset increase revenues

19
Apply the Rules of Double Entry Based on
Increases/Decreases in Categories of Accounts

• Increases in assets are debits
• Debit Cash
• Increases in revenues are credits
• Credit Sales

20
Record the Entry

• Transaction is written down in journal form
• Often on special paper
• One column for debit
• One column for credit
• Other columns for additional info
• Date
• Account number
• Account description
• Brief description

21
Record the Entry
SourceExcel/AC 205 Classes/Journal Entry
Example.xls
22
Post the Entry

• Information from journal entry is transferred to
  actual accounts in general ledger
• Manually
• Computerized systems generally automatically post
  entry at time it is entered

23
Prepare Trial Balance After all Entries Posted

• Columnar listing of all accounts their balances
• Initially used to prove that debits credits are
  in balance (equal) after posting entries