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Chapter 2
Recording Business Transactions
Chapter 2 Mugan-Akman 2007 2
Accounting Methods for Measuring Performance
(a) Cash basis of accounting– Revenues are recognized when cash is received and
expenses are recognized when cash is paid
(b) Accrual basis of accounting(b) Accrual basis of accounting– Revenues and expenses are recognized on an Revenues and expenses are recognized on an
economic basis regardless of when cash is paid or economic basis regardless of when cash is paid or receivedreceived
Chapter 2 Mugan-Akman 2007 3
Accounting Methods for Measuring Performance
(a) Cash basis of accounting(a) Cash basis of accounting– Revenues are recognized when cash is received and Revenues are recognized when cash is received and
expenses are recognized when cash is paidexpenses are recognized when cash is paid
(b) Accrual basis of accounting– Revenues and expenses are recognized on an
economic basis regardless of when cash is paid or received
X
Chapter 2 Mugan-Akman 2007 4
Recognition of Revenues
• Significant risks and benefits of ownership passes from the seller to the buyer
(Transfer of title of goods)
Chapter 2 Mugan-Akman 2007 5
Recognition of Expenses
• Expenses are recognized when they are incurred and helped to produce revenues
Chapter 2 Mugan-Akman 2007 6
Generally Accepted Accounting Principles and Concepts
• Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companies
• Monetary Unit- only economic events that have monetary transactions will be reported in the financial statements
• Cost Principle- assets are presented at their original (historical) cost
• Going Concern- companies are established with the goal that they will operate for an indefinitely long period of time
• Periodicity - economic activities of any firm can be divided into discrete time periods for reporting purposes
• Matching Principle -all revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting period in which they are incurred to produce such revenues
Chapter 2 Mugan-Akman 2007 7
Accounting Cycle
Analyze and record the transactions
Post the transactions and prepare trial balance
Adjust the accounts and prepare trial balance
Close the accounts and prepare trial balance
Prepare the financial statements
Chapter 2 Mugan-Akman 2007 8
Analysis and Recording Business Transactions
• Business transaction is an economic event that causes a change in the financial position
• Financial Position:– What we own – How we own
Chapter 2 Mugan-Akman 2007 9
Fundamental Accounting Equation
ASSETS = EQUITIES
ASSETS = LIABILITIES + OWNERS' EQUITY
Chapter 2 Mugan-Akman 2007 10
Transaction Analysis and The Duality Concept
if an asset account increases, because of duality concept there must be a corresponding
1. increase in a specific liability account
2. or a decrease in a another asset account
3. or an increase in owners' equity account.
Chapter 2 Mugan-Akman 2007 11
How do we record?• an ACCOUNT: accounting report of a
specific asset, liability or owners’ equity item
• Has 3 elements: title, debit side and credit side (also called the “T-Account”)
Title
Debit Credit
Chapter 2 Mugan-Akman 2007 12
How do accounts behave?
Assets = Liabilities + Shareholders’ Equity
+ + +
So Assets increase on the left hand or debit side then they decrease on the credit side
Assets
+ -
debit credit
Chapter 2 Mugan-Akman 2007 13
Behavior of Accounts
Liabilities and Owners’ Equity accounts increase on the credit side, decrease on the debit side
Liabilities or Owners’ Equity Accounts
- +
debit credit
Chapter 2 Mugan-Akman 2007 14
Yağmur Bulut completed the following transactions during October 2007:
1. 1 October, invested TL 50.000 to start an accounting practice, Yağmur Bulut, SMMM
2. 2 October, Rented office space and paid TL 1.200 for October and November.
3. 4 October, paid cash for a Dell computer, TL 2.000. The computer is expected to remain in service for five years
4. 5 October, purchased furniture and fixtures for the office on account, TL 5.400 . These items have an estimated useful life of 5 years.
5. 6 October, purchased supplies on account, TL 150
6. 8 October, performed tax filing services for a client on account, TL 375
P2-6
Chapter 2 Mugan-Akman 2007 15
7. 22 October, made an agreement with a client to perform bookkeeping for 6 months and received TL 1.200 in advance
8. 23 October, the electricity invoice for an amount of TL 52 was received, which will be paid in November
9. 27 October, paid the liability for the purchase of office supplies
10. 29 October, the client who was billed on 8 October paid TL 275
11. 31 October, Withdrew cash to pay her son’s school fee, TL 1.600
Chapter 2 Mugan-Akman 2007 16
Date Account Debit Credit1 October Cash 50,000
Y. Bulut, Capital 50,000
Chapter 2 Mugan-Akman 2007 17
Date Account Debit Credit1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600Prepaid Rent 600 Cash 1,200
Chapter 2 Mugan-Akman 2007 18
Date Account Debit Credit1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600Prepaid Rent 600 Cash 1,200
4 October Office Equipment 2,000 Cash 2,000
Chapter 2 Mugan-Akman 2007 19
Date Account Debit Credit1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600Prepaid Rent 600 Cash 1,200
4 October Office Equipment 2,000 Cash 2,000
5 October Office Furniture 5,400 Accounts Payable 5,400
Chapter 2 Mugan-Akman 2007 20
Date Account Debit Credit1 October Cash 50,000
Y. Bulut, Capital 50,000
2 October Rent Expense 600Prepaid Rent 600 Cash 1,200
4 October Office Equipment 2,000 Cash 2,000
5 October Office Furniture 5,400 Accounts Payable 5,400
6 October Supplies 150 Accounts Payable 150
Chapter 2 Mugan-Akman 2007 21
Date Account Debit Credit1 October Cash 50.000
Y. Bulut, Capital 50.000
2 October Rent Expense 600Prepaid Rent 600 Cash 1.200
4 October Office Equipment 2.000 Cash 2.000
5 October Office Furniture 5.400 Accounts Payable 5.400
6 October Supplies 150 Accounts Payable 150
8 October Accounts Receivable 375 Revenues 375
Chapter 2 Mugan-Akman 2007 22
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
Chapter 2 Mugan-Akman 2007 23
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
Chapter 2 Mugan-Akman 2007 24
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
Chapter 2 Mugan-Akman 2007 25
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
29 October Cash 275
Accounts Receivable 275
Chapter 2 Mugan-Akman 2007 26
Debit Credit
22 October Cash 1,200
Unearned Revenues 1,200
23 October Utilities Expense 52
Accounts Payable 52
27 October Accounts Payable 150
Cash 150
29 October Cash 275
Accounts Receivable 275
31 October Y. Bulut, Withdrawals 1,600
Cash 1,600
Chapter 2 Mugan-Akman 2007 27
Accounting Cycle
Analyze and record the transactions
Post the transactions and prepare trial balance
Adjust the accounts and prepare trial balance
Close the accounts and prepare trial balance
Prepare the financial statements
Chapter 2 Mugan-Akman 2007 28
Posting to The LedgerGENERAL JOURNAL Page 1Date Account Title and Description Ref* Debit Credit
1 Jan 2004Cash 100 100.000
Capital 500 100.000
Investment by the shareholders
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit Balance
Credit Balance
1 Jan 2004Investment by the shareholders P 1 100.000 100.000
LEDGER - Capital Acc. No. 500
Date Description Ref Debit Credit Debit Balance
Credit Balance
1 Jan 2004Investment by the shareholders P 1 100.000 100.000
Chapter 2 Mugan-Akman 2007 29
LEDGER - Cash Acc. No. 100
Date Description Ref Debit Credit Debit Balance
1 Jan Investment by the shareholders P 1 100.000 100.0001 Jan Payment of office rent P 1 600 99.4002 Jan Purchase of office furniture and equipment P 1 5.000 94.4003 Jan Payment of insurance P 1 120 94.28010 Jan Borrowing from the bank P 1 15.000 109.28010 Jan Purchase of office supplies P 1 2.500 106.78020 Jan Payment for an accounts payable P 1 5.000 101.78022 Jan Receipt of advance payment from a customer P 1 7.500 109.28023 Jan Receipt of payment from a customer P 1 5.000 114.28024 Jan Payment of salaries P 1 9.000 105.28031 Jan Withdrawal by the owner P 1 3.000 102.280
Chapter 2 Mugan-Akman 2007 30
50,000 1,200 375 275 150 600 1,200 2,000 100 150 600
275 150 1,600
51,475 4,950 46,525
2,000 5,400 150 5,400 2,000 5,400 150
52 150 5,602
5,452
1,200 50,000 1,600 375 1,200 50,000 1,600 375
600 52 600 52
Prepaid Rent
Accounts Payable
Unearned Revenues Capital
Rent Expense
Withdrawals Revenues
Utilities Expense
Cash Accounts Receivable Supplies
Office Equipment Office Furniture
Chapter 2 Mugan-Akman 2007 31
Debit CreditCash 46,525 Accounts Receivable 100 Supplies 150 Prepaid Rent 600 Equipment 2,000 Furniture 5,400 Accounts Payable 5,452 Unearned Revenues 1,200 Capital 50,000 Withdrawals 1,600 Revenues 375 Rent Expense 600 Utility Expense 52 Total 57,027 57,027
Trial Balance
Chapter 2 Mugan-Akman 2007 32
Category of the Account
Increase Recorded By
Normal Balance
Assets Debits Debit
Liabilities Credits Credit
Shareholders’ Equity
Capital Credits Credit
Dividends or Withdrawals
Debits Debit
Revenues Credits Credit
Expenses Debits Debit
NORMAL BALANCES OF ACCOUNTS