Lecture 4

2-1
Lecture 4
Financial Statements
2-2
Implications Of Debits And Credits

Debits and Credits are used to indicate
that something happened to an account.
Interpreting the implications requires an
analysis of the entire journal entry.
Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?
2-3
Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?
ANSWER:
Notes Payable would increase.
2-4
Implications
Question 2
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?
2-5
Implications
Question 2
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?
ANSWER:
Such an increase could imply that the
company borrowed money.
2-6
Implications
Question 3
If the company borrowed money, which
account would also be affected and in
what way?
2-7
Implications
Question 3
If the company borrowed money, which
account would also be affected and in
what way?
ANSWER:
There would also be an equal-sized
increase in the Cash account.
2-8
Implications
Question 4
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?
2-9
Implications
Question 4
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?
ANSWER:
The company acquired land and gave a
note that promised to pay for the land
in the future.
2-10
2-11
Recording Transactions
Initially, all transactions are recorded in

the General Journal.
Journal
2-12
Recording Transactions
Initially, all transactions are recorded in

the General Journal.
Journal
Each transaction always affects at

least two different accounts.
One account has a debit effect.
The second account has a credit effect.
This methodology was named double

entry accounting by whom?
Pacioli
2-13
General Journal Page

GENERAL JOURNAL
Page:
Date
Description
PR
Debit
Credit
Journal Entries
Example 1
On January 1, 19X7, Caldwell Company
borrows $10,000 from the bank.
Prepare the appropriate general journal
entry for the above transaction.
2-14
Journal Entries
Solution 1
Two accounts are affected:

Cash is increased by $10,000.
Notes Payable is increased by $10,000.
2-15
2-16
Journal Entries
Solution 1

GENERAL JOURNAL
1
Page:
Date
Description
PR
Debit
Credit
2-17
Journal Entries
Solution 1

GENERAL JOURNAL
1
Page:
Date
Description
1-Jan Cash
Notes Payable
to record loan from bank
PR
Debit
100
201
10,000
Credit
10,000
Journal Entries
Example 2
On January 15, 19X7, Caldwell
Company purchases a truck for
$19,500 cash.
Prepare the appropriate journal entry
for the above transaction.
2-18
Journal Entries
Solution 2

Trucks is increased by $19,500.
Cash is decreased by $19,500.
2-19
2-20
Journal Entries
Solution 2

GENERAL JOURNAL
1
Page:
Date
Description
PR
Debit
Credit
2-21
Journal Entries
Solution 2

GENERAL JOURNAL
1
Page:
Date
Description
PR
15-JanTrucks
150
Cash
100
to record purchase of truck
Debit
Credit
19,500
19,500
Journal Entries
Example 3
On January 20, 19X7, Caldwell Co.
pays the $400 electric bill for January.
Prepare the appropriate journal entry
for the above transaction.
2-22
Journal Entries
Solution 3

Utility Expense is increased by $400.
Cash is decreased by $400.
2-23
2-24
Journal Entries
Solution 3

GENERAL JOURNAL
1
Page:
Date
Description
PR
Debit
Credit
2-25
Journal Entries
Solution 3

GENERAL JOURNAL
1
Page:
Date
Description
PR
20-JanUtility Expense
511
Cash
100
to record payment of January
electric bill
Debit
Credit
400
400
2-26
More About The General Ledger
It is a complete collection of all the

accounts of a company
Accounts are individually numbered for

easy reference
It is used to collect the information about

all of the transactions affecting a specific
account
Categories of
General Ledger Accounts
The five types of accounts fall into one of
two categories
Real
Real AccountsAccounts- BS
BS accounts
accounts
Nominal
Nominal AccountsAccounts- IS
IS accouts
accouts
2-27
2-28
Real Accounts
This category includes Assets,

Liabilities, and Stockholders Equities
(i.e., Balance Sheet accounts)
Accounts are permanent.
Account balances are carried forward

from one fiscal year to the next.
2-29
Nominal Accounts
Nominal accounts include revenues

and expenses.
Nominal accounts are temporary.
Nominal account balances are closed

out to zero at the end of the fiscal year.
Closing Entries will be discussed in

Chapter 4.
2-30
Posting to the GL
Example
GENERAL JOURNAL
1
Page:
Date
Description
1-Jan Cash
Notes Payable
PR
Debit
Credit
10,000
10,000
Start with the journal entry from the

General Journal.
2-31
Posting to the GL
Example
GENERAL JOURNAL
Date
Page: page
Next, find the appropriate
Description
PR forDebit
in the General
Ledger
Cash. Credit
1-Jan Cash
Notes Payable
10,000
10,000
ACCOUNT NAME: CASH

Date
Description
Beginning Balance
ACCOUNT No.
PR
Debit
Credit
100
Balance
2-32
Posting to the GL
Example
GENERAL JOURNAL
Post the account
referencePage:
number.
Date
Description
1-Jan Cash
Notes Payable
ACCOUNT NAME: CASH
Date
Description
Beginning Balance
PR
Debit
100
10,000
1
Credit
10,000
ACCOUNT No.
PR
Debit
Credit
100
Balance
2-33
Posting to the GL
Example
GENERAL JOURNAL
1
Page:
Date
Description
1-Jan Cash
Notes Payable
Description
Beginning Balance
1-JanLoan
Debit
100
10,000
Credit
10,000
ACCOUNT NAME: CASH

Date
PR
ACCOUNT No.
PR
Debit
G1
0
10,000
Credit
Post the transaction info to the GL.
100
Balance
2-34
Posting to the GL
Example
GENERAL JOURNAL
Date
Page:
Next, find the Notes Payable
PR Ledger.
Debit
pageDescription
in the General
1-Jan Cash
Notes Payable
100
Description
Beginning Balance
Credit
10,000
10,000
ACCOUNT NAME: Notes Payable

Date
ACCOUNT No.
PR
Debit
Credit
201
Balance
2-35
Posting to the GL
Example
GENERAL JOURNAL
Post the account
referencePage:
number.
Date
Description
1-Jan Cash
Notes Payable
Date
Description
Beginning Balance
PR
Debit
100
201
10,000
1
Credit
10,000
ACCOUNT No.
PR
Debit
Credit
201
Balance
2-36
Posting to the GL
Example
GENERAL JOURNAL
1
Page:
Date
Description
1-Jan Cash
Notes Payable
Date
Description
Beginning Balance
1-JanLoan
PR
Debit
100
201
10,000
Credit
10,000
ACCOUNT No.
PR
G1
Debit
Credit
0
10,000
Post the transaction info to the GL.
201
Balance
2-37
Posting to the GL
Example
GENERAL JOURNAL
Examine the next journalPage:

entry.
Date
Description
PR
Debit
15-Jan Trucks
Cash
Description
Beginning Balance
1-JanLoan from bank
Credit
9,500
9,500
ACCOUNT NAME: CASH

Date
ACCOUNT No.
PR
Debit
G1
0
10,000
Credit
100
Balance
0
10,000
2-38
Posting to the GL
Example
GENERAL JOURNAL
Record the account reference.

Page:
Date
Description
PR
15-Jan Trucks
Cash
Description
Beginning Balance
1-JanLoan from bank
Credit
9,500
100
ACCOUNT NAME: CASH

Date
Debit
9,500
ACCOUNT No.
PR
Debit
G1
0
10,000
Credit
100
Balance
0
10,000
2-39
Posting to the GL
Example
GENERAL JOURNAL
3
Page:
Date
Description
PR
15-Jan Trucks
Cash
Description
Beginning Balance
1-JanLoan from bank
15-JanPurchase of truck
Credit
9,500
100
ACCOUNT NAME: CASH

Date
Debit
9,500
ACCOUNT No.
PR
G1
G3
Debit
Credit
0
10,000
Post the entry to the GL.
100
Balance
0
10,000
9,500
2-40
Posting to the GL
Example
GENERAL JOURNAL
3
Page:
Date
Description
PR
15-Jan Trucks
Cash
Description
Beginning Balance
1-JanLoan from bank
15-JanPurchase of truck
Credit
9,500
100
ACCOUNT NAME: CASH

Date
Debit
9,500
ACCOUNT No.
PR
G1
G3
Debit
Credit
0
10,000
9,500
Update the General Ledger balance.
100
Balance
0
10,000
500
2-41
TRIAL BALANCE
Used to periodically test whether the

General Ledger is in balance.
Consists of a listing of each account

with its balance as of a specific date.
All Debit balances are in one column.
All Credit balances are in another column.
Trial Balance Illustration

(Text example is on p. 79)
First Company
Trial Balance
12/31/X8
Cash
Accounts Receivable
Equipment
Accounts Payable
Notes Payable
Capital Stock
Retained Earnings - 1/1/X8
Dividends
Revenues
Salary Expense
Utility Expense
Rent Expense
Debits
$
500
1,200
3,800
Credits
700
1,450
3,000
-
250
11,000
5,000
3,000
2,400
$ 16,150
$ 16,150
2-42
Trial Balance Illustration

(Text example is on p. 79)
First Company
Trial Balance
12/31/X8
Cash that
Notice
Notice
that
Accounts Receivable
Total
Debits
Total Equipment
Debits are
are
Accounts Payable
equal
to
Total
equal
toPayable
Total
Notes
Capital Stock
Credits.
Credits.
Retained Earnings - 1/1/X8
Dividends
Revenues
Salary Expense
Utility Expense
Rent Expense
Debits
$
500
1,200
3,800
Credits
700
1,450
3,000
-
250
11,000
5,000
3,000
2,400
$ 16,150
$ 16,150
2-43
2-44
Dividends Account
The
The Dividends
Dividends account
account is
is aa contra
contra account
account
to
to Retained
Retained Earnings.
Earnings. Therefore,
Therefore, itit is
is
affected
affected by
by debits
debits and
and credits
credits as
as follows:
follows:
DIVIDENDS
Debit
Credit
for
for
Increase Decrease
2-45
EXERSISE
Mr. Johnson commenced business on 1st April, 2015 with a
capital of $100,000 in cash. During the month of April 2015 the
following transactions took place:
- On 1/4/ 2015 Bought equipment for cash 70,000
- 2/4/2015 Sold good to Steve Co.(Credit) 38,000
- 22/4/2015 paid Telephone bill on credit 500
- 28/4/2015 Paid rent by cash 2,000
Required:
1) Make journal entries for the transactions.
2) Post all entries to ledgers.

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2-1

Implications Of Debits And Credits

Initially, all transactions are recorded in

Initially, all transactions are recorded in

Each transaction always affects at

This methodology was named double

General Journal Page

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

More About The General Ledger

It is a complete collection of all the

Accounts are individually numbered for

It is used to collect the information about

This category includes Assets,

Accounts are permanent.

Account balances are carried forward

Nominal accounts include revenues

Nominal accounts are temporary.

Nominal account balances are closed

Closing Entries will be discussed in

Start with the journal entry from the

ACCOUNT NAME: CASH

ACCOUNT NAME: CASH

Post the transaction info to the GL.

ACCOUNT NAME: Notes Payable

Post the transaction info to the GL.

Examine the next journalPage:

ACCOUNT NAME: CASH

Record the account reference.

ACCOUNT NAME: CASH

ACCOUNT NAME: CASH

Post the entry to the GL.

ACCOUNT NAME: CASH

Update the General Ledger balance.

Used to periodically test whether the

Consists of a listing of each account

Trial Balance Illustration

Trial Balance Illustration

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