Recording Business Transactions

Introduce a formal way to record business transactions using debits and credits (journals).
Calculate normal account balances with T-accounts (ledgers).

The accounting profession developed a formal method to record transactions and to determine and validate each account's balance through double-entry accounting.
This chapter is described as "deceptively simple but pragmatically hard."

In $1494$ , the first book on double-entry accounting was published by an Italian friar, Luca Pacioli.
His book included most of the accounting cycle as known today, such as the use of journals and ledgers.
Pacioli famously warned that "a person should not go to sleep at night until his debits equaled his credits!"
He also proposed using a trial balance to prove a balanced ledger.

Trial Balance (Debits = Credits)
Adjustments (Identify, Journal, & Post)
Adjusted Trial Balance
Prepare Financial Statements (Income Statement, Balance Sheet, Statement of Retained Earnings, Statement of Cash Flows)
Closing Entries (Journal & Post)
Post-Closing Trial Balance - End of Cycle

Identify the accounts (and the account type) and amounts. Each transaction must affect at least two accounts.
Decide whether each account balance increases ( $+$ ) or decreases ( $-$ ) as a result of the transaction.
Record the transaction in a journal, applying the rules of debits and credits.
Post (copy) the journal entry to the ledger to determine the account balance.
Check whether the fundamental accounting equation ( $A = L + E$ ) is in balance.

In an accounting system, a Ledger is used to determine an account’s balance.
In ACCT $121$ , a T-account simulates a ledger, serving as a graphical representation of a ledger account. Each account has its own T-account.
- The name of the account is placed above the "T."
- Debit (DR): The left side of the T-account.
- Credit (CR): The right side of the T-account.
- The account balance appears at the bottom of the account, either on the left or right side.
Fundamental Rule: In every transaction, the total dollar value of all debits must equal the total dollar value of all credits. The accounting equation ( $A = L + E$ ) must still hold true.

Assets (Cash, Accounts Receivable, Land, etc.):
- Increase ( $+$ ) on the Debit side (left). Decreases ( $-$ ) on the Credit side (right).
- Normal Account Balance: Debit.
- Reason: Assets are on the left side of the accounting equation.
Liabilities (Accounts Payable, Notes Payable, Unearned Revenue, etc.):
- Increase ( $+$ ) on the Credit side (right). Decreases ( $-$ ) on the Debit side (left).
- Normal Account Balance: Credit.
- Reason: Liabilities are on the right side of the accounting equation.
Equity (Common Stock & Retained Earnings):
- Increase ( $+$ ) on the Credit side (right). Decreases ( $-$ ) on the Debit side (left).
- Normal Account Balance: Credit.
- Reason: Equity is on the right side of the accounting equation.
Revenue:
- Increase ( $+$ ) on the Credit side (right). Decreases ( $-$ ) on the Debit side (left).
- Normal Account Balance: Credit.
- Reason: Revenue is an addition to equity, so the placement of the plus and minus signs is the same as for common stock and retained earnings.
Expenses and Dividends:
- Increase ( $+$ ) on the Debit side (left). Decreases ( $-$ ) on the Credit side (right).
- Normal Account Balance: Debit.
- Reason: Expenses and dividends are treated as deductions from equity, so the placement of the plus and minus signs is reversed compared to other equity accounts.

A journal is a log of all financial transactions (events) that have occurred, shown in date order.
Each time a transaction is entered, it is called a journal entry.
Chapter $1$ focused on recording transactions using the horizontal model; Chapter $2$ transitions to recording transactions using a Journal.

Steps Applied: Identify accounts and amounts, decide increase/decrease, record in journal, post to T-accounts, check $A = L + E$ .

Nov $1$ : The company deposited $\$90,000$ cash in a checking account from issuing common stock to a shareholder.
- $Cash ext{ (Asset, increase)}\ ext{ Common Stock ext{ (Equity, increase)}}$
  \begin{array}{l|l} ext{Debit (DR)} & ext{Credit (CR)}\ \$90,000 & \$90,000 ext{ ext{ (Issued common stock)}}
Nov $3$ : The company bought land, paying $\$38,000$ in cash.
- $Land ext{ (Asset, increase)}\ ext{ Cash ext{ (Asset, decrease)}}$
  \begin{array}{l|l} ext{Debit (DR)} & ext{Credit (CR)}\ \$38,000 & \$38,000 ext{ ext{ (Purchased land)}}
Nov $8$ : The company earns $\$40,000$ in service revenue by providing its service to a client. The client promised to pay this amount in one month.
- $Accounts ext{ Receivable ext{ (Asset, increase)}}\ ext{ Service Revenue ext{ (Equity, increase)}}$
  \begin{array}{l|l} ext{Debit (DR)} & ext{Credit (CR)}\ \$40,000 & \$40,000 ext{ ext{ (Performed services on account)}}

$\underline{\text{Cash}}$
- Nov $1$ : $\$90,000$
- Nov $3$ : $\$38,000$
- Bal: $\$52,000$
$\underline{\text{Accounts Receivable}}$
- Nov $8$ : $\$40,000$
- Bal: $\$40,000$
$\underline{\text{Land}}$
- Nov $3$ : $\$38,000$
- Bal: $\$38,000$
$\underline{\text{Common Stock}}$
- Nov $1$ : $\$90,000$
- Bal: $\$90,000$
$\underline{\text{Service Revenue}}$
- Nov $8$ : $\$40,000$
- Bal: $\$40,000$

Assets: Cash ( $52,000) + Accounts Receivable ($ 40,000) + Land ( $38,000) =$ \$130,000
Liabilities: \$0
Equity: Common Stock (90,000) + Service Revenue ( $40,000) =$ \$130,000
Result: \$130,000 = \$0 + \$130,000$$ - The equation is in balance.