Chapter 2 FTs Slides-1

ACCT 1036 - Principles of Accounting

  • Instructor: Dr. Francis Taylor, CPA

  • Chapter 2: Recording Business Transactions (Double Entry Accounting)

Fundamentals of Accounting Storytelling

Simple Rules of Story Telling (Accounting Jargon)

  1. Something happens that we want to remember (Recognize it)

  2. There has to be a start and a finish (Balanced)

  3. Every sentence has to have a noun and a verb (Debit and Credit)

Building Blocks of Accounting

  • We turn letters into a word;

  • Words into a sentence;

  • Sentences into a paragraph;

  • Paragraphs into a chapter;


  • Chapters into a book.Accounting employs a similar building block concept.

Accounting Jargon: Structure of Accounting Story

  • Letters: Something happened – do we want to recognize it?

  • Words: Numbers and Accounts

  • Sentences: Journal Entries

  • Paragraphs: Periods in Time

  • Chapters: Individual Statements

Making the Sentence – Double Entry Accounting

  1. An event occurs – decision to recognize or not.

  2. Recognition through a journal entry (the sentence).

  3. Posting makes it real (like sending a text message).

Journal Entry Rules




  • Sentences (Journal Entries) have rules:a) Noun: An account (who was affected).b) Verb: An amount (what happened).c) Must be grammatically correct: Balanced or Double Entry Accounting.

Double Entry Accounting

Rules of Double Entry Accounting

  1. Every Journal Entry must have at least two accounts (two nouns).

  2. Total amounts for all accounts must equal.

Chart of Accounts

  • Definition: A list of all accounts used in the business. Compare to characters in a story.

Example Chart of Accounts

  • 101 – Bank Account

  • 201 – Accounts Payable

  • 102 – Accounts Receivable

  • 202 – Bank Loan

  • 103 – Inventory

  • 301 – Investments

  • 104 – Plant, Property & Equipment

  • 302 – Withdrawals

  • 401 – Revenue

  • 501 – Cost of Sales

  • 502 – Rent Expense

  • 503 – Payroll Expense

Journal Entry Example

  • Example: Owner invests $1,500 into the company.

    • Asset: Cash $1,500

    • Equity: Investments $1,500

    • Key questions:

      • Are there at least two accounts used? Yes!

      • Do the amounts match? Yes!

Understanding Debits and Credits

  • Left Side = Right Side…

  • Debits increase Assets; Credits increase Liabilities and Equity.

Assets, Liabilities, and Equity

  • Assets = Left Side (Debits)

  • Liabilities + Equities = Right Side (Credits)

Understanding Equity

  • Defined as Owner’s Equity, Shareholder’s Equity, and Capital.

  • Components: Investments, Withdrawals, Revenues, and Expenses.

    • Equation: Equity = (Investments - Withdrawals) + (Revenues - Expenses)

Accounting Equation

  • A = L + E

  • Expanded: E = (Investments - Withdrawals) + (Revenues - Expenses)

  • Conclusion: Adjustments must equally balance the equations.

Memory Aids

  • AWE LIR:

    • Left Side: Assets, Withdrawals, Expenses increase with a Debit.

    • Right Side: Liabilities, Investments, Revenues increase with a Credit.

Posting Journal Entries

  • Example:

    • Owner invests $1,500 into the company:

      1. DR - Asset: Cash $1,500

      2. CR - Equity: Investments $1,500

      3. Post to T-Accounts, reflecting Ledger balances.

Completing the Accounting Cycle

  1. Sum up T-Accounts.

  2. Place values into a Trial Balance.

  3. Complete Financial Statements.

Trial Balance

  • Definition: A summary of all accounts’ balances in the ledger.

  • Role: To demonstrate that total Debits equal total Credits and ensure Double Entry Accounting adherence.

Example Transaction Analysis for ARE Company

  1. Record Journal Entries for each transaction.

  2. Post transactions to a Ledger using T-accounts.

  3. Show Trial Balance.

  4. Complete Income Statement, Statement of Equity, and Balance Sheet for the month of January.