Recording Business Transactions
Business Transactions
Recording ABC Transactions
Now, I think we should be ready to revisit our ABC Mowing Company and record the transactions presented in prior lessons in our detailed accounts.
We are going to assume that ABC has beginning balances already recorded in their accounts. These balances are as of December 1, xxxx.
Note: If these balances were as of the beginning of the year the nominal or temporary accounts – revenues, expenses, and draws would all have zero balances.
Lastly, we are going to thoroughly review each transaction for December xxxx and show you the hows and whys to properly recording each transaction and present the steps for properly analyzing and recording a transaction.
ABC’s Beginning Account Balances as of December 1, xxxx
| Assets | Liabilities | Equity | |||
| Cash | $5,500 Dr | Accounts Payable | $2,000 Cr | Owner's Capital | $7,500 Cr |
| Accounts Receivable | $1,600 Dr | Mowing Revenue | $1,000 Cr | ||
| Mowing Equipment | $2,500 Dr | Advertising Expense | $200 Dr | ||
| Inventory-Office Supplies | $-0- | Mulch Expense | $100 Dr | ||
| Owner Draws | $600 Dr | ||||
Notice I used the symbols Dr and Cr to abbreviate the Debit and Credit balances in the table of ABC’s beginning balances. While this is a common method of representing debits and credits, other symbols that we discussed earlier are also used.
You’d better check me out to see if our books balance before we start recording ABC’s transactions. We’re going to perform two checks that relate to what we’ve been learning in prior lessons.
The first check is to see if our Accounting Equation balances and the second to make sure that the debit balances equal the credit balances.
Equation Check Calculations
Total Assets = Cash + Accounts Receivable + Mowing Equipment
Total Assets = 5,500 + 1,600 + 2,500
Total Assets = 9,600
Total Liabilities is easy because there is only one account (Accounts Payable) with a balance of 2,000.
Total Liabilities = 2,000
Total Equity = Owner’s Capital + Revenues – Expenses – Draws
Since we have more than one expense let’s summarize them before we use them in our equation.
Total Expenses = Mulch Expense + Advertising
Total Expenses = 100 + 200
Total Expenses = 300
Total Equity = Owner’s Capital + Revenues – Expenses – Draws
Total Equity = 7,500 + 1000 – 300- 600
Total Equity = 7,600
Substituting our totals into the Accounting Equation we find that our equation balances.
Assets = Liabilities + Owner’s Equity
9,600 = 2,000 + 7,600
Our second check is to see if our debit account balances equal our credit account balances.
| Debit Balances | |||
| Cash | 5,500 | ||
| Accounts Receivable | 1,600 | ||
| Mowing Equipment | 2,500 | ||
| Advertising Expense | 200 | ||
| Mulch Expense | 100 | ||
| Owner's Draw | 600 | ||
| Total Debits | 10,500 | ||
| Credit Balances | |||
| Accounts Payable | 2,000 | ||
| Owner's Capital | 7,500 | ||
| Mowing Revenue | 1,000 | ||
| Total Credits | 10,500 | ||
It looks like we passed muster again. Debit Balances do equal Credit Balances.
We will discuss each transaction and “post” the entry to the appropriate General Ledger Account
( T-Account). Keep in mind that each entry will have a debit and a credit.
If you recall, a T-Account is a skeleton outline of a formal account which provides the same basic data as a formal ledger account. They are normally used as a teaching aid. In a later lesson we'll be using formal ledger accounts. The following is what the T-Accounts look like.
Notice that Assets, Draws, and Expense Type of Accounts are increased using the Left Side (Column) of the account ( debited ) and decreased using the Right Side (Column) of the account ( credited ).
The reverse is true for the Liability, Equity, and Revenue Type of Accounts. These Type Of Accounts are increased using the Right Side (Column) of the account ( credited ) and decreased using the Left Side (Column) of the account ( debited ).
Detail Transaction Information
For each transaction for ABC Mowing, we will identify the Source Document, Type Of Transaction, Accounts Affected, and determine and explain the Debits and Credits needed to properly record and post to our General Ledger (T-Accounts).
Entry 1
1. ABC mows a client’s yard and receives a check from the customer for $50 for the service provided.
Source Document:Customer’s Check
Type Of Transaction:Cash Sale
Accounts Affected:Cash Sales
Debits and Credits:
Increase (Left Side) Cash: Debit
Increase (Right Side) Mowing Revenue (Sales): Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit.
The Revenue Account Mowing Revenue (Equity) is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit.
Entry 2
2. ABC purchases $100 worth of office supplies and stores them in their storage room. The office supply store gives them an invoice that allows them to pay for them in 15 days (on account).
Source Document:Supplier’s Invoice
Type Of Transaction:On Account Purchase
Accounts Affected:Inventory-Office Supplies Accounts Payable
Debits and Credits:
Increase (Left Side) Inventory-Office Supplies: Debit
Increase (Right Side) Accounts Payable: Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Inventory-Office Supplies is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of inventory-office supplies, which is an asset, is the left (debit) side of the account so we increase inventory-office supplies by entering the amount in the left side as a debit.
The Liability Account Accounts Payable is also increased. Again, we record an increase by entering the amount in the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side of the account so we increase accounts payable by entering the amount in the right side as a credit.
Entry 3
3. ABC places an ad in the local newspaper receives the invoice from the supplier and writes a check for $25 to the newspaper.
Source Document:Supplier’s Invoice and Company Check
Type Of Transaction:Cash Purchase
Accounts Affected:Advertising Expense (Equity) Cash
Debits and Credits:
Increase (Left Side) Advertising Expense (Decrease Equity): Debit
Decrease (Right Side) Cash: Credit
Explanation Using Our Debit/Credit Rules:
The Expense Account Advertising Expense is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of advertising expense, which is an expense account, is the left (debit) side so we increase advertising expense by entering the amount in the left side as a debit.
The Asset Account Cash is decreased.
We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit.
Some additional clarification might be useful in order to clarify why an expense is recorded as an increase with a debit. The actual amount of the advertising expense has increased. The business now has spent more for advertising. More expenses are not what a business or an individual wants. Increased personal expenses reduce our personal equity and likewise increased business expenses reduce the owner’s equity of a business.
Since an increase in an expense reduces equity it is recorded as an increase using a debit.
Entry 4
4. ABC purchases five mowers for $10,000 and finances them with a note from the local bank.
Source Document:Bank Note
Type Of Transaction:Borrow Money
Accounts Affected:Mowing Equipment Note Payable-Bank
Debits and Credits:
Increase (Left Side) Mowing Equipment: Debit
Increase (Right Side) Note Payable-Bank: Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Mowing Equipment is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of mowing equipment, which is an asset account, is the left (debit) side so we increase mowing equipment by entering the amount in the left side as a debit.
The Liability Account Note Payable-Bank is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of note payable-bank, which is a liability account, is the right (credit) side , so we increase note payable-bank by entering the amount in the right side as a credit.
Entry 5
5. ABC mows another customer’s yard and sends the customer a $75 bill (invoice) for the
service they performed. They allow their customer ten (10) days to pay them for this service (on account).
Source Document:Sales Invoice
Type Of Transaction:On Account Sale
Accounts Affected:Accounts Receivable Mowing Revenue (Sales)
Debits and Credits:
Increase (Left Side) Accounts Receivable: Debit
Increase (Right Side) Mowing Revenue (Sales): Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Accounts Receivable is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of accounts receivable, which is an asset, is the left (debit) side of the account so we increase accounts receivable by entering the amount in the left side as a debit.
The Revenue Account Mowing Revenue (Equity) is also increased. Again, an increase is recorded
by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit.
Entry 6
6. The owner of ABC needs a little money to pay some personal bills and writes himself a check for $500.
Source Document:Check
Type Of Transaction:Draw
Accounts Affected:Cash Draw
Debits and Credits:
Increase (left Side)Owner’s Draw (Decrease Equity): Debit
Decrease (Right Side) Cash: Credit
Explanation Using Our Debit/Credit Rules:
The Draw Account Owner’s Draw is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of owner’s draw, which is a draw account, is the left (debit) side so we increase owner’s draw by entering the amount in the left side as a debit.
The Asset Account Cash is also decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit.
Entry 7
7. ABC pays the office supply company $100 with a check for the office supplies that they charged (promised to pay).
Source Document:Check
Type Of Transaction:Pay Supplier Charge Purchases
Accounts Affected:Cash Accounts Payable
Debits and Credits:
Decrease (Left Side) Accounts Payable: Debit
Decrease (Right Side) Cash: Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Cash is decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side so we decrease cash by entering the amount in the opposite side which is the right (credit) side of the account as a credit.
The Liability Account Accounts Payable is also decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side so we decrease accounts payable by entering the amount in the opposite side which is the left (debit) side of the account as a debit.
Entry 8
8. ABC receives a check from the customer who they billed (invoiced) $75 for services and allowed 10 days to pay.
Source Document:Customer Check
Type Of Transaction:Receive Customer Charge Payments
Accounts Affected:Cash Accounts Receivable
Debits and Credits:
Increase (Left Side) Cash: Debit
Decrease (Right Side) Accounts Receivable: Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit.
Another Asset Account, Accounts Receivable decreased. We record a decrease by entering the amount in the opposite side of the normal balance side of an account. The normal balance side of accounts receivable, which is an asset, is the left (debit) side so we decrease accounts receivable by entering the amount in the opposite side which is the right (credit) side of the account as a credit.
We actually “swapped” one asset accounts receivable for another asset cash.
Entry 9
9. ABC purchased some mulch for $60 and received an invoice from their supplier who allows them 15 days to pay. The mulch was used on a customer’s yard.
Source Document:Supplier’s Invoice
Type Of Transaction: Purchase on Account
Accounts Affected:Mulch Expense Accounts Payable
Debits and Credits:
Increase (Left Side) Mulch Expense (Decrease Equity): Debit
Increase (Right Side) Accounts Payable: Credit
Explanation Using Our Debit/Credit Rules:
The Expense Account Mulch Expense is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of mulch expense, which is an expense account, is the left (debit) side so we increase mulch expense by entering the amount in the left side as a debit.
The amount owed to a supplier also increased.
The Liability Account Accounts Payable is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of accounts payable, which is a liability, is the right (credit) side of the account so we increase accounts payable by entering the amount in the right side as a credit.
Entry 10
10. ABC bills (prepares an invoice) the customer $80 for the mulch and mowing his yard and
receives a check for $80 from the customer.
Source Document:Sales Invoice and Customer Check
Type Of Transaction:Cash Sale
Accounts Affected:Cash Mowing Revenue (Sales)
Debits and Credits:
Increase (Left Side) Cash: Debit
Increase (Right Side) Mowing Revenue (Equity): Credit
Explanation Using Our Debit/Credit Rules:
The Asset Account Cash is increased. An increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of cash, which is an asset, is the left (debit) side of the account so we increase cash by entering the amount in the left side as a debit.
The Revenue Account Mowing Revenue (Equity) is also increased. Again, an increase is recorded by entering the amount in the normal balance side of an account. The normal balance side of a revenue account is the right (credit) side of the account so we increase mowing revenue (sales) by entering the amount in the right side as a credit.
ABC’s Calculated Ending Account Balances After Posting
Me, being the nice guy that I am, calculated the ending account balances for you.
| Assets | Liabilities | Equity | |||
| Cash | 5,080 Dr | Accounts Payable | 2,060 Cr | Owner's Capital | 7,500 Cr |
| Accounts Receivable | 1,600 Dr | Note Payable-Bank | 10,000 Cr | Mowing Revenue | 1,205 Cr |
| Mowing Equipment | 12,500 Dr | Advertising Expense | 225 Dr | ||
| Inventory-Office Supplies | 100 Dr | Mulch Expense | 160 Dr | ||
| Owner Draws | 1,100 Dr | ||||
Let’s perform our checks on our ending balances after posting.
The first check is to see if our Accounting Equation balances and the second to make sure that the debit balances equal the credit balances.
Equation Check Calculations
Total Assets = Cash + Accounts Receivable + Mowing Equipment +Office Supplies
Total Assets = 5,080 + 1,600 + 12,500 + 100
Total Assets = 19,280
Total Liabilities = Accounts Payable + Notes Payable
Total Liabilities = 2,060 + 10,000
Total Liabilities = 12,060
Total Equity = Owner’s Capital + Revenues – Expenses – Draws
Since we have more than one expense let’s summarize them before we use them in our equation.
Total Expenses = Mulch Expense + Advertising
Total Expenses = 160 + 225
Total Expenses = 385
Total Equity = Owner’s Capital + Revenues – Expenses – Draws
Total Equity = 7,500 + 1205 – 385- 1100
Total Equity = 7,220
Substituting our totals into the Accounting Equation we find that our equation balances.
Assets = Liabilities + Owner’s Equity
19,280 = 12,060 + 7,220
Our second check is to see if our debit account balances equal our credit account balances.
Let's Total Our Debit Balances
| Debit Balance Accounts | ||
| Cash | 5,080 | |
| Accounts Receivable | 1,600 | |
| Mowing Equipment | 12,500 | |
| Inventory-Office Supplies | 100 | |
| Advertising Expense | 225 | |
| Mulch Expense | 160 | |
| Owner's Draw | 1,100 | |
| Total Debits | 20,765 | |
Now, we'll Total Our Credit Balances
| Credit Balance Accounts | ||
| Accounts Payable | 2,060 | |
| Note Payable-Bank | 10,000 | |
| Owner's Capital | 7,500 | |
| Mowing Revenue | 1,205 | |
| Total Credits | 20,765 | |
Looks like everything is still in balance after we posted our transactions.
Assets = Liabilities + Owner’s Equity and our Debit Balance Accounts = our Credit Balance Accounts.
That wasn't too bad was it ? Get a grip on yourself. We still have more lessons to complete. After the Videos and Tests let's tackle the next lesson that covers the General Ledger and Journals.
