Accountants use the double‐entry bookkeeping system to keep the accounting equation in balance and to double‐check the numerical accuracy of transaction entries. Under this system, each transaction is recorded using at least two accounts. An account is a record of all transactions involving a particular item. T-accounts serve as a great graphical representation of a general ledger that records business transactions.

Normal Account Balances

• Accountants use the double‐entry bookkeeping system to keep the accounting equation in balance and to double‐check the numerical accuracy of transaction entries.
• When the customer pays the amount owed, (generally using a check), bookkeepers use another shortcut to record its receipt.
• A merchandising business would need to track Merchandise Inventory.
• Mr. Green uses $5,000 of the company’s cash to place a down‐payment on a used truck that costs $15,000, and he signs a note payable that requires him to pay the remaining $10,000 in eighteen months.

Match each of the transactions in the right column with the appropriate journal from the left column. The information in the sales journal was taken from a copy of the sales invoice, which is the source document representing the sale. The sales invoice number is entered so the bookkeeper could look up the sales invoice and assist the customer. One benefit of using special journals is that one person can work with this journal while someone else works with a different special journal. Because we are paying a bill, our Cash is going to decrease.

• Good internal control dictates the best rule is that all cash received by a business should be deposited, and all cash paid out for monies owed by the business should be made by check.
• This is posted to the Accounts Receivable T-account on the debit side.
• Similar transactions are used to show how to track changes in the Accounting Equation using first T-Accounts and then journal entries.
• Accounting is the recording of financial transactions pertaining to a business.
• If there were a $4,000 credit and a $2,500 debit, the difference between the two is $1,500.
• In accounting textbook language “on account” always means money has not yet changed hands.

( . Identifying the accounts involved:

We would use the cash receipts journal because we are receiving cash, but the credit would be to our Utility Expense account. If you look at the example in Figure 7.23, you see that there is no column for Utility Expense, so how would it be recorded? We would look up the account number for Utility Expense and credit the account https://www.bookstime.com/ for the amount of the check. If we received a refund from the electric company on January 28 in the amount of $100, we would find the account number for utility expense (say it is 615) and record it. Transaction analysis allows you to comprehend your business’s financial statements better and make smarter choices.

Accounts affected by the transaction in question

The balance sheet would experience an increase in assets and an increase in liabilities. The company has yet to provide the service, so it has not fulfilled the obligation yet. According to the revenue recognition principle, the company cannot recognize that revenue until it meets this performance obligation or in other words provides the service. After ascertaining the nature of the accounts, it is necessary to determine which account is increasing and which one is decreasing as a result of the transaction. This is necessary for the proper application of rules of debit and credit on each account.

Forensic Accounting

• The process of analyzing a business transaction starts with identifying these accounts.
• Given the large number of transactions that companies usually have, accountants need a more sophisticated system for recording transactions than the one shown on the previous page.
• Net income (loss) is computedinto retained earnings on the statement of retained earnings.
• The increase to assets would be reflected on the balance sheet.
• A tool that can be helpful to businesses looking for an easier way to view their accounting processes is to have drillable financial statements.
• One benefit of using special journals is that one person can work with this journal while someone else works with a different special journal.
• Because this is a new business and we only have four transactions before this one, it’s easy to determine what creditor we are paying.

If the transaction involves a monetary amount and funds have been exchanged, it’s a qualifying transaction and has to be recorded. For example, paying a deposit to purchase equipment for your business is a recorded transaction, but simply signing the contract without making a payment is not. Banks work closely with merchant partners to offer customers some of the world’s most lucrative credit card incentives. The growth of e-commerce in Hong Kong has played a significant role in the increasing number of credit card transactions. Online shopping has become more popular, especially during the COVID-19 pandemic, as consumers have turned to online platforms for their shopping needs.

In this spreadsheet format, we are using the Expanded Accounting Equation. Joe Smith will now have Equity in the business because of his investment of $55,000. In the spreadsheet, we enter $55,000 in Joe Smith, Capital on the same line analyzing transactions as the Cash part of the transaction. We aren’t concerned with Joe Smith’s personal accounting. One business might call its Cash account “Checking” or “Bank Name Checking”. Another business may have multiple bank accounts to track.

Net income (loss) iscomputed into retained earnings on the statement of retainedearnings. This change to retained earnings is shown on the balancesheet under stockholder’s equity. Utility payments are generated from bills for services that were used and paid for within the accounting period, thus recognized as an expense. The decrease to assets, specifically cash, affects the balance sheet and statement of cash flows. The decrease to equity as a result of the expense affects three statements.

What is an accounting equation?

• On January 3, there was a debit balance of $20,000 in the Cash account.
• Our Chart of Accounts has a Rent Expense account for us to record rent.
• The decrease toassets, specifically cash, affects the balance sheet and statementof cash flows.
• The decrease to equity as a result of the expenseaffects three statements.
• This similarity extends to other retailers, from clothing stores to sporting goods to hardware.
• This decision depends on the preference of company officials.

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