Chapter 2 - Recording business transactions
Chapter 2 uses the foundation established in Chapter 1 and expands the discussion of recording
business transactions. A thorough understanding of this process is vital to your success in mastering
topics in future chapters. The words, ideas and processes established in this chapter are assumed
knowledge in the rest of the textbook. The learning objectives for this chapter are to:
Use accounting terms.
Apply the rules of debit and credit.
Record transactions in the journal.
Post from the journal to the ledger.
Prepare and use a trial balance.
Set up a chart of accounts for a business.
Analyse transactions without a journal.
Objective 1 - Use accounting terms.
The terms used in accounting sometimes have meanings that differ from ordinary usage. You must
learn the accounting meaning of terms now. Key terms to remember are: account, ledger, assets,
liabilities, owner’s equity, capital, drawings, revenues, expenses, double-entry bookkeeping, T-
account, debit, and credit.
is the basic summary device used to record changes that occur in a particular asset,
liability, or owner’s equity.
All accounts grouped together form the
. The order of the accounts in the ledger is assets first,
then liabilities, and finally owner’s equity (i.e., the order in which the accounts are listed in the
are those economic resources that will benefit the business in the future. Examples of asset
accounts are Cash, Bills Receivable, Accounts Receivable, Prepaid Expenses, Land, Buildings,
Equipment, Furniture and Fixtures.
are obligations that the business owes. Examples of liability accounts include Bills
Payable, Accrued Liabilities and Accounts Payable.
is the claim that the owner has on the assets of the business. Examples of owner’s
equity accounts are
, which is the owner’s claim on the assets;
, which are assets that
the owner removes for personal use;
, such as Service Revenue; and
such as Rent
Accounting is based on
bookkeeping. Each transaction affects two accounts.
illustrate the dual effects of a transaction. The left side of the T-account is the
The right side is the
side. Remember: debit = left side and credit = right side.
Recording business transactions