Chapter 2 Recording Business Transactions

The Accounting Process as the process of Analyzing (Identifying business transactions); Classifying); (Determining the specific accounts involved and deciding whether the accounts should be increased or decreased); Recording (Listing the details in a permanent record (either in writing or electronically); Summarizing (After a period of time, showing the results of a group of transactions in the form of financial statements); and Interpreting (Drawing conclusions and making decisions from financial statements) and shows the process as a cycle which is repeated every accounting period. In the process of analyzing the business transactions, the questions that are asked (giving the acronym ACID) are:

1. What A CCOUNTS are involved? 2. What are the C LASSIFICATIONS of the accounts? 3. Are the accounts I NCREASED (+)? Or 4. Are the accounts D ECREASED (-)?

The accounts involved in the business transaction are classified under the elements of the accounting equation as follows:

Assets = Liabilities + Owner’s Equity Properties of Creditors’ claims Owners’ claims the business against the properties against properties

The business transactions are summarized in the form of financial statements where the accounts from the elements of the accounting equation appear on the financial statements as follows:

Assets = Liabilities + Owner's Equity

Accounts Accounts J. Ashley, Cash + Supplies + Equipment + + Revenue _ Expenses Receivable = Payable Capital + Income Statement

Statement of Owner’s Equity

Balance Sheet

In Chapter 1, the Recording of transactions (Step 3 in the accounting process) was done under the accounts within each section of the fundamental accounting equation to see how the double-entry accounting system works in that with each transaction, the accounting equation must remain in balance. The transactions are shown with increases and decreases in the elements of the accounting equation. The manual system of accounting is presented first in accounting courses as understanding how to record business transactions into a manual accounting system helps to understand how to enter data into a computerized accounting system. The analyzing and classifying steps must be done first before recording the transaction so that it will be recorded properly.

1 I. The Double-Entry Accounting System. Every business transaction has at least two effects (called the Dual Effect) on the accounting equation. It does not mean that business transactions are recorded twice. In chapter 1, the business transactions were recorded in a column arrangement under the elements of the accounting equation so that the increases and decreases can be seen in each account with +’s and –‘s. When the transactions were completed for a period, such as a month, the equality of the accounting equation is proved by adding up the left side (Assets) as well as the right side (Equities) to see that they are the same. Problems can occur when recording using the column (tabular) arrangement with the accounting equation: The volume of daily transactions, makes this form of recording impractical for an actual accounting system because all transactions are recorded on a single sheet. Also with the column arrangement, it is not easy to determine the total increases to an account or the total decreases to an account. In chapter 2, then, business transactions are going to be recorded into a different form of the accounts where the accounts will be shaped like a T.

A. Define account—an individual accounting record in which the results of transactions are accumulated with increases and decreases in a specific asset, liability, or owner’s equity item. Accounts collectively are called a ledger. In a total manual system, the ledger is a book form that contains all the accounts for a business. But if the business is using computerized accounting software, the accounts are listed in the software program not in a book. Accounts are assigned numbers to indicate the type of account. The ledger should be arranged in the order in which accounts are presented in the financial statements—assets, liabilities, owner’s capital, owner’s drawing, revenues, and expenses. B. Define T-account—simplified form of an account where increases are accumulated on one side of the T-account and decreases on the other. The T-account form has the advantage of providing two sides for each account so the total dollar amount of increases and the total dollar amount of decreases to an account can be calculated C. Define the Standard Form of Account—it is the basic account form with two amount (or money) columns. The left is the Debit and the right is the Credit column. These columns are used to record the dollar value of business transactions. D. Recording transactions in T-accounts: 1. Example of the T-account for Cash: Note how all the pluses (+)’s or increases are on the left side and all the minuses (–)’s or decreases are on the right side:

Cash + -

2 (a) 60,000 (b) 33,000 (f) 2,520 (d) 2,000 (p) 850 (g) 700 (q) 2,220 (h) 360 (k) 1,800 (l) 160 (m) 200 (n) 1,130 (o) 620 (r ) 2,500 Foot 65,590 Foot 42,470 Bal. 23,120 2. There is a reason that the Cash account has all the +’s on the left side and all the –‘s on the right side. Refer to the accounting equation below where T-accounts has been set up under the three elements of the accounting equation. What determines which side is the plus (+) side and which side is the minus (–) side has to do with where the particular account is located within the accounting equation: Assets = Liabilities + Owner’s Equity + - - + - + Left Right Left Right Left Right If the account type is left of the equal sign (Assets), then the increases will go on the left side. But if an account type is right of the equal sign (Liabilities and Owner’s Equity). This rule is consistent with the mathematical requirement that signs of all numbers change (from plus to minus or minus to plus) when they move from one side of an equation to the other side. This also true with the accounting equation that in order to keep the equation in balance, accounts on the opposite side of the accounting equation must have their plus side on the opposite sides to keep the equation in balance. RULE OF SIGN PLACEMENT CAN BE SUMMARIZED as follows: Whether the LEFT side of an account is an INCREASE or + side of an account or whether the RIGHT side is an account is an INCREASE or + depends on whether the account is LEFT or RIGHT of the Equal sign. When moving "LEFT" of the equal sign, the + side will be on the LEFT side of the account and the - side will be on the RIGHT side of the account. Left of = Left side is + side Right of = Right side is + side

Assets = Liabilities + Owner's Equity

+ - - + - + Left Right Left Right Left Right Note the accounts under the umbrella of owner’s equity. When dealing with the four types of accounts that fall under owner's equity, you must determine if the account type increases

3 or decreases owner's equity. If it increases owner's equity (OE), then the sign placement is the same, but if it decreases OE, the sign placement is the opposite as shown here + Capital - Drawing + Revenues - Expenses

- + + - - + + - Left Right Left Right Left Right Left Right

What account does to Owner's Equity increases decreases increases decreases So the sign placement is Same as Opposite of Same as Opposite of O.E. O.E. O.E. O.E. a. The assets being left of the equal sign will have the plus (+) side on the left and the minus (–) side on the right side of the T-accounts. Place the signs on the asset accounts of Cash, Accounts Receivable, Supplies, and Equipment. b. Since the liabilities are right of the equal sign will have the plus (+) side on the right and the minus (–) side on the left side of the T-accounts. Place the signs on the liability accounts of Accounts Payable and Notes Payable. c. Since the owner’s equity section is right of the equal sign will have the plus (+) side on the right and the minus (–) side on the left side of the T-accounts. BUT YOU MUST BE CAREFUL WITH OWNER’S EQUITY to analyze whether the particular account type increases or decreases owner’s equity and will work the same or the opposite of owner’s equity. 1) The capital account increases owner’s equity so the plus (+) side on the right and the minus (–) side on the left side of the T-account. 2) The drawing (dividends for a corporation) account decreases owner’s equity so the plus (+) side on the left and the minus (–) side on the right side of the T- account. 3) The revenue account increases owner’s equity so the plus (+) side on the right and the minus (–) side on the left side of the T-account. 4) The expense accounts decrease owner’s equity so the plus (+) side on the left and the minus (–) side on the right side of those T-accounts. Therefore, enter the signs of + and – to the Rent Expense, Advertising Expense, Wages Expense, and Utilities Expense. 3. Remember to apply the acronym ACID to properly analyze the transactions to determine what accounts are involved; what the classifications of the accounts are; and whether the accounts are

4 being increased or decreased. To complete the transactions, the accounting equation will be expanded so that the owner’s equity account types that are revenues and expenses will appear next to owner’s equity as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - a. Owner invested $10,000 cash to start a business. The accounts involved are cash and Owner, Capital. The classifications are assets and owner’s equity. Both accounts are increased. According to the rule, cash is increased on the left side and owner’s capital on the right side (owner’s capital increases owner’s equity so the sign placement is the same as owner’s equity). The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Capital 10,000 10,000 Note: left 10,000 cash and right 10,000 capital—left, right. b. Company purchases $500 supplies on account. The accounts involved are Supplies and Accounts Payable. The classifications are assets and liabilities. Both accounts are increased. According to the rule, cash is increased on the left side and liabilities on the right side as right of the equal sign. The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Supplies Accts. Payable 500 500 Note: left 500 supplies and right 500 accounts payable—left, right. c. Company paid $1,000 rent expense on a building. The accounts involved are Rent Expense and Cash. The classifications are expenses and assets. Rent expense is increased. Cash is decreased. According to the rule, expenses are increased on the left side (expenses decrease owner’s equity so the sign place is the opposite of owner’s equity) and assets are decreased on the right side. The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Rent Exp. 1000 1000 Note: left 1,000 rent expense and right 1,000 cash—left, right.

5 d. Company purchased $15,000 of equipment paying $2,000 down and signing a note for the remainder. The accounts involved are Equipment, Cash, and Notes Payable. The classifications are assets and liabilities. Equipment is increased; cash is decreased; and notes payable is increased. According to the rule, assets are increased on the left side and decreased on the right side and liabilities are increased on the right side. The entry is entered into the T- accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Notes Payable 2,000 13,000 Equipment 15000 Note: left 15000 equipment and right 2,000 cash and right Notes Payable 13,000— left, right. e. Company rendered services for cash of $2,500. The accounts involved are Cash and Service Revenue. The classifications are assets and revenues. Both accounts are increased. According to the rule, cash is increased on the left side and revenues on the right side (revenues increase owner’s equity so the sign placement is the same as owner’s equity) as right of the equal sign. The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Service Rev. 2500 2500 Note: left 2,500 cash and right 2,500 service revenue—left, right. f. Company rendered services billing customers for $5,000. The accounts involved are Accounts Receivable and Service Revenue. The classifications are assets and revenues. Both accounts are increased. According to the rule, cash is increased on the left side and revenues on the right side (revenues increase owner’s equity so the sign placement is the same as owner’s equity) as right of the equal sign. The entry is entered into the T-accounts as follows Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Accts.Receiv. Service Rev 5000 5000 Note: left 5,000 accounts receivable and right 5,000 service revenue—left, right. g. Company paid $250 advertising expense. The accounts involved are Advertising Expense and Cash. The

6 classifications are expenses and assets. Rent expense is increased. Cash is decreased. According to the rule, expenses are increased on the left side (expenses decrease owner’s equity so the sign place is the opposite of owner’s equity) and assets are decreased on the right side. The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Advert.Exp. 250 250 Note: left 250 advertising expense and right 250 cash—left, right. h. Company paid $850 wages expense. The accounts involved are Wages Expense and Cash. The classifications are expenses and assets. Rent expense is increased. Cash is decreased. According to the rule, expenses are increased on the left side (expenses decrease owner’s equity so the sign place is the opposite of owner’s equity) and assets are decreased on the right side. The entry is entered into the T- accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Wages Exp. 850 850 Note: left 850 wages expense and right 850 cash—left, right. i. Company received a bill of $275 for utilities but will not pay the bill until the following month. The accounts involved are Utilities Expense and Accounts Payable. The classifications are expenses and liabilities. Utilities expense is increased. Accounts Payable is increased. According to the rule, expenses are increased on the left side (expenses decrease owner’s equity so the sign place is the opposite of owner’s equity) and liabilities are increased on the right side. THIS TRANSACTION IS OFTEN MISSED ON THE FIRST TEST as it is believed that this transaction does not need to be recorded. Just keep in mind that expenses must be recorded when they are incurred so it needs to be recorded when received as an expense has already been incurred. The entry is entered into the T- accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Accts. Payable Utilities Exp. 275 275 Note: left 275 utilities expense and right 275 accounts payable—left, right.

7 j. Owner takes a draw of $1,000. The accounts involved are Owner, Drawing and Cash. The classifications are owner’s equity and assets. Owner, Drawing is increased. Cash is decreased. According to the rule, owner, drawing is increased on the left side (drawing decreases owner’s equity so the sign place is the opposite of owner’s equity) and assets are decreased on the right side. The entry is entered into the T-accounts as follows: Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Owner, Drawing 1000 1,000 Note: left 1,000 owner, drawing and right 1,000 cash—left, right.

k. Company received $2,000 from customers on account. The accounts involved are Cash and Accounts Receivable. Both fall under the classification of assets. The cash account is increased and the accounts receivable account is decreased According to the rule, assets are increased on the left side and decreased on the right side. This transaction is known as a shift in assets, that is, the individual asset accounts changed, but the total dollar value of assets remained the same. The entry is entered into the T-accounts as follows:

Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash 2000 Accts.Rec. 2000 Note: left 2,000 cash and right 2,000 accounts receivable—left, right.

Now you should be able to SEE A PATTERN here from these transactions— that every transaction had at least one account with a left entry and one account with a right entry. A RULE should be evident at this point— EVERY TRANSACTION REQUIRES AN EQUAL DOLLAR AMOUNT OF ENTRIES ON THE LEFT SIDE OF AN ACCOUNT(S) AS THERE ARE ENTRIES ON THE RIGHT SIDE OF AN ACCOUNT(S). When recording transactions, think of marching—LEFT, RIGHT; LEFT; RIGHT to keep in mind that there needs to be at least one left side of an account entry and at least one right side of an account entry so that the dollar amounts of left entries will equal the dollar amount of right entries.

II. The Rules of Debit and Credit. The concepts of understanding the rules of debit and credit are difficult to grasp when applying them to accounting because of

8 the preconceived ideas that we have concerning what the words debit and credit mean. For example, when you return an item of a department store and get a “credit” to your account, that means that your account balance is reduced so you think the word, “credit” must mean decrease. When you received a bank statement and see a “debit” memo, it means that a service charge or something similar has deducted from your account, so then you think that “debit” must be deduct or decrease. So what has happened from your life experiences, you have associated the words, “debit” and “credit” with being an increase or a decrease or vice-versa. Students often get the impression that “debit” means bad and “credit” means good. But what you need to do to understand the concepts of debit and credit is to just forget all the preconceived notions that you have as to what these words mean to you so that you can fully understand and apply them correctly to accounting.

A. How do the terms "debit" and "credit" play into the accounting? As a Franciscan monk, Luca Pacioli (the father of accounting) spoke Latin. In Latin, "debit" means "left," and "credit" means "right." So when you "debit" an account, you are making an entry on the "left" side of an account. When you "credit" an account, you are making an entry on the "right" side of an account. Whether that entry increases or decreases the account depends on the accounts location in relation to the equal sign-- left or right of it.

In Latin, the actual word for "left" is "debere" so we get the abbreviation for "debit" as "Dr." In Latin, the actual word for "right" is "credere" so we get the abbreviation for "credit" as "Cr."

B. In English, we use the word “debit” for debere and the word, “credit” for credere. But for accounting the term “debit” means left (left side of an account) and “credit” means right (right side of an account). To apply the meaning of these words, think of your “left” hand as being your “debit” hand or your “right” foot as your “credit” foot. When you are driving and turning left or right, think turning “debit” or turning “credit.” C. Summary of the rules for debits and credits in asset, liability, and owner’s equity accounts to see their relationship to the accounting equation with T-Accounts. Whether debits and credits signify increases or decreases depends on the type of account involved. DOUBLE ENTRY RECORDING RULES: 1. Asset accounts, which are left of the equal sign, the left or debit side is the increase side of an account, and the right or credit side is the decrease side of an account. The normal balance of accounts is the plus side so the normal balance of asset accounts is the debit side. 2. Liability accounts which are right of the equal sign, the right or credit side is the increase side of an account, and the left or debit side is the decrease side of an account. The normal balance of liability accounts is the credit or plus side of an account.

9 3. Owner’s Equity accounts require that you analyze an account type as to whether it increases or decreases owner’s equity. a. Capital Account increases owner’s equity so the sign is the same as owner’s equity with the right or credit side as the increase side and normal balance of the account. b. Revenue Accounts increase owner’s equity so the sign is the same as owner’s equity with the right or credit side as the increase side and normal balance of the account. c. Withdrawals or Dividends decreases owner’s equity so the sign is the opposite of owner’s equity with the left or debit side as the increase side and normal balance of the account. To help understand why withdrawals decrease owner’s equity, just think of it this way that the owner withdrew cash or other assets from the business and did not put anything back in its place. d. Expenses decreases owner’s equity so the sign is the opposite of owner’s equity with the left or debit side as the increase side and normal balance of the account. D. Temporary owner’s equity accounts—Expense accounts, revenue accounts, and owner’s drawing account are called temporary owner’s equity accounts because they are used to record transactions during an accounting period to show changes that occur in owner’s equity during an accounting period and help with the preparation of financial statements. Since revenues and expenses appear separately on the income statement, the accounting equation is expanded to aid in recording these transactions. The statement of owner’s equity shows the beginning owner’s capital, the net income, and the drawings to calculate the ending owner’s capital. Temporary owner’s equity accounts or subdivisions are used to yield a separate record of the items affecting owner’s equity and their balances will be transferred to the owner’s equity account at the end of the accounting period. Refer to the handout on page 5. This illustration helps to show the effects of the temporary owner’s equity accounts on owner’s equity. Credits increase owner’s equity and Debits decrease owner’s equity because owner’s equity is right of the equal sign soothe right side is the plus side. NOTE that the Revenues T- account is shown on the right side of the Owner’s Equity T-account to show that revenues work the same as owner’s equity (a CREDIT to increase the account) because they increase owner’s equity. But Expenses T-account and Drawing T-account are shown on the left side of the larger owner’s equity T-account to show that these accounts decrease owner’s equity and it take s a DEBIT to decrease owner’s equity. E. The key to successful recording is ANALYSIS of transactions. Follow the process of ANALYZING BUSINESS TRANSACTIONS by answering the questions in the table as follows: a. Which Accounts are affected?

10 b. What is the Classification of each account? Note that the expanded accounting equation is utilized now for the classifications (Assets = Liabilities + Owner’s Equity + Revenues – Expenses). c. Is each account Increased or Decreased? d. Which account is Debited and for what amount? e. Which account is Credited and for what amount? III. The Trial Balance—a listing of all ledger accounts with their balances to test the equality of debits and credits, prepared at the end of the accounting period before the financial statements are prepared. A. After the transactions have been recorded into the T-Accounts, the balance in each account needs to be calculated. Balances are arrived by footing (adding up the column for a total) the debit and credit columns of each account and calculating the difference between the two columns. To calculate the difference, you subtract the footed minus side of the account from the footed plus side of the account. The balance needs to be shown on the increase side of the account. If there is just one transaction in an account, that is the balance. In Excel, it is helpful to double underline the balances to identify the balance. It is possible to have a negative balance in an account like with cash if the cash has been overdrawn. But since we are not going to be teaching bad habits in this accounting course, all the accounts will have normal balances. It is also possible to have an account with a zero balance even if there are entries on the debit and credit sides of the account. This could happen in a liability account such as accounts payable if all the debts has been paid in full by the end of the accounting period or in the accounts receivable account if all the customers have paid their accounts in full by the end of the accounting period. All the transactions as well as the footing and balancing (footings are highlighted green and balances are highlighted yellow) of the accounts is shown below so that you can check your work after determining the balance in each account:

Assets = Liabilities + Owner’s Equity + Revenues - Expenses + - - + - + - + + - Cash Accts.Payable Owner, Capital ServiceRev Rent Expense 10000 1000 500 10000 2500 1000 2500 2000 275 5000 2000 250 775 Owner, Drawing 7500 Advert. Exp. 850 1000 250 1000 Notes Payable 14500 5100 13000 Wages Exp. 9400 850 Accts.Rec. 5000 2000 Utilities Exp. 3000 275

11 Supplies 500 Equipment 15000

B. The Trial balance can be considered a trial run as the purpose is to show that there was an equal dollar amount of debit and credit entries to the accounts over the accounting period. IT IS NOT A FORMAL FINANCIAL STATEMENT so the format of the report does not need to follow all the strict requirements as with the financial statements. It is actually an accountant’s work paper to check the equality of the debits and credits in the ledger so it is OK to ABBREVIATE on this report. The trial balance shows only that total debits in the ledger equal total credits. The fact that a trial balance is in balance DOES NOT MEAN OR PROVE THAT NO ERRORS have occurred. Since the trial balance is a report, there is a format to follow for the presentation as follows: 1. Heading shows to answers to the questions … i. Who: Name of the company ii. What: Name of the report—Trial Balance iii. When: Last day of the accounting period (Note that since it has the word “balance” it cannot be over a period of time as balances change continually so the balance is at the end of the day on the last day of the accounting period). 2. Listing of accounts is done as how would appear in a ledger: i. Assets in order of liquidity. ii. Liabilities iii. Owner’ Equity—capital and then drawing iv. Revenues v. Expenses 3. Balances of accounts ONLY are brought to the trial balance-not the debit footing and the credit footing—only the balance. The normal balance side of an account is always the same as the increase side. The “normal” balance is where you would expect to find the balance. i. Debit balances are entered under the debit column of the trial balance—assets, drawing, and expenses. ii. Credit balances are entered under the credit column of the trial balance—liabilities, owner’s capital, and revenues. C. Types of accounts have the normal balances on the debit side (assets, owner’s drawing, and expenses) and types of accounts have normal balances on the credit side (liability, owner’s capital, and revenue). Balances normally appear on the increase side of an account. NOTE that three account types have normal debit balances and three

12 account types have normal credit balances. The Trial Balance Equation showing that Assets, Drawing, and Expenses on the left side of the equation as their normal balances are on the left side and that Liabilities, Capital, and Revenue are on the right side of the equation as their normal balances are on the right side. A helpful tool to memorize the accounts with their normal balances is the following T-account: Dr Cr After Eating Dinner A E D L R C Let's Read Comics A = assets L = liabilities E = expenses R = revenues D = drawing C = capital

IT SHOULD BE STRESSED THAT THE DEBIT AND CREDIT RULES LEARNED IN THIS CHAPTER WILL BE USED THROUGHOUT THE COURSE, ALL OTHER ACCOUNTING COURSES, AND IN ACCOUNTING PRACTICE. THESE RULES MUST BE LEARNED THOROUGHLY, OR YOU WILL BE RESTING ON A SHAKY FOUNDATION THROUGHOUT YOUR ENTIRE STUDY OF ACCOUNTING.

The following Trial Balance assuming that the month of the transactions is January in 20--: Company Name Trial Balance January 31, 20-- Account Title Debit Credit Cash 9,400 Accounts Receivable 3,000 Supplies 500 Equipment 15,000 Accounts Payable 775 Notes Payable 13,000 Owner, Capital 10,000 Owner, Drawing 1,000 Service Revenue 7,500 Rent Expense 1,000 Advertising Expense 250 Wages Expense 850 Utilities Expense 275 Totals 31,275 31,275 The totals are always side-by-side to show that the debit total equals the credit total and also double-underline the totals. Notice that it does not matter how you capitalize on a trial balance and it is acceptable to abbreviate (as is only an accountant’s work paper) but you need to use the FULL NAME OF ACCOUNTS. For example Office Equipment could be written Office

13 Equip. But it is important that the word, “Office” is used as it is the FULL NAME OF THE ACCOUNT and there can be more than one kind of equipment account. Also it is important to use the word “Expense” with expense accounts. Advertising Expense could be written, “Advert. Exp.,” because it does show the FULL NAME OF THE ACCOUNT. It is important to use the word, “Expense,” because there will be, for example, a “Supplies Expense” account along with the “Supplies” account and there will different names for different kinds of supplies and equipment so the full name must be used but words can be abbreviated.

IV. Steps of the Recording Process showing the FLOW OF ACCOUNTING DATA illustrating how the accounting process proceeds in a process as follows:

1. Business 2. Business 3. Analyze 4. Entry 5. Entry 6. Prepare a Transaction → Document → Business → Recorded → Posted to → Trial Occurs Prepared Transactions in Journal Ledger Balance

A. ANALYZE TRANSACTIONS FROM SOURCE DOCUMENTS. The principle of objective evidence applies that states financial events recorded in accounting records are supported by written source documents. Transactions should be properly documented to provide an audit trail. An audit trail is documentation that a person can follow in checking or following up on recorded information. Source documents can take many forms: invoices, bills, check stubs, memorandums, and so forth. REMEMBER: In the process of ANALYZING BUSINESS TRANSACTIONS the questions that are asked (giving the acronym ACID) are as follows: 5. What A CCOUNTS are involved? 6. What are the C LASSIFICATIONS of the accounts? 7. Are the accounts I NCREASED (+)? Or 8. Are the accounts D ECREASED (-)? 9. Which account(s) are DEBITED and for what amount? 10. Which account(s) are CREDITED and for what amount? B. RECORD TRANSACTIONS IN A JOURNAL. In Chapter 1, transactions were recorded in terms of their effects on the accounting equation. This method was used to gain a good understanding of the double-entry system of accounting in that with every transaction at least two accounts are affected and with the t- account format above it can be seen, also, with every transaction, there needs to be an equal dollar amount of debit entries as there are credit entries. The actual FORMAL RECORD for recording business transaction is the JOURNAL.

C. POST FROM THE JOURNAL TO THE LEDGER.

D. PREPARE A TRIAL BALANCE OF THE LEDGER.

14 II. Recording in a Journal. A. DEFINE A JOURNAL. A journal is a record of original entry. Describing the journal as “the book of original entry” means that the journal is the first place in which transactions are formally recorded. The actual first recording is on the source document. The JOURNAL provides a complete record of each transaction in chronological order (by order of date). The JOURNAL is like a diary of information—that is, a day-by-day record of business transactions in which both the debit and credit parts of an entry are recorded in one place. B. STEPS IN RECORDING TRANSACTIONS IN THE BASIC FORM OF JOURNAL CALLED THE GENERAL JOURNAL. See a full general journal handout). The format of a general journal is shown below where the: 1. (1) is the area for the particular page of the journal; 2. (2) dates on the journal page where the top will show the year and month and then just the day is recorded for the remainder of the page; 3. (3) shows the account names and the explanation of each transaction (Debits go next to the line in the box, Credits are indented 4 to 5 spaces, and the explanation indented about 10 spaces; 4. (4) is for the Post Reference to form an audit trail to trace where the entry goes from here (THIS COLUMN REMAINS BLANK UNLESS AN ENTRY IS ACTUALLY POSTED TO A GENERAL LEDGER); 5. (5) the amount of the debit entry (dollar signs are NOT used); and 6. (6) the amount of the credit entry (dollar signs are NOT used).

7. The normal order for recording in a general journal is to enter the debit account and amount first (or all the debit accounts or amounts in the case of a compound entry) and then all credit account and amount second (or all the credit accounts or amounts in the case of a compound entry) for each particular entry. 8. Note the second entry below which is functionally correct as the debit entry is next to the line of the box and the credit entry is indented about 5 spaces and the explanation is indented about 10 spaces. There is nothing wrong with that entry as follows the journalizing (the process of recording transactions in a journal) rules. But the problem is that the indenting is often forgotten to do if the credit entry is entered first and then the entry also does not look as symmetrical as shown with the stair- step look as with the first entry. That is the reason that you are instructed in the textbook to always enter the debit(s) first and then the credit(s). Note the line separating each entry: General Journal (1) Page 1 (2) Date (3) Account Title (4) P.R. (5) Debit (6) Credit Year Month Day Debit account name $ debited Credit account name $ credited Explanation

15 Day Credit account name $ credited Debit account name $ debited Explanation

9. Record the date. The year and month are recorded only at the top of a page and when either changes. 10. Record the account to be debited. The account name (USE EXACT NAMES FOR ACCOUNTS BUT CAN ABBREVIATE) only is given with the debit account—any explanation will go AFTER the debit and credit account names are entered. You only want the account name. A typical student error is to describe what happened with the account name but the account names stand alone. 11. Record the amount to be debited. No dollar signs are used. 12. Record the account to be credited. The account name (USE EXACT NAMES FOR ACCOUNTS BUT CAN ABBREVIATE) only is given with the credit account—any explanation will go AFTER the debit and credit account names are entered. 13. Record the amount to be credited. The debit and credit amounts must be equal. Total debits must equal total credits. 14. Write a brief explanation. The explanation should contain vital information like information on source documents like names of suppliers and customers, invoice numbers, check numbers, etc. Jan. 2—Transaction 0. The business bought office supplies from Central Supply for $850 would be recorded as follows using the Chart of Accounts for the exact names for accounts noting that the account, Cash in Bank (Check # s/b recorded in the explanation) is used rather than just Cash to differentiate this type of cash account from others that will be also used later on: General Journal Page 1 Date Account Title P.R. Debit Credit 20-- Jan. 2 Office Supplies 850.00 Cash in Bank 850.00 Purch. Supplies for cash from Central Supply—Ck.#______.. Jan. 5—Transaction 1. The business sold a used dot matrix printer on account for $1,500 (must be an antique or gold inlayed!!!). Note that since this is the second entry on the page, only the “5” goes under the date section. Also note the line in the explanation indicating some vital information that should be there. General Journal Page 1 Date Account Title P.R. Debit Credit

. 5 Accts. Receivable 1,500.00 Office Equip. 1,500.00 Sold dot matrix printer on account to ______.

16 Jan. 5—Transaction 2. Ms. Adams invested $75,000 of her personal savings in the business. Note even though the date is the same date as the transaction above, the number “5” is still written again to indicate that this is a separate entry. General Journal Page 1 Date Account Title P.R. Debit Credit

. 5 Cash in Bank 75,000.00 J. Adams, Capital 75,000.00 Owner invested cash in business. Jan. 11—Transaction 3. The business purchased word processing equipment for $9,500 on account from Northern Office Equipment Company. General Journal Page 1 Date Account Title P.R. Debit Credit

. 11 Office Equip. 9,500.00 Accts. Payable 9,500.00 Purch. word proc. equip. from Northern Office Equip. Inv.#____ Jan. 16—Transaction 4. The business paid $3,500 on account to Northern Office Equipment Company. General Journal Page 1 Date Account Title P.R. Debit Credit

. 16 Accts. Payable 3,500.00 Cash in Bank 3,500.00 Paid on acct. to Northern Office Equip. Co. Ck# ______. Jan. 25—Transaction 5. Ms. Adams invested an office file cabinet valued at $375 in the business. Note that an owner can invest other assets besides cash into a business and the amount that is used is the fair market value. General Journal Page 1 Date Account Title P.R. Debit Credit

. 25 Office Equip. 375.00 J. Adams, Capital 375.00 Owner Invested file cabinet into the business.

The entire journal page completed would appear as follows noting that the P.R. column in blank at this time as none of the entries have been posted to a general ledger as yet: General Journal Page 1 Date Account Title P.R. Debit Credit 20-- Jan. 2 Office Supplies 850.00

17 Cash in Bank 850.00 Purch. Supplies for cash from Central Supply—Ck.#______..

5 Accts. Receivable 1,500.00 Office Equip. 1,500.00 Sold dot matrix printer on account to ______.

5 Cash in Bank 75,000.00 J. Adams, Capital 75,000.00 Owner invested cash in business.

11 Office Equip. 9,500.00 Accts. Payable 9,500.00 Purch. word proc. equip. from Northern Office Equip. Inv.#____

16 Accts. Payable 3,500.00 Cash in Bank 3,500.00 Paid on acct. to Northern Office Equip. Co. Ck# ______.

25 Office Equip. 375.00 J. Adams, Capital 375.00 Owner Invested file cabinet into the business.

C. RECORDING A COMPOUND JOURNAL ENTRY—an entry requiring two or more debits or two more credits or two or more debits and credits. For example to record the entry: On July 1, 20--, Leeds Company purchased from Office Max store supplies, $125, office supplies, $75, and office equipment, $2,000 paying $500 down with check # 101 and the remainder on account, invoice #7077R, the proper format would be:

General Journal Page 1 Date Account Title P.R. Debit Credit 20-- July 1 Store Supplies 125.00 Office Supplies 75.00 Office Equipment 2,000.00 Cash 500.00 Accounts Payable 1,700.00 Purchased supplies & equip.from Office Max, Ck.#101, Inv.#7077R

18 NOTE: With a compound journal entry, all the debit entries were entered first and then all of the credit entries followed by the explanation.

III. The Advantage of Recording in a Journal. A. The entire entry is in one place.. B. Complete chronological record of transactions C. Place for an explanation. D. Lessens possibility of an error in amounts as when recording into T accounts. E. Makes it easier to locate errors than when using the T account format.

IV. Posting to the Ledger. The Journal shows an entire transaction in one place but it does not provide the advantage that a T account form did to show the amount of increases to an account and the amount of decreases to an account nor able to determine the balance in an account. Therefore the transactions that are entered into the Journal must be posted to a Ledger that contains all the individual accounts. The third step in the accounting process is posting (the process of transferring information from a journal to the individual ledger accounts. The reason why both a journal and a ledger are necessary is that businesses need a chronological record of transactions (provided by the journal) and a record of the activity relating to each account (provided by the ledger). Both are necessary to ensure that information is recorded and reported accurately.

A. Define and describe the chart of accounts. A chart of accounts is a directory or listing of accounts in the ledger. It would be similar to a table of contents in the front of a book and is used as a basis for posting to help locate ledger accounts. Also it helps us to know the exact name for accounts to aid in the journaling process. Refer to the Chart of Accounts for Pioneer Advertising Agency on page 57. Note the sections that have been set-up reflecting the classifications with the expanded accounting equation. Under the asset section, you will see that numbers have been skipped in the sequence. This has been done to provide a flexible system so that accounts can be added later as needed. Account numbers reflect the type of account as follows: 1. Those beginning with the number 1 = assets. 2. Those beginning with the number 2 = liabilities. 3. Those beginning with the number 3 = owner’s equity. 4. Those beginning with the number 4 = revenues. 5. Those beginning with the number 6-7 = expenses. 6. Those beginning with the number 8 = other expenses. 7. Those beginning with the number 9 = other revenues. The order of accounts in the ledger follow the same order used to prepare the trial balance which usually follows the order of accounts listed in the financial statements, with the balance sheet accounts being shown first, followed by the income statement accounts and therefore the sequence of accounts in the ledger would be as follows:

19 1. assets, 2. liabilities 3. owner’s equity 4. revenues 5. expenses 6. other revenues 7. other expenses

B. The three-column account or the balance form of account has three amount columns so that there is a running balance of the account so that the account balance can be seen in an account at any time during the account period not just at the end of the accounting period as was with the T account format where the General Ledger has (1) a Debit column; (2) a Credit column; and (3) a Balance column. column. The explanation column is NOT USED FOR DESCRIPTIONS AS THE JOURNAL CONTAINS THE DESCRIPTIONS. The explanation column is used to record the word, “Balance,” if the account has a carry forward balance and also is used to indicate special type of entries were posted here known as adjusting entries, closing entries; and reversing entries that will be covered later on in the course. Those are the ONLY WORDS that will appear under the explanation column. Note the T that is showing in the debit and credit columns for illustration purposes only to show that the General Ledger is like the T account as has a column for enter the plus amounts and a column for entering the minus amounts. But the General Ledger has the advantage of also giving a running balance in accounts. General Ledger Account Account No.____ Date Item Ref. (1)Debit (2)Credit (3) Balance

C. STEPS IN POSTING. Each debit and each credit in the journal must be posted. The posting process requires the following 4 steps where the acronym DAPA will be used: 1. Record the DATE in the ledger account. 2. Record the AMOUNT and obtain the BALANCE in the ledger account at this point. 3. Record the journal PAGE in the ledger account. The posting references set up a cross-referencing system. 4. Record the ledger ACCOUNT number in the journal. The last step sets up a system for knowing if an entry has been posted or not because if there is an account number in the post reference column of the journal, then that is an indication that the entry HAS been posted and if

20 there is not an entry there, then that is saying that the entry HAS NOT been posted. Using this 4-step process, the entries will now be posted to the ledger accounts shown on pages 9 and 10 (this ledger has a 4-column format that has the balance wither debit or credit which is helpful when learning the posting and balancing process and is illustrated here) as follows (Enter plus (+) or minus (-) on the debit and credit columns to indicate which one increases the account and which one decreases the account to aid in the process): Jan. 2 Debit entry to Office Supplies for $850: 1. Record the DATE under the “Date” column. 2. Record the AMOUNT under the debit column of $850 with the BALANCE of $850 under the balance column. 3. Record the journal PAGE under the Ref. column (J1 for Journal, page 1). 4. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Office Supplies Account No.113 Balance Date Item P.R. Debit Credit Debit Credit (+) (-) (+) (-) 20-- Jan 2 J1 850.00 850.00

Jan. 2 Credit entry to Cash in Bank for $850 (Note cash has a beginning balance so the word, “Balance” appears in the item column; a check mark under the P.R. as was not posted but brought forward; and the $5,000 appears in the Debit Balance column NOT IN THE DEBIT column as was not posted from a journal): 1. Record the DATE under the “Date” column. 2. Record the AMOUNT under the credit column of $850 with the BALANCE of $4,150 under the balance debit column (a beginning balance of $5,000 – the credit of $850 = $4,150 debit balance). 3. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 4. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Cash in Bank Account No.111 Balance Date Item P.R. Debit Credit Debit Credit (+) (-) (+) (-) 20-- Jan 1 Balance √ 5,000 2 J1 850.00 4,150

21 Jan. 5 Debit entry to Accounts Receivable for $1,500: 5. Record the DATE under the “Date” column. 6. Record the AMOUNT under the debit column of $1,500 with the BALANCE of $1,500 under the balance debit column. 7. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 8. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Accounts Receivable Account No.112 Balance Date Item P.R. Debit Credit Debit Credit (+) (-) (+) (-) 20-- Jan 5 J1 1,500.00 1,500.00

Jan. 5 Credit entry to Office Equipment for $1,500: 5. Record the DATE under the “Date” column. 6. Record the AMOUNT under the credit column of $1,500 with the BALANCE of $1,500 under the balance credit column ($3,000 beginning minus (-) $1,500 in the credit column = $1,500 debit balance). 7. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 8. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Office Equipment Account No.116 Balance Date Item P.R. Debit Credit Debit Credit (+) (-) (+) (-) 20-- Jan 1 Balance √ 3,000.00 5 J1 1,500.00 1,500.00

Jan. 5 Debit entry to Cash in Bank for $75,000: 9. Record the DATE under the “Date” column. 10. Record the AMOUNT under the debit column of $75,000 with the BALANCE of $79,150 under the balance debit column (a prior balance of $4,150 + the debit of $75,000 = $79,150 balance). 11. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 12. Record the ledger ACCOUNT number in the journal (shown below in the completed journal.

22 General Ledger Account Cash in Bank Account No.111 Balance Date Item P.R. Debit (+) Credit Debit (+) Credit (-) (-) 20-- Jan 1 Balance √ 5,000 2 J1 850.00 4,150 5 J1 75,000.00 79,150.00

Jan. 5 Credit entry to J. Adams, Capital for $75,000: 13. Record the DATE under the “Date” column. 14. Record the AMOUNT under the credit column of $75,000 with the BALANCE of $82,000 under the balance credit column (a prior beginning balance of $7,000 + the credit of $75,000 = $82,000 balance). 15. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 16. Record the ledger ACCOUNT number in the journal (shown below in the completed journal.

General Ledger Account J. Adams, Capital Account No.311 Balance Date Item P.R. Debit (-) Credit Debit (1) Credit (+) (+) 20-- Jan 1 Balance √ 7,000 5 J1 75,000.00 82,000.00

Jan. 11 Debit entry to Office Equipment for $9,500: 17. Record the DATE under the “Date” column. 18. Record the AMOUNT under the debit column of $9,500 with the BALANCE of $11,000 under the balance debit column ($1,500 prior balance plus (+) $9,500 in the debit column = $11,000 debit balance). 19. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 20. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Office Equipment Account No.116 Balance Date Item P.R. Debit Credit Debit (+) Credit (+) (-) (-) 20--

23 Jan 1 Balance √ 3,000.00 5 J1 1,500.00 1,500.00 11 J1 9,500.00 11,000.00 Jan. 11 Credit entry to Accounts Payable for $9,500: 21. Record the DATE under the “Date” column. 22. Record the AMOUNT under the credit column of $9,500 with the BALANCE of $10,500 under the balance credit column (a prior beginning credit balance of $1,000 + the credit of $9,500 = $10,500 credit balance). 23. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 24. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Accounts Payable Account No.211 Balance Date Item P.R. Debit (-) Credit Debit (1) Credit (+) (+) 20-- Jan 1 Balance √ 1,000 11 J1 9,500.00 10,500.00

Jan. 16 Debit entry to Accounts Payable for $3,500: 25. Record the DATE under the “Date” column. 26. Record the AMOUNT under the debit column of $3,500 with the BALANCE of $7,700 under the balance credit column (a prior credit balance of $10,500 - the debit of $3,500 = $7,000 credit balance). 27. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 28. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Accounts Payable Account No.211 Balance Date Item P.R. Debit (-) Credit Debit (1) Credit (+) (+) 20-- Jan 1 Balance √ 1,000 11 J1 9,500.00 10,500.00 16 J1 3,500.00 7,000.00

Jan. 16 Credit entry to Cash in Bank for $3,500: 29. Record the DATE under the “Date” column.

24 30. Record the AMOUNT under the credit column of $3,500 with the BALANCE of $75,650 under the balance debit column (a prior balance of $79,150 - the credit of $3,500 = $75,650 debit balance). 31. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 32. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Cash in Bank Account No.111 Balance Date Item P.R. Debit (+) Credit Debit (+) Credit (-) (-) 20-- Jan 1 Balance √ 5,000 2 J1 850.00 4,150 5 J1 75,000.00 79,150.00 16 J1 3,500.00 75,650.00

Jan. 25 Debit entry to Office Equipment for $375: 33. Record the DATE under the “Date” column. 34. Record the AMOUNT under the debit column of $375 with the BALANCE of $11,375 under the balance debit column ($11,000 prior balance plus (+) $375 in the debit column = $11,375 debit balance). 35. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 36. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account Office Equipment Account No.116 Balance Date Item P.R. Debit Credit Debit (+) Credit (+) (-) (-) 20-- Jan 1 Balance √ 3,000.00 5 J1 1,500.00 1,500.00 11 J1 9,500.00 11,000.00 25 J1 375.00 11,375.00

Jan. 25 Credit entry to J. Adams, Capital for $375: 37. Record the DATE under the “Date” column. 38. Record the AMOUNT under the credit column of $375 with the BALANCE of $82,375 under the balance credit column (a prior beginning balance of $82,000 + the credit of $375 = $82,375 credit balance).

25 39. Record the journal PAGE under the P.R. column (J1 for Journal, page 1). 40. Record the ledger ACCOUNT number in the journal (shown below in the completed journal. General Ledger Account J. Adams, Capital Account No.311 Balance Date Item P.R. Debit (-) Credit Debit (1) Credit (+) (+) 20-- Jan 1 Balance √ 7,000 5 J1 75,000.00 82,000.00 25 J1 375.00 82,375.00

Below is the completed General Journal to check your work that account numbers (bolded for emphasis for the added items not shown on the General Journal above) were properly recorded back in the General Journal . The posting process should be done each time an entry is made in the General Journal so that account balances are always current like with Cash, for example, to know that the account has not been overdrawn. Since transactions are recorded first in the General Journal (the book of original entry) and then transferred to the ledger, the General Ledger is often referred to as the book of final entry. General Journal Page 1 Date Account Title P.R. Debit Credit 20-- Jan. 2 Office Supplies 113 850.00 Cash in Bank 111 850.00 Purch. Supplies for cash from Central Supply—Ck.#______..

5 Accts. Receivable 112 1,500.00 Office Equip. 116 1,500.00 Sold dot matrix printer on account to ______.

5 Cash in Bank 111 75,000.00 J. Adams, Capital 311 75,000.00 Owner invested cash in business.

11 Office Equip. 116 9,500.00 Accts. Payable 211 9,500.00 Purch. word proc. equip. from Northern Office Equip. Inv.#____

26 16 Accts. Payable 211 3,500.00 Cash in Bank 111 3,500.00 Paid on acct. to Northern Office Equip. Co. Ck# ______.

25 Office Equip. 116 375.00 J. Adams, Capital 311 375.00 Owner Invested file cabinet into the business.

V. Review of the Trial Balance. A. Its purpose is to show that debits equal credits. Remember: The trial balance is not a formal financial statement, but a test of the equality of debits and credits in the ledger. B. How to prepare it. 1. Enter the heading: a. First line tells Who: Name of the company b. Second line tells What: Name of the report—Trial Balance c. Third line tells When: Single date—last day of the accounting period as showing the “balance” in accounts. 2. Enter the account names in the order shown in the ledger—assets in order of liquidity, liabilities, owner’s capital, owner’s drawing, revenues, and expenses 3. Transfer the final balance showing in each account to either the debit or credit column of the Trial Balance whether the final balance is a debit or a credit balance. 4. Add up the debit and credit columns. If they balance, then double- underline the totals (after checking the check figures of course!). If they do not, you need to locate and correct the error(s). See tips below.

D. Use, “J. Adams, Professional Services” as the name of the company and the year as 20--. The trial balance should appear as below when you are finished: J. Adams, Professional Services Trial Balance January 31, 20-- Account Title Debit Credit Cash 75,650.00 Accounts Receivable 1,500.00 Office Supplies 850.00 Office Equipment 11,375.00 Accounts Payable 7,000.00 J. Adams, Capital 82,375.00 Totals 89,375.00 89,375.00

27 VI. Locating and Correcting Errors. A. Identify the types of errors. The difference between debits and credits will often give a clue to the type of error and/or where it occurred. 1. Math errors. To find them first re-add the columns. 2. Posting errors. First check to see if the balance of a particular account type (asset, liability, owner’s equity, revenue, or expense) is on its normal balance side which is the account type’s plus (+) side. a. Posting a debit or credit more than once called a doubling error. This error is found by subtracting the difference between the debit and credit column. If the difference is divisible by 2. Divide the difference by 2 and look to see if there is a transaction for that amount or if an account balance has that difference. b. Posting to the wrong side. c. Leaving out a posting. d. Posting the wrong amount. Common errors of this type are transpositions (the reversal of digits, such as entering 240 for 420) and slides (an entry with an incorrectly places decimal point, such as entering 100 for 1,000 or 10,000 for 1,000 or 24.50 for 245 . Both transpositions and slides cause the difference in the debit and credit columns to be divisible by 9. 1) To find slide errors, look as the account balances to see if any of the account balances have an unreasonable balance as compared to the balances in the other accounts by too many or not enough zeros. 2) To find transposition errors, add 1 to the first digit of the difference and then investigate all accounts for a transposition where the difference between the first and second digit is that number. See example below: ABC Company Trial Balance Debit Credit 911 585 703 1,210 255 277 1,812 719 514 745 857 472 4,395 4,665

28 The difference between the total debits and the total credits is $270 ($4,395 - $4,665) which is divisible by 9 ($27/9 = 30). To see if the difference of 270 is from a transposition error, add 1 to the first digit of the difference. Thus, 2 (the first digit of the 270 difference) +1 = 3. Investigate all account balances where the difference between the first and second digits is 3 (See the bolded first two digits of those accounts that have a difference of 3). This really helps to narrow down the search for the accounts that may have a transposition. This handout page 13, comes from the booklet, Mastering Correction of Accounting Errors that is tested on the Certified Bookkeeper Exam.