Page 96 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

• Debits increase asset, expense, and Dividends accounts.
• Credits increase liability, stockholders' equity, and revenue accounts.

• Analyze transactions by examining source documents.
• Journalize transactions in the journal.
• Post journal entries to the accounts in the ledger.
• Prepare a trial balance of the accounts and complete the work sheet.
• Prepare financial statements.
• Journalize and post adjusting entries.
• Journalize and post closing entries. Prepare a post-closing trial balance.

• A journal contains a chronological record of the transactions of a business. An example of a general journal
is shown in Exhibit 11. Journalizing is the process of entering a transaction in a journal.
• Posting is the process of transferring information recorded in the journal to the proper places in the ledger.
• Cross-indexing is the placing of (1) the account number of the ledger account in the general journal and (2)
the general journal page number in the ledger account.
• An example of cross-indexing appears in Exhibit 10.
• A trial balance is a listing of the ledger accounts and their debit or credit balances.
• If the trial balance does not balance, an accountant works backward to discover the error.

• A trial balance is shown in Exhibit 13.
• Horizontal analysis involves calculating the dollar and/or percentage changes in an item from one year to
the next.
• Vertical analysis shows the percentage that each item in a financial statement is of some significant total.

Demonstration problem
Green Hills Riding Stable, Incorporated, had the following balance sheet on 2010 June 30:
GREEN HILLS RIDING STABLE, INCORPORATED
Balance Sheet
2010 June 30
Assets
Cash $ 7,500
Accounts receivable 5,400
Land 40,000
Total assets $ 52,900
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable $ 800
Notes payable 40,000
Total liabilities $ 40,800
Stockholders' equity:
Capital stock $ 10,000
Retained earnings 2,100
Total stockholders' equity 12,100
Total liabilities and stockholders' equity $52,900

a. Prepare the journal entries to record the transactions for July 2010.
b. Post the journal entries to the ledger accounts after entering the beginning balances in those accounts. Insert
cross-indexing references in the journal and ledger. Use the following chart of accounts:

Accounting Principles: A Business Perspective 97 A Global Text