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3-1
Chapter 3
The Double-Entry Accounting System
General Comments for Chapter 3
Chapter 3 introduces recording procedures at a level designed to serve students who plan to
major in accounting as well as those who do not. Although advances in computer technology
have reduced the importance of recording procedures, debit and credit terminology continues
to be used in everyday business practice. Banks issue debit and credit cards. Customers are
told that their accounts have been debited or credited. Most medium- to large-size businesses
account for transactions using double-entry accounting with debits and credits. Therefore,
general business students as well as accounting majors need exposure to double-entry termi-
nology.
The traditional approach introduces technical terminology too early and in too much depth.
We believe you will find the two previous chapters have provided your students a back-
ground that facilitates their ability to master recording procedures. In other words, teaching
debits and credits should be easier under the concepts approach.
This text does omit many of the more detailed topics found in traditional texts. For example,
it does not include worksheets, special journals, and posting references. It does not use an
income summary account. The revenue, expense, and dividends accounts are closed directly
to retained earnings. Accounting majors will see these topics in their intermediate course,
and other business majors do not need the procedural detail. The text provides appropriate
background without overburdening detail.
Detailed Outline of a Lesson Plan for Chapter 3
I. Begin by introducing T-accounts. Observe that using columns of pluses and minuses
becomes increasingly unmanageable as the number of transactions increases. Introduce
the T-account as a means of simplifying the recording of events. Draw a large T on the
board and then write the accounting equation such that the ‘=’ sign is over the vertical
part of the T with ‘Assets’ on the left side and ‘Claims’ on the right side of the ‘=’ sign.
This will help students understand that Assets balances are typically on the left side of
the T account and Claims balances – Liabilities and Equity are on the right side of the T
account. Next, draw a T-account on the board and write the word assets across the hor-
izontal bar. Reference the initial T account with the accounting equation and suggest
that for assets we record increases on the left side of the T and decreases on the right
side. Then complete the accounting equation by drawing T-accounts for liabilities and
equity and suggest that increases for liability and equity accounts are recorded on the
right side of the T and decreases on the left side. Add the terms debit and credit as the
3-2
last part of your presentation. You may find it useful to demonstrate recording several
transactions in T-accounts before introducing debit and credit terminology. The terms
seem easier to digest if students first have time to grasp the plus and minus recording
scheme. Also, students might remember credits more readily by linking credit termi-
nology to the fact that creditors (including investors) are the ones that lay claims to the
assets of a company.
The treatment of pluses and minuses for expense and dividend accounts is particularly
important. Should you describe a debit to an expense account as a plus or a minus?
The debit is in fact both. Debits increase the expense but the expense decreases equity.
The plus or minus impact depends on whether the reference point is the expense or the
equity interest. The reference point you choose can make a big difference in how easily
students learn debit and credit terminology. If you use equity as the reference point, the
plus and minus scheme for the expense accounts is consistent with the other equity ac-
counts. On the claims side of the accounting equation, all debits are minuses and all
credits are pluses. If you use the expense account as the reference point, then the plus
and minus signs in the expense account are the reverse of the other equity accounts.
Since consistent patterns are easier to learn than inconsistent patterns, referencing the
equity account may work better than referencing the expense account. Furthermore,
referencing the equity account is consistent with the horizontal statements model used
throughout the text. The text uses the following pattern of plus and minus signs for
debit and credit terminology.
Illustration 1
Debit and Credit Relationships
Assets
=
Liabilities
+
Equity
Debit
Credit
Debit
Credit
Debit
Credit
+
–
–
+
–
+
Common Stock
Debit
Credit
–
+
Dividends
Debit
Credit
– Equity
+ Equity
+ Div.
- Div.
Revenue
Debit
Credit
– Equity
+ Equity
-Revenue
+Revenue
Expense
Debit
Credit
– Equity
+ Equity
+ Exp.
– Exp.
II. Immediately after introducing the plus and minus structure in T-account form,
give the students a demonstration problem that requires them to record several
events in T-accounts. Include accrual and deferral events in this problem so you can
also introduce other topics such as unadjusted and adjusted trial balances. We work
Demonstration Problem 3-1 step by step, encouraging students to work along with us.
For example, ask students to record each transaction in T-accounts before providing
them with the answer. After recording all the transactions, show the students how to
prepare an unadjusted trial balance. Next, ask the students to record the adjusting en-
tries and to prepare an adjusted trial balance. Then provide the answers so students can
check their work. Instruct the faster students to use the information in the adjusted trial
balance to prepare a set of financial statements. Finally, have the students prepare clos-
ing entries and a post-closing trial balance.
Keep the students actively involved. Let the problem drive your comments and sugges-
tions. For example, after introducing the trial balance, ask students what would happen
if a debit were incorrectly recorded in accounts receivable instead of cash. Would the
trial balance still balance? Point out that equal totals in a trial balance is evidence ra-
ther than proof of accuracy. Similarly, after preparing the post-closing trial balance,
you may ask the students: would real-world companies prepare only three trial balanc-
es during the year? How often should a trial balance be prepared? Questions such as
these help you emphasize that a trial balance is a method of checking debit and credit
balances. It is prepared whenever the accountant wants to check the accuracy of the re-
cording process. Most businesses prepare a trial balance at least daily. The “ask-
before-you-tell approach” keeps students actively involved. You can introduce points
such as those discussed above whenever it seems appropriate. Remember to use this
outline as a guide. Make every attempt to personalize your lesson plans.
III. After students have grasped debit and credit terminology, introduce journalizing.
Explain that the journal is a book of original entry. Note that the journal can take many
different forms. Today, electronic scanners, keyboards, and computer disks are more
3-4
ly, have them close the revenue account to retained earnings and prepare a post-closing
trial balance. Using a single event focuses attention on the steps in the accounting cy-
cle. Students do not become so involved in transaction data that they lose sight of the
sequence of events in an accounting cycle. Students should occasionally be required to
work through a problem without the benefit of workpapers. This exercise provides an
ideal opportunity to bypass using workpapers. The solution is simple and the need for
workpapers is minimal. Therefore, we have not provided solutions and workpapers for
this example.
V. Use the horizontal financial statements model to demonstrate the effects of busi-
ness events on financial statements as you deem appropriate. Use the horizontal fi-
nancial statements model in conjunction with recording procedures. For example, dis-
cuss accounting events in the following sequence. First, demonstrate how the business
event affects the financial statements by recording it in a horizontal financial statements
model. Next, show how to record the event with T-accounts or a general journal entry.
To reinforce the relationship between recording procedures and financial statement ef-
fects, you can write a journal entry on the board and have the students record the effects
of the journal entry in the horizontal financial statements model. For example:
XYZ Company experienced an accounting event that was recorded in its general jour-
nal as follows:
Cash
xxx
Accounts Receivable
xxx
Use a horizontal financial statements model to how this event would affect the company’s finan-
cial statements.
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
+ Ä
NA
NA
NA
NA
NA
+ OA
VI. Time considerations and homework assignments. Spend approximately one hour
introducing recording procedures. You should have time to complete Demonstration
Problem 3-1 step by step while students work along with you. You should also have
time to introduce the general journal recording format and get started on Demonstration
Problem 3-2. If you do not have time to complete this problem in class, assign the re-
mainder as homework. You need not spend an enormous amount of time covering re-
cording procedures in class because the subject is not conceptually complex. Mastering
recording procedures requires drill which homework assignments can provide. If you
have any additional classroom time, consider the enrichment exercise described below.
If you want your students to get a good grasp of debit and credit terminology, assign a
generous supply of homework exercises and problems. Mastery requires considerable
practice. Exercises 3-5A or B, 3-14 A or B, and 3-19A or B are good for drill. Prob-
lems 3-33A or B and 3-32 A or B require using recording procedures for a complete
accounting cycle.
3-5
VII. Enrichment. We highly recommend that you use ATC Case 4-7 as an in-class assign-
ment. It is a comprehensive case that requires students to consider what information to
include in financial statements and to examine the limitations of accounting information
in decision-making. The case is set in medieval times and uses numbers of sheep as the
common unit of measure. Students have fun and learn accounting in the process. You
can work the case step by step. Start by drawing an accounting equation for each
brother. Record the first event (acquiring capital from the father) for the students, then
ask them to proceed on their own. After allowing students ample time to record the
events under the accounting equation, provide a solution to use as a guide for preparing
financial statements. Be accepting of student suggestions and observe that there is
more than one right answer. Explain, though, that useful results require consensus re-
garding measuring and recording transactions in order to produce comparable financial
statements. Next, have students prepare financial statements, then provide a solution so
they can check their answers. Finally, have students answer the questions. You may
use more or less structure than we propose. We find that students need help getting
started, so at least begin the case in class. Depending on the time available, assign parts
of the case as homework. The case is also an effective group project. It raises many is-
sues that students can debate. It is most effective when students share their ideas with
each other. Plan to spend a minimum of one hour of class time on the case.
EDGAR database cases. Internet cases that require students to access the Securities
and Exchange Commission’s EDGAR database are introduced in this chapter. Appen-
dix A discusses the EDGAR database in more detail. These cases focus on analyzing
10-K annual reports. They provide real-world exposure in a contemporary electronic
format. If your school has the computer facilities to access the EDGAR database, you
may want to include some of these cases in homework assignments.
3-6
Demonstration Problem 3-1 - Recording Procedures
The following events apply to Braxton Personnel Advisory Services Company (BPASC).
1. On January 1, 2015, issued common stock for $5,000 cash.
2. Paid $1,800 cash to rent office space for one year beginning on February 1, 2015.
3. Received a $2,400 cash advance as a retainer for services to be provided. Services were
to be provided evenly for one year beginning on March 1, 2015.
4. On December 1, 2015, paid dividends of $200 to the stockholders.
Required
a. Record the events in ledger T-accounts and prepare an unadjusted trial balance.
b. Record necessary adjusting entries in ledger T-accounts and prepare an adjusted trial
balance.
c. Use the adjusted trial balance to prepare an income statement, a statement of retained
earnings, a balance sheet, and a statement of cash flows.
d. Record the closing entries in ledger T-accounts and prepare a post-closing trial balance.
3-7
Demonstration Problem 3-2 - General Journal Entries
Required
Record the following transactions in general journal entry form. Record the event number in
the date column.
1. Issued common stock for $5,000 cash.
2. Borrowed $4,000 cash from a local bank.
3. Purchased $500 of supplies on account.
4. Recognized revenue of $8,000 for services provided on account.
5. Paid $3,900 cash for salaries expense.
6. Paid $2,400 cash in advance for a one-year lease to rent office space.
7. Purchased $3,500 of office furniture on account.
8. Received $1,800 cash for services to be performed in the future.
9. Collected $3,000 cash from accounts receivable.
10. Paid $1,200 cash for utilities.
11. Paid dividends of $1,000 cash to the stockholders.
12. Invested $2,000 cash in a certificate of deposit.
13. Repaid $1,600 of the bank loan described in Event No. 2.
14. Purchased land for $2,700 cash.
15. Recognized $400 of accrued interest expense.
16. Completed $1,800 of services on contract described in Event No. 8.
17. Counted supplies on hand at the end of the accounting period. Determined that $400 of
supplies were used during the accounting period.
18. Recognized accrued salary expense of $2,300.
19. Recognized $150 of accrued interest revenue.
3-8
Demonstration Problem 3-1 Solution, part a.
T-Account Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
–
–
+
–
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
(1) 5,000
1,800 (2)
2,400 (3)
5,000 (1)
(3) 2,400
200 (4)
Bal. 5,400
Prepaid Rent
Dividends
(2) 1,800
(4) 200
Braxton Personnel Advisory Services Company
Unadjusted Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
5,400
Prepaid rent
1,800
Unearned revenue
2,400
Common stock
5,000
Retained earnings
0
Services revenue
0
Rent expense
0
Dividends
200
Totals
7,400
7,400
3-9
Demonstration Problem 3-1 Solution, part b.
T-Account Adjusting Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
-
-
+
-
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
(1) 5,000
1,800 (2)
(adj2) 2,000
2,400 (3)
5,000 (1)
(3) 2,400
200 (4)
400 Bal.
Bal. 5,400
Prepaid Rent
Services Revenue
(2) 1,800
1,650 (adj1)
2,000 (adj2)
Bal. 150
Rent Expense
(adj1) 1,650
Dividends
(4) 200
Braxton Personnel Advisory Services Company
Adjusted Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
5,400
Prepaid rent
150
Unearned revenue
400
Common stock
5,000
Retained earnings
0
Services revenue
2,000
Rent expense
1,650
Dividends
200
Totals
7,400
7,400
3-10
Demonstration Problem 3-1 Solution, part c. Financial Statements
Braxton Personnel Advisory Services Company
Financial Statements
Income Statement
For the Year Ended December 31,
2015
Services revenue
$ 2,000
Rent expense
(1,650)
Net income
$ 350
Statement of Retained Earnings
Beginning retained earnings
$ 0
Plus: Net income
350
Less: Dividends
(200)
Ending retained earnings
$ 150
Balance Sheet as of December 31, 2015
Assets
Cash
$ 5,400
Prepaid rent
150
Total assets
$ 5,550
Liabilities
Unearned revenue
$ 400
Stockholders’ equity
Common stock
5,000
Retained earnings
150
Total stockholders’ equity
5,150
Total liabilities and stockholders’ equity
$ 5,550
Statement of Cash Flows
Net cash flow from operating activities1
$ 600
Net cash flow from investing activities
0
Net cash flow from financing activities2
4,800
Net change in cash
5,400
Beginning cash balance
0
Ending cash balance
$ 5,400
1Net cash flow from operating activities: $2,400 inflow from clients less $1,800 outflow for
prepaid insurance ($2,400 – $1,800 = $600).
2Net cash flow from financing activities: $5,000 inflow from issuing common stock less
$200 outflow for dividends to stockholders. ($5,000 – $200 = $4,800).
3-11
Demonstration Problem 3-1 Solution, part d. T-Account Closing Entries
Panel 1 Recording Scheme Provided for Convenience
ASSETS
LIABILITIES
EQUITY
Debit
Credit
Debit
Credit
Debit
Credit
+
−
−
+
−
+
Panel 2 Ledger T-Accounts
Cash
Unearned Revenue
Common Stock
(1) 5,000
1,800 (2)
(adj2) 2,000
2,400 (3)
5,000 (1)
(3) 2,400
200 (4)
400 Bal.
5,000 Bal.
Bal. 5,400
Prepaid Rent
Retained Earnings
(2) 1,800
1,650 (adj1)
(cl2) 1,650
2,000 (cl1)
Bal. 150
(cl3) 200
150 Bal.
Services Revenue
(cl1) 2,000
2,000 (adj2)
Rent Expense
(adj1) 1,650
1,650 (cl2)
Dividends
(4) 200
200 (cl3)
Braxton Personnel Advisory Services Company
Post-closing Trial Balance
December 31, 2015
Account Title
Debit
Credit
Cash
5,400
Prepaid rent
150
Unearned revenue
400
Common stock
5,000
Retained earnings
150
Services revenue
0
Rent expense
0
Dividends
0
Copyright © McGraw-Hill Education. Permission required for reproduction or display.
3-12
Totals
5,550
5,550
