978-0324651140 Chapter 2 Lecture Note

2-1 Notes

CHAPTER 2

THE BASICS OF RECORD KEEPING AND FINANCIAL STATEMENT

PREPARTION

I. Learning Objectives

1. Learn the conventions of recording transactions, including the dual nature of

transactions, T-accounts, and journal entries.

2. Understand how the recording of transactions forms the foundation for

financial statement preparation.

3. Understand how the balance sheet and the income statement articulate

II. Organization of Class Sessions

We recommend coverage of the material in this chapter in eight steps. First,

discuss the significance of the term “Accounts” and bring out a clear

understanding of Permanent Vs Temporary accounts. List and explain the typical

Assets, Liability and Share holders’ Equity accounts in a Balance sheet. Next,

explain the dual effects of individual transactions and explain how information

about transactions and events are recorded with the use of “T–accounts” and how

it looks like. Also, explain which side records increases and which side records

decreases depending on whether T-account represents an asset account or

represents a liability or shareholders’ equity account. Third, provide the meaning

of two abbreviations Dr. & Cr. used by accountants and their effect on T-accounts.

Also, introduce recording of individual transactions in T-accounts; the preparation

of a journal entry. Bring out the dual effects rule (sum of amount debited equals

the sum of the amounts credited) so that the journal entry balances. Fourth,

describe some account titles used in an income statement and display how a

typical income statement appears. Also, bring out the relation between the

Balance Sheet and the Income Statement. Next, explain the accounting process

for revenues, expenses, and dividends. Provide an example for income transaction

entries. Sixth, explain what an adjusting entry is, and when it is carried out. Next

explain the steps in preparation of financial statements and the closing entries to

be recorded. Last, explain how spreadsheets are used to record business

transaction.

III. Lecture Outline

1. Learn the conventions of recording transactions, including the dual

nature of transactions, T-accounts, and journal entries.

Notes 2-2

Use Exercise at the end of the chapter to develop understanding of three

bookkeeping conventions.

A. Begin by illustrating dual effect (Exercise 2.11, & 2.12) , (Problems 2.27, &

B. T-accounts (Problem 34): provides an alternative way of organizing and

recording the transactions; they are also convenient devices for collecting

the records of a series of transactions or journal entries that affect a single

account during a period.

C. Journal Entries (Exercise 2.20, 2.21, 2.22, 2.23, 2.24, 2.25 and 2.26) : Stress

that journal entry indicates the dual effects of a transaction on both the

accounts and the balances in accounts and follows the same rules for

increases and decreases in asset, liability, and shareholders’ equity

accounts as illustrated earlier for entries in T-accounts

2. Understand how the recording of transactions forms the foundation for

financial statement preparation. (Problem 34,35,36, & 37)

Underscore that recording the effects of each transaction in a dual

resulting balance sheet should be in balance.

3. Understand how the balance sheet and the income statement

articulate.

Journal entries and T-accounts record the effects of transactions that

affect the income statement. All income statement accounts are temporary.

The closing process ensures that the ending balance in an income statement

account is zero, by debiting or crediting each account with exactly the amount

2-3 Notes

Notes 2-4

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