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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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