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Teaching Strategy
Students will wonder why the rules of debit and credit are as they are. Simply state they are
an arbitrary set of rules whose careful interrelationships make them work. In addition,
students need to dispel any preconceived notions as to what debit and credit imply (good,
bad, and so on). One way to accomplish this is to make an imaginary T account of the
classroom. Students are assigned roles (debit or credit) depending on which side of the room
they are seated. Ask the debits if they like being debits or would they rather be credits. If a
student indicates a preference, ask why. It may indicate a misconception about what debit
and credit really mean. Tell students who work in a bank to reverse what they have learned
about debits and credits. Finally, explain the beauty of the double-entry system.
Refer students to Exhibit 2, stressing that the chart of accounts is merely a table of contents
to the ledger. Point out the traditional order of accounts (the same as in the ledger) and the
need for (exibility in the numbering scheme. In addition, state the restrictive nature of the
accounts—that is, students must use the exact titles that have been established and cannot
use phrases for account names (such as “cash paid” or “equipment purchased”).
It may be useful to again de-ne asset, liability, and owner’s equity before discussing the
individual accounts. While you discuss the accounts, emphasize that establishing account
names for a business is a (exible process (and that similar items are frequently “lumped
together” into one account). Students often do not distinguish accounts from transactions at
this point. Clarify the di2erence.
Students need to know that transactions are not recorded in T accounts in practice, but T
accounts are used by accountants to analyze complex transactions.
Memorization and repetition are the keys to mastering the rules of debit and credit. Drill
students until they know the rules perfectly. The double-entry rules do not require as much
memorization as students often think. Point out that if they know the accounting equation
and that assets are increased with debits, they can reason through the rest of it. For
example, liabilities and owner’s equity must be increased with credits because they are on
the opposite side of the equation. Accounts that increase equity (e.g., revenues) have the
same rules, whereas accounts that decrease equity (e.g., expenses, withdrawals) have the
opposite rules.
Lead students through the process of determining account balances. Point out that negative
balances do not exist. The balance in an account is simply the absolute di2erence between
the debits and credits. Exercise 3A is excellent for reinforcing account terminology,
classi-cation, and normal balances.
Use Exhibit 5 to review the steps in the accounting cycle.
Tell students they must answer (at least in their minds) the following questions before preparing a
journal entry:
10. What is the transaction in words?
20. Which accounts are involved, and how are they classi-ed (asset, liability, etc.)?
30. Is each account increased or decreased?
40. Based on the foregoing answers, which rules of debit and credit apply, and what is the
correct journal entry?
Writing out the answers to these four questions for every transaction analyzed is helpful at
-rst. Short Exercises 5 and 6 and Exercise 4A or 6A are helpful to quickly illustrate
transaction analysis. Analyzing the transactions in Problems 2, 3, 4, 5, 7, and 10 in terms of
debits and credits is helpful for driving home the point.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Chapter 2: Analyzing and Recording Business Transactions Instructor’s Manual, p. 2
Students need to know that a trial balance is not a -nancial statement to be published and
that it is prepared only at the end of the accounting period. They also need to know that it
tests the equality of the ledger before -nancial statement preparation and that, even if it
balances, it may show an incorrect balance.
Point out that the accounts are listed in Exhibit 7 in the same order in which they are listed
in the ledger. Emphasize that only account balances are entered, not footings. Tell students
that if a zero balance exists, the account need not be listed in the trial balance.
Short Exercise 7 and Exercises 10A and 12A give students the opportunity to prepare a trial
balance and to recognize which errors cause it to be out of balance. Assigning Problem 5 or
10 is an excellent way to tie all the concepts together.
It is assumed that students have read the entire chapter and thus have knowledge of a
journal and a ledger. Point out how diCcult, if not impossible, it would be to prepare -nancial
statements directly from the journal (that is, without the use of a ledger). In e2ect, a ledger
is merely a -ling system in which each account occupies its own page. Pass around a
general ledger from a manual system and one (a printout) from a computerized system.
At this point, students may be confused about the proper order of procedure. Explain that,
even though the -nancial statements and ledger were introduced before the journal, the
correct order of procedure at this point is (1) analyze the transactions, (2) enter transactions
into the general journal, (3) post from the journal to the ledger, and (4) prepare the trial
balance.
Students need to be shown the formatting conventions normally employed with the general
journal (such as proper use of the amount columns, placement of all debits -rst, indention of
credits, skipping of a space between entries, and so on). They will worry about what exactly
to include in the explanation. Exercise 8A and Problems 5 and 10 provide good practice in
preparing journal entries.
Contrast the general journal form (Exhibit 8) with the general ledger form (Exhibit 9).
Acknowledge that transactions are recorded twice.
Suggest to students that we do away with the journal and just keep a ledger. What would be
missing? Then suggest we do away with the ledger. What information would be lacking? A
helpful analogy is to have them picture the general journal as a bagful of mail and the
general ledger as several slots into which the mail (journal entries) is sorted.
Point out that posting is not diCcult. All of the analysis has already been done. Posting is a
clerical process. Explain that journalizing and posting occur simultaneously in a
computerized system.
Common errors that students make regarding the ledger are to skip a line between postings
and to make use of the Item column when it is normally ignored.
When posting, students may either forget to use or be confused about the Post. Ref. columns
in the general journal and ledger. In addition, they need to know how to compute an account
balance (that is, how to add a debit to a debit balance, to add a credit to a credit balance,
and to subtract with a debit-credit combination). Refer to Exhibit 10 as you explain the
posting procedure.
Exercise 14A provides an excellent classroom exercise for the posting aspects of learning
objective 5.
Section 3: Business Applications
Business Applications
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Chapter 2: Analyzing and Recording Business Transactions Instructor’s Manual, p. 3
Ethics
Cash (ows
Liquidity
Lecture Outline
I0. Remind students that three measurement issues must be resolved before a business
transaction is recorded.
0. Recognition issue—When should the transaction be recorded?
0. Valuation issue—What dollar amount should be recorded?
0. Classication issue—Which accounts are a2ected?
II0. A sale is recognized when title passes to the buyer (recognition point).
III0. Transactions should be recorded at their original cost (historical cost).
IV. Transactions must be classi-ed according to the appropriate categories or accounts.
V0. Recognition, valuation, and classi-cation are important factors in ethical -nancial
reporting.
VI. Discuss the importance of maintaining good liquidity.
V0. Discuss the timing of cash (ows in maintaining a company’s adequate liquidity to pay
bills.
Summary
Before recording a business transaction, the accountant must determine three things:
00. When the transaction occurred (the recognition issue)
00. What value to place on the transaction (the valuation issue)
00. How the components of the transaction should be categorized (the classication issue)
A sale is recognized (entered in the accounting records) when the title to merchandise
passes from the supplier to the purchaser, regardless of when payment is made or received.
This is called the recognition point.
Prior to the recognition point, there has not been an economic event that should be recorded
as a business transaction. Examples of events that should not be recorded as business
transactions are:
A customer inquires about the availability of a product
A company hires a new employee
A company signs a contract to provide a service in the future.
The dollar value of any item involved in a business transaction is its original cost (also
called historical cost).
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Chapter 2: Analyzing and Recording Business Transactions Instructor’s Manual, p. 4
Every business transaction is classi-ed by means of categories called accounts. Each asset,
liability, stockholders’ equity, revenue, and expense has a separate account. By the simple
violation of the guidelines for classi-cation, companies have recorded as assets their
expenditures that should have been classi-ed as expenses, thus understating expenses and
overstating income.
Recognition, valuation, and classi-cation are important factors in ethical -nancial reporting.
These guidelines are intended to help managers meet their obligations to the company’s
owners and to the public.
Because the timing of cash (ows is critical to maintaining adequate liquidity to pay bills,
users of -nancial information must understand the di2erence between transactions that
generate cash and those that do not. To maintain liquidity, the management of a company
must carefully plan the company’s needs for cash.
Relevant Examples and Exhibits
Exhibit 13 Transaction of Blue Design Studio
Teaching Strategy
Many students approach the topic of measurement (as well as accounting itself) as though it
is fairly cut-and-dried. Nevertheless, they must realize that there are often several ways to
approach the recognition, valuation, and classi-cation issues, only one of which typically
follows GAAP. Emphasize that the recognition problem is not always easily solved and that
the historical cost principle is somewhat controversial.
Explain why a business transaction cannot be recorded until the three measurement issues
have been addressed.
Emphasize that as a user of -nancial statements, it is important to understand that the
balance sheet does not aim to show what a business is worth. Give an example using land or
a building, which generally increases in value over time.
Mention some exceptions to the basic recognition rule of recording transactions only when
title transfers. Short Exercise 3, Exercises 1A and 15A, or Cases 1 and 7 illustrate the
recognition point. You may also present a basic journal entry and ask students to point out
the portion of the journal entry that refers to recognition, valuation, and classi-cation. Short
Exercise 2 provides an excellent opportunity for students to integrate recognition, valuation,
and classi-cation issues.
Walk students through Exhibit 13, stressing the roles of Accounts Receivable and Accounts
Payable in managing cash (ows and liquidity. Then assign Exercise 16A and use Case 4 for
class discussion.
Student Engagement Tactics
10.Use a Jeopardy game format to reinforce student comprehension of account
classi-cations and normal balances. At least one class prior to the game, let students
know about the game and the learning objectives to be covered.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
Chapter 2: Analyzing and Recording Business Transactions Instructor’s Manual, p. 5
20. Students could form their own teams between classes. Specify team size. (Three is
recommended.) Remind teams that they must sit together in class. The -rst group
member to class picks team seats, which have been labeled by the instructor with tags
showing large-print numbers. Students wear tags during the game to make scoring
easier.
30. Using information from the exercise 3A (and elsewhere), prepare a list of account items,
such as “accounts payable classi-cation” or “inventory normal balance.” Responses
could be in Jeopardy form, such as “What is a liability?” or “What has a normal debit
balance?” Particularly tough questions could be identi-ed as Double Jeopardy items
worth double points—for example, having to answer both account classi-cation and
normal balance within the time limit.
40. As a preliminary round, call out an account and have each group member write the
classi-cation and/or normal balance on a piece of paper. Each individual score will be
treated as part of a team grade. Emphasize that answers must be legible so that
another team can grade it. If an answer can’t be read, it will be counted as incorrect. If
you want to make it tougher, make the time limit to answer ten seconds or less. A
stopwatch is helpful.
50. To determine who moves on to the -nal round, have Team 1 give its answer sheet to
Team 2, Team 2 to Team 3, etc., until the last team gives its answer sheet to Team 1.
Each correct answer wins one point. Double Jeopardy answers are worth two points.
60. The teams with the highest scores for round one move to the -nal round. Assign team
names or keep the same team numbers. Tags with the group name/number should be
easily visible from the scorers’ viewpoint. Ask one or two trusted students to keep
score.
00. In the -nal round, ask one team at a time a di2erent question to be answered within
-ve seconds. A limited use of recycled questions is OK as long as the same team does
not get the same question. This process continues for a stated number of rounds.
“Sudden death” could be played if more than one team remains.
00. Consider performance-based rewards. For example, the members of the team with the
highest score could be granted bonus quiz points or have a quiz waived. Additionally,
you could honor winners as reigning team champions, presenting them with -rst-place
ribbons.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated,
or posted to a publicly accessible website, in whole or in part.
