Chapter+2+Notes+-+Recording+Transactions

__ **SO 1 - 2** __ Homework: SS1, SS2, SS3, SS4; BE2-1, BE2-3 (b); E2-1 (a), E2-2 (b) Highlights: asset, liability, equity (capital, revenues, expenses, drawings) accounts; debit and credit theory; double-entry system of recording transactions; review summary of debit/credit rules on page 58 (or click here for a link to the grade 11 accounting summary of basic bookkeeping rules)

Reminder: Use the Capital account for owner investments of cash/other assets

Homework: SS5, SS6, SS7; BE2-2; E2-3, E2-6(a) Highlights: basic steps in recording of transactions (analyze transaction, journalize transaction, post to ledger accounts); source documents; general journal; steps in journalizing (debit, credit, line of explanation); manual vs. computerized accounting systems; simple vs. compound entries; general ledger; account formats (t-accounts vs. standard form accounts)
 * __ SO 3 - 5 __**

Homework: SS8, SS9, SS10; BE2-9; P2-3A Highlights: posting from journal to ledger accounts; chart of accounts and numbering system; trial balance and proper order of accounts (assets, liabilities, capital, drawings, revenues, expenses); limitations of trial balance when detecting errors; different types of errors and effects on trial balance
 * __ SO 6 - 7 __**


 * __Analyzing transactions using debit-credit theory and double-entry system of accounting__**


 * 1) Purchased $750 worth of supplies on account**

Supplies dr 750 -- Accounts Payable cr 750


 * 2) Owner withdrew $500 for personal use**

B. Gold, Drawings dr 500 -- Cash cr 500


 * 3) Provided service on account, $900**

Accounts Receivable dr 900 --- Revenue cr 900


 * 4) Purchased equipment for $6000, paid $2000 with balance outstanding**

Equipment dr 6000 --- Cash cr 2000 --- Accounts Payable cr 400


 * 5) Received $350 from debtor customer**

Cash dr 350 Accounts Receivable cr 350

(1) A **note** (or more properly a **promissory note** or **IOU**) is a written agreement (formal legal contract) wherein one party covenants (promises) to pay/repay another party, with or without interest, at specified intervals for monies borrowed or credit extended.
 * __Additional notes__**

If the terms of the note are violated (i.e., if timely payment/repayment is not forthcoming), the holder of the note may sue the issuer of the note for breach of contract.

The party that issues or signs the note (borrower or purchaser of goods on account) is said to be legally obligated to pay/repay both principal (amount borrowed or initial purchase price) and sometimes interest (cost of borrowing money or receiving credit) to the party that holds the note (lender or seller of goods on account).

When a note is issued, the party that signs the note (the purchaser on account or borrower) will typically employ an account called **Notes Payable** which is similar to Accounts Payable or Bank Loan.

**Notes Payable** is a liability account that can be used in one of three ways:

(a) to represent monies owed to a lender such as a bank or private citizen (bank loan or private loan) (b) to represent monies owed to a creditor supplier (ordinary purchase of supplies or inventory on account) (c) to represent monies owed to a vendor on the purchase of a long-term capital asset (major purchase of equipment or machinery on account)

A note is simply additional evidence that a legal obligation exists on the part of a borrower or purchaser of goods on account.

In the context of an ordinary purchase of supplies or inventory on account, the creditor supplier may require that the purchaser sign a note to ensure prompt payment of the outstanding debt. (For most ordinary purchases on account though, the creditor supplier will __not__ demand that the purchaser sign a promissory note - in those circumstances, the purchaser should simply credit Accounts Payable as before.)

When money is borrowed or goods are purchased on account and a note is issued by the borrower or purchaser, the journal entry should appear as follows:

--- ** Notes Payable cr 10000 **
 * Cash (or) Other Asset dr 10000 **
 * To record 10-month, 5% (annual interest rate) note on January 1 **

When partial repayment or payment is subsequently made, typically at the start of each month, the journal entry should reflect payment of both principal and, if applicable, interest:

**Cash cr 1041.67**
 * Notes Payable dr 1000 (10000 / 10 months)**
 * Interest Expense dr 41.67 (10000 x 5% annually / 12 months)**
 * To record monthly payment of principal and interest on note on February 1**

(2) **Unearned Revenue** is a __liability__ account that represents an obligation to provide future services to a client who has already paid in advance of the receipt of said services. (In the unlikely event that services are never actually delivered to the client, the obligation to provide services is replaced with the obligation to refund all monies received.)

When prepayment is received from a client for services that have yet to be provided:

--- ** Unearned Revenue cr 400 **
 * Cash dr 400 **
 * Received cash advance (advance payment) for future services**

When services are finally delivered to the client, the value of the services provided must then be charged to the appropriate revenue account:

--- ** Fees Earned cr 150 **
 * Unearned Revenue dr 150 **
 * To record billing of services to prepaying client**

(3) Please remember that business transactions should only be recorded (journalized) when the accounts of the business are affected (increased or decreased) by the event in question.

Accordingly, the hiring of an employee or a discussion with a potential client are not considered business transactions because the accounts of the company are not (yet) affected by such actions.