The Basic Tool of Accounting: Understanding the Accounting

The basic tool of accounting is the accounting equation. It measures the resources of a business (what the business owns or has control of) and the claims to those resources (what the business owes to creditors and to the owners). The accounting equation comprises three parts—assets, liabilities, and equity— and shows how these three parts are related. Assets appear on the left side of the equation, and liabilities and equity appear on the right.Assets=Liabilities+Equity Part 2: Transactions are first recorded in a journal, which records transactions in date order. Journalizing a transaction records the data only in the journal— but not in the ledger (the record-holding all of the accounts of a business). The data must also be transferred to the ledger. The process of transferring the date from the journal to the ledger is calledposting. We post from the journal to the ledger. Debits in the journal are posted as debits in the ledger, and credits as credits— no exceptions. Part 3:The journalizing and posting process has five steps: Step 1:Identify the accounts and the account type (asset, liability, or equity). Step 2:Decide if each account increases or decreases using therulesof debits and credits. Step 3:Record the transaction in the journal. Step 4:Post the transaction into the ledger. Step 5:Determine if the accounting equation is in balance. In this problem, we will focus on the first three steps. We will analyze and then recordLaughton Engineering's transactions in the journal (journalize the transactions). Part 4 Journalize the transactions ofLaughtonEngineering. Include an explanation with each journalentry. We'll begin with the first transaction on the 2nd and will analyze the first few transactions in the context of the first three steps discussed above. Part 5 : July 2: Received$9,000 contribution from Laughton in exchange for common stock. Step1:Identify the accounts and the account type (asset, liability, or equity). The two accounts involved are Cash (an asset) and Common Stock (an equity account). Step2:Decide if each account increases or decreases using therulesof debits and credits. Cash increases. The business has more cash than it had before. Common Stock increases. The business received a $9,000 contribution from the owner of the business in exchange for common stock. An asset account (Cash) increase is recorded with a debit. An increase in the equity account is recorded with a credit. Step3:Record the transaction in the journal. To record this transaction in the journal we must increase Cash with a debit for $9,000 and Common Stock with a credit for $9,000. Go ahead and prepare the entry. Be sure to select a brief description of the transaction on the last line of the journal entry table. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) DateAccounts and ExplanationDebitCredit Jul. 2Cash9,000 Common Stock9,000 Issued common stock for cash. Part 6: J uly 4: Paid utilities expense of$350. Step1:Identify the accounts and the account type (asset, liability, or equity). The two accounts involved are Utilities Expenses (equity) and Cash (an asset). Step2:Decide if each account increases or decreases using therulesof debits and credits. Utilities Expense increases. The business has incurred an expense. Cash decreases. The business paid cash. An increase in an expense account is recorded with a debit. A decrease in an asset account is recorded with a credit. Step3:Record the transaction in the journal. To record this transaction in the journal, we must increase Utilities Expenses with a $350 debit and decrease Cash with a $350 credit. Record the entry. DateAccounts and ExplanationDebitCredit Jul. 4Utilities Expense350