CHAPTER

Analyzing and Recording Business Transactions

Analyzing and Recording Process

Exchanges of economic consideration between two parties.

External Transactions occur between the organization and an outside party.

Internal Transactions occur within the organization.

2-2

Analyzing and Recording Process

Analyze each transaction and event from source documents

Record relevant transactions and events in a journal P o s t j o u

2-3

Prepare and analyze the trial balance

The Account and its Analysis

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

The general ledger is a record containing all accounts used by the company.

The Account and its Analysis

Assets

Liabilities

+
+

Equity

+
Owners Capital

Owners Withdrawals

Expenses

Revenues

Ledger and Chart of Accounts

The ledger is a collection of all accounts for an information system. A companys size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts and includes an identifying number for each account.
Account Number 101 106 126 128 167 201 236 307 Account Name Cash Accounts receivable Supplies Prepaid insurance Equipment Accounting payable Unearned revenue Common stock Accounting Number 319 403 406 622 637 640 652 690 Accounting Name Dividends Revenues Rental revenue Salaries expense Insurance expense Rent expense Supplies expense Utilities expense

Debits and Credits

Remember:
Debits are simply entries on the left.
Credits are simply entries on the right.

Rule of Debits and Credits

Assets Expenses Dividends/ Withdrawals Liabilities Revenues Owners Equity

DR

CR

DR

CR

(+)

(-)

(-)

(+)

Debit is an increase. Credit is a decrease.

Debit is a decrease. Credit is an increase.

Determining Account Balances

Name of Account
An accounts balance is usually on the side that increases the account. It is referred to as the Normal Balance.

Debit
Accounts with typical debit balances are?

Credit
Accounts with typical credit balances are?

Expenses Assets Dividends

Owners Equity Liabilities Revenues

Remember the mnemonic memory device, DEAD COLR

Debits and Credits

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions.
T- Account (Left side) (Right side) Debit Credit

Friends dont let friends do Accounting without t-accounts -Anonymous

Using a T-Account
The cash account has a beginning balance of $50. A check for $20 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?

Cas h

Double-Entry Accounting
Assets
ASSETS

Liabilities
LIABILITIES

Equity
EQUITIES

Debit

Credit

Debit

Credit

Debit

Credit

Double-Entry Accounting

Equity
Owners Capital
Capital

Owners Withdrawals
Withdrawals

Revenues
Revenues

Expenses
Expenses

Debit Credit

Debit Credit

Debit Credit

Debit Credit

Double-Entry Accounting
An account balance is the difference between the increases and decreases in an account.

Cash
Investment by owner Consulting services revenues earned Collection of accounts receivable 30,000 Purchase of supplies 4,200 Purchase of equipment 1,900 Payment of rent Payment of salary Payment of note payable Withdrawal by owner 36,100 Total decreases 4,400 2,500 26,000 1,000 700 900 600 31,700

Total increases Balance

Journalizing and Posting Transactions

Assets

Liabilities

Equity

T- Account (Left side) (Right side) Debit Credit

Step 1: Analyze transactions and source documents.

Step 2: Apply doubleentry accounting

ACCOUNT NAME:
Date Description PR

ACCOUNT No.
Debit Credit Balance

GENERAL JOURNAL
Date Description Post. Ref.

Page
Debit

123
Credit

Step 4: Post entry to ledger

Step 3: Record journal entry

Journalizing Transactions
Transaction Date Titles of Affected Accounts
Page 1
Debit 30,000 30,000 Credit

GENERAL JOURNAL
Date 2008 Dec. 1 Cash Description PR

Common stock Investment by shareholders Dec. 2 Supplies Transaction Cash explanation

Purchased store supplies

2,500 Dollar amount of 2,500 debits and credits

Analyzing Transactions
Transaction: Shareholders invested $30,000 in FastForward on Dec. 1.

Analyzing Transactions
Transaction: FastForward purchases supplies by paying $2,500 cash.

Analyzing Transactions
Transaction: FastForward purchases equipment by paying $26,000 cash.

Analyzing Transactions
Transaction: FastForward purchases $7,100 of supplies on credit.

Analyzing Transactions
Transaction: FastForward provides consulting services and immediately collects $4,200 cash.

After processing its remaining transactions for December, FastForwards Trial Balance is prepared.
FastForward Trial Balance December 31, 2008

Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue Common stock Dividends Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total

Debits $ 3,950 9,720 2,400 26,000

Credits

6,200 3,000 30,000 5,800 300

600

The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

1,400 1,000 230 $ 45,300 $ 45,300

Searching for and Correcting Errors

If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added. Make sure account balances are correctly entered from the ledger. See if debit or credit accounts are mistakenly placed on the trial balance. Recompute each account balance in the ledger. Verify that each journal entry is posted correctly. Verify that each original journal entry has equal debits and credits.

Using a Trial Balance to Prepare Financial Statements

Income Statement
Statement of Retained Earnings

Beginning Balance Sheet

Income Statement of Cash Flows

Ending Balance Sheet

End of Chapter 2