1

2

Analyzing Analyzing TransactionsTransactions

2

1. Describe the characteristics of an account and record transactions using a chart of accounts and journal.

2. Describe and illustrate the posting of journal entries to accounts.

3. Prepare an unadjusted trial balance and explain how it can be used to discover errors.

4. Discover and correct errors in recording transactions.

After studying this chapter, you should be able to:

3

2-1

Describe the characteristics of an account and record

transactions using a chart of accounts and journal.

Objective 1Objective 1Objective 1Objective 1

4

5

Accounting systems are designed to show the

increases and decreases in each financial statement item

as a separate record. This record is called an account.

2-1

6

Detailed record of increases and

decreases in specific assets, liabilities,

equities, revenues, or expenses.

Separate accounts are maintained for each item

of importance.

Detailed record of increases and

decreases in specific assets, liabilities,

equities, revenues, or expenses.

Separate accounts are maintained for each item

of importance.

The Account

75

The T account has a title.

Title

2-1The T Account

86

The left side of the account is

called the debit side.

Title

Debit

2-1

9

The right side of the account is called the

credit side.

Title

Debit Credit

2-1

7

10

Title

Debit Credit

Amounts entered on the

left side are debits.

2-1

8

11

Title

Debit Credit

Amounts entered on the right side are

credits.

2-1

9

12

Cash(a) 25,000 (b) 20,000(d) 7,500 (e) 3,650

(f) 950(h) 2,000

Balance 5,900

Balance of the accountBalance of the account

2-1

10

13

A group of accounts for a business entity is

called a ledger.

2-1

14

A list of the accounts in a ledger is called a

chart of accounts.

2-1

15

Assets are resources owned by the business entity.

• Cash• Supplies• Prepaid expenses• Buildings

2-1

16

LandLand

EquipmentEquipmentBuildingsBuildings

CashCash

Prepaid Expenses

Prepaid Expenses

Office Supplies

Office Supplies

Store Supplies

Store Supplies

Prepaid Insurance

Prepaid Insurance Notes

Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

ASSETSASSETS

Asset Accounts

17

Liabilities are debts owed to outsiders (creditors).• Accounts payable• Notes payable• Wages payable

2-1

18

Accrued Liabilities

Accrued Liabilities

Unearned Revenues

Unearned Revenues

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

LIABILITIESLIABILITIES

LiabilityAccounts

19

Owner’s equity is the owner’s right to the assets of the

business. A drawing account represents the amount of

withdrawals by the owner.

2-1

20

EquitiesEquities

RevenuesRevenues

Owners’ Capital

Owners’ Capital

Owners’ Withdrawals

Owners’ Withdrawals

ExpensesExpenses

Equity Accounts

21

Revenues are increases in owner’s equity as a result

of selling services or products to customers.

• Fees earned• Commission revenue• Rent revenue

2-1

22

The using up of assets or consuming services in the

process of generating revenues results in expenses.

• Wages expense• Rent expense• Miscellaneous expense

2-1

23

24

Debits Credits

Asset accounts……. Increase (+) Decrease (-)

Liability accounts.… Decrease (-) Increase (+)

Owner’s equity (capital) accounts… Decrease (-) Increase (+)

Balance Sheet Accounts

2-1

31

25

Credit for increases

(+)

Debit for decreases

(–)

Owner’s Equity Accounts

Credit for decreases

(–)

Debit for increases

(+)

Asset AccountsCredit for increases

(+)

Debit for decreases

(–)

Liability Accounts

Balance Sheet Accounts

2-1

32

26

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

Double-Entry AccountingExh.3.7

27

Debits Credits

Revenue accounts… Decrease (-) Increase (+)

Expense accounts… Increase (+) Decrease (-)

2-1Income Statement Accounts

40

28

Credit for increases

(+)

Debit for decreases

(–)

Revenue AccountsIncome Statement Accounts

Credit for decreases

(–)

Debit for increases

(+)

Expense AccountsLess

2-1

41

Continued

29

Equals

Net Income (credit > debits) increases owners’ equity (capital)

Net Loss (debits > credits) decreases owners’ equity (capital)

2-1

42

30

RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Debit Credit

Capital

- +Debit Credit

Withdrawals

+ -Debit Credit

Expenses

+ -Debit Credit

Revenues

- +

Double-Entry Accounting - Detail of Effects on Equity

EquityEquity

Exh.3.8

31

Every transaction affects at least two accounts.

2-1

32

This transaction is initially entered in a record called a

journal. The process of recording a transaction in the

journal is called journalizing.

Journalizing 2-1

33

Journalizing requires the following steps:

1. Record the date. If this is the first entry on the page, the year is inserted above the month. As long as the month does not change, the rest of the journal entries on the require on the day be recorded.

2. The title of the account debited is listed in the Description column.

(Continued)

2-1

34

3. Enter the amount in the Debit column.

4. Record the credit account in the Description column.

5. Enter the amount in the Credit column.

Watch these steps take place as the entry to record Chris Clark’s deposit is

presented in the next slide.

2-1

35

NetSolutionsNetSolutionsA Sole ProprietorshipA Sole Proprietorship

NetSolutionsNetSolutionsA Sole ProprietorshipA Sole Proprietorship

“ On November 1, 2007, I started a sole

proprietorship called NetSolutions. I plan to use my

knowledge of microcomputers and offer computer

consulting services for a fee. The following double-

entry transactions show how amounts received

(debits) always equal amounts given (credits).”

Chris Clark, Owner

36

(a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.

Balance Sheet Accounts 2-1

3723

JOURNAL

Date Description Debit Credit

Page 1

1

2

3

4

Nov. 12007

Cash 25 000 00

Chris Clark, Capital 25 000 00

Invested cash in NetSolutions.

2-1

P.R.

38

The effect of this entry is shown in the accounts of NetSolutions as follows:

CashNov. 1 25,000 Nov. 1 25,000

Chris Clark, Capital

2-1

39

(b) On November 5, NetSolutions bought land for $20,000, paying cash.

2-1

4026

5 Land 20 000 00

Cash 20 000 00

Purchased land for

building site.

2-1

41

(c) On November 10, NetSolutions purchased supplies on account for $1,350.

2-1

4228

10 Supplies 1 350 00

Accounts Payable 1 350 00

Purchased supplies on

account.

2-1

43

(d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.

Income Statement Accounts 2-1

44

18 Cash 7 500 00

Fees Earned 7 500 00

Received fees from

customers.

2-1

35

45

Example Exercise 2-2

Prepare a journal entry on August 7 for the fees earned on account, $115,000.

Follow My Example 2-2

Aug. 7 Accounts Receivable 115,000Fees Earned

115,000

For Practice: PE 2-2A, PE 2-2B

2-1

43

46

(e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

2-1

47

30 Wages Expense 2 125 00

Rent Expense 800 00

Utilities Expense 450 00

Miscellaneous Expense 275 00

Cash 3 650 00

Paid expenses.

2-1

37

48

(f) On November 30, NetSolutions paid creditors on account, $950.

2-1

49

30 Accounts Payable 950 00

Cash 950 00

Paid creditors on

account.

2-1

30

50

Example Exercise 2-1

Prepare a journal entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder on account.

Follow My Example 2-1

June 3 Truck 42,500Cash 8,500Accounts Payable 34,000

For Practice: PE 2-1A, PE 2-1B

2-1

33

51

(g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.

2-1

52

30 Supplies Expense 800 00

Supplies 800 00

Supplies used during

November.

2-1

39

53

The owner of a proprietorship may withdraw cash from the business for

personal use. Such withdrawals have the effect of decreasing owner’s equity.

Drawing Account 2-1

54

(h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.

2-1

55

Cash 2 000 00

Chris Clark withdrew

cash for personal use.

Nov 30 Chris Clark, Drawing 2 000 002007

2-1

46

56

Example Exercise 2-3

Prepare a journal entry on December 29 for the payment of $12,000 to the owner of Smartstaff Consulting Services, Dominique Walsh, for personal use.

Follow My Example 2-3

Dec. 29 Dominique Walsh, Drawing 12,000Cash 12,000

For Practice: PE 2-3A, PE 2-3B

2-1

47

57

Increase(Normal Bal.) Decreases

Balance sheet accounts:AssetDebit CreditLiability Credit DebitOwner’s Equity:

Capital Credit DebitDrawing Debit

CreditIncome statement accounts:

Revenue Credit DebitExpense DebitCredit

2-1

48

58

Example Exercise 2-4

State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance.

1. Amber Saunders, Drawing2. Accounts Payable3. Cash4. Fees Earned5. Supplies6. Utilities Expense

2-1

49

59

For Practice: PE 2-4A, PE 2-4B

Follow My Example 2-4

1. Debit entries only; normal debit balance2. Debit and credit entries; normal credit balance3. Debit and credit entries; normal debit balance4. Credit entries only; normal credit balance5. Debit and credit entries; normal debit balance6. Debit entries only; normal debit balance

2-1

50

60

The equality of debits and credits for each transaction is built into the

accounting equation: Assets = Liabilities + Owner’s Equity.

Because of this double equality, this system is called the double-

entry accounting system.

2-1

61

2. For each account affected by the transaction, determine whether the account increases or decreases.

3. Determine whether each increase or decrease should be recorded as a debit or a credit.

1. Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction.

2-1Transaction Analysis

Continued

62

4. Record the transaction using a journal entry.

5. Periodically post journal entries to the accounts in the ledger.

6. Prepare an unadjusted trial balance at the end of the period.

2-1

63

(continued)

64

(concluded)

65

Describe and illustrate the posting of journal

entries to the accounts.

Objective 2Objective 2Objective 2Objective 2

2-2

66

The process of transferring the debits and credits from the journal entries to the

accounts is called posting.

2-2

67

Dec. 1 NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period.

2-2

68

2-2

57

69

Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.

2-2

70

1 Rent Expense 52 800 00

Cash 11 800 00

Paid rent for

December.

2-2

59

71

An alternative approach is to debit Rent Expense for $800 on

December 1. This avoids having to transfer the balance to an expense account at the end of the month.

2-2

72

NetSolutions received an offer from a local retailer to rent the land purchased

on November 5. The retailer plans to use the land as a parking lot for its employees

and customers. NetSolutions agreed to rent the land to the retailer for three

months, with the rent payable in advance.

2-2

73

Dec. 1 NetSolutions receives $360 for three month’s rent for use of its land beginning December 1.

1 Cash 11 360 00

Unearned Rent 23 360 00

Received advance

payment for three

months’ rent on land.

2-2

62

74

Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.

4 Office Equipment 18 1 800 00

Accounts Payable 21 1 800 00

Purchased office

equipment on account.

2-2

63

75

Dec. 6 NetSolutions paid $180 for a newspaper advertisement.

6 Miscellaneous Expense 59 180 00

Cash 11 180 00

Paid for newspaper ad.

2-2

64

76

Dec. 11 NetSolutions paid creditors $400.

11 Accounts Payable 21 400 00

Cash 11 400 00

Paid creditors on

account.

2-2

65

77

Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.

13 Wages Expense 51 950 00

Cash 11 950 00

Paid two weeks’ wages.

2-2

66

78

Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.

16 Cash 11 3 100 00

Fees Earned 41 3 100 00

Received fees from

customers.

2-2

67

79

Dec. 16 Fees earned on account totaled $1,750 for the first half of December.

16 Accounts Receivable 12 1 750 00

Fees Earned 41 1 750 00

Recorded fees earned

on account.

2-2

68

80

Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.

20 Accounts Payable 21 900 00

Cash 11 900 00

Paid part of amount

owed to Executive

Supply Co.

2-2

69

81

Dec. 21 NetSolutions received $650 from customers in payment of their accounts.

21 Cash 11 650 00

Accounts Receivable 12 650 00

Received fees from

customers on account.

2-2

70

82

Dec. 23 NetSolutions paid $1,450 for supplies.

23 Supplies 14 1 450 00

Cash 11 1 450 00Purchased supplies.

2-2

71

83

Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.

27 Wages Expense 51 1 200 00

Cash 11 1 200 00

Paid two weeks’ wages.

2-2

72

84

Dec. 31 NetSolutions paid $310 for telephone charges for the month.

31 Utilities Expense 54 310 00

Cash 11 310 00

Paid telephone charges.

2-2

73

85

Dec. 31 NetSolutions paid $225 for electric usage for the month.

Post. Ref.

JOURNAL

Date Description Debit Credit

Page 1

Dec 31 Utilities Expense 54 225 002007

Cash 11 225 00

Paid for electric usage.

2-2

74

86

Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.

31 Cash 11 2 870 00

Fees Earned 41 2 870 00

Received fees from

customers.

2-2

75

87

Dec. 31 NetSolutions earned $1,120 on account for the second half of December.

31 Accounts Receivable 12 1 120 00

Fees Earned 41 1 120 00

Recorded fees earned

on account.

2-2

76

88

Dec. 31 Chris Clark withdrew $2,000 for personal use.

31 Chris Clark, Drawing 32 2 000 00

Cash 11 2 000 00

Chris Clark withdrew

cash for personal use.

2-2

77

89

Example Exercise 2-5

On March 1, the cash account balance was $22,350. During March, cash receipts totaled $241,880 and the March 31 balance was $19,125. Determine the cash payments made during March.

2-2

78

90

Follow My Example 2-5

Using the following T-account solve for the amount of cash payment (indicated by ? below).

Cash

Mar. 1 Bal 22,350 ? Cash paymentsCash receipts 241,880Mar. 31 Bal. 19,125

$19,125 = $22,350 + $241,880 – Cash paymentsCash payments = $22,350 + $241,880 –$19,125 = $245,105

For Practice: PE 2-5A, PE 2-5B

2-2

79

91

Prepare an unadjusted trial balance and explain

how it can be used to discover errors.

2-3

Objective 3Objective 3Objective 3Objective 3

92

92

The equality of debits and credits in the ledger should be

proven at the end of each accounting period by

preparing a trial balance.

4

Trial Balance

93

93

The steps in preparing a trial balance are as follows:

1. List the name of the company, the title of the trial balance, and the date

the trial balance is prepared.2. List the accounts from the ledger and

enter their debit or credit balance in the Debit or Credit column of the

trial balance.

(continued)

4

94

94

3. Total the Debit and Credit columns of the trial balance.

4. Verify that the total of the Debit column equals the total of the Credit

column.

4

95

2-3

82

96

Discover and correct errors in recording

transactions.

2-4

Objective 4Objective 4Objective 4Objective 4

97

Errors Not Affecting the Trial Balance

• Failure to record transaction or to post a transaction.

• Recording the same erroneous amount for both the debit and the credit parts of a transaction.

• Recording the same transaction more than once.

• Posting a part of a transaction correctly as debit or credit but to the wrong account.

98

99

99

A transposition occurs when the order of the digits is

changed mistakenly, such as writing $542 as $452 or $524.

4

Errors

100

Example Exercise 2-6

For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much.a. Payment of a cash withdrawal of $5,600 was

journalized and posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash.

b. A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850.

c. A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash.

2-3

83

101

Follow My Example 2-6

a. The totals are equal since both the debit and credit entries were journalized and posted for $6,500.

b. The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580).

c. The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500).

2-3

For Practice: PE 2-6A, PE 2-6B 84

102

102

In a slide, the entire number is mistakenly moved one or more

spaces to the right or the left, such as writing $542.00 as $54.20 or

$97.50 as $975.00.

Errors

103

A transposition occurs when the order of the digits is

changed mistakenly, such as writing $542 as $452 or $524.

In a slide, the entire number is mistakenly moved one or more

spaces to the right or the left, such as writing $542.00 as $54.20.

2-4

104

104

For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. Also indicate the nature of error ( Transposition or Slide).

a. Payment of a cash withdrawal of $5,600 was journalized and posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash.

b. A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850.

c. A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash.

4 Example Exercise 2-6

2-75

Trial Balance Errors

105

105

24Example Exercise 2-6 (continued)

Follow My Example 2-6

a. The totals are equal since both the debit and credit entries were journalized and posted for $6,500.

2-76

For Practice: PE 2-6A, PE 2-6B

b. The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580).

c. The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500).

106

106

If an error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared.

4

107

107

Another type of error is a posting error. Assume that on May 5 a

$12,500 purchase of office equipment on account was

incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500.

Errors Not Affecting the Trial Balance

4

108

Entry to Correct Error

May 31 Office Equipment 18 12 500 00

Supplies 14 12 500 00

To correct erroneous

debit to Supplies on

May 5. See invoice

from Bell Office

Equipment Company.

2-4

88

109

Example Exercise 2-7

a. A withdrawal of $6,000 by Cheri Ramey, owner of the business, was recorded as a debit to Office Salaries Expense and a credit to Cash.

b. Utilities Expense of $4,500 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Accounts Payable.

The following errors took place in journalizing and posting transactions:

Journalize the entries to correct the errors. Omit explanations.

2-4

89

110

Follow My Example 2-7

a. Cheri Ramey, Drawing 6,000Office Salaries Expense

6,000b. Accounts Payable 4,500

Miscellaneous Expense4,500

Utilities Expense 4,500

Cash 4,500

Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry.

For Practice: PE 2-7A, PE 2-7B

2-4

90

111

111