Analyzing Transactions

1. 2 Analyzing Transactions

2. 0 After studying this chapter, you should be able to: • Describe the characteristics of an account and record transactions using a chart of accounts and journal. • Describe and illustrate the posting of journal entries to accounts. • Prepare an unadjusted trial balance and explain how it can be used to discover errors. • Discover and correct errors in recording transactions.

3. 0 2-1 Objective 1 Describe the characteristics of an account and record transactions using a chart of accounts and journal.

4. 0 2-1 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.

5. 0 2-1 The T Account Title The T account has a title. 5

6. 0 2-1 Title Debit The left side of the account is called the debit side. 6

7. 0 2-1 Title Debit Credit The right side of the account is called the credit side. 7

8. 0 2-1 Title Debit Credit Amounts entered on the left side are debits. 8

9. 0 2-1 Title Debit Credit Amounts entered on the right side are credits. 9

10. 0 2-1 Cash (a) 25,000 (b) 20,000 (d) 7,500 (e) 3,650 (f) 950 (h) 2,000 Balance 5,900 Balance of the account 10

11. 0 2-1 A group of accounts for a business entity is called a ledger.

12. 0 2-1 A list of the accounts in a ledger is called a chart ofaccounts.

13. 0 2-1 Assets are resources owned by the business entity. • Cash • Supplies • Prepaid expenses • Buildings

14. 0 2-1 Liabilities are debts owed to outsiders (creditors). • Accounts payable • Notes payable • Wages payable

15. 0 2-1 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.

16. 0 2-1 Revenues are increases in owner’s equity as a result of selling services or products to customers. • Fees earned • Commission revenue • Rent revenue

17. 0 2-1 The using up of assets or consuming services in the process of generating revenues results in expenses. • Wages expense • Rent expense • Miscellaneous expense

18. 0 2-1 IMPORTANT NOTE Every transaction affects at least two accounts.

19. 0 2-1 Journalizing This transaction is initially entered in a record called ajournal. The process of recording a transaction in the journal is called journalizing.

20. 0 2-1 Journalizing requires the following steps: • 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. • The title of the account debited is listed in the Description column. (Continued)

21. 0 2-1 • Enter the amount in the Debit column. • Record the credit account in the Description column. • 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.

22. 0 2-1 Balance Sheet Accounts (a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.

23. 0 2-1 JOURNAL Page 1 P.R. Date Description Debit Credit 2007 1 2 3 4 Nov. 1 Cash 25 000 00 Chris Clark, Capital 25 000 00 Invested cash in NetSolutions. 23

24. 0 2-1 The effect of this entry is shown in the accounts of NetSolutions as follows: Cash Chris Clark, Capital Nov. 1 25,000 Nov. 1 25,000

25. 0 2-1 (b) On November 5, NetSolutions bought land for $20,000, paying cash.

26. 0 2-1 5 Land 20 000 00 Cash 20 000 00 Purchased land for building site. 26

27. 0 2-1 (c) On November 10, NetSolutions purchased supplies on account for $1,350.

28. 0 2-1 10 Supplies 1 350 00 Accounts Payable 1 350 00 Purchased supplies on account. 28

29. 0 2-1 (f) On November 30, NetSolutions paid creditors on account, $950.

30. 0 2-1 30 Accounts Payable 950 00 Cash 950 00 Paid creditors on account. 30

31. 0 2-1 Balance Sheet Accounts Debits Credits Asset accounts……. Increase (+) Decrease (-) Liability accounts.… Decrease (-) Increase (+) Owner’s equity (capital) accounts… Decrease (-) Increase (+) 31

32. Liability Accounts Balance Sheet Accounts Asset Accounts Debit for decreases (–) Credit for increases (+) Debit for increases (+) Credit for decreases (–) Owner’s Equity Accounts Debit for decreases (–) Credit for increases (+) 0 2-1 32

33. Example Exercise 2-1 Follow My Example 2-1 0 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. June 3 Truck 42,500 Cash 8,500 Accounts Payable 34,000 33 For Practice: PE 2-1A, PE 2-1B

34. 0 2-1 Income Statement Accounts (d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.

35. 0 2-1 30 Cash 7 500 00 Fees Earned 7 500 00 Received fees from customers. 35

36. 0 2-1 (e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

37. 0 2-1 30 Wages Expense 2 125 00 Rent Expense 800 00 Utilities Expense 450 00 Miscellaneous Expense 275 00 Cash 3 650 00 Paid expenses. 37

38. 0 2-1 (g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.

39. 0 2-1 30 Supplies Expense 800 00 Supplies 800 00 Supplies used during November. 39

40. 0 2-1 Income Statement Accounts Debits Credits Revenue accounts… Decrease (-) Increase (+) Expense accounts… Increase (+) Decrease (-) 40

41. Expense Accounts Revenue Accounts Less Debit for increases (+) Credit for decreases (–) Debit for decreases (–) Credit for increases (+) 0 2-1 Income Statement Accounts 41 Continued

42. 0 2-1 Equals Net Income (credit > debits) increases owners’ equity (capital) Net Loss (debits > credits) decreases owners’ equity (capital) 42

43. Example Exercise 2-2 Follow My Example 2-2 0 2-1 Prepare a journal entry on August 7 for the fees earned on account, $115,000. Aug. 7 Accounts Receivable 115,000 Fees Earned 115,000 43 For Practice: PE 2-2A, PE 2-2B

44. 0 2-1 Drawing Account The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity.

45. 0 2-1 (h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.

46. 2007 Nov 30 Chris Clark, Drawing 2 000 00 0 2-1 Cash 2 000 00 Chris Clark withdrew cash for personal use. 46

47. Example Exercise 2-3 Follow My Example 2-3 0 2-1 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. Dec. 29 Dominique Walsh, Drawing 12,000 Cash 12,000 47 For Practice: PE 2-3A, PE 2-3B

48. 0 2-1 Increase (Normal Bal.) Decreases Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owner’s Equity: Capital Credit Debit Drawing Debit Credit Income statement accounts: Revenue Credit Debit Expense Debit Credit 48

49. Example Exercise 2-4 0 2-1 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. • Amber Saunders, Drawing • Accounts Payable • Cash • Fees Earned • Supplies • Utilities Expense 49

50. Follow My Example 2-4 0 2-1 • Debit entries only; normal debit balance • Debit and credit entries; normal credit balance • Debit and credit entries; normal debit balance • Credit entries only; normal credit balance • Debit and credit entries; normal debit balance • Debit entries only; normal debit balance 50 For Practice: PE 2-4A, PE 2-4B