Chapter 2

1. Chapter 2 Analyzing and Recording Business Transactions

2. Conceptual Learning Objectives C1: Explain the steps in processing transactions C2: Describe source documents and their purpose C3: Describe an account and its use in recording transactions C4: Describe a ledger and a chart of accounts C5: Define debits and credits and explain their role in double-entry accounting

3. Analytical Learning Objectives A1: Analyze the impact of transactions on accounts and financial statements A2: Compute the debt ratio and describe its use in analyzing financial performance

4. Procedural Learning Objectives P1: Record transactions in a journal and post entries to a ledger P2: Prepare and explain the use of a trial balance P3: Prepare financial statements from business transactions

5. Analyzing and Recording Process C 1 Exchanges of economic consideration between two parties. External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization.

6. Record relevant transactions and events in a journal Analyze each transaction and event from source documents Post journal information to ledger accounts Prepare and analyze the trial balance Analyzing and Recording Process C 1

7. Source Documents C 2 Bills from Suppliers Checks Purchase Orders Employee EarningsRecords Bank Statements Sales Tickets

8. The Account and its Analysis C 3 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.

9. AssetsAccounts AssetsAccounts + AssetsAccounts LiabilityAccounts LiabilityAccounts LiabilityAccounts EquityAccounts EquityAccounts EquityAccounts The Account and its Analysis C 3 =

10. Asset Accounts C 3 Cash Accounts Receivable Land AssetAccounts Notes Receivable Buildings Prepaid Accounts Equipment Supplies

11. Liability Accounts C 3 Accounts Payable Notes Payable LiabilityAccounts Unearned Revenue Accrued Liabilities

12. Equity Accounts C 3 Retained Earnings CommonStock Dividends EquityAccounts Revenues Expenses

13. – – + + CommonStock Dividends Revenues Expenses The Account and its Analysis C 3 = + Assets Liabilities Equity

14. Ledger and Chart of Accounts C 4 The ledger is a collection of all accounts for aninformation system. A company’s size anddiversity of operations affect the numberof accounts needed. The chart of accounts is a list of all accounts andincludes an identifying number for each account.

15. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C 5

16. = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- - + - + Double-Entry Accounting C 5

17. _ _ CommonStock Dividends + Revenues Expenses Stock Dividends Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit - + +- - + +- Double-Entry Accounting C 5 Equity

18. Double-Entry Accounting C 5 An account balance is the difference between the increases and decreases in an account. Notice the T-Account

19. = + Assets Liabilities Equity Step 1: Analyze transactions and source documents. Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry Journalizing & Posting Transactions P1

20. Titles of Affected Accounts • Transaction Date • Transaction explanation • Dollar amount of debits and credits Journalizing Transactions P1

21. T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Balance Column Account P1

22. Posting Journal Entries P1 1 Identify the debit account in ledger.

23. Posting Journal Entries P1 2 Enter the date.

24. Posting Journal Entries P1 3 Enter the amount and description.

25. Posting Journal Entries P1 Enter the journal reference. 4

26. Posting Journal Entries P1 Compute the balance. 5

27. Posting Journal Entries P1 6 Enter the ledger reference.

28. Analysis: Double entry: 101 Posting: 301 Analyzing Transactions A1

29. Analysis: Double entry: Posting: 101 126 Analyzing Transactions A1

30. Double entry: Posting: 101 167 Analyzing Transactions A1 Analysis:

31. Double entry: Posting: 201 126 Analyzing Transactions A1 Analysis:

32. Analysis: Double entry: Posting: 101 403 Analyzing Transactions A1

33. FastForward Trial Balance December 31, 2007 Debits Credits Cash $ 4,350 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. Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable $ 6,200 Unearned consulting revenue 3,000 Common stock 30,000 Dividends 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300 A1 After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

34. Six Steps for Searching for and Correcting Errors P2 If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added. Recompute each account balance in the ledger. Make sure account balances are correctly entered from the ledger. Verify that each journal entry is posted correctly. See if debit or credit accounts are mistakenly placed on the trial balance. Verify that each original journal entry has equal debits and credits.

35. Using a Trial Balance to Prepare Financial Statements P3 Point inTime Point inTime Period of Time Income Statement Statement of Retained Earnings Statement of Cash Flows Beginning Balance Sheet Ending Balance Sheet

36. Income Statement P3

37. Statement of Retained Earnings P3

38. Balance Sheet P3

39. Describes the relationship between the amounts of the company’s liabilities and assets. Helps to assess the risk that a company will fail to pay its debts. Debt Ratio A2

40. End of Chapter 2