Describe the characteristics of an account and a chart of accounts.

1. 0 Chapter 2 –Analyzing Transactions After studying this chapter, you should be able to: • Describe the characteristics of an account and a chart of accounts. • Describe and illustrate journalizing transactions using the double-entry accounting system. • Describe and illustrate the journalizing and posting of transactions to accounts. • Prepare an unadjusted trial balance and explain how it can be used to discover errors.

2. Objective #1 - Describe the characteristics of an account and a chart of accounts. 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. Title Debit Credit The left side of the account is called the debit side. DEBITS are entered here The right side of the account is called the credit side. CREDITS are entered here

3. 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

4. A group of accounts for a business entity is called a ledger. 0 2-1 A list of the accounts in a ledger is called a chart ofaccounts.

5. 0 Assets are resources owned by the business entity. 2-1 • Cash • Supplies • Accounts receivable • Prepaid expenses • Buildings Liabilities are debts owed to outsiders (creditors). • Accounts payable • Notes payable • Wages payable 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.

6. Revenues are increases in owner’s equity as a result of selling services or products to customers. 0 2-1 • Fees earned • Commission revenue or earned • Rent revenue The using up of assets or consuming services in the process of generating revenues results in expenses. • Wages expense • Rent expense • Supplies expense • Miscellaneous expense

7. 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 (+) Objective 2 – Describe and illustrate journalizing transactions using the double-entry accounting system. 0 2-2

8. Expense Accounts Revenue Accounts Debit for increases (+) Credit for decreases (–) Debit for decreases (–) Credit for increases (+) 0 2-2 Income Statement Accounts

9. Drawing Account Debit for increases (+) Credit for decreases (–) 0 Owner’s Withdrawals - Drawing Account 2-2 The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity.

10. 0 2-2 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

11. 0 2-2 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.

12. 0 2-2 Journalizing A transaction is initially entered in a record called ajournal. The process of recording a transaction in the journal is called journalizing. Note Every transaction affects at least two accounts.

13. 0 Journalizing requires the following steps: 2-2 • 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 same page only require the day be recorded. • The title of the account debited is listed in the Description column. • 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.

14. Balance Sheet Accounts 0 (a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions. 2-2 JOURNAL Page 1 P.R. Date Description Debit Credit 2009 1 2 3 4 Nov. 1 Cash 25 000 00 Chris Clark, Capital 25 000 00 Invested cash in NetSolutions.

15. 0 2-2 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

16. 0 (b) On November 5, NetSolutions bought land for $20,000, paying cash. 2-2 5 Land 20 000 00 Cash 20 000 00 Purchased land for building site.

17. 0 (c) On November 10, NetSolutions purchased supplies on account for $1,350. 2-2 10 Supplies 1 350 00 Accounts Payable 1 350 00 Purchased supplies on account.

18. 0 (f) On November 30, NetSolutions paid creditors on account, $950. 2-2 30 Accounts Payable 950 00 Cash 950 00 Paid creditors on account.

19. 0 Income Statement Accounts 2-2 (d) On November 18, NetSolutions received fees of $7,500 from customers for services provided. 30 Cash 7 500 00 Fees Earned 7 500 00 Received fees from customers.

20. 0 2-2 (e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 30 Wages Expense 2 125 00 Rent Expense 800 00 Utilities Expense 450 00 Miscellaneous Expense 275 00 Cash 3 650 00 Paid expenses.

21. 0 2-2 (g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month. 30 Supplies Expense 800 00 Supplies 800 00 Supplies used during November.

22. 2007 Nov 30 Chris Clark, Drawing 2 000 00 0 Drawings Account 2-2 (h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use. Cash 2 000 00 Chris Clark withdrew cash for personal use.

23. 0 Summary – Analysis of Transactions 2-2 1. Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction. 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. 4. Record the transaction using a journal entry. • Periodically post journal entries to the accounts in the ledger. (Objectives 3) • Prepare an unadjusted trial balance at the end of the period. (Objective 4)

24. 0 Objective 3 –Describe and illustrate the journalizing and posting of transactions to accounts. 2-2 The process of transferring the debits and credits from the journal entries to the accounts is called posting. 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.

25. 0 2-3 2-2

26. 0 2-3 As an alternative, the rent may be due at the beginning of the month e.g. Rent for $800 due on December 1.,

27. 0 2-3 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. 1 Rent Expense 52 800 00 Cash 11 800 00 Paid rent for December.

28. 0 2-3 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.

29. 0 2-3 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.

30. 0 2-3 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.

31. 0 2-3 Dec. 6 NetSolutions paid $180 for a newspaper advertisement. 6 Advertisement Expense 59 180 00 Cash 11 180 00 Paid for newspaper ad.

32. 0 2-3 Dec. 11 NetSolutions paid creditors $400. 11 Accounts Payable 21 400 00 Cash 11 400 00 Paid creditors on account.

33. 0 2-3 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.

34. 0 2-3 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.

35. 0 2-3 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.

36. 0 2-3 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.

37. 0 2-3 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.

38. 0 2-3 Dec. 23 NetSolutions paid $1,450 for supplies. 23 Supplies 14 1 450 00 Cash 11 1 450 00 Purchased supplies.

39. 0 2-3 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.

40. 0 2-3 Dec. 31 NetSolutions paid $310 for telephone charges for the month. 31 Utilities Expense 54 310 00 Cash 11 310 00 Paid telephone charges.

41. Post. Ref. 0 2-3 Dec. 31 NetSolutions paid $225 for electric usage for the month. Date Description Debit Credit 2007 Dec 31 Utilities Expense 54 225 00 Cash 11 225 00 Paid for electric usage.

42. 0 2-3 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.

43. 0 2-3 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.

44. 0 2-3 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.

45. 2-3

46. 0 Objective #4 - Prepare an unadjusted trial balance and explain how it can be used to discover errors 2-4 The equality of debit and credit balances in the ledger should be proved at the end of each accounting period by preparing a trial balance. The heading should first list the name of the company, the statement’s title, and the date it is prepared.

47. 0 2-4

48. 0 2-4 A transpositionoccurs 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.

49. Example Exercise 2-6 0 2-4 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. • 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. • 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. • 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.

50. 0 2-4 Follow My Example 2-6 • The totals are equal since both the debit and credit entries were journalized and posted for $6,500. • The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580). • The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500). For Practice: PE 2-6A, PE 2-6B