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Analyzing Transactions

These slides should be viewed using the presentation mode (left click your mouse on the icon). Analyzing Transactions. Chapter 2. Student Version. Learning Objective 1. Describe the characteristics of an account and a chart of accounts. LO 1. Using Accounts to Record Transactions.

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Analyzing Transactions

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  1. These slides should be viewed using the presentation mode (left click your mouse on the icon). Analyzing Transactions Chapter 2 Student Version

  2. Learning Objective 1 Describe the characteristics of an account and a chart of accounts.

  3. LO 1 Using Accounts to Record Transactions • Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account.

  4. The T account has a title. LO 1 The T Account Title Debit Credit The right side of the account is called the credit side. The left side of the account is called the debitside.

  5. LO 1 Chart of Accounts • A group of accounts for a business entity is called a ledger. • A list of the accounts in the ledger is called a chart of accounts. • Assets are resources owned by the business. • Liabilities are debts owed to outsiders (creditors).

  6. LO 1 Chart of Accounts • Stockholders’ equity is the stockholders’ right to the assets of the business after all liabilities have been paid. Stockholders’ equity is represented by the balance of the capital stock and retained earnings accounts. • A dividends account represents distributions of earnings to stockholders.

  7. LO 1 Chart of Accounts • Revenuesare increases in owner’s equity as a result of selling services or products to customers. • The using up of assets or consuming services in the process of generating revenues results in expenses.

  8. Learning Objective 2 Describe and illustrate journalizing transactions using the double-entry accounting system.

  9. LO 2 Double-Entry Accounting System • All businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires: • Every business transaction to be recorded in at least two accounts. • The total debits recorded for each transaction to be equal to the total credits recorded.

  10. LO 2 Normal Balances • The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance ofan account is either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

  11. LO 2 Transaction A On November 1, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.

  12. LO 2 Transaction A Step 2 Step 3 Step 1 Step 5 Step 4 Step 3 Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (investment) increase increase

  13. LO 2 Journalizing • Journalizing requires the following steps: Step 1.The date of the transaction is entered in the Date column. Step 2. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column. (continued)

  14. LO 2 Journalizing Step 3.The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column. Step 4. A brief description may be entered below the credited account. (continued)

  15. LO 2 Journalizing Step 5.The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later when the journal entry amounts are transferred to the accounts in the ledger. (concluded)

  16. LO 2 Journalizing • A transaction is initially entered in a record called a journal. • The process of recording a transaction in the journal is called journalizing. • The entry in the journal is called a journal entry.

  17. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 2 Transaction B On November 5, NetSolutions paid $20,000 for the purchase of land as a future building site. increase decrease

  18. Assets = Liabilities + Stockholders’ Equity LO 2 Transaction C On November 10, NetSolutions purchased supplies on account for $1,350. Accounting Equation Impact increase increase

  19. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) LO 2 Transaction D On November 18, NetSolutions received cash of $7,500 from customers for services provided. increase increase

  20. LO 2 Transaction E On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

  21. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 2 Transaction E All four expense accounts increase decrease

  22. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 2 Transaction F On November 30, NetSolutions paid creditors on account, $950. decrease decrease

  23. LO 2 Transaction G NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550 or, stated another way, $800 in supplies had been used.

  24. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 2 Transaction G increase decrease

  25. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Dividends) LO 2 Transaction H On November 30, NetSolutions paid $2,000 to stockholders as dividends. decrease increase

  26. Learning Objective 3 Describe and illustrate journalizing and posting of transactions to accounts.

  27. LO 3 Posting Journal Entries to Accounts • The process of transferring the debits and credits from the journal entries to the accounts is called posting. On December 1, NetSolutions paid a premium of $2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-year period.

  28. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 0 Posting Journal Entries to Accounts decrease increase

  29. LO 3 December Transactions On December 1, NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the first of each month, rather than at the end of the month.

  30. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 December Transactions decrease increase

  31. LO 3 December Transactions • On December 1, 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. • NetSolutions received $360 for three months’ rent beginning December 1.

  32. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 December Transactions increase increase

  33. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 LO 3 December Transactions On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800. increase increase

  34. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 DecemberTransactions On December 6, NetSolutions paid $180 for a newspaper advertisement. decrease increase

  35. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 DecemberTransactions On December 11, NetSolutions paid creditors $400. decrease decrease

  36. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 DecemberTransactions On December 13, NetSolutions paid a receptionist and a part-time assistant $950 for two weeks’ wages. decrease increase

  37. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) LO 3 December Transactions On December 16, NetSolutions received $3,100 from fees earned for the first half of December. increase increase

  38. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) LO 3 December Transactions Fees earned on account totaled $1,750 for the first half of December. increase increase

  39. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 December Transactions On December 20, NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction. decrease decrease

  40. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 December Transactions On December 21, NetSolutions received $650 from customers in payment of their accounts. increase decrease

  41. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity LO 3 December Transactions On December 23, NetSolutions paid $1,450 for supplies. decrease increase

  42. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 December Transactions On December 27, NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks’ wages. decrease increase

  43. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 December Transactions On December 31, NetSolutions paid its $310 telephone bill for the month. decrease increase

  44. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Expense) LO 3 December Transactions On December 31, NetSolutions paid its $225 electric bill for the month. increase decrease

  45. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) LO 3 LO 3 December Transactions On December 31, NetSolutions received $2,870 from fees earned for the second half of December. increase increase

  46. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Revenue) LO 3 December Transactions On December 31, fees earned on account totaled $1,120 for the second half of December. increase increase

  47. Accounting Equation Impact Assets = Liabilities + Stockholders’ Equity (Dividends) LO 3 December Transactions On December 31, paid dividends of $2,000. decrease increase

  48. Learning Objective 4 Prepare an unadjusted trial balance and explain how it can be used to discover errors.

  49. LO 4 Trial Balance and Trial Balance Errors • The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance. • A transposition occurs when the order of the digits is changed by mistake, such as writing $542 as $452 or $524. • In a slide, the entire number is moved one or more spaces to the right or the left by mistake, such as writing $542.00 as $54.20 or $97.50 as $975.00.

  50. LO 4 Errors Not Affecting the Trial Balance • If an error has already been journalized and posted to the ledger, a correcting journalentry is normally prepared.

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