C2 - 1 Learning Objectives 1.Usefulness of an Account 2.Characteristics of an Account 3.Analyzing and Summarizing Transactions 4.Illustration of Analyzing and Summarizing 5.Trial Balance 6.Discovery and Correction of Errors 7.Financial Analysis and Interpretation Ch 02 Analyzing transactions

C2 - 2 Double-Entry Accounting “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.” Luca Pacioli Developer of Double-Entry Accounting Scale or Balance Receive DEBIT Give CREDIT T account

C2 - 3 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given =

C2 - 4 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given = Assets

C2 - 5 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Assets DEBITS received CREDITS given = Expenses

C2 - 6 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Assets DEBITS received CREDITS given = Liabilities

C2 - 7 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Assets DEBITS received CREDITS given = Owner’s Equity

C2 - 8 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Owner’s Equity Assets DEBITS received CREDITS given = Revenues

C2 - 9 Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Owner’s Equity Assets DEBITS received CREDITS given = Revenues Net Income

C NetSolutions A Sole Proprietorship NetSolutions “ On November 1, 2002, 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 P.48 exhibit 1 Chart of accounts for NetSolutions

C Chris Clark deposits $25,000 in a bank account for NetSolutions. Business Transactions Business Transactions General Journal receive Debit give Credit NetSolutions (investee) Chris Clark (investor) give Credit Entry A. DateDescriptionDebitCredit 11/1

C Chris Clark deposits $25,000 in a bank account for NetSolutions. Business Transactions General Journal receive Debit give Credit NetSolutions (investee) Cash Chris Clark (investor) give Credit Entry A. DateDescriptionDebitCredit 11/1Cash 25,000

C Chris Clark deposits $25,000 in a bank account for NetSolutions. Business Transactions General Journal DateDescriptionDebitCredit 11/1Cash 25,000 Chris Clark, Capital 25,000 receive Debit give Credit NetSolutions (investee) Cash A promise to the owner Chris Clark (investor) give Credit Entry A.

C NetSolutions buys land for $20,000. Business Transactions receive Debit give Credit NetSolutions (buyer) Land Owner (seller) give Credit Entry B. General Journal DateDescriptionDebitCredit 11/5

C NetSolutions buys land for $20,000. Business Transactions receive Debit give Credit NetSolutions (buyer) Land Land Owner (seller) give Credit Entry B. General Journal DateDescriptionDebitCredit 11/5Land 20,000

C NetSolutions buys land for $20,000. Business Transactions receive Debit give Credit NetSolutions (buyer) Land Cash Land Owner (seller) give Credit Entry B. General Journal DateDescriptionDebitCredit 11/5Land 20,000 Cash 20,000

C NetSolutions buys supplies for $1,350, agreeing to pay in the near future. Business Transactions receive Debit give Credit NetSolutions (buyer) Supplier (seller) give Credit Entry C. General Journal DateDescriptionDebitCredit 11/10

C NetSolutions buys supplies for $1,350, agreeing to pay in the near future. Business Transactions receive Debit give Credit NetSolutions (buyer) Supplies Supplier (seller) give Credit Entry C. General Journal DateDescriptionDebitCredit 11/10Supplies 1,350

C NetSolutions buys supplies for $1,350, agreeing to pay in the near future. Business Transactions receive Debit give Credit NetSolutions (buyer) Supplies Supplier (seller) give Credit Entry C. A promise to pay later General Journal DateDescriptionDebitCredit 11/10Supplies 1,350 Accounts Payable 1,350

C NetSolutions earns fees of $7,500, receiving cash. Business Transactions receive Debit give Credit NetSolutions (seller) Customer (buyer) give Credit Entry D. General Journal DateDescriptionDebitCredit 11/18

C NetSolutions earns fees of $7,500, receiving cash. Business Transactions receive Debit give Credit NetSolutions (seller) Cash Customer (buyer) give Credit Entry D. General Journal DateDescriptionDebitCredit 11/18Cash 7,500

C NetSolutions earns fees of $7,500, receiving cash. Business Transactions receive Debit give Credit NetSolutions (seller) Cash Customer (buyer) give Credit Entry D. Services General Journal DateDescriptionDebitCredit 11/18Cash 7,500 Fees Earned 7,500

C DateDescriptionDebitCredit NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Business Transactions General Journal receive Debit give Credit NetSolutions (buyer) Various suppliers give Credit Entry E.

C DateDescriptionDebitCredit 11/18 Wages Expense2,125 Rent Expense800 Utilities Expense450 Misc. Expense275 NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Business Transactions General Journal receive Debit give Credit NetSolutions (buyer) Services, benefits Various suppliers give Credit Entry E.

C DateDescriptionDebitCredit 11/18 Wages Expense2,125 Rent Expense800 Utilities Expense450 Misc. Expense275 Cash 3,650 NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Business Transactions General Journal receive Debit give Credit NetSolutions (buyer) Services, benefits Various suppliers give Credit Entry E. Cash

C NetSolutions pays $950 to creditors on account. Business Transactions receive Debit give Credit NetSolutions (payor) Supplier (payee) give Credit Entry F. General Journal DateDescriptionDebitCredit 11/30

C NetSolutions pays $950 to creditors on account. Business Transactions receive Debit give Credit NetSolutions (payor) Reduction in obligation Supplier (payee) give Credit Entry F. General Journal DateDescriptionDebitCredit 11/30Accounts Payable 950

C NetSolutions pays $950 to creditors on account. Business Transactions receive Debit give Credit NetSolutions (payor) Reduction in obligation Supplier (payee) give Credit Entry F. Cash General Journal DateDescriptionDebitCredit 11/30Accounts Payable 950 Cash 950

C At the end of the month, the cost of supplies on hand is $550. Business Transactions receive Debit give Credit NetSolutions (user) Internal Transaction (no external entity) give Credit Entry G. General Journal DateDescriptionDebitCredit 11/30

C At the end of the month, the cost of supplies on hand is $550. Business Transactions receive Debit give Credit NetSolutions (user) Use of supplies Internal Transaction (no external entity) give Credit Entry G. General Journal Balance of Supplies account $1,350 less $550 on hand = $800 used DateDescriptionDebitCredit 11/30Supplies Expense 800

C At the end of the month, the cost of supplies on hand is $550. Business Transactions receive Debit give Credit NetSolutions (user) Use of supplies Internal Transaction (no external entity) give Credit Entry G. Supplies General Journal DateDescriptionDebitCredit 11/30Supplies Expense 800 Supplies 800 Balance of Supplies account $1,350 less $550 on hand = $800 used

C Chris Clark withdraws $2,000 in cash. Business Transactions receive Debit give Credit NetSolutions (payor) Chris Clark (payee) give Credit Entry H. General Journal DateDescriptionDebitCredit 11/30

C Chris Clark withdraws $2,000 in cash. Business Transactions receive Debit give Credit NetSolutions (payor) Reduction in obligation Chris Clark (payee) give Credit Entry H. General Journal DateDescriptionDebitCredit 11/30Chris Clark, Drawing 2,000

C Chris Clark withdraws $2,000 in cash. Business Transactions receive Debit give Credit NetSolutions (payor) Reduction in obligation Chris Clark (payee) give Credit Entry H. Cash General Journal DateDescriptionDebitCredit 11/30Chris Clark, Drawing 2,000 Cash 2,000

C NetSolutions Chart of Accounts Balance Sheet Income Statement 1.Assets 11Cash 12Accounts Receivable 14Supplies 15Prepaid Insurance 17Land 18Office Equipment 2.Liabilities 21Accounts Payable 23Unearned Rent 3.Owner’s Equity 31Chris Clark, Capital 32Chris Clark, Drawing 4.Revenue 41Fees Earned 5.Expenses 51Wages Expense 52Rent Expense 54Utilities Expense 55Supplies Expense 59Miscellaneous Expense

C NetSolutions Trial Balance November 30, Cash5,900 14Supplies550 17Land20,000 21Accounts Payable400 31Chris Clark, Capital25,000 32Chris Clark, Drawing2,000 41Fees Earned7,500 51Wages Expense2,125 52Rent Expense800 54Utilities Expense450 55Supplies Expense800 59Miscellaneous Expense27532,900

C NetSolutions Trial Balance November 30, Cash5,900 14Supplies550 17Land20,000 21Accounts Payable400 31Chris Clark, Capital25,000 32Chris Clark, Drawing2,000 41Fees Earned7,500 51Wages Expense2,125 52Rent Expense800 54Utilities Expense450 55Supplies Expense800 59Miscellaneous Expense27532,900 Balance Sheet

C Income Statement NetSolutions Trial Balance November 30, Cash5,900 14Supplies550 17Land20,000 21Accounts Payable400 31Chris Clark, Capital25,000 32Chris Clark, Drawing2,000 41Fees Earned7,500 51Wages Expense2,125 52Rent Expense800 54Utilities Expense450 55Supplies Expense800 59Miscellaneous Expense27532,900

C Transactions are analyzed and recorded in journal. Documents Journal Journal, Ledger, Trial Balance

C Transactions are analyzed and recorded in journal. Documents Journal 2.Transactions are posted from journal to ledger. Journal Ledger Journal, Ledger, Trial Balance

C Transactions are analyzed and recorded in journal. Documents Journal 2.Transactions are posted from journal to ledger. Journal Ledger 3.Trial balance is prepared. Journal, Ledger, Trial Balance Trial Balance

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance 2,400 Cash 2,400 General Journal Page 1 Recording and Posting an Entry 1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction. 3. Post the credit side of the transaction. Transaction 1

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance 2,400 Cash 2,400 Post. Balance DateItemRef.DebitCredit DebitCredit 12/1 Account: Prepaid Insurance Account No. 15 General Journal General Ledger Page 1 Recording and Posting an Entry 1 1 Enter the transaction date in the ledger account.

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance 2,400 Cash 2,400 Post. Balance DateItemRef.DebitCredit DebitCredit 12/11 2,400 Account: Prepaid Insurance Account No. 15 General Journal General Ledger Page 1 Recording and Posting an Entry 2 2 Enter the debit amount in the ledger debit column.

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance 2,400 Cash 2,400 Post. Balance DateItemRef.DebitCredit DebitCredit 12/11 2,4002,400 Account: Prepaid Insurance Account No. 15 General Journal General Ledger Page 1 Recording and Posting an Entry 3 3 Update the ledger account balance.

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance 2,400 Cash 2,400 Post. Balance DateItemRef.DebitCredit DebitCredit 12/11 Account: Prepaid Insurance Account No. 15 General Journal General Ledger Page 1 Recording and Posting an Entry 4 4 Enter the journal page in the ledger account.

C Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance152,400 Cash 2,400 Post. Balance DateItemRef.DebitCredit DebitCredit 12/112,4002,400 Account: Prepaid Insurance Account No. 15 General Journal General Ledger Page 1 Recording and Posting an Entry 5 5 Enter the ledger account number in the journal.

C Recording and Posting an Entry Post. DateDescriptionRef.DebitCredit 12/1Prepaid Insurance152,400 Cash112,400 Post. Balance DateItemRef.DebitCredit DebitCredit 11/30Balance5,900 12/112,4003,500 Account: Cash Account No. 11 General Journal General Ledger Page All five parts of the credit posting are shown.

C Transactions Prepaid insurance expenses $2,400 for two years. 2. paid Rent expense $ Unearned rent revenue received $360 for three months. 4.Purchase office equipment for $1, Paid $180 advertisement expense.

C Transactions Paid creditors $ Paid wages $ Fees earned $3,100 for cash. 9.Fees earned $1,750 on account. 10.Paid $900 to supplier. 11.Received $650 from customer. 12.Purchased supplies $1,450 for cash.

C Transactions Paid wages $1, Paid telephone bill $ Paid electric bill $ Fees earned $2,870 for cash. 17.Received cash for $1, Withdrew $2,000 for cash.

C Journal, Ledger, and Trial Balance P61-67 QUESTIONS: 1.Why the transaction is initially recorded in a journal? 2.Why the entry must be posted to ledger? 3.Why should the accountant should prepare the trial balance? 4.How to find an error and correct it?

C Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure 1.incorrectnot postedcorrect Journal

C Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure 1.incorrectnot postedcorrect Journal 2.correctincorrectly postedcorrect Ledger

C Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure Error 3 requires a correcting journal entry. 1.incorrectnot postedcorrect Journal 2.correctincorrectly postedcorrect Ledger 3.incorrectalready postedrecord and post a correcting entry

C General Journal – As recorded and posted Correcting Errors – An Example On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. What part of this entry is incorrect? What correcting entry would you make? DateDescriptionDebitCredit 5/5Supplies 12,500 Accounts Payable 12,500

C General Journal – As recorded and posted On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. General Journal – A correcting entry Correcting Errors – An Example DateDescriptionDebitCredit 5/5Supplies 12,500 Accounts Payable 12,500 DateDescriptionDebitCredit 5/5

C General Journal – As recorded and posted On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. Correcting Errors – An Example General Journal – A correcting entry DateDescriptionDebitCredit 5/5Supplies 12,500 Accounts Payable 12,500 DateDescriptionDebitCredit 5/5Office Equipment 12,500

C General Journal – As recorded and posted On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. Correcting Errors – An Example General Journal – A correcting entry DateDescriptionDebitCredit 5/5Office Equipment 12,500 Supplies 12,500 DateDescriptionDebitCredit 5/5Supplies 12,500 Accounts Payable 12,500

C Objective: Use horizontal analysis to compare financial statements from different periods. Financial Analysis and Interpretation Comparative Balance Sheet December 31, 2003 and 2002 Assets Current assets$ 550,000$ 533,000 Long-term investments95,000177,500 Plant assets (net)444,500470,000 Intangible assets50,00050,000 $1,139,500$1,230,500 Increase (Decrease) AmountPercent

C Objective: Use horizontal analysis to compare financial statements from different periods. Financial Analysis and Interpretation Comparative Balance Sheet December 31, 2003 and 2002 Assets Current assets$ 550,000$ 533,000$ 17, % Long-term investments95,000177,500(82,500)(46.5%) Plant assets (net)444,500470,000(25,500)(5.4%) Intangible assets50,00050,000— $1,139,500$1,230,500$ (91,000)(7.4%) Increase (Decrease) AmountPercent Horizontal Analysis: Horizontal Analysis: Current year (2003)$550,000 Base year (2002)$533,000 = 103.2% Increase amount $17,000 Base year (2002) $533,000 = 3.2%

C Objective: Use horizontal analysis to compare financial statements from different periods. Financial Analysis and Interpretation Comparative Income Statement December 31, 2003 and 2002 Sales$1,530,500$1,234,000 Sales returns32,50034,000 Net sales$1,498,000$1,200,000 Cost of goods sold1,043,000820,000 Gross profit $ 455,000$ 380,000 Increase (Decrease) AmountPercent

C Objective: Use horizontal analysis to compare financial statements from different periods. Financial Analysis and Interpretation Comparative Income Statement December 31, 2003 and 2002 Sales$1,530,500$1,234,000$296, % Sales returns32,50034,000(1,500)(4.4%) Net sales$1,498,000$1,200,000$298,000)24.8% Cost of goods sold1,043,000820,000223, % Gross profit $ 455,000$ 380,000$ 75, % Increase (Decrease) AmountPercent Horizontal Analysis: Horizontal Analysis: Current year (2003) $1,498,000 Base year (2002) $1,200,000 = 124.8% Increase amount $298,000 Base year (2002) $1,200,000 = 24.8%

C HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise 2-8; 2-13; 2-16; Problem 2-1A; 2-4A 3.Problem 1-5A Discussion: 1.Activity 2-6 Into the real world

C The end of Chapter 2.