Power Notes Chapter F2 Learning Objectives C2 Analyzing Transactions 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 C2

Power Notes Chapter F2 Analyzing Transactions Slide # Power Note Topics 3 11 36 40 43 50 57 Double-Entry Accounting Analyzing and Recording Transactions Chart of Accounts, Trial Balance Journal, Ledger, and Trial Balance Recording and Posting an Entry Correcting Errors Horizontal Analysis Note: To select a topic, type the slide # and press Enter.

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.” Scale or Balance T account Left Side Receive DEBIT Right Side Give CREDIT Luca Pacioli Developer of Double-Entry Accounting Receive DEBIT Give CREDIT

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 =

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

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 Expenses

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 = Liabilities Assets Expenses

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 = Liabilities Assets Owner’s Equity Expenses

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 = Liabilities Assets Owner’s Equity Revenues Expenses

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 = Liabilities Assets Owner’s Equity Net Income Revenues Expenses

NetSolutions “ On November 1, 2002, I started a business 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

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

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

Business Transactions Chris Clark (investor) Entry A. Chris Clark (investor) Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock. Cash Capital Stock receive Debit NetSolutions (investee) give Credit give Credit General Journal Date Description Debit Credit 11/1 Cash 25,000 Capital Stock 25,000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Business Transactions Chris Clark (stockholder) Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. receive Debit NetSolutions (payor) give Credit give Credit General Journal Date Description Debit Credit 11/30

Business Transactions Chris Clark (stockholder) Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. Reduction in equity receive Debit NetSolutions (payor) give Credit give Credit General Journal Date Description Debit Credit 11/30 Dividends 2,000

Business Transactions Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. Reduction in obligation Cash receive Debit NetSolutions (payor) give Credit give Credit General Journal Date Description Debit Credit 11/30 Dividends 2,000 Cash 2,000

Balance Sheet Income Statement NetSolutions Chart of Accounts Balance Sheet Income Statement 1. Assets 11 Cash 12 Accounts Receivable 14 Supplies 15 Prepaid Insurance 17 Land 18 Office Equipment 2. Liabilities 21 Accounts Payable 23 Unearned Rent 3. Owner’s Equity 31 Capital Stock 32 Retained Earnings 33 Dividends 4. Revenue 41 Fees Earned 5. Expenses 51 Wages Expense 52 Rent Expense 54 Utilities Expense 55 Supplies Expense 59 Miscellaneous Expense

NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 52 Rent Expense 800 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900

Balance Sheet NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 52 Rent Expense 800 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900 Balance Sheet

Income Statement NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 52 Rent Expense 800 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900 Income Statement

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal 2. Transactions are posted from journal to ledger. Journal Ledger

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal 2. Transactions are posted from journal to ledger. Journal Ledger Trial Balance 3. Trial balance is prepared.

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction. 3. Post the credit side of the transaction.

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 1 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 Enter the transaction date in the ledger account. 1

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 2 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 Enter the debit amount in the ledger debit column. 2

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 3 Update the ledger account balance. 3

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 4 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 Enter the journal page in the ledger account. 4

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400 Cash 2,400 5 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 Enter the ledger account number in the journal. 5

Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400 Cash 11 2,400 1 4 5 2 General Ledger Account: Cash Account No. 11 Post. Balance Date Item Ref. Debit Credit Debit Credit 11/30 Balance 5,900 12/1 1 2,400 3,500 3 All five parts of the credit posting are shown.

Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure 1. incorrect not posted correct Journal

Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure 1. incorrect not posted correct Journal 2. correct incorrectly posted correct Ledger

Error 3 requires a correcting journal entry. Correcting Errors Three Types of Errors Journal Entry Ledger Posting Correction Procedure 1. incorrect not posted correct Journal 2. correct incorrectly posted correct Ledger 3. incorrect already posted record and post a correcting entry Error 3 requires a correcting journal entry.

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

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

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

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

Comparative Balance Sheet December 31, 2003 and 2002 Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent Assets Current assets $ 550,000 $ 533,000 Long-term investments 95,000 177,500 Plant assets (net) 444,500 470,000 Intangible assets 50,000 50,000 $1,139,500 $1,230,500

Comparative Balance Sheet December 31, 2003 and 2002 Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent Assets Current assets $ 550,000 $ 533,000 $ 17,000 3.2% Long-term investments 95,000 177,500 (82,500) (46.5%) Plant assets (net) 444,500 470,000 (25,500) (5.4%) Intangible assets 50,000 50,000 — $1,139,500 $1,230,500 $ (91,000) (7.4%) Horizontal Analysis: Current year (2003) $550,000 Base year (1999) $533,000 = 103.2% Increase amount $17,000 Base year (2002) $533,000 = 3.2%

Comparative Income Statement December 31, 2003 and 2002 Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Income Statement December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent Sales $1,530,500 $1,234,000 Sales returns 32,500 34,000 Net sales $1,498,000 $1,200,000 Cost of goods sold 1,043,000 820,000 Gross profit $ 455,000 $ 380,000

Comparative Income Statement December 31, 2003 and 2002 Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Income Statement December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent Sales $1,530,500 $1,234,000 $296,500 24.0% Sales returns 32,500 34,000 (1,500) (4.4%) Net sales $1,498,000 $1,200,000 $298,000) 24.8% Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7% 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%

Power Notes This is the last slide in Chapter F2. Chapter F2 Analyzing Transactions This is the last slide in Chapter F2. Note: To see the topic slide, type 2 and press Enter.