1 2 Analyzing Transactions

2 1. Describe the characteristics of an account and record transactions using a chart of accounts and journal. 2. Describe and illustrate the posting of journal entries to accounts. 3. Prepare an unadjusted trial balance and explain how it can be used to discover errors. 4. Discover and correct errors in recording transactions. After studying this chapter, you should be able to:

3 2-1 Describe the characteristics of an account and record transactions using a chart of accounts and journal. Objective 1

4 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. 2-1

5 5 The T account has a title. Title 2-1 The T Account

6 6 The left side of the account is called the debit side. Title Debit 2-1

7 The right side of the account is called the credit side. Title DebitCredit 2-1 7

8 Title DebitCredit Amounts entered on the left side are debits

9 Title DebitCredit Amounts entered on the right side are credits

10 Cash (a)25,000(b)20,000 (d)7,500(e)3,650 (f)950 (h)2,000 Balance5,900 Balance of the account (In Rp 000)

11 A group of accounts for a business entity is called a ledger. 2-1

12 A list of the accounts in a ledger is called a chart of accounts. 2-1

13 Assets are resources owned by the business entity. Cash Supplies Prepaid expenses Buildings 2-1

14 Liabilities are debts owed to outsiders (creditors). Accounts payable Notes payable Wages payable 2-1

15 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. 2-1

16 Revenues are increases in owner’s equity as a result of selling services or products to customers. Fees earned Commission revenue Rent revenue 2-1

17 The using up of assets or consuming services in the process of generating revenues results in expenses. Wages expense Rent expense Miscellaneous expense 2-1

18 Every transaction affects at least two accounts. 2-1

19 This transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing. Journalizing 2-1

20 Journalizing requires the following steps: 1.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 require on the day be recorded. 2.The title of the account debited is listed in the Description column. (Continued) 2-1

21 3.Enter the amount in the Debit column. 4.Record the credit account in the Description column. 5.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. 2-1

22 (a)On November 1, Cita Cinta opens a new business and deposits Rp. 25,000,000 in a bank account in the name of SolusiNet. Balance Sheet Accounts

23 JOURNAL DateDescription Debit Credit Page Nov Cash Cita Cinta, Capital Invested cash in SolusiNet. 2-1 P.R.

24 The effect of this entry is shown in the accounts of SolusiNet as follows: Cash Nov. 125,000 Cita Cinta, Capital 2-1 (In Rp 000)

25 (b)On November 5, SolusiNet bought land for Rp 20,000,000 paying cash.

26 5Land Cash Purchased land for building site. 2-1

27 ( c)On November 10, SolusiNet purchased supplies on account for Rp1,350,000

28 10Supplies Accounts Payable Purchased supplies on account. 2-1

29 (f)On November 30, SolusiNet paid creditors on account, Rp. 950,000

30 30Accounts Payable Cash Paid creditors on account

31 Debits Credits Asset accounts…….Increase (+)Decrease (-) Liability accounts.…Decrease (-)Increase (+) Owner’s equity (capital) accounts…Decrease (-)Increase (+) Balance Sheet Accounts

32 Credit for increases (+) Debit for decreases (–) Owner’s Equity Accounts Credit for decreases (–) Debit for increases (+) Asset Accounts Credit for increases (+) Debit for decreases (–) Liability Accounts Balance Sheet Accounts

33 Example Exercise 2-1 Prepare a journal entry for the purchase of a truck on June 3 for Rp.42,500, 000 paying Rp.8,500,000 cash and the remainder on account. Follow My Example 2-1 June 3 TruckRp. 42,500,000 Cash 8,500,000 Accounts Payable34,000,000 For Practice: PE 2-1A, PE 2-1B

34 (d)On November 18, SolusiNet received fees of Rp7,500,000 from customers for services provided. Income Statement Accounts

35 30Cash Fees Earned Received fees from customers

36 (e)Throughout the month, SolusiNet incurred the following expenses: wages, Rp. 2,125,000; rent Rp. 800,000; utilities, Rp. 450,000; and miscellaneous, Rp.275,000.

37 30Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses

38 (g)On November 30, a count revealed that Rp.800,000 of the supplies inventory had been used during the month.

39 30Supplies Expense Supplies Supplies used during November

40 Debits Credits Revenue accounts…Decrease (-)Increase (+) Expense accounts…Increase (+)Decrease (-) 2-1 Income Statement Accounts 40

41 Credit for increases (+) Debit for decreases (–) Revenue Accounts Income Statement Accounts Credit for decreases (–) Debit for increases (+) Expense Accounts Less Continued

42 Equals Net Income (credit > debits) increases owners’ equity (capital) Net Loss (debits > credits) decreases owners’ equity (capital)

43 Example Exercise 2-2 Prepare a journal entry on August 7 for the fees earned on account, Rp.115,000,000. Follow My Example 2-2 Aug. 7Accounts Receivable115,000,000 Fees Earned115,000,000 For Practice: PE 2-2A, PE 2-2B

44 The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity. Drawing Account 2-1

45 (h)On November 30, Cita Cinta withdrew Rp.2,000,000 in cash from SolusiNet for personal use.

46 Cash Cita Cinta withdrew cash for personal use. Nov 30Cita Cinta, Drawing

47 Example Exercise 2-3 Prepare a journal entry on December 29 for the payment of Rp.12,000,000 to the owner of Smartstaff Consulting Services, Dominique Walsh, for personal use. Follow My Example 2-3 Dec. 29Dominique Walsh, Drawing 12,000,000 Cash12,000,000 For Practice: PE 2-3A, PE 2-3B

48 Increase (Normal Bal.) Decreases Balance sheet accounts: AssetDebitCredit LiabilityCreditDebit Owner’s Equity: Capital CreditDebit DrawingDebitCredit Income statement accounts: RevenueCreditDebit ExpenseDebitCredit

49 Example Exercise 2-4 State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance. 1.Ambarwati, Drawing 2.Accounts Payable 3.Cash 4.Fees Earned 5.Supplies 6.Utilities Expense

50 For Practice: PE 2-4A, PE 2-4B Follow My Example Debit entries only; normal debit balance 2.Debit and credit entries; normal credit balance 3.Debit and credit entries; normal debit balance 4.Credit entries only; normal credit balance 5.Debit and credit entries; normal debit balance 6.Debit entries only; normal debit balance

51 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. 2-1

52 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. 1.Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction. 2-1 Transaction Analysis Continued

53 4.Record the transaction using a journal entry. 5.Periodically post journal entries to the accounts in the ledger. 6.Prepare an unadjusted trial balance at the end of the period. 2-1

54 Describe and illustrate the posting of journal entries to the accounts. Objective 2 2-2

55 The process of transferring the debits and credits from the journal entries to the accounts is called posting. 2-2

56 Dec. 1SolusiNet paid a premium of Rp.2,400,000 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period.

(In Rp. 000)

58 Dec. 1SolusiNet paid rent for December, Rp.800,000. The company from which SolusiNet is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.

59 1 Rent Expense Cash Paid rent for December

60 An alternative approach is to debit Rent Expense for Rp.800,000 on December 1. This avoids having to transfer the balance to an expense account at the end of the month. 2-2

61 SolusiNet 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. SolusiNet agreed to rent the land to the retailer for three months, with the rent payable in advance. 2-2

62 Dec. 1SolusiNet receives Rp. 360,000 for three month’s rent for use of its land beginning December 1. 1 Cash Unearned Rent Received advance payment for three months’ rent on land. 2-2

63 Dec. 4SolusiNet purchased office equipment on account from PD.Tunas Jaya. for Rp.1,800,000 4 Office Equipment Accounts Payable Purchased office equipment on account. 2-2

64 Dec. 6SolusiNet paid Rp.180,000 for a newspaper advertisement. 6 Miscellaneous Expense Cash Paid for newspaper ad. 2-2

65 Dec. 11SolusiNet paid creditors Rp.400, Accounts Payable Cash Paid creditors on account. 2-2

66 Dec. 13SolusiNet paid a receptionist and part-time assistant Rp.950,000 for two weeks’ wages. 13 Wages Expense Cash Paid two weeks’ wages. 2-2

67 Dec. 16SolusiNet received Rp.3,100,000 from fees earned for the first half of December. 16 Cash Fees Earned Received fees from customers. 2-2

68 Dec. 16Fees earned on account totaled Rp.1,750,000 for the first half of December. 16 Accounts Receivable Fees Earned Recorded fees earned on account. 2-2

69 Dec. 20SolusiNet paid Rp.900,000 to Executive Supply Co. on the Rp.1,800,000 debt owed from the December 4 transaction. 20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 2-2

70 Dec. 21SolusiNet received Rp.650,000 from customers in payment of their accounts. 21 Cash Accounts Receivable Received fees from customers on account. 2-2

71 Dec. 23SolusiNet paid Rp 1,450,000 for supplies. 23 Supplies Cash Purchased supplies. 2-2

72 Dec. 27SolusiNet paid the receptionist and part-time assistant Rp.1,200,000 for two weeks’ wages. 27Wages Expense Cash Paid two weeks’ wages. 2-2

73 Dec. 31NetSolutions paid Rp.310,000 for telephone charges for the month. 31Utilities Expense Cash Paid telephone charges. 2-2

74 Dec. 31SolusiNet paid Rp.225,000 for electric usage for the month. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 1 Dec 31Utilities Expense Cash Paid for electric usage. 2-2

75 Dec. 31SolusiNet received Rp.2,870,000 from fees earned for the second half of December. 31Cash Fees Earned Received fees from customers. 2-2

76 Dec. 31NetSolutions earned Rp.1,120,000 on account for the second half of December. 31Accounts Receivable Fees Earned Recorded fees earned on account. 2-2

77 Dec. 31Cita Cinta withdrew Rp.2,000,000 for personal use. 31Cita Cinta, Drawing Cash Cita Cinta withdrew cash for personal use. 2-2

78 Example Exercise 2-5 On March 1, the cash account balance was Rp. 22,350,000. During March, cash receipts totaled Rp.241,880,000 and the March 31 balance was Rp.19,125,000. Determine the cash payments made during March

79 Follow My Example 2-5 Using the following T-account solve for the amount of cash payment (indicated by ? below). Cash Mar. 1 Bal22,350?Cash payments Cash receipts241,880 Mar. 31 Bal.19,125 Rp.19,125 = Rp.22,350 + Rp.241,880 – Cash payments Cash payments = Rp.22,350 + Rp.241,880 –Rp.19,125 = Rp.245,105 For Practice: PE 2-5A, PE 2-5B In Rp.000

80 Prepare an unadjusted trial balance and explain how it can be used to discover errors. 2-3 Objective 3

81 The equality of debits and credits 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. 2-3

83 Example Exercise 2-6 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. a.Payment of a cash withdrawal of Rp.5,600,000 was journalized and posted as a debit of RP.6,500,000 to Salary Expense and a credit of RP.6,500,000 to Cash. b.A fee of Rp.2,850,000 earned from a client was debited to Accounts Receivable for Rp.2,580,000 and credited to Fees Earned for Rp.2,850,000. c.A payment of Rp.3,500,000 to a creditor was posted as a debit of Rp.3,500,000 to Accounts Payable and a debit of Rp.3,500,000 to Cash

84 Follow My Example 2-6 a.The totals are equal since both the debit and credit entries were journalized and posted for Rp.6,500,000. b.The totals are unequal. The credit total is higher by Rp.270,000 (Rp.2,850,000 – Rp.2,580,000). c.The totals are unequal. The debit total is higher by Rp.7,000,000 (Rp.3,500,000 + Rp.3,500,000). 2-3 For Practice: PE 2-6A, PE 2-6B 84

85 Discover and correct errors in recording transactions. 2-4 Objective 4

86 A transposition occurs when the order of the digits is changed mistakenly, such as writing Rp.542,000 as Rp.452,000 or Rp.524,000. In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing RP as $54,

87 Another type of error is a posting error. Assume that on May 5 a Rp.12,500,000 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for Rp.12,500,

88 Entry to Correct Error May 31Office Equipment Supplies To correct erroneous debit to Supplies on May 5. See invoice from Bella Office Equipment Company

89 Example Exercise 2-7 a.A withdrawal of Rp.6,000,000 by Roni Ahmad, owner of the business, was recorded as a debit to Office Salaries Expense and a credit to Cash. b.Utilities Expense of Rp.4,500,000 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Accounts Payable. The following errors took place in journalizing and posting transactions: Journalize the entries to correct the errors. Omit explanations

90 Follow My Example 2-7 a.Cheri Ramey, Drawing6,000 Office Salaries Expense6,000 b.Accounts Payable4,500 Miscellaneous Expense4,500 Utilities Expense4,500 Cash4,500 Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry. For Practice: PE 2-7A, PE 2-7B In Rp.000