1. Analyzing Transactions2
Analyzing Transactions

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

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

5. 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.

6. Separate accounts are maintained for each item of importance.
The Account
Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses.
Separate accounts are maintained for each item of importance.

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

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

9. The right side of the account is called the credit side.
2-1
Title
Debit
Credit
The right side of the account is called the credit side. 7

10. Amounts entered on the left side are debits.
2-1
Title
Debit
Credit
Amounts entered on the left side are debits. 8

11. Amounts entered on the right side are credits.
2-1
Title
Debit
Credit
Amounts entered on the right side are credits. 9

12. Cash (a) 25,000 (b) 20,000 (d) 7,500 (e) 3,650 (f) 950 (h) 2,000
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 10

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

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

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

16. Asset Accounts ASSETS Prepaid Insurance Cash Notes Receivable
Accounts Receivable
Prepaid Expenses
ASSETS
Office Supplies
Land
Store Supplies
Buildings
Equipment

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

18. LiabilityAccounts LIABILITIES Accounts Payable Notes Payable
Unearned Revenues
Accrued Liabilities

19. 2-1
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.

20. Equity Accounts Equities Owners’ Capital Owners’ Withdrawals Revenues
Expenses

21. 2-1
Revenues are increases in owner’s equity as a result of selling services or products to customers.
Fees earned
Commission revenue
Rent revenue

22. 2-1
The using up of assets or consuming services in the process of generating revenues results in expenses.
Wages expense
Rent expense
Miscellaneous expense

24. Balance Sheet Accounts
2-1
Balance Sheet Accounts
Debits
Credits
Asset accounts……. Increase (+) Decrease (-)
Liability accounts.… Decrease (-) Increase (+)
Owner’s equity (capital) accounts… Decrease (-) Increase (+) 31

25. Balance Sheet Accounts
2-1
Credit for decreases (–)
Debit for increases (+)
Asset Accounts
Credit for increases (+)
Debit for decreases (–)
Liability Accounts
Balance Sheet Accounts
Credit for increases (+)
Debit for decreases (–)
Owner’s Equity Accounts 32

26. Double-Entry Accounting
Exh.
3.7
Double-Entry Accounting
Liabilities
Equity
Assets = +
Debit Credit
ASSETS
LIABILITIES
EQUITIES

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

28. Income Statement Accounts
2-1
Income Statement Accounts
Credit for increases (+)
Debit for decreases (–)
Revenue Accounts
Credit for decreases (–)
Debit for increases (+)
Expense Accounts
Less 41
Continued

29. Net Income (credit > debits) increases owners’ equity (capital)
2-1
Equals
Net Income (credit > debits) increases owners’ equity (capital)
Net Loss (debits > credits) decreases owners’ equity (capital) 42

30. Double-Entry Accounting - Detail of Effects on Equity
Exh.
3.8
Double-Entry Accounting - Detail of Effects on Equity
Equity
Revenues
Expenses
Owner’s Capital
Owner’s Withdrawals _ +
Debit Credit
Capital
Withdrawals
Expenses
Revenues

31. Every transaction affects at least two accounts.
2-1
IMPORTANT NOTE
Every transaction affects at least two accounts.

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

33. Journalizing requires the following steps:
2-1
Journalizing requires the following steps:
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.
The title of the account debited is listed in the Description column.
(Continued)

34. Enter the amount in the Debit column.
2-1
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.

35. NetSolutions A Sole Proprietorship
“ On November 1, 2007, 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

36. Balance Sheet Accounts
2-1
(a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.

37. 2-1 23 JOURNAL Page 1 Date Description P.R. Debit Credit 1 2 3 4
2-1
JOURNAL
Page 1
Date
Description
P.R.
Debit
Credit 1 2 3 4
2007
Nov. 1
Cash
Chris Clark, Capital
Invested cash in NetSolutions. 23

38. 2-1
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

39. (b) On November 5, NetSolutions bought land for $20,000, paying cash.
2-1
(b) On November 5, NetSolutions bought land for $20,000, paying cash.

40. 2-1
5 Land
Cash
Purchased land for building site. 26

41. 2-1
(c) On November 10, NetSolutions purchased supplies on account for $1,350.

42. 2-1 28 10 Supplies 1 350 00 Accounts Payable 1 350 00
2-1
10 Supplies
Accounts Payable
Purchased supplies on account. 28

43. 2-1
Income Statement Accounts
(d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.

44. 2-1
18 Cash
Fees Earned
Received fees from customers. 35

45. Aug. 7 Accounts Receivable 115,000 Fees Earned 115,000
2-1
Example Exercise 2-2
Prepare a journal entry on August 7 for the fees earned on account, $115,000.
Follow My Example 2-2
Aug. 7 Accounts Receivable 115,000
Fees Earned 115,000 43
For Practice: PE 2-2A, PE 2-2B

46. 2-1
(e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

47. 2-1 37 30 Wages Expense 2 125 00 Rent Expense 800 00
2-1
30 Wages Expense
Rent Expense
Utilities Expense
Miscellaneous Expense
Cash
Paid expenses. 37

48. (f) On November 30, NetSolutions paid creditors on account, $950.
2-1
(f) On November 30, NetSolutions paid creditors on account, $950.

49. 2-1 30 30 Accounts Payable 950 00 Cash 950 00
2-1
30 Accounts Payable
Cash
Paid creditors on account. 30

50. For Practice: PE 2-1A, PE 2-1B
2-1
Example Exercise 2-1
Prepare a journal entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder on account.
Follow My Example 2-1
June 3 Truck 42,500
Cash 8,500
Accounts Payable 34,000 33
For Practice: PE 2-1A, PE 2-1B

51. 2-1
(g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.

52. 2-1 39 30 Supplies Expense 800 00 Supplies 800 00
2-1
30 Supplies Expense
Supplies
Supplies used during November. 39

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

54. 2-1
(h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.

55. 2-1 46 Nov 30 Chris Clark, Drawing 2 000 00 Cash 2 000 00
2-1
Nov 30 Chris Clark, Drawing
2007
Cash
Chris Clark withdrew cash for personal use. 46

56. Dec. 29 Dominique Walsh, Drawing 12,000 Cash 12,000
2-1
Example Exercise 2-3
Prepare a journal entry on December 29 for the payment of $12,000 to the owner of Smartstaff Consulting Services, Dominique Walsh, for personal use.
Follow My Example 2-3
Dec. 29 Dominique Walsh, Drawing 12,000
Cash 12,000 47
For Practice: PE 2-3A, PE 2-3B

57. Increase (Normal Bal.) Decreases
2-1
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 48

58. Amber Saunders, Drawing Accounts Payable Cash Fees Earned Supplies
2-1
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.
Amber Saunders, Drawing
Accounts Payable
Cash
Fees Earned
Supplies
Utilities Expense 49

59. Debit entries only; normal debit balance
2-1
Follow My Example 2-4
Debit entries only; normal debit balance
Debit and credit entries; normal credit balance
Debit and credit entries; normal debit balance
Credit entries only; normal credit balance 50
For Practice: PE 2-4A, PE 2-4B

60. 2-1
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.

61. Transaction Analysis
2-1
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.
Continued

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

63. (continued)

64. (concluded)

65. 2-2
Objective 2
Describe and illustrate the posting of journal entries to the accounts.

66. 2-2
The process of transferring the debits and credits from the journal entries to the accounts is called posting.

67. 2-2
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.

68. 2-2 57

69. 2-2
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.

70. 2-2
1 Rent Expense
Cash
Paid rent for December. 59

71. 2-2
An alternative approach is to debit Rent Expense for $800 on December 1. This avoids having to transfer the balance to an expense account at the end of the month.

72. 2-2
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.

73. 2-2
Dec. 1 NetSolutions receives $360 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. 62

74. 2-2
Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.
4 Office Equipment
Accounts Payable
Purchased office equipment on account. 63

75. Dec. 6 NetSolutions paid $180 for a newspaper advertisement.
2-2
Dec. 6 NetSolutions paid $180 for a newspaper advertisement.
6 Miscellaneous Expense
Cash
Paid for newspaper ad. 64

76. Dec. 11 NetSolutions paid creditors $400.
2-2
Dec. 11 NetSolutions paid creditors $400.
11 Accounts Payable
Cash
Paid creditors on account. 65

77. 2-2
Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.
13 Wages Expense
Cash
Paid two weeks’ wages. 66

78. 2-2
Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.
16 Cash
Fees Earned
Received fees from customers. 67

79. 2-2
Dec. 16 Fees earned on account totaled $1,750 for the first half of December.
16 Accounts Receivable
Fees Earned
Recorded fees earned on account. 68

80. 2-2
Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.
20 Accounts Payable
Cash
Paid part of amount owed to Executive Supply Co. 69

81. 2-2
Dec. 21 NetSolutions received $650 from customers in payment of their accounts.
21 Cash
Accounts Receivable
Received fees from customers on account. 70

82. Dec. 23 NetSolutions paid $1,450 for supplies.
2-2
Dec. 23 NetSolutions paid $1,450 for supplies.
23 Supplies
Cash
Purchased supplies. 71

83. 2-2
Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.
27 Wages Expense
Cash
Paid two weeks’ wages. 72

84. Dec. 31 NetSolutions paid $310 for telephone charges for the month.
2-2
Dec. 31 NetSolutions paid $310 for telephone charges for the month.
31 Utilities Expense
Cash
Paid telephone charges. 73

85. Dec. 31 NetSolutions paid $225 for electric usage for the month.
2-2
Dec. 31 NetSolutions paid $225 for electric usage for the month.
JOURNAL
Page 1
Post Ref.
Date
Description
Debit
Credit
2007
Dec 31 Utilities Expense
Cash
Paid for electric usage. 74

86. 2-2
Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.
31 Cash
Fees Earned
Received fees from customers. 75

87. 2-2
Dec. 31 NetSolutions earned $1,120 on account for the second half of December.
31 Accounts Receivable
Fees Earned
Recorded fees earned on account. 76

88. Dec. 31 Chris Clark withdrew $2,000 for personal use.
2-2
Dec. 31 Chris Clark withdrew $2,000 for personal use.
31 Chris Clark, Drawing
Cash
Chris Clark withdrew cash for personal use. 77

89. 2-2
Example Exercise 2-5
On March 1, the cash account balance was $22, During March, cash receipts totaled $241,880 and the March 31 balance was $19,125. Determine the cash payments made during March. 78

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

91. 2-3
Objective 3
Prepare an unadjusted trial balance and explain how it can be used to discover errors.

92. 2-3
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.

93. 2-3 82

95. 2-3
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.
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. 83

96. For Practice: PE 2-6A, PE 2-6B
2-3
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). 84
For Practice: PE 2-6A, PE 2-6B

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

98. 2-4
A transposition occurs 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 $ as $54.20.

99. 2-4
Another type of error is a posting error. Assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500.

100. 2-4 Entry to Correct Error 88 May 31 Office Equipment 18 12 500 00
2-4
Entry to Correct Error
May 31 Office Equipment
Supplies
To correct erroneous debit to Supplies on May 5. See invoice from Bell Office Equipment Company. 88

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

102. Office Salaries Expense 6,000
2-4
Follow My Example 2-7
Cheri Ramey, Drawing 6,000
Office Salaries Expense 6,000
Accounts Payable 4,500
Miscellaneous Expense 4,500
Utilities Expense 4,500
Cash 4,500
Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry. 90
For Practice: PE 2-7A, PE 2-7B