1. Chapter 2 – Analyzing Transactions
Chapter 2 – Analyzing Transactions
After studying this chapter, you should be able to:
Describe the characteristics of an account and a chart of accounts.
Describe and illustrate journalizing transactions using the double-entry accounting system.
Describe and illustrate the journalizing and posting of transactions to accounts.
Prepare an unadjusted trial balance and explain how it can be used to discover errors.

2. Objective #1 - Describe the characteristics of an account and a chart of accounts.
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.
Title
Debit
Credit
The left side of the account is called the debit side.
DEBITS are entered here
The right side of the account is called the credit side.
CREDITS are entered here

3. 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

4. A group of accounts for a business entity is called a ledger.
2-1
A list of the accounts in a ledger is called a chart of accounts.

5. Assets are resources owned by the business entity. Cash Supplies
Assets are resources owned by the business entity.
2-1
Cash
Supplies
Accounts receivable
Prepaid expenses
Buildings
Liabilities are debts owed to outsiders (creditors).
Accounts payable
Notes payable
Wages payable
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.

6. Commission revenue or earned Rent revenue
Revenues are increases in owner’s equity as a result of selling services or products to customers.
2-1
Fees earned
Commission revenue or earned
Rent revenue
The using up of assets or consuming services in the process of generating revenues results in expenses.
Wages expense
Rent expense
Supplies expense
Miscellaneous expense

7. Balance Sheet Accounts
Objective 2 – Describe and illustrate journalizing transactions using the double-entry accounting system.
2-2
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

8. Income Statement Accounts
Income Statement Accounts
2-2
Credit for increases (+)
Debit for decreases (–)
Revenue Accounts
Credit for decreases (–)
Debit for increases (+)
Expense Accounts

9. Owner’s Withdrawals - Drawing Account
Owner’s Withdrawals - Drawing Account
2-2
The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity.
Credit for decreases (–)
Debit for increases (+)
Drawing Account

10. Balance sheet accounts: Asset Debit Credit Liability Credit Debit
2-2
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

11. 2-2
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.

12. Every transaction affects at least two accounts.
2-2
Journalizing
A transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing.
Note
Every transaction affects at least two accounts.

13. Journalizing requires the following steps:
Journalizing requires the following steps:
2-2
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 same page only require the day be recorded.
The title of the account debited is listed in the Description column.
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.

14. Balance Sheet Accounts
(a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.
2-2
JOURNAL
Page 1
Date
Description
P.R.
Debit
Credit 1 2 3 4
2009
Nov. 1
Cash
Chris Clark, Capital
Invested cash in NetSolutions.

15. 2-2
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

16. (b) On November 5, NetSolutions bought land for $20,000, paying cash.
(b) On November 5, NetSolutions bought land for $20,000, paying cash.
2-2
5 Land
Cash
Purchased land for building site.

17. (c) On November 10, NetSolutions purchased supplies on account for $1,350.
2-2
10 Supplies
Accounts Payable
Purchased supplies on account.

18. (f) On November 30, NetSolutions paid creditors on account, $950. 2-2
(f) On November 30, NetSolutions paid creditors on account, $950.
2-2
30 Accounts Payable
Cash
Paid creditors on account.

19. Income Statement Accounts
2-2
(d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.
30 Cash
Fees Earned
Received fees from customers.

20. (e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
2-2
30 Wages Expense
Rent Expense
Utilities Expense
Miscellaneous Expense
Cash
Paid expenses.

21. 2-2
(g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.
30 Supplies Expense
Supplies
Supplies used during November.

22. Drawings Account
2-2
(h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
Nov 30 Chris Clark, Drawing
2007
Cash
Chris Clark withdrew cash for personal use.

23. Summary – Analysis of Transactions
Summary – Analysis of Transactions
2-2
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.
4. Record the transaction using a journal entry.
Periodically post journal entries to the accounts in the ledger. (Objectives 3)
Prepare an unadjusted trial balance at the end of the period. (Objective 4)

24. Objective 3 –Describe and illustrate the journalizing and posting of transactions to accounts.
2-2
The process of transferring the debits and credits from the journal entries to the accounts is called posting.
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.

25. 2-3
2-2

26. 2-3
As an alternative, the rent may be due at the beginning of the month e.g. Rent for $800 due on December 1.,

27. 2-3
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.
1 Rent Expense
Cash
Paid rent for December.

28. 2-3
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.

29. 2-3
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.

30. 2-3
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.

31. Dec. 6 NetSolutions paid $180 for a newspaper advertisement.
2-3
Dec. 6 NetSolutions paid $180 for a newspaper advertisement.
6 Advertisement Expense
Cash
Paid for newspaper ad.

32. Dec. 11 NetSolutions paid creditors $400.
2-3
Dec. 11 NetSolutions paid creditors $400.
11 Accounts Payable
Cash
Paid creditors on account.

33. 2-3
Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.
13 Wages Expense
Cash
Paid two weeks’ wages.

34. 2-3
Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.
16 Cash
Fees Earned
Received fees from customers.

35. 2-3
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.

36. 2-3
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.

37. 2-3
Dec. 21 NetSolutions received $650 from customers in payment of their accounts.
21 Cash
Accounts Receivable
Received fees from customers on account.

38. Dec. 23 NetSolutions paid $1,450 for supplies.
2-3
Dec. 23 NetSolutions paid $1,450 for supplies.
23 Supplies
Cash
Purchased supplies.

39. 2-3
Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.
27 Wages Expense
Cash
Paid two weeks’ wages.

40. Dec. 31 NetSolutions paid $310 for telephone charges for the month.
2-3
Dec. 31 NetSolutions paid $310 for telephone charges for the month.
31 Utilities Expense
Cash
Paid telephone charges.

41. Dec. 31 NetSolutions paid $225 for electric usage for the month.
2-3
Dec. 31 NetSolutions paid $225 for electric usage for the month.
Post Ref.
Date
Description
Debit
Credit
2007
Dec 31 Utilities Expense
Cash
Paid for electric usage.

42. 2-3
Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.
31 Cash
Fees Earned
Received fees from customers.

43. 2-3
Dec. 31 NetSolutions earned $1,120 on account for the second half of December.
31 Accounts Receivable
Fees Earned
Recorded fees earned on account.

44. Dec. 31 Chris Clark withdrew $2,000 for personal use.
2-3
Dec. 31 Chris Clark withdrew $2,000 for personal use.
31 Chris Clark, Drawing
Cash
Chris Clark withdrew cash for personal use.

45. 2-3

46. Objective #4 - Prepare an unadjusted trial balance and explain how it can be used to discover errors
2-4
The equality of debit and credit balances 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.

47. 2-4

48. 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.

49. 2-4
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.

50. 2-4
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).
For Practice: PE 2-6A, PE 2-6B

51. 2-4
If an error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared.
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.

52. 2-4 Entry to Correct Error 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.

53. 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.

54. 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.
For Practice: PE 2-7A, PE 2-7B