Finance and Accounting
Chapter 2
Analyzing and Recording Transactions
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1-2
Chapter 2 Learning Objectives
CONCEPTUAL
C1 Explain the steps in processing transactions and the role of source documents.
C2 Describe an account and its use in recording transactions.
C4 Define debits and credits and explain double-entry accounting.
ANALYTICAL
A1 Analyze the impact of transactions on accounts and financial statements.
PROCEDURAL
P1 Record transactions in a journal and post entries to a ledger.
P2 Prepare and explain the use of a trial balance.
P3 Prepare financial statements from business transactions.
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1-3
Learning Objective C1
Explain the steps in processing
transactions and the role of
source documents.
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1-4
Basics of Financial Statements
Business transactions
Click to and events
edit Master are the starting points of
text styles
financial statements. Process from transactions to financial
Second
statements level
is as follows:
Third level
• Identify each transaction and event from source documents.
• Analyze each transaction and event using the accounting
equation.
• Record relevant transactions and events in a journal.
• Post journal information to ledger accounts.
• Prepare and analyze the trial balance and financial
statements.
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Learning Objective C1: Explain the steps in processing transactions and the role of source documents.
1-5
Source Documents
Source documents identify and describe
transactions entering the accounting system.
Examples:
• Bills from suppliers
• Sales receipts
• Checks
• Purchase orders
• Payroll records
• Bank statements
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Education 5
Learning Objective
reproduction or-C1: Explaindistribution
further the steps in processing
permitted transactions and the
without the rolewritten
prior of sourceconsent
documents.
of McGraw-Hill Education.
1-6
Learning Objective C2
Describe an account and its use in
recording transactions.
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1-7
The Account Underlying
Financial Statements
An account is a
record of
The general
increases and
ledger is a record
decreases in a
of all accounts
specific asset,
used by the
liability, equity,
company.
revenue, or
expense.
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Education 7
Learning Objective C2: Describe an account and its use in recording transactions.
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
1-8
The Account and Its Analysis
Exhibit
2.1
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Education 8
Learning Objective C2: Describe an account and its use in recording transactions.
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
1-9
Asset Accounts
Cash
Accounts
Land
Receivable
Buildings
Asset Notes
Receivable
Accounts
Prepaid
Equipment
Accounts
Supplies
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Learning Objective C2: Describe an account and its use © McGraw-Hill
in recording Education.
transactions.
Liability Accounts
Accounts Notes
Payable Payable
Liability
Accounts
Accrued Unearned
Liabilities Revenue
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Learning Objective C2: Describe an account and its use in recording transactions.
Equity Accounts
+ –
Owner Owner
capital withdrawals
Equity
Accounts
+ –
Revenues Expenses
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Learning Objective C2: Describe an account and its use in recording transactions.
Expanded Accounting Equation
Revenues and Owner capital increases equity.
Expenses and Owner withrawals decrease equity.
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Learning Objective C2: Describe an account and its use in recording transactions.
Learning Objective C4
Define debits and credits and
explain double-entry
accounting.
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Debits and Credits
A T-account represents a ledger account
and is used to show the effects of one or
more transactions.
Exhibit
2.5
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Learning Objective C4: Define debits and credits and explain double-entry accounting.
Double-Entry Accounting
Assets = Liabilities + Equity
Exhibit
2.6
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Learning Objective C4: Define debits and credits and explain double-entry accounting.
Double-Entry Accounting:
Expanded Accounting Equation
Here is the expanded accounting equation
showing the equity section. Exhibit
2.7
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Learning Objective C4: Define debits and credits and explain double-entry accounting.
Double-Entry Accounting:
Account Balance
An account balance is the difference between the increases and
decreases in an account. Notice the T-Account of Cash
has an account balance of $4,800.
Exhibit
2.8
Learning Objective C4: Define debits and credits and explain double-entry accounting. © McGraw-Hill Education 17
Learning Objective P1
Record transactions in a
journal and post entries to a
ledger.
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Journalizing and Posting
Transactions Exhibit
2.9
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Learning Objective P1: Record transactions in a journal and post entries to a ledger.
Journalizing Transactions
a. Transaction b. Titles of Affected
Date Accounts
Exhibit
2.10
d. Transaction c. Dollar amount of debits
explanation and credits
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Learning Objective P1: Record transactions in a journal and post entries to a ledger.
Balance Account Column Exhibit
2.11
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
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Learning Objective P1: Record transactions in a journal and post entries to a ledger.
Posting Journal Entries
Exhibit
2.12
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Learning Objective P1: Record transactions in a journal and post entries to a ledger.
Learning Objective A1
Analyze the impact of
transactions on accounts and
financial statements.
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Processing Transactions
Double-entry accounting is useful in analyzing and
processing transactions. Analysis of each transaction
follows these four steps.
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #1
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #2
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #3
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #4
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #5
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #6
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #7
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #8
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #9
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #10
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #11
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #12
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #13
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #14
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #15
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #16
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Summarizing Transactions in a Ledger
Exhibit
2.13
Learning Objective P2
Prepare and explain the
use of a trial balance.
© McGraw-Hill Education 42
Preparing a Trial Balance
Preparing a trial balance has three steps:
1. List each account title and its amount (from ledger) in
the trial balance. If an account has a zero balance, list it
with a zero in the normal balance column (or omit it
entirely).
2. Compute the total of debit balances and the total of
credit balances.
3. Verify (prove) total debit balances equal total credit
balances.
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Learning Objective P2: Prepare and explain the use of a trial balance.
FastForward’s Trial Balance
Exhibit The trial
2.14
balance lists
all ledger
accounts and
their balances
at a point in
time. If the
books are in
balance, the
total debits
will equal the
total credits.
© McGraw-Hill Education 44
Searching for Errors
If the trial balance does not balance, the error(s)
must be found and corrected.
Make sure the trial Recompute each
balance columns are account balance in the
correctly added. ledger.
Make sure account Verify that each journal
balances are correctly entry is posted correctly.
entered from the ledger.
See if debit or credit Verify that each
accounts are mistakenly original journal entry has
placed on the trial balance. equal debits and credits.
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Learning Objective P2: Prepare and explain the use of a trial balance.
Learning Objective P3
Prepare financial statements
from business transactions.
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Financial Statements
Prepared from Trial Balance
Exhibit
2.15
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Learning Objective P3: Prepare financial statements from business transactions.
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Financial Statements
The four financial statements and their purposes are:
1. Income statement — reports revenues less expenses incurred by a
business over a period of time.
2. Statement of owner’s equity — reports how equity changes over the
reporting period from net income (or loss) and from any owner investments
and withdrawals over a period of time.
3. Balance sheet — reports the financial position (types and amounts of
assets, liabilities, and equity) at a point in time.
4. Statement of Cash Flows — The statement of cash flows lists the cash
inflows and cash outflows for the period.
**For simplicity, we do not show the statement of cash flows for FastForward in this
chapter, but we do return to this statement in the next chapter.**
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Learning Objective P3: Prepare financial statements from business transactions.
Income Statement Exhibit
2.16
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Learning Objective P3: Prepare financial statements from business transactions.
Statement of Owner’s Equity
Exhibit
2.16
50
Learning Objective P3: Prepare financial statements from business transactions.
Balance Sheet
Exhibit
2.16
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Learning Objective P3: Prepare financial statements from business transactions.
Presentation Issues
1. Dollar signs are not used in journals and ledgers.
2. Dollar signs appear in financial statements and other
reports such as trial balances. Put dollar signs beside
only the first and last numbers in a column.
3. When amounts are entered in the journal, ledger, or
trial balance, commas are optional to indicate
thousands, millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to the
nearest dollar, or even to a higher level.
© McGraw-Hill Education 52
Learning Objective P3: Prepare financial statements from business transactions.
End of the Chapter 2
Homework:
Exercises: 2-2, 2-11, 2-13, 2-14, 2-19, 2-23.
Problems: 2-1A, 2-7A
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