Analyzing and Recording

Transactions
Chapter 2

Wild and Shaw

Fundamental Accounting Principles
24th Edition
 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.
C3 Describe a ledger and a chart of accounts.
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.

© McGraw-Hill Education.
 1-3

Learning Objective C1

Explain the steps in processing

transactions and the role of
source documents.
 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.
4
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

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
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.

6
 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.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
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

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
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

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

Learning Objective C2: Describe an account and its use in recording transactions.
 Equity Accounts
+ –
Owner Owner
capital withdrawals

Equity
Accounts
+ –
Revenues Expenses

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.

Learning Objective C2: Describe an account and its use in recording transactions.
 Learning Objective C3

Describe a ledger and chart of

accounts.
 Ledger and Chart of Accounts
The ledger is a collection of all accounts and their
balances for an accounting system. A company’s
size and diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all
accounts and includes an
Exhibit
identifying number for each account. 2.4

Learning Objective C3: Describe a ledger and chart of accounts.

 Learning Objective C4

Define debits and credits and

explain double-entry
accounting.
 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

Learning Objective C4: Define debits and credits and explain double-entry accounting.
 Double-Entry Accounting

Assets = Liabilities + Equity

Exhibit
2.6

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

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.
 Learning Objective P1

Record transactions in a
journal and post entries to a
ledger.
 Journalizing and Posting
Transactions Exhibit
2.9

21
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

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.

Learning Objective P1: Record transactions in a journal and post entries to a ledger.
 Posting Journal Entries
Exhibit
2.12

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.
 Processing Transactions
Double-entry accounting is useful in analyzing and
processing transactions. Analysis of each transaction
follows these four steps.

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #1

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #2

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #3

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #4

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #5

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #6

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #7

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #8

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #9

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #10

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #11

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #12

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #13

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #14

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #15

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Processing Transactions #16

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Summarizing Transactions
Exhibit
in a Ledger 2.13

Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
 Learning Objective P2

Prepare and explain the

use of a trial balance.
 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.

© McGraw-Hill Education 45
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 46
Learning Objective P2: Prepare and explain the use of a trial balance.
 Learning Objective P3

Prepare financial statements

from business transactions.
 Financial Statements
Prepared from Trial Balance
Exhibit
2.15

Learning Objective P3: Prepare financial statements from business transactions.

 1 - 49

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.**

Learning Objective P3: Prepare financial statements from business transactions.

 Income Statement Exhibit
2.16

Learning Objective P3: Prepare financial statements from business transactions.

 Statement of Owner’s Equity
Exhibit
2.16

Learning Objective P3: Prepare financial statements from business transactions.

 Balance Sheet
Exhibit
2.16

52
Learning Objective P3: Prepare financial statements from business transactions.
End of Chapter 2