Chapter 2
Analyzing and Recording
Transactions
C1 Analyzing and Recording
Process
Record relevant transactions
Analyze each transaction and
and events in a journal
event from source documents
Post journal
information
to ledger
Prepare and analyze accounts
the trial balance
2-2
C1
Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements
Sales
Tickets
2-3
C2
The Account and Its Analysis
An account is a
record of
increases and The general
decreases in a ledger is a record
specific asset, containing all
liability, equity, accounts used by
revenue, or the company.
expense item.
2-4
C2
The Account and Its Analysis
Assets
Assets
Asset Liability
Liability
Liability Equity
Equity
Equity
Accounts
Accounts
Accounts = Accounts
Accounts
Accounts + Accounts
Accounts
Accounts
2-5
C3
Asset Accounts
Cash
Accounts
Land
Receivable
Buildings
Asset Notes
Accounts Receivable
Prepaid
Equipment
Accounts
Supplies
2-6
C3
Liability Accounts
Accounts Notes
Payable Payable
Liability
Accounts
Accrued Unearned
Liabilities Revenue
2-7
C3
Equity Accounts
Retained
Earnings
Common
Stock Dividends
Equity
Accounts
Revenues Expenses
2-8
C3
The Account and Its Analysis
Assets = Liabilities + Equity
+ – + –
Common
Dividends Revenues Expenses
Stock
2-9
C3
Ledger and Chart of Accounts
The ledger is a collection of all accounts for
an information 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 identifying number for each account.
101 Cash 319 Dividends
106 Accounts receivable 403 Consulting revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
307 Common stock 690 Utilities expense
318 Retained earnings
2-10
C4
Debits and Credits
A T-account represents a ledger account
and is a tool used to understand the effects
of one or more transactions.
T- Account
(Left side) (Right side)
Debit Credit
2-11
C4
Double-Entry Accounting
Assets = Liabilities + Equity
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
+ - - + - +
2-12
C4
Double-Entry Accounting
Equity
Common _ _
Stock
Dividends
+ Revenues Expenses
Stock Dividends Revenues Expenses
Debit Credit Debit Credit Debit Credit Debit Credit
- + + - - + + -
2-13
C4
Double-Entry Accounting
An account balance is the difference between the
increases and decreases in an account.
Notice the T-Account
Cash
Investment by owner for stock 30,000 Purchase of supplies 2,500
Consulting services revenues earned 4,200 Purchase of equipment 26,000
Collection of accounts receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of accounts payable 900
Payment of cash dividend 200
Total increases 36,100 Total decreases 31,300
Balance 4,800
2-14
P1
Balance Column Account
T-accounts are useful illustrations, but
balance column accounts are used in
practice.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1 Initial investment 30,000 30,000
Dec. 2 Purchased supplies 2,500 27,500
Dec. 3 Purchased equipment 26,000 1,500
Dec. 10 Collection from customer 4,200 5,700
2-15
P1 Journalizing and
Posting Transactions
Assets = Liabilities + Equity
T- Account
(Left side) (Right side)
Debit Credit
Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.
GENERAL JOURNAL Page 123
ACCOUNT NAME: ACCOUNT No.
Post.
Date Description Ref. Debit Credit
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger Step 3: Record journal entry
2-16
P1
Journalizing Transactions
Transaction Titles of Affected
Date Accounts
GENERAL JOURNAL Page 1
Date Account Titles and Explanations PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
Transaction Dollar amount of debits
explanation and credits
2-17
P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles and Explanation PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
1 Identify the debit account in ledger.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
2-18
P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles and Explanation PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
2 Enter the date.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1
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P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles & Explanations PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
3 Enter the amount and description.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1 30,000
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P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles and Explanation PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
4 Enter the journal reference.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1 G1 30,000
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P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles & Elxplanations PR Debit Credit
2011
Dec. 1 Cash 30,000
Common stock 30,000
Investment by shareholders
5 Compute the balance.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1 G1 30,000 30,000
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P1
Posting Journal Entries
GENERAL JOURNAL Page 1
Date Account Titles and Explanation PR Debit Credit
2011
Dec. 1 Cash 101 30,000
Common stock 30,000
Investment by shareholders
6 Enter the ledger reference.
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2011
Dec. 1 G1 30,000 30,000
2-23
A1
Analyzing Transactions
Shareholder invested $30,000 in FastForward on Dec.
Transaction: 1.
Analysis:
Assets = Liabilities + Equity
Cash Common
Stock
30,000 30,000
Double entry:
(1) Cash 101 30,000
Common stock 307 30,000
Posting:
Cash 101 Common Stock 307
(1) 30,000 (1) 30,000
2-24
A1
Analyzing Transactions
FastForward purchases supplies by paying $2,500
Transaction: cash.
A1
Analyzing Transactions
FastForward purchases supplies by paying $2,500
Transaction: cash.
Analysis:
Assets = Liabilities + Equity
Cash Supplies Common
Stock
(2,500) 2,500
Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
2-25
A1
Analyzing Transactions
FastForward purchases equipment by paying $26,000
Transaction: cash.
A1
Analyzing Transactions
FastForward purchases equipment by paying $26,000
Transaction: cash.
Analysis:
Assets = Liabilities + Equity
Cash Equipment Common
Stock
(26,000) 26,000
Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
2-26
A1
Analyzing Transactions
Transaction: FastForward purchases $7,100 of supplies on credit.
A1
Analyzing Transactions
Transaction: FastForward purchases $7,100 of supplies on credit.
Analysis:
Assets = Liabilities + Equity
Supplies Accounts Payable Common
Stock
7,100 7,100
Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100
Posting:
Supplies 126 Accounts Payable 201
(2) 2,500 (4) 7,100
(4) 7,100
2-27
A1
Analyzing Transactions
FastForward provides consulting services and
Transaction: immediately collects $4,200 cash.
A1
Analyzing Transactions
FastForward provides consulting services and
Transaction: immediately collects $4,200 cash.
Analysis:
Assets = Liabilities + Equity
Cash Revenue
4,200 4,200
Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Posting:
Cash 403 Consulting Revenue 101
(1) 30,000 (2) 2,500 (3) 4,200
(5) 4,200 (3) 26,000
2-28
P2
Trial Balance
After processing its
FastFoward remaining transactions
Trial Balance for December,
December 31, 2011 FastForward’s trial
Debits Credits balance is prepared.
Cash $ 4,350
Accounts receivable -
Supplies 9,720
The trial balance lists
Prepaid Insurance 2,400 all account balances in
Equipment 26,000
Accounts payable $ 6,200 the general ledger. If
Unearned consulting revenue 3,000 the books are in
Common stock 30,000
Dividends 200 balance, the total
Consulting revenue 5,800 debits will equal the
Rental revenue 300
Salaries expense 1,400 total credits.
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
2-29
P2 Six Steps for Searching for
and Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.
Verify that the trial balance Recompute each account
columns are correctly added. balance in the ledger.
Verify that account balances
Verify that each journal
are correctly entered from the
entry is properly posted.
ledger.
See whether a debit (or Verify that each original
credit) balance is mistakenly journal entry has equal
listed as a credit (or debit). debits and credits.
2-30
P3 Using a Trial Balance to
Prepare Financial Statements
Point in Point in
Time Period of Time Time
Income Statement
Statement of Retained Earnings
Statement of Cash
Flows
Beginning Ending
Balance Balance
Sheet Sheet
2-31
P3
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
2-32
P3
Statement of Retained Earnings
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2011
Balance, 12/1/11 $ -
Net income for December 3,470
3,470
Less: Dividends (200)
Balance, 12/31/11 $ 3,270
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
2-33
P3
Balance Sheet
FASTFORWARD
FASTFORWARD Balance Sheet
Statement of Retained Earnings December 31, 2011
For the Month Ended December 31, 2011
Assets
Balance, 12/1/11 $ -
Net income for December 3,470 Cash $ 4,350
3,470 Supplies 9,720
Less: Dividends 200 Prepaid insurance 2,400
Balance, 12/31/11 $ 3,270 Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Total liabilities 9,200
Equity
Common stock 30,000
Retained earnings 3,270
Total equity 33,270
Total liabilities and equity $ 42,470
2-34