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Chapter 2: Transaction Analysis

Analyze transactions

Understand how accounting works

Record transactions in journal entries

Use a trial balance

Analyze transactions using "T-accounts"

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works

al entries

T-accounts"

Analyze transactions

Every transaction has two sides You give something You receive something

in accounting we record both sides of a tra

An account. is the record of all changes in a particular asset, liability, or equity account during a period

Assets Cash Accounts receivable Notes receivable Inventory Prepaid expenses Land Buildings Equipment, Furniture and Fixtures

Liabilities Accounts payable Notes payable Accrued liablities Unearned revenue

Stockholders equity Common stock Retained earning Revenues Expenses Dividends

Analyze transactions

Tranactions 1 Assets = 50,000


Cash

Liabilities

issue $50,000 of common stock to shareholder

Tranactions 2 Assets = Liabilities Cash (40,000) = Land 40,000 = pays $40,000 for land for a new location

Tranactions 3 Assets 3,700


supplies

= Liabilities + = 3,700
accounts payable

buys $3,700 supplies on acount

Tranactions 4 Assets

= Liabilities

7,000
Cash

earn $7,000 of service revenue and collects cash

Tranactions 5 Assets 3,000

= Liabilities = -

accounts receivable

performs $3,000 of service on account--- customer will pay later

Tranactions 6 Assets Cash (1,100) Cash (1,200) Cash (400)

= Liabilities = = =

Pays for rent, salaries and utilities

Tranactions 7 Assets = Liabilities + (1,900) = (1,900)

cash

accounts payable

pays $1,900 on account

Tranactions 8 Assets

= Liabilities

major shareholder pays $30,000 to remodel his home

Tranactions 9 Assets = Liabilities Cash 1,000 = Acct rec (1,000) = -

collects $1,000 for services performed on account

Tranactions 10 Assets = Cash 22,000

Liabilities -

land

(22,000)

Sells some of the land for $22,000

Tranactions 11 Assets = Cash (2,100)


Pay $2,100 for dividends

Liabilities -

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both sides of a transaction

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es in a particular y account during

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nd Fixtures

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Equity 50,000
Common Stock

holder

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Equity -

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Equity -

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Equity

7,000
Service revenue

cts cash

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Equity 3,000
Service revenue

customer will pay later

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Equity (1,100) (1,200) (400)
rent expense salary expense utilities expense

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Equity -

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Equity

del his home

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Equity -

n account

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Equity -

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Equity (2,100)

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ASSETS
Cash 1 2 3 4 5 6 Acct Rec Supplies Land

50,000 (40,000) 3,700 7,000 3,000 (1,100) (1,200) (400) (1,900) 1,000 22,000 (2,100) 33,300

40,000

8 9 10 11

(1,000) (22,000) 2,000 3,700 57,000 18,000

Genie Car Wash, Inc. Income Statement Month ended April 30, 2009 Revenues Service revenue ($7,000 + $3,000) Expenses

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10,000

Salary expense Rent expense Utilities expense


Total expenses Net Income

$ 1,200 1,100 400 $ 2,700 7,300

Genie Car Wash, Inc. Statement of Retained Earnings Month ended April 30, 2009

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Retained earnings, April 1, 2009 Add: Net Income Less: Dividends Retained earnings, April 30, 2009

7,300 7,300 (2,100) 5,200

Genie Car Wash, Inc. Balance Sheet April 30, 2009

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Assets Cash Acct Rec. Supplies' Land

$ 33,300 2,000 3,700 18,000

Liabilities Acc Pay. Stockholders Equity Common stock Retained Earnings Total Equity

Total Assets

$ 57,000

Total Liabilities & Equity

Liabilities Acct Pay

Equity
Com Stk Ret Earn

50,000 3,700 7,000 3,000 (1,100) (1,200) (400) (1,900)

1,800 1,800 57,000

50,000 55,200

(2,100) 5,200

1,800

olders Equity on stock ed Earnings

50,000 5,200 55,200

abilities & Equity

$ 57,000

Understand how accounting works

All business transactions include two parts You give something you receive something

Accounting is based on a "dual entry" system

Each transaction effects at least two accou

Accounts can be represented by

thel letter T. We call them T-accounts .

The account "cash" would appear as: Cash


left side right side

Debit

Credit

the left side of each account is the debit side the right side of each account is the credit side

Every business transaction involves a debit and a credit

the debit ---> what you received the credit ---> what you gave

Rules for increases and decreases in the accounts Assets increased by debits decreased by credits increased by credits decreased by debits

Liabilities & Equity

Assets + debits - credits

Liabilities + + credits - debits

Eq

works

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two parts

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ntry"

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t two accounts

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accounts .

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es

Equity

Assets Dr debit (dr) side + Cr credit (cr) side -

Liabilities Dr Cr +

Shareholde Contributed Capital Dr -

Assets Dr Cr debit (dr) credit (cr) side side + -

Liabilities Dr Cr +

+ Dr -

Shareholde
Contributed Capital

Revenues Dr Cr

Expenses Dr

Shareholder's Equity ntributed Capital Retained Earning Cr Dr Cr + +

Shareholder's Equity
Retained Earning

ntributed Capital

Cr +

Dr -

Cr +

Expenses Cr

Dividends Dr Cr

3 1 2 3

Record transactions in journal entries

Specify each account affected by the and classify as to "account type" Determine whether each account is in or decreased by the transaction Record the transaction in the journal side and credit side with a brief expla

The Ledger a grouping of all accounts

entering a transaction in the journal does data into the ledger data must be copied to the ledger a process called . posting

Journal Entry
transaction 1

Date
Apr 2 Cash

Account and explanation


Common Stock
issued common stock

Journal Entry
transaction 2

Date
Land

Account and explanation


Cash
purchase Land with cash

Journal Entry
transaction 3

Date

Account and explanation


Supplies Acct Payable

purchase supplies on account

Journal Entry
transaction 4

Date
Cash

Account and explanation


Service revenue
sold services for cash $7000

Journal Entry
transaction 5

Date

Account and explanation


Account receivable

Service revenue
sold services $3000 on account

Journal Entry
transaction 6

Date

Account and explanation


Rent expense Salary expense Utilities expense Cash
pay rent, salary, and utilities expense

Journal Entry
transaction 7

Date

Account and explanation


Account payable Cash
paid cash on account

Journal Entry
transaction 8

Date

Account and explanation

no entry

Journal Entry
transaction 9

Date
Cash

Account and explanation


Accounts receivable
collect cash on account

Journal Entry

transaction 10

Date
Cash

Account and explanation


Land
sold land

Journal Entry
transaction 11

Date

Account and explanation


Dividends Cash
declared and paid cash dividends

al entries

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cted by the transaction nt type" ccount is increased action the journal -- debit brief explanation

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ournal does not get the

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50,000 50,000

Credit

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40,000 40,000

Credit

page 83 Debit
3,700 3,700

Credit

page 83 Debit
7,000 7,000

Credit

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3,000

Credit

3,000

page 84 Debit
1,100 1,200 400 2,700

Credit

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1,900 1,900

Credit

page 85 Debit Credit

page 85 Debit
1,000 1,000

Credit

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Debit
22,000

Credit
22,000

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2,100 2,100

Credit

ASSETS Cash
1 4 9 10

LIABILITIES Act Payable

50,000 7,000 1,000 22,000


80,000

2 6 7 11

40,000 2,700 1,900 2,100


46,700

1900 3
1,900

3700
3,700

1,800

33,300

Act Rec
5

3000
3,000

1000
1,000

2,000

Supplies
3

3700 3,700

Land
2

40000 10
40,000

22000
22,000

18,000

Genie Car Wash, Inc.

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Trial Balance April 30, 2010


Debit Credit

Assets Cash Accounts Receivable Supplies Land Liabilities Accounts Payable Stockholders Equity Common Stock Revenues Service revenue Expenses Rent expense Salary expense Utilities expense Dividends

33,300 2,000 3,700 18,000 1,800 50,000 10,000 1,100 1,200 400 2,100 61,800

61,800

STOCKHOLDERS' EQUITY Common Stock


1

Dividends
11

50,000 50,000

2,100 2,100

Revenues Service Revenues


4 5

Expenses Rent expense


6

7,000 3,000 10,000

1,100 1,100

Salaries expense
6

1,200 1,200

Utilities expense
6

400 400

Use a trial balance

a list of all the accounts with their balanc

a trial balance summarizes all the account balances for financial statements

a trial balance

shows whether the total of the debits equ the total of the credits

Chart of Accounts a list of all the accounts

The "normal balance" of an account

falls on the side of the account - debit or c increases or recorded

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their balances

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alances for the

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e debits equal

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- debit or credit - where

Analyze transactions using "T-accounts"

because sometimes decisions must be m without the benefit of a complete acco system

T - accounts are used to analyze trans

Cash Accounts rec

100 800

Sales Revenue

Acct Pay 1600 300 900 300 2500 2200

Cash 9000 Receipts 25000 Payments 14000 11000 25000

Supplies Cash Acct Payable

780

T-accounts"
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s must be made mplete accounting

nalyze transactions

900

380 400