A l,onhBalt A bnl, laTfu A/€f,.|tn A L"..

lt Akil
Chapter I defined accounting and
introduced fi nancial statements.We
described forms of organizations
and identified users and uses of
accounting. \ y'e defined the ac-
countinS equation and applied it to
transaction analysis.
This chapter focuses on the accounting process. Chapter 3 extends our focus on
We describe transactions and source documents, processing information.We explain
and we explain the analysis and recording of trans- the importance of adjusting
actions.The accounting equation,T-account, general accounts and the procedures in
ledger, trial balance, and debits and credirs are key preparing financial statements.
tools in the accounting process.

Analyzing and
Recording
Transactions
Chapter

CAP
Conceptual Analytical Procedural
fie
llD 1
Explain sreps in processing Analfze the impact of transaclions on Record lransactions in a iournal and
C1 rransacflons. {p. 4d)
A1 accounts and financial statements. (p.57) posr entnes to a reoger. (p. J{./

n? their Compure lhe debt ratio and describe D? Prepare and explain the use of a trial
lAt!) i,. u.u in analyzing financial
Describe source documents and
v! purpose. (p. 487 a 6alance.1p.63)
'
condition. (P. 56)
l^A
vJ
Describe an account and its use in D2 Prepare financial statements from
recording rransactions. (p. 49) r J brrin"r, transactions. (p. 54)
Describe a ledger and a chart of
C4 accounts. (p. 52)
lEl
(1 ( Define debrts and credits and explain @l
v/ double-entry accounting. (p. 53) LPz
The Bottom Line "lt hos been o dreom come true"
-
Sara Blal<ely

ATLANTA-"Working as a sales trainer by day and
peforming stand-up comedy at night, I didn't know rhe
first thing about the pantyhose industry," admits Sara
Blakely. "Except, I dreaded wearing most pantyhose.,' One night Sara cu!
the feet out of her pantyhose to wear wilh white pants and open-toed
shoes, and at that moment, Sara knew she had a unique idea. Sara look
$5,000 in savings and launched SPANX (Spanx,com), a manufacturer
of footless pantyhose, slimming intimates, hosiery, and other women!
apparel.
To pursue her business ambitions, Sara studied business activities
and learned rhe value of accounting informarion. She esrablished
recordkeeping processes, tTansaclion analysis, inventory accounting,
and financial statemenr reporting. I had to get a handle on my financial
situation, says Sara, as I wanted to remain self-funded.To this day,
Sara remains self-funded and has a reliable accounring system to
her make good business decisions.
I had to account for product costs, office expenses, supplier pay-
ments, patent fees. and other expenses, says Sara.At the same time,
Sara expanded sales and struggled ro stay profitable. "l had no
money to advertise, so I hit the road," laughs Sara. "For the enrire
first year, I did in-slore rallies... sraying all day inrroducing customers
to Spanx."
ln her first three months, Sara sold over 50,000 pairs of foolless
pantyhose. Today, just seven short years from her launch, Sara reports
over $150 million in retail sales."We are still a small company of
women," claims Sara,"obsessed with inventant and improvang comfort-
able undergarments." Sara continues to track and account for all
revenues and expenses. She maintains that success requiTes proper ac-
counting for and analysis of the financial side.
The bigger message of Spanx, says Sara, is promorins comforr and
confidence for women. lnsists Sara, "We believe all women deserve
the opportunity to make the most of their assers!"
help
[Sources: SPANX Websire, ]anuary 2009; Entreprereur, ytay ZOOT. Smort
,^4oney, September 20021W Guide,
)uly 20071 Finonciol Times, 2006; ABC
Ieleyis,on, 2007I
Financial statements report on the financial performance and they are reflected in financial statements, and how they
condiljon of an organization. Knowledge of their preparation, impact analysis of financial statements. Debits and credits are
organization, and analysis is important.A main goal of this introduced and identified as a tool in helping analyze and
chapter is to illustrate how transactions are recorded, how Process transactions.

. Source documents ' General ledger

. ' Trial balance preparation
' The account and its Double-entr), accounting ' Search for and correcdon
analysis ' Journalizing and posting of errors
' Types of accounts . An illustration ' Trial balance use

Analyzing and Recording Process

The accounting process identifies business transactions and events, analyzes and records their
(]| Exnlain the steps in
effects, and summarizes and presents information in reports and financial statements. These re-
Processrng transacttons.
ports and statements are used for making investing, lending, and other business decisions. The
EXHIBIT 2.I steps in the accounting process that foc|s ot analyzing and recortling transactions and events
The Analyzing and Recording
are shown in Exhihit 2 I
Process

Er+ t+ rr>
Analyze each Record relevani Post journal Prepare and
transaction transactions informatron analyze the
and event from and events to ledger trial balance
source documents in a journal accounts

Business transactions and events are the starting points. Relying on source documents, the
transactions and events are analyzed using the accounting equation to understand how they
aff'ect company performance and financlal position. These effects are recorded in accounting
records, informally refened to as the accounting books, or simply the Doolr.r. Additional steps
such as posting and then preparing a trial balance help summarize and classify the effects of
transactions and events. ultimately, the accounting process provides information in useful
reports or financial statements to decision makers.

Source Documents
Source documents identify and describe transactions and events entering the accounting
Describe source doc-
f,f umenB and their purpose.
process. They are the sources of accounting information and can be in either hard copy or
electronic form. Examples are sales tickets, checks, purchase orders, bills from suppliers,
 Chapter2 Analyzingand RecordingTransactions 49

employee earnings records. and bank statements. To illustrate, when an item is purchased on
credit, the seller usually prepares at least two copies of a sales invoice. One copy is given to
the buyer Anothel copy, otien sent electronically, results in an entr.y in the seller,s informa-
tion system to record the sale. Sellers use invoices fbr recording sales and for control; buy-
ers use them for recordin-q purchases and tbr monitoring purchasing activity. Many cash
registers record information for each sale on a tape or electronic file locked inside the regis- Point: To efsu.e thrL a saes are rlnt
up oi lhe , eg srei. mos. sc lc s requ -e
ter. This record can be used as a source document tbr recor.ding sales in the accounting records. cusronrers to hrvc tfeir €ceip.s ro
Source documents, especially if obtained from outside thc organization, provide objective and cx.rii8. or er! I plr.hased irems
reliable evidence about transactions and events and their amounts.

Decision Ethics *
Cashier Your manager requires that you, as cashieri immediately enter each sale. Recently, lunch hoLlr
a
traffic has increased and the assistant manager asks you to avoid delays by taking customers'cash and
making change without entering sales.The assistant manager says she will add up cash and enter sales after
lunch. She says that, in this way, the register will always match the cash amounr when the manager arrives at
three o'clock.What do you do? lAnswer-p.7t]

The Account and lts Analysis

An account is a record of increases and decreases in a specitrc asset, liability, equity, revenue,
Describe an accoun!
or expense item. Information fiom an account is analyzed, summarized, and presented in re- f,J- and rts use rn recording
ports and flnancial statemeltts. The general ledger, or sirnply ledger, is a record containing all
transactions.
accounts used by a company. The ledger is ofien in electlonic form. While most companies,
ledgers contain similar accounts, a company often uses one or mole urique accounts because
of its type of operations. Accounts are arranged into three general categories (based on the ac-
counting equation), as shown in Exhibit 2.2.

#_- t -47
AssetAccounts
Il-oV,*oYl- ffi = | ----
Liability Accoirnts ffitl Equity Accounts ffi A((ounts orsanized bv the

"VAccountingEquation
Asset Accounts Assets are resources owned or colttrolled by a company and that have
expected future benefits. Most accounting systems include (at a minimum) separate accounts
fbr the assets described here.
A C.ri account reflects a company's cash balance. All incteases ilnd decreases in cash are
recorded in the Cash account. It includes money and any medium of exchange that a bank ac-
cepts fbr deposit (coins, checks, money orders, and checking account balances).
AccoLlnts receivable are held by a seller and refer to promises of payment fiom customers to Point: C!sromeB and orhe, s who
sellers. These transactions are otien caIled credit seles ot' sales on account (or on cizdlt). Accounts owe a conrpany arc .a ed ts debtors.
receivable are increased by credit sales and are decleased by customer payments. A company
needs a separate record for each customer, but fbr now, we use the simpler practice of record-
ing all increases and decreases in leceivables in a single account called Accounts Receivable.
A note rcceivable, or promissory note, is a written pr omise ol'another entity to pay a definite
sum of money on a specified future date to the holder of the note. A company holding a prom-
issory note signed by another entity has an assct that is recorded in a Note (or Notes) Receivable
account.
Prepaid accotrnts (also called prepoid expenses) ale assets that reprcsent prepaymelts of Point: A .o cte pxrl(iig icc is i
prcp, d icco!n. fronr rhe st!defts
future expenses (nol cument expenses). When the expenses are later incuffed, the amounts in staidpo n! Ai .hc bcSinn ng of rhe
prepaid accounts are transferred to expense accounts. Common examples of prepaid accounts rerir. ! reprcscr.s ri asser thai citires
include prepaid insurance, prepaid rent. ard prepaid services (such as club memberships). r {udeir ro p. < on o i.a..ampls
Prepaid accounts expire with the passage of time (such as with rent) or through use (such as Th. benefrs of rhe pi < nr fce cxpire
.s thc term piogresses A! !c,m cni.
with prepaid meal tickets). When financial statements are prepared, prepaid accounts are
p,epa d pa r nt (asser) e!u:r s ze, o is r
adjusted so that (l ) all expired and used prepaid accoullts are recorded as regular expenses and D5 becn cntii. y recorde. rs p ii,!
(2) all unexpired and unused prepaid accounts are recorded as assets (reflecting future use in
50
Point: Prcpaid accoun!s rha! apply ro
.ur-enr and f!r! e periods xre a*ets.
These ass€rs arc adjusted a! rhe end
of each p.riod ro reflect only ihose
amounB rhar have not ye! exP red, a.d
ro re.ord as cxPenses th
Point: Some assets are desoibed as
,)td"g,bie becalse lhey do nor havc
phys cal exisience or their benefits i,e
hishy uncer.ain. A re.en. balance sheet
fo, Co.a-Cola Company shows
iearly $l blllon in nianrb e assets.
Point: Accounts Payab e a.e also
crt ea ha'1e Payables.
Chapter 2 Analyzing and Recording Tran sactions
future periods). To illustrate, when an insurance fee, called a premium, is paid in advance, the
cost is typically recorded in the asset account Prepaid Insurance. Over time, the expiring por-
tion of the insurance cost is removed fiom this asset account and rePorted in expenses on the
income statement. Any unexpired pofiion remains in Prepaid Insurance and is reported on the
balance sheet as an asset. (An exception exists for prepaid accounts that will expire or be used
before the end of the cunent accounting period when financial statements are prepared. In this
case, the prepayments can be recorded immediately as expenses.)
Supplies arc assets until they are used. When they are used up, their costs are reported as
expenses. The costs of unused supplies are recorded in a Supplies asset account. Supplies are
often grouped by purpose-for example, ofhce supplies and store supplies. Office supplies rn-
clude stationery, paper, toner, and pens. Store supplies rnclude packaging matedals, plastic and
paper bags, gift boxes and cartons, and cleaning materials. The costs of these unused supplies
can be recorded in an Office Supplies or a Store Supplies asset account. When supplies are
used, their costs are transferred from the asset accounts to expense accounts.
Equipment is an asset. When equipment is used and gets worn down, its cost is gradually
reported as an expense (called depreciation). Equipment is often grouped by its purpose-for
example, office equipment and store equipment. OlJice equipment includes computers, print-
ers, desks, chairs, and shelves. Costs incurred for these items are recorded in an Ofhce Equip-
ment asset account. The Store Equipment account includes the costs of assets used in a store,
such as counters, showcases, ladders, hoists, and cash registers.
Buiklings such as stores, offices, warehouses, and factories are assets because they provide
expected future benefits to those who control or own them. Their costs are recorded in a
Buildings asset account. When several buildings are owned, separate accounts are sometimes
kept fbr each of them.
The cost of land owned by a business is recorded in a Land account. The cost of buildings
located on the land is separately recorded in one or more building accounts.
Be6is*{rm l*$iSkt
women Entrepreneurs The Center forWoment Business Research rePorts
rhar women-owned businesses, such as SPANX, are growing and that they
. Total approximately ll million and employ nearly 20 million workers.
. Generate $2.5 trillion in annual sales and tend to embrace technology.
. Are philanthropic-70% of owners volunteer at least once per month.
. Are more likely funded by individual investors (73%) fian venture firms (15%).
Liability Accounts Liabilities are claims (by creditors) against assets, which means they
are obligations to transfer assets or provide products or seNices to other entities. Creditors
are individuals and organizations that own the right to receive payments from a company. If a
company fails to pay its obligations, the law gives creditors a right to force the sale of that
company's assets to obtain the money to meet creditors' claims. When assets are sold under
these conditions, creditors are paid first, but only up to the amount of their claims. Any re-
maining money, the residual, goes to the owners of the company. Creditors often use a balance
sheet to help decide whether to loan money to a company. A loan is less risky if the borrower's
liabilities are small in comparison to assets because this means there are more resources than
claims on resources. Common Iiability accounts are described here.
AccoLtnts pq-able refer to oral or implied promises to pay later, which usually arise from
purchases of merchandise. Payables can also arise from purchases of supplies, equipment, and
services. Accounting systems keep separate records about each creditor We describe these in-
dividual records in Chapter 5.
A note payable refers to a formal promise, usually denoted by the signing of a promissory
note, to pay a future amount. It is recorded in either a short-term Note Payable account or a
long-term Note Payable account, depending on when it must be repaid. We explain details of
short- and long-term classification in Chapter 3.
Unearned Revenue refers to a liability that is settled in the future when a company delivers
its products or services. When customers pay in advance for products or seNices (before revenue
 Chapter 2 Analyzing and Record ing Tran sactions 5l

is earned), the revenue recognition principle requires that the seller consider this payment as
unearned revenue. Examples of unearned revenue include magazine subscriptions collected in
advance by a publisheq sales of gilt certificates by stores, and season ticket sales by sports
teams. The seller would record these in liability accounts such as Unearned Subscriptions,
Uneamed Store Sales, and Uneamed ricket Revenue. when products and services are laier de-
Point: ll. subsoip.lon s canceled. rhe
livered, the earned portion of the unearned revenue is transferred to revenlre accounts such as
plb isher is expe.red !o reflnd rr.
Subscription Fees, Store Sales, and Ticket Sales.t unlsed po tioi to fie s!bs., be,
Accrued liabilitier are amounts owed that are not yer paid. Exantples are wages payable,
taxes payable, and irterest payable. These are often recorded in separate liability accounts
by the same title. If they are not Iarge in amolrnt. one or more led-qer accounts can be addecl
and reported as a single amount on the bulance sheet. (Financial statements often have
amounts reported that are a summatioD of several ledger accounts.)

m{r(l$i{}n ln$igh*
Revenue Spfead The Chicago Bears have lJneorned Reyenues of
about $60 million in advance ticket sales.When the team plays its home
games, it settles this liability to its ticket holders and then transfers the
amount earned to Iiaket Reyenues.

Equity Accounts The owner's claim on a company's assets is called e tluity or owter's eq- point: Equiry is i so cir .d ,er dsscrs
uiry Equity is the owner's re sidual intercst in the assets of a business after deducting liabilities.
Equity is impacted by four types of accounts: owner's capital, owner,s withdrawals, revenues,
and expenses. We show this visualJy in Exhibit 2.3 by expanding the accounting equation.

- L: =,:-..1 .-;-=-==.1 EXHIBIT 2.3

)-A)a
A6set uqoilny f .{-
I Accounts fi = | Aclounts Expanded Accounting Equation
F
k^rylr_H ,

When an owner invests in a company, the invested amount is recorded in an account titled Point: Thc ownei s wirhd, iiwars
Owner, Capital (wherc the owner's name is inserted in place of "owner"). The account ti- ac.ouft is i .o,t,o eqriry a.colnt
tled. C. Taylor, copital is used fof FastForwa[d. Any further owner investments are recorded b{ se t ied!c' tlre ionna baince
or tv
in this account. When an owner withdraws assets for personal use it decrerses both company 'q!
assets and total equi ty. Withdrawal s are not expenses of the business; they are simply the op- Point: The wi.hd,iwa o{ assers by
posite of owner investments. The Owner, Withdrawals account is used to recorcl asset dis- d,e owners or . co po a. on s ca led a
tributions to the owner. The account titled c. Tatlor, withdrtmals is used for FastForward. d)vltend
(Owners of proprietorships cannot receive company salaries because they are not legally sep-
arate from their companies; and they cannot enter into company contracts with themselvei.)
Revenues and expenses also impact equity. Examples of revenue accounts are Sales,
Commissions Earned, Professional Fees Earned, Rent Eamed, and Interest Revenue. Reyenues
increase equity and result from products and services provided to customers. Examples of ex-
pense accounts are Advertising Expense, Store Supplies Expense, Otfice Salaries Expense,
Office Supplies Expense, Rent Expense, Utilities Expense, and Insurance Expense. Experses
decrease equity and result from assets and services used in a company's operations. The variety
ofrevenues and expenses can be seen by looking atrhe chort ol qccoLLnts that follows the index

r
In practice, account titles varv. As one example, Subscripiion Fees is sometimes called Subsc ption Fees Revenue,
subsc ption Fees Eamed, or Eamed subscription Fees. As anotller example, Rent Earned is sometimes called
Rent llevenue, Rental Revenue, or Earned Rent Revenue. we must use good j,dgnent when reading financial
statemenis because titles can differ even within ihe same industrv. For example, product sales are called reaer;rre
at Best Buy, but 7?et srles atd alelatfug rcwn ds at Circuit City. Generally, the ierm /er.r .s or
fres is more corn_
monly used with service businesses, and ,itl snles or srles with product businesses.
t7. Chapter 2 Analyzing and Recording Transactions

at the back of this book. (Dilltlent cornpunies sometimes use different account titles than those
in this book s chart of accounts. Fo[ erlnple. some might use Interest Revenue instead of
Interest Earnecl, or Rental Expense instead ol Rcnt Expense. lt is important only that an ac-
count title describe the item it represents. )

Sporting Accounts The San Antonio Spurs have the {ollowing

major revenue and expense accounts:

Expenses
Basketball ticl<et sales
TV & radio broadcast fees Game costs
Advertlsing revenues NBA franchise costs
Baskerbal playoff recelpts

Analyzing and Processing Transactions

This section explains several tools altd processes that comprise an accounting system. These in
clude a led-eer. T-account, debits and credits, double-entry accounting. journalizing, and posting.

Ledger and Chart ofAccounts

The coilection of all accounls for an intbrmation systen] is cdled a letlger (ot generul letlgar).
(]4[ Describe a ledger and a
If accounts are in files on a hard drive. the sum of those files is the ledger. If the accounts Llre
chaTf ol iccolrnts
pages in a hle, that flle is the ledger A company's size and diversity of operations ail'ect the
number of accounts needed. A small company can get by with as lew as 20 or 30 accounts; a
large company can require several thousand. The chart of accounts is a list of all accoutts a
company uses and includes an identification numbel assigned to each.rccount. A snrall busi
ness might use the tbllowing numbering system for its accounts:

These nurl.rbers provide a three-digit codc that is usetul in recordkeeping. [n this case, the tlrst
digit assigned to asset accounts is a l, the tilst digit assigned to ]iability accounts is a 2, and
so on. The second and third digits relate to the accounts'subcategories. Exhibit 2.zl shows a
partial chart (:)1 accounts for FastForward. the tbcus company of Chapter L (Please review the
more complete chart of accounts that follows the index at the back of this book.)

EXHTBIT 2.4
Parrial Chart of Accounts
t0t Cash 30t C.Taylor, Capital
for FastForward
t06 Accounts receivable 302 C. Taylor,Withdrawals
126 Supplies 403 Consulting revenue
t28 406
t67 Equipment 622 Salaries expense
20t 637
136 Unearned consulting 640
651 Supplies expense
690 Utilities expense
 Chapter 2 Analyzing and Recording Transacrions 53

Debits and Credits

A T-account represents a ledger account and is a tool used to understand the eft'ects of one Define debits. and. cred,ls
or more transactions. Its name comes from its shape like the lettef T. The layout of a T-account,
C5- and explarn double-entry
shown in Exhibit 2.5, is (l) the account title on top, (2) a left, or debit side, and (3) a right, or accounting.
credit, side.
The left side of an account is called the EXHIBIT 2.5
debit side, often abbreviated Dr. The dght side The T-Account
is called the credit side, abbreviated Cr.2 To
enler amounls on lhe left side of rn accounr i.
to debil the account. To enter amounts on the
right side is to credit the account. Do not make the efior of thinking that the terms clebit and Point: Th ni of debir and .redir as
credit mean increase or decrease. Whether a debit or a credit is an increase or decrease de- a..o!nrns direcrons for left and rlsht.
pends on the account. For an account where a debit is an increase, the credit is a decrease; fbr
an account where a debit is a decrease. the credit is an increase. The diI1'erence between total
debits and total credits tbr an account, including any beginning balance, is the account bal-
ance. When the sum of debits exceeds the sum of credits. the account has a tlebit bakmce.
It has a credit baktnce when the sum of credits exceeds the sum of debits. When the sum of
debits equals the sum of credits, the account has a zero balance.

Double-Entry Accounting
Double-entry accounting requires that each transaction affect, and be recorded in, at least
two accounts. It also means the totql aruount d.ebited must equctL the totol amount credited
fbr each transaction. Thus, the sum of the debits for all entries must equal the sum of the
credits for all entries, and the sum of debit account balances in the ledger must equal the
sum of credit account balances-
The system for recording debits and credits follows from the usual accounting equation-
see Exhibit 2.6. Two points are important here. First, like any simple mathematical relation,
net increases or decreases on one side have equal net effects on the other side. For example, a
net increase in assets must be accompanied by an identical net increase on the liabilities and

EXHIBIT 2.6
+ Debits and Credits in the
Accounting Equation

equity side. Recall that some transactions affect only one side of the equation, meaning that
two or more accounts on one side are affected. but their net effect on this one side is zero.
Second, the left side is the normal balance side for assets, and the right sid,e is the normol
bqlance side for liabilities and equity. This matches their Iayout in the accounting equation
where assets are on the left side of this equation, and liabilities and equity are on the right.
Recall that equity increases from revenues and owner investments and it decreases from expenses
and owner withdrawals. These important equity relations are conveyed by expanding the accounting
equation to include debits and credits in double-entry form as shown in Exhibit 2.7.
Increases (credits) to owner's capital and revenues lncrease equity; increases (debits) to with- Point: Debns and ediE do not
drawals and expenses decrease equity. The normal balance of each account (asset, Iiabitity, meln favorable o_ !nfavorable A debit
capital, withdrawals, revenue, or expense) refers to the left or right (debit or credit) side where r, as does a debi!
to ai A cred t to a iabiny
expense.
increases are recorded. Understanding these diagrams and rules is required to prepare, analyze,
n.reases it as does a cred t to .
and interpret financial statements.

z
These abbreviations are remnants of 18th-century English reco.dkeeping practices where the terms rleriio,'and
c/edifor were used instead of ,isrit and a,'edtt. The abbreviations use the first and last lctters of these terms, just
as we stjll do lor Saint (St.) and Doctor (Dr.).
54 Chapter 2 Analyzing and Record ing Tran sactions

EXHIBIT 2.7
Debit and Credit Effects for Component Accounts

Liabilities + Ownei, Capital withdrawab +

Dr. for Cr. for Dr.lor Cr. for Dr. for

+ + +
Normal Normal Normal

The T-account for FastForward's Cash account, retlecting its first I l transactions (tiom
Exhibit 1.9), is shown in Exhibit 2.8. The total increases in its Cash account are $36,100, the
total decreases are $31.300, and the account's debit balance is $4,800. (We illustrate use of
Taccounts later in this chapter)

EXHIBIT 2.4
Computing the Balance for lnvestment by owner 10,000 Purchase o{ supplies 2,500
a T-Account Consulting services revenue earned 4,100 Purchase of equipment 25,000
Collection of accoLrnt receivable t,900 r,000
700
Payment of account payable 900
Wirhdrawal by owner 200

Point: Thc cidifg bahnce lr oi rhe

s dc wi.r drc arrc, do L i,mo!ir

l. ldentify examples of accounling source documents.

2. Explain the importance of source documents.
3. ldendfy each of the following as either an asset, a liability, or equity: (o) PrePaid Rent,
(b) Unearned Fees, (c) Building, (d) Wages Payable, and (e) Office Supplies.
4. What is an accountl Vy'hat is a ledger?
5. What determines lhe number and types of accounts a company usesl
6. Does debit always mean increase and credit always mean decreasel
7. Describe a chart of accounts.

Journalizing and Posting Transactions

pl Record transactions in a
lournal and Post entfles
to a ledger.
Processing transactions is a crucial pafi of accountjng. The four usual steps of this process
are depicted in Exhibit 2.9. Steps I and 2 involving transaction analysis and double-entry
accounting-were introduced in prior sections. This section extends that discussion and fb-
cuses on steps 3 and 4 of the accounting process. Step 3 is to record each transaction in a jour-
nal. A journal gives a complete record of each transaction in one place. It also shows debits
and credits fbr each transaction. The process of recording transactions in a journal is called
journalizing. Step 4 is to transfer (or poJl) entries trom the journal to the ledger. The process
of transfening journal entry infbrmation to the ledger is called posting.

Journalizing Transactions The process of journalizing transactions requires an under-

standing of joumal. While companies can use various journals, every company uses a general
a
journal. It can be used to record any transaction and includes the following infomation about
each transaction: (l) date of transaction, (2) titles of affected accounts, (3) dollar amount of each
 Chapter 2 Analyzing and Reco rd ing Transactio ns 55

Step l rAnalyze transactions and

source documents,
Step 2: Apply double-entry accounting. EXHIBIT 2.9
Steps in Processing Transaclions

+
Step 3: Record iournalentry. Step 4i Posi entry to ledger.
Goneral Journal
Cash
Tavlor, CaDrtal 30,000
rl>
upplies
Cash

debit and credlt, and (4) explanation of the transaction. Exhibit 2.10 shows how the flrst two
transactions of FastForward are recorded in a general joumal. This process is similar for manual
and computerized systems. Computerized journals are often designed to look like a manual jour-
nal page, and also include error-checking routines that ensure debits equal credits for each entry.
Shoftcuts allow recordkeepers to select account names and numbers from pull-down menus.

EXHIBIT 2.tO
Partial General Journal for
2009 FastForward
Dec. 1 Cash 30,000
C. Tavlor, Caoital 30,000
lnvestmenl by owoer.

Dec.2 Supplies 2,500

Cash 2,500
Purchased supplies lot cash.

To record enties in a general joumal, apply these steps; refer to the entries in Exhibit 2.10 when
reviewing these steps. @ Date the tmnsaction: Enter the year at the top of the first column and
the month and day on the first line of each joumal entry. O Enter titles of accounts debited and
then enter amounts in the Debit column on the same line. Account titles are taken from the chart
of accounts and are aligned with the left margin of the Account Titles and Explanation column.
O Enter titles of accounts credited and then enter amounts in the Credit column on the same line.
Account titles are from the charl of accounts and are indented from the left margin of the Account
Titles and Explanation coluntn to distlnguish them fiom debited accounts. @ Enter a brief ex-
planation of the transaction on the line below the entry (it often references a source document). This Point: There irc no exa.i rlles fo.
wrriig iourial en!.y cxp rnarions
explanation is indented about half as far as the credited account titles to avoid confusing it with
Ai exp i.iriion should b. shor. ye!
accounts, and it is italicized. nes.ribe why an enny s made.

llee lsion lnsight

IFRSs IFRSsrequire rhat companies report the following four financial statements with explanatory notes:
sheet of changes in equity (or slatement of recognized revenue and expense)
-Balance
statement -Statement of cash flows
-lncome -Statement
lFRss do not prescribe specific formats;and compararive informarion is required for the preceding period only.
56 Chapter2 Analyzingand RecordingTransactions

A blank line is leti between each ioul nal entlv [or clarity. When a transaction is first recorded.
the posting reference (PR) column is iei blank (in a manual system). Later, when posting
entries to the ledger. the identification numbers of the individual led-qer accoults are entered
in the PR column.
Balance Column Account Taccounts are simplc and direct means to show how the
accounting plocess works. However, actual accounting systems need more structure and there-
fore use balance column accounts. such as that in Erhibit 2.1 l.

EXHIBIT 2. I I
Cash Account in Balance
Column Format

The balance columr account tbrmat is similar to a T-accoul'rt jn havin.g columns tbr debits
and credits. It is diil'erent in including transaction date and explanation columns. It also has a
column with the balance of the account atter each entry is recorded. To illustmte, FastForward's
Cash account in Exhibit 2.11 is debited on December I for the 530,000 owner investment,
yielding a $30,000 debit balance. The account is credited on December 2 for $2,500, yielding
Point: Exp ri.t,ons e Lyp,.i y
a $27,500 debit balalce. On December 3, it is crcdited again, this time tbr $26,000, and its
li.l!d.d i edgei i..o!nrs on/ fo debit balance is reduced to $1,500. The Cash account is debited fbr $4,200 on December 10,
and its debit balance increases to tj5.7001 and so on.
The heading of the Balance column does nol show whcthcr jt is a debit or credit balance.
Instead. an account is assumed to h!.Ve a nonnal bdance. Unusual events can sometimes

EXH|B|T 2.t2
Posting an Entry to the Ledger

Point: The iLridanreiral .oi.eprs of r ldently deb t account n Ledger: enterdate, journalpage, amount, and baance.
nrailal (p.i.i xnd pxp. ) srstcn a . Enter the debit accounl nuriber from the Ledger in ihe PB co umn of ihe journa.
d.ntl.il to thos. of a .oirput. z.n ldentily cred t accou nt n Ledger: enier date, journal page, amo uni, and ba ance.
Enter the credrt account nunrber from the Ledger in the PB co Lmn oJ ihe journa.
 Chapter 2 Analyzing and Record ing Transactions 57

temporarily give an account an abnormal balance. An abnormal balcutce refers to a balance

on
the side where decreases are recorded. For example, a customer rnight mistakenly overpay
a
bill. This gives that customer's account receivable an abnormal (credit) balance. An abnormal
balance is often identified by circling it or by entering it in red or some other unusual
color. A
zero balance tbr an account is usualy shown by writing zeros or a dash in the Barance
column
to avoid contusion between a zero balance and one omitted in error

Posting lournat Entries step 4 of processing transacrions is to post jou,rar entdes to Point: Comp!r$zed s/Srems oiien
Iedger accounts (see Exhibit 2.9). To ensure that the ledger is up-ro-date. entries are posred provide a code bes dc a baance such as
as
soon as possible. This might be dairy, weekly, or when time permits. AI entries must Le posted d. or c, io ideitry its baai.e. Posrng is
lo the ledger before financiar statements are prepared to ensure that account balances are up- automaric and mmediite wirh ac.ounlint
to-date. when entries are posted to the ledger, the debits in journal entries are transferred
inio
ledger accounts as debits, and credits are transfered into ledger accounts as credits. Exhibit Point: A lolrna rs ofren refened ro
2.12 shows the four steps to post a jotuzal entry. First, iclentify the ledger account that as rhe boo( ofor€,nol eniry The ledger
is deb-
ited in the entry; then, in the ledger, enter the entry date, the journal ind page in its pR col_ s refeied ro as the book off,oleDrry

umn, the debit amount, and the new balance of the ledger account. (The letter G shows it beceuse finaicla slaiemenrs are pre
came
fiom the General Journal.) Second, enter the ledger account number in the pR column of the
journal. Steps 3 and 4 repeat the flrst two steps tbr credit entries
and amounts. The posting
process creates a link between the ledger and the journal entry. This link is
a useful cross-
ret'erence for tracing an amount from one record to another

Analyzing Transactions-An I llustration

we retum to the activities of FastForward to show how cloubre-entry aecounting is usetul in an-
alyzing and processing transactions. Analysis of each transaction foliows the roui rr.p. or e^r,iu Analyze the impact of
r A1
2.9. First, we review rhe transaction and any source documenrs. Seconcl, we anaryze the
action using the accounting equation. Third, we use doubre-entry accounting to record
trans ::ffi:tjl"# il H::::'
the trans-
action in journal entry form. Foufih, the entry is posted (for simplicity, use Ttaccounts to ;
represent ledger accounts). study each transaction thoroughly before proceeding
to the next. The
first 1l transactions are frorn chapter l, and we analyze trve additio,al December transactions
of FastForward (numbered 12 through 16) that were omitted earlier

l. lnvestment by Owner .#4$175,-warrt

I hrxlrrr Chuck Taylor invests $30,000 cash in
@ Pos r
FastForward
@ Arrr,r zr.:

E] Itrtrrro
30,000

2. Purchase Supplies for Cash

I lrrr.:.r'r'rrr, FastForward pays $2,500 cash fbr supplies. E P,,rr'
[AN,rrrzr Assets : Liabitities + Equity

Changes the composition of assers but not the toral.

I Rn<rxo
5A Chapter 2 Analyzing and Recording Tran sactions

3. Purchase Equipment for Cash

E ILn:.,,,,'t FastForward pays $26,000 cash for equiprnent. E P,,t,
I As rr.r zr Assets=Liabilities+Equiry
Cash Equipment
-26,000+26,000=0+0
Changes the composition of assets but not the total

E Rr:crrnu (3) | Equipment

26.000

4. Purchase Supplies on Credit

I hrrxlrn FastForward purchases Xi7, t00 of supplies on
credit from a supplier
@ A.l rr.r zr: Assets : Liabilities + Equily

P Rr.:rrrrl

5. Provide Services for Cash

I Iorvrrnl FastForward provides consulting services and tr l'os r

immediately collects $4,200 cash.

El Ax r r.r z. Assets : Liabilities + Equit),

E Rr:rrrro

6. Payment o, Expense in Cash

E Iul:,r lu r FastForward pays $ ,000 cash for December rent.
1
fd I I'os r

E A.-,rr-r zr Assets : Liabilities + Equity

(r) 30.000 (7) 2,s00

E Rrcorl (5) 4,700 (3) 26,000
(6)

7. P^yfient ot Expense in Cash

Point: Solory uslaiy refeB to I lor,.r.r'rrn FastForward pays $700 cash for employee salary.
compensation for an emp oyee who
receives a fxed anroln. lo- a given rlme Pl Ar,rrr zr: Assets = Liabiljties + Equiry
pe od. whereas wdges usla y rcfcrs ro
Cash Salaries
compensaiorr based on ti e workcd
Expense
-700 -700
(r) 30,000 (2) 2,500
E Rrtrrnu (s) 4,200 (3) 25,000
(6) t.000
(7) 700
 Chapter 2 Analyzing and Recording Transacrions 59

8. Provide Consulting and Rental Services on Credit

I It,o:,r I['r FastForward provides consulting services of$1,600 pPosr
and rents its test facilities for $300. The customer is
billed $1.900 for these services.

E Ax r r.r zr:

Point: Tr_ansact on 8 is a compound

iournal entry, which affe.ts rhree or
E Rlconrr

9. Receipt of Cash on Account

I hrrl.i.r'rrr FastForward receives $1.900 cash from the client E I'ost Point: The .evenle re.ognition Pin.iple
billed in transaction 8. relu res revenue !o be recognized when
earned, which ls when the company
I An,rr.r'2r,. Assets = Liabilities + Equity
(r) 30.000 (2) 2,s00 provides producrs and serv ces !o a

Accounts
(s) 4,200 (3) 26,000 c!sromerThis is io! necessarily rhe
Cash Receivable (e) r,900 (6) r,000 same t me rhat rhe .!stomer pays

+ 1,900 - 1,900 .= 0 + 0 (7) 700 A clslomer can pry before or after

p.od!cts o. services are provided.

P Rrcono
Accounts Receivable r,900

lO. Partial Payment of Accounts Payable

I hulr'r rrr FastForward pays CalTech Supply $900 cash @ Pos r

toward the payable of transaction 4.

lZ Ar,,,r.rru,

(t) 30,000 (2) 2,500

lJl Rrtorl (5) 4,200 (3) 25,000
(e) t,900 (6) t,000
(7) 700
(t 0) 900

I l. rrvithdralval of Cash by Owner

E lruNr u r Chuck Taylor withdraws $200 cash from @ Pos r

FastForward for personal use.

[2lAr.rr,vzr Assets : Liabilities Equrty

Cash C.T:rylor,
Withdrawals
-200 - 200 (t) 30,000 (2) 2,500
(s) 4,200 (3)
P Rr<,rxrr C.TaylonWithdrawals
(e)
26,000

Cash t,900 (6) t,000

(7\ 700
( t0) 900
( ) 200
60 Chapter 2 Analfzing and RecordingTransactions

12. Receipt of Cash for Future Services

E Lrf.l lrr.r FastForward receives $3,000 cash in advance of @ Pos r'

pror iding consulting ser\ ices to a cu.tomer.

+ (r) 30,000 (2) 2,s00

[ ,\r rr.r zr.. Assets = Liabilities Equity
(3) 26,000
(s) 4.200
Unearned
Cash Consulting Revenue
(e) t,900 (6) r,000

+3,000:+3,000+0 t7) 3,000 (7) 700

(r0) 900
Accepting $3,000 cash obligates FastForward to (ll) 200
perform future services and is a liability. No
rcvenue is eamed until services are provided.

Point: Llca Pac o i, a slh-century I Rr.trrnr, ( l2) Cash

monk, is considered a p oneer in Unearned Consulting
accountinr and the first !o dev se Revenue 3,000
doub e-enrry accoun!ing

13. Pay cash tor Future lnsurance Coverage

I L,rrvr rr.r FastForward pays $2,400 cash (insurance premium)
for a 24-month insurance policy. Coverage begins
on December l.

zl = Liabilities + Equity
[] Ar,rr.r
Prepaid
Cash lnsurance (r) 30,000 (2) 2,500
-2,400+2,400=0+0 (s) 4,200 (3) 26,000
Changes the composition of assets from cash to (e) r,900 (6) t,000
prepaid insurance. Expense is incurred as insur- (r2) 3,000 (7) 700
ance coverage expires. (10) 900
(ll) 200
[] Rrrrrrl Prepaid lnsurance
(t3) 2,400
Cash 2,400

14. Purchase SuPPlies for Cash

I lr,r,trr rrr FastForward pays $120 cash for supp]ies. @ Posr'

P .\r rt.r zr.: = Liabilities + Equity

$ Rr;trrrl
(l) 30,000 (2) 2,500
(s) 4,200 (3) 26.000
(e) t,900 (6) r,000
(t2) 3,000 (7\ 700
(t0) 900
(l t) 200
(t3) 2,400
(t4)
 Chapter 2 Analyzing and Recording Transactions 6t

15. Payment of Expense an Cash

I lDr.:.' r'rr.r FastForward pays $230 cash for December utili- []l lbsr
ties expense.

[,\r rr r zr. = Liabilities + Equiry

Utilities
Cash Expense
-230 -230 (r) 30,000 (2) 2,500
(s) 4.200 p) 26,000
I Rr:c ,rnn (rs) Utilities Expense 690
(e) t,900 (6) r,000
Cash t0t
( t2) 3,000 (7) 700
( t0) 900
(|) 200
(r3) 2,400
(t4) t20
(ts)

16. Payment of Expense in Cash

I llr.:r'r rrr FastForward pays $700 cash in employee salary P l'os r
Point: Wc could nrerge naisacrions
for work pedormed in the latter pafi of Dgcember. l5 and l5 into one corrpo!,d enry

[.\r u.r zr Assets = Liabiliries + Equity

(r) 30,000 (2) 2,500

I Ilr..rrrrrl
(s) 4,200 (3) 25,000
(e) t,900 (5) i,000
( l2) 3,000 (7) 700
(t0) 900
(r t) 200
(t3) 7,400
(t4) t20
(t5) 230
(t6)

Accounting Equation Analysis

Exhibit 2. 13 shows the ledger accounts (in T:account form) of FastForward alier all l6 transactions
are recorded and posted and the balances computed. The accounts are grouped into three
major columns corresponding to the accounting equation: assets, liabilities, and equity. Note
several important points. First, as with each transaction, the totals for the three columns must
obey the accounting equation. Specifically, assets equal $42,470 (94,350 + $0 + $9,720 +
$2,400 + $26,000)l liabilities equal $9,200 ($6,200 + $3,000)r rnd equity equals $33,270
($30,000 $200 + $5,800 + $300 - $1,400 $1,000 - $230). These numbirs prove the
accounting equation: Assets of $42,470 : Liabilities of $9,200 + Equity of $33,270. Second,
the capital, withdrawals, revenue, and expense accounts reflect the transactions that change eq- Point: Tcchno ogy does ior provide
rhe j!d8mcn. rcq!ired to aia yze mosr
uity. These account categodes underlie the statement of owner's equity. Third, the revenue and
bus nessninsacllofs Anays s req!ires
expense account balances will be summarized and reported in the income statement. Foufih, dre expeft se of skllled .nd crh ca
increases and decreases in the cash account make up the elements repofied in the statement of
cash flows.
62 Chapter 2 Analyzing and Recording Transactions

EXHtBtT 2.t3
Ledger for FastForward (in T-Account Form)

(t) 30,000 (2) 2,500

E r,r 3o,ooo
I
(s) 4,200 (3) 26,000
(e) t,900 (6) 1,000
(t2) 3,000 (7) 700
( t0) 900
(t t) 200
(t3) 2,400
(t4) t20 (s) 4,200
(ts) 230 (8) t,600
(16) 700

E
I ter 3oo

o 700
(t6) 700
(2) 2,500
(4) 7, t00
( r4) r20
Balance

r
(3) 26,000
|
Accounts in this white area reflect those
reported on the income statement.

8. What types of transactions increase equityl What types decrease equityl

9, Why are accountinS systems called double-entry?
10. For each lransaction, double-entry accounting requires which of the following? (o) Debits to
asset accounts must create creditsto liability or equity accounts, (b) a debit to a liability
account must create a credit to an asse! account, or (a) total debits must equal total credits.
I L An owner invests $ 15,000 cash alonS with equipment having a market value of $23,000 in a
company. Prepare the necessary iournal entry.
12. Explain what a compound iournal entry is.

13. Why are posting reference numbers entered in the journal when entries are posted to ledger
accountsl
 Chapter 2 Analyzing and Reco rd ing Transactions 63

Trial Balance
Double-entry accounting requires the sum of debit account balances to equal the sum of credit
account balances. A trial balance is used to verity this. A trial balance is a list of accounts
and their balances at a point in time. Account balances are leported in the appropriate debit or
6l
Video2-
credit column of a trial balance. Exhibit 2.14 shows the trial balance lbr FastForward after its
l6 entries have been posted to the ledger. (This is an unodjllsted trial balance-Chapter 3 ex-
plains the necessary adjustments.)

EXHTBIT 2. I4
Trial Balance (Unadjusted)

Point: Thc oider n8 of i.counlr n

a $ia b. ancc typi.a y fo lows thei,
iientif.aror number ffom rhe.h.r.

Preparing aTrial Balance

Preparing a trial balance involves three steps: Prepare and explain the
P2 use of a trial balance.
l. List each account title and its amount (from ledger) in the t al balance. If an account has
a zero balance, list it with a zero in its normal balance column (or omit it entirely).
2. Compute the total of debit balances and the total of credit balances.
3. Verify (prctve) total debit balances equal total credit balances.
The total of debit balances equals the total of credit balances for the trial balance in Exhibit
2. 14. Equality of these two totals does not guarantee that no errors were made. For example,
the column totals still will be equal when a debit or credit of a correct amount is made to a
wrong account. Another elTor that does not cause unequal co]umn totals is when equal debits
Point: A o al balai.e s ror i finan. al
and credits of an incorrect amount are entered.
shtement but a mcchaiism fo, .hecking
eqraliry o, debirs and ciedils n rhe
SearchinS for and Correcting Errors If the trial balance does not balance (when ledge. Fininc a srarcm.nrs do nor have
its columns are not equal), the efior (or errors) nrust be found anrl corected. An eflicient debir aid c.ed i col!mns
64
Example: lf a credi. ro Unear.ed
Reve !e was incorreciy posted f'om
the iournal as a credt to rhe Revenre
edger accouir. would .he ledSe st l
balancel Wo!ld the fi,rai.
be correcti A,swc^r The edger wo!ld
balance. bLr! Liabiities wo!ld be !nder
srited. equit/ wou d be overst.red. and
iicome wou d be overstated (al b€
c.use or oveBnred relen er.
Point: The iRS requires compaiies ro
<eep records rha!.a. be aud red.
pJ
^
Prepare financial
. This section shows how to prepare fintmcial statements from the trial balance in Exhibit 2.14
- statements from business
transactions'
EXHIBIT 2.I5
Links between Financial
Statements across Time
Chapter2 Analyzingand RecordingTransactions
way to search for an error is to check the journalizing, posting, and trial balance preparation
in reyerse order. Step 1 is to verify that the trial balance columns are correctly added. If
step I lails to find the error, step 2 is to verify that account balances are accurately entered
tiom the ledger. Step 3 is to see whether a debit (or credit) balance is mistakenly listed in
the trial balance as a credit (or debit). A clue to this error is when the difference between
total debits and total credits equals twice the amount of the incon'ect account balance.
If the error is still undiscovered, Step 4 is to recompute each account balance in the
ledger. Step 5 is to verity that each journal entry is properly posted. Step 6 is to verify
that the original journal entry has equal debits and credits. At this point, the errors should
be uncovered.j
lf an enor in a journal entty is discovered before the error is Posted, it can be corrected in
a manual system by drawing a line through the incorect information. The correct infonnation
is written above it to create a record of change for the auditor. Many computerized systems al-
low the operator to replace the incorrect information directly.
If an error in a journal entry is not discovered until after it is posted, we do not strike
through both erro[eous entrjes in the journal and ledger. Instead, we correct this error by cre
ating a correcting entD) thitt removes the amount from the wrong account and records it to
the correct account. As an example, suppose a $100 pulchase of supplies is journalized with
an inconect debit to Equipment, and ther this incorrect entry is posted to the ledger. The
Supplies ledger account balance is understated by $ 100, and the Equipment ledger account
balance is overstated by $100. The correcting entry is: debit Supplies and credit Equipment
(both tbr $ 100).
Using aTrial Balance to Prepare Financial Statements
und from information on the December transactions of FastForward. These statements differ
from those in Chapter I because of several additional transactions. These statements are also
more precisely called unadjusted state
rnerrs because we need to make some
further accounting adjustments (de-
scribed in Chapter 3).
How financial statements are linked in
time is illustrated in Exhibit 2.15. A bal-
ance sheet rcpofts on an organization's
f u,, 'ntns I
::T
\E
- l"*-'l Endins
financial position at a point in time. Tlte
income statement. statement of owner's
I I equitv I
equity, and statement of cash flows re-
poft on financial pedbrmance over a
lq*'\ period o[ time. The three \lalements in
the middle column of Exhibit 2.15 link
balance sheets from the beginning to the
end of a reporling period. They explain
how financial position changes from one
point to another.
i ??,,sl,osifio/r occurs when two digits are switched, or transposed, within a number. If transPosition is the only
errot it yields a difference between the two trial balance totals that is evenly divisible by 9. For example, assume
that a $691 debit in an entry is incorectly posted to ihe Iedger as 5619. Total credits in the triai balance arc then
larger tllan total debits by S72 (5691 $619). The $72 error is eoe,rly divisible by 9 (7219 : B). The lirst digii of
the quotient (in our example it is 8) equals tl're difference between the digits of the two transposed numbers (the
9 and the'l). The number of digits in the quotient also tells the location of the transposition, starting I(om the
right. The quoiieni in oul example had only one digit (8), so it tells us ihe transPosition is in the first digit.
Consider anoiher example r^41ere a trausposition error involves posting $961 instead of the correct $691. The dif
Ierence in tllese numbers is $j270, and its quoiieni is 30 (270/9)- The quotient has two digits, so it tells us to check
the second digit from the right for a transposiiion of two numbers that }Iave a diflerence of 3.
 Chapter 2 Analyzing and Reco rd ing Transaction s 65

Preparers and users (including regulatory agencies) determine the length of the report- Point: A statemenCs heading lisrs rhe
ing period. A one-year, or annual, reporting period is common, as are semiannual, quar- 3 Ws:Who-name of organization,

terly, and monthly periods. The one-year repofiing period is known as the accounting, or What name ot slatenrent, When
starement\ point in time or perioi of
fiscal, year. Businesses whose accounting year begins on January 1 and ends on December
3l are known as calendar-year companies. Many companies choose a fiscal year ending on
a date other than December 31. Best Buy is a noncalendar-year compaty as reflected in
the headings of its March 3 year-end financial statements in Appendix A near the end of
the book.

lncome Statement An income statement reports the revenues earned less the expenses
incurred by a business over a period of time. FastForward's income statement for December
is shown at the top of Exhibit 2.16. Information about revenues and expenses is conveniently
taken from the trial balance in Exhibit 2.14. Net income of $3,470 is reported at the bottom
of the statement. Owner investments and withdrawals ate not part of income.
Ht @|1fd0/DAt&ofrNc &6*r7,lRoood
Statement of Ownerts Equity The statement of owner's equity reports information $lg66f8 99rA(...fi.rrir E r$cA
CrtARlY r\tk$l \.1A5\Nfi.lt ZoNEI'
an A(
about how equity changes over the reporting period. FastForward's statement of owner's

EXHtBtr 2.r6
Financial Statements and
Their Links

ConsukinS revenue ($4,200 l $1,600) . .. ... . $ 5,800

Rental revenue 300
Total revenues $ 6,100
Expenses
Rent expense t,000
Salaries expense t,400
Utilities expenre 230
Totil expenses
Ner in.ome $ 3,470

Poiiit: Affow lines show how rhe

e:iemenR rre linked

C.Taylor Capital. De(ember l,2009 .

Plus: lrvestmenB by owner , $30,000

Net income 3,470 33,470
33,470
Less: Withdrawals by owner . . 200
C.Taylor Capital. December 31, 2009 $33,270

Liabilities
$ 4,350 Accounts payable .. . .. . . $ 6,200
9,720 Unearned revenue 3,000
2,400 Total liabilities ......... 9,200
26,000 Equity
33,270
Total assets . . $47,470 Total liabilities and equity $ 42,470 Pointl To foot a co umn of numbe, s s
66
Point: An nconre sratenrent s also
caled an eoDings stolcDenl. o stdlc,r..t
ofoperdiions, oi a P&l (p,of,t and oss)
A balance sheet s a so ci
noreDent
. storeme,t o[ f.dncidl Pos,troi.
Point! Whie revcn!es in(erse cqu !y.
and expenses dc.rease equity, the
imounts are nor rcporred i. deta lln
fic s.alemenr of owier's eq!ity. lnsleid.
rhe r effcc.s are refecred rh.olth ne.
Point: Knowlng how fnancia
snremcnis are prepa.ed mp.oves
our analysis of them.
Compute the debt ratio
[',2 and describe its use in
analyzing financial
condition.
Chaprer 2 Analyzing and Reco rd ing Transaction s
equity is the second report in Exhibit 2.16. lt shows the $30,000 owner investment, the
$3,470 of net income, the $200 withdrawal, and the $33,270 (capital) bal-
"r6-s1'-period
ance. (The beginning balance in the statement of owner's equity is rarely zero; an excep-
tion is fbr the first period of operations. The beginning capital balance in January 2010 is
$33.270, which is December's ending balance )
Balance Sheet The balance sheet reports the financial position of a company at a
point in time, usually at the end of a month, quarter, or year. FastForward's balance sheet
is the third report in Exhibit 2.16. This statement refers to financial condition at the close
led
of business on December 31. The lett side of the balance sheet lists its assets: cash, sup-
plies, prepaid insutance, and equipment. The upper right side of the balance sheet shows
ihat it owis $6,200 to creditors and $3,000 in services to customers who paid in advance.
The equity section shows an ending balance of $33,270. Note the Iink between the ending
balanci oi the statement of owner's equity and the capital balance here. (Recall that this
presentation of the balance sheet is called the accourtt.fbnn: assets on the left and liabilities
and equity on the right. Another presentation is the report forn: assets on top, fol)owed by
liabilities and then equity. Either presentation is acceptable )
t oecision Maker
a Entrepreneur You open a wholesale business selling entertainment equipment to retail outlets.You
find that most of your customers demand to buy on credit How can you use the balance sheets of these
customers to decide which ones !o extend credit tol lAnswer P.7l]
Presentation lssues Dollar signs are not used in journals and ledgers. They do appear
in hnancial statements and other reports such as trial balances. The usual plactice is to Put
dollar signs beside only the tirst and last numbers in ir column. llest Buy's financial state-
ments in Appendix A show this. When amounts are entered in a journal, ledger, or trial bal-
ance, comrras are optional to indicate thousands, millions, and so forth. Howeverr com[las
are always used in financial statements. Companies also commonly tound amounts in rePolts
to the nearest dollar, ot even to a higher level. Best Buy is typical of many companies in that
it rounds its t-rnancial statement amounts to the nealest million. This decision is based on the
perceived impact of lounding for users' business decisions.
14, Where are dollar signs typically entered in financial statemen$?
15. lf a $4,000 debit to Equipment in a iournat entry is incorreclly posted to the ledger as a $4,000
crediq and the ledger account has a resulting debit balance of $20,000, what is the effect of this
error on the Trial Balance column totals?
16. Describe the link between the income statement and the statement of owner! equity'
17. Explain the link between the balance sheet and the statement of owner's equity'
18, Define and describe revenues and expenses.
19. Define and describe assers, liabilities, and equity.
An impofiant business objective is gathering information to help assess a company's risk of failing to
pay its debts. Companies finance their assets with either liabilities or equity. A company that finances
a relatively large podion of its assets with liabilities is said to have a high degree o'i financial letter'
age. Higher hnaniial leverage involves greater risk because liabilities must be repaid and often require
 Chapter 2 Analyzing and Recording T.ansacdons 67

regular interest payments (equity financing does not). The risk that a company might not be able to
meet such required paymelts is higher if it has more liabilities (is more highly leveraged). One way
to assess the risk associated with a company's use of liabilities is to compute the debt ratio as in
Exhibit 2.17.

Total liabilities
EXHIBIT 2.I7
Debt ratio = Debt Ratio
Total assets

To see how to apply the debt ratio, lefs look at Skechers's liabilities and assets. The company de- Point: Compare rhe equity amount to
signs, markets, and sells footwear for men, women, and children under the Skechers brand. Exhibit 2.18 .he llabillty amo!n. to assess the extent
computes and reports its debt mtio at the end of each year from 2002 to 2006. of owner versus nonowner finan.ing.

EXHTB|T 2.t8
Computation and Analysis of
Total liabilities $288 $238 $224 $2r l $224 Debt Ratio
Total assets . $737 $582 $s l9 $467 $483
Debt ratio 0.39 0.4 t 0.43 0.4s 0.46
lndustry debt ratio ....... 0.48 0.47 0.48 0.46 0.45

Skechers's debt ratio ranges from a low of 0.39 to a high of 0.46-also, see graph in margin. Its ratio
is slightly lower, and has been declining, compared with the industry ratio. This analysis implies a
low risk from its financial leverage. Is financial leverage good or bad for Skechers? To answer that
question we need to compare the company's retum on the borrowed money to the rate it is paying cred-
itors. If the company's rctum is higher, it is successfully borrowing money to make more money. A com
pany's success with making money from borrowed money can quickly tum unprofitable if its own retum
drcps below the rate it is paying creditors.

Decision Maker
lnvestor You conside. buying stock in Converse. As part of your analysis, you compure irs debt rario
I
for 2006, 2007, and 2008 as: 0.35, 0.74, and 0.94, respectively. Based on the debt rario, is Converse a low-
risk investmentl Has the risk of buying Converse stock changed over this period? (The industry debt ratio
averages 0.40.) IAnswer ?.7ll

Demonstration Problem
(This problem extends the demonstration problem of Chapter l.) After several months of planning, to
Jasmine Worthy started a haircutting business called Expressions. The following events occurred dur-
ing its first month.
lol
DP2
a, On August l, Worthy invested $3,000 cash and $15,000 of equipment in Exptessions.
b. On August 2, Expressions paid $600 cash for furniture lbr the shop.
c. On August 3, Expressions paid $500 cash to rent space in a strip mall for August.
d. On August.1, it purchased $1,200 of equipment on credit for the shop (using a long{erm note payable).
e. On August 5, Expressions opened for business. Cash received from haircutting services in the first
week and a half of business (ended August l5) was $825.
f. On August 15, it provided $100 of haircutting services on account.
g. On August 17, it rcceived a $100 check for scrviccs prcviously rendcred on account.
h. On August 17. it paid $125 to an assistant for hours worked during the grand opening.
i, Cash received from services provided during the second half ol August was Xi930.
i, On August 31 , it paid a $400 installment toward plincipal on the note payable entered into on August 4.
k, On August 31, Worthy withdrew $900 cash for personal use.
6a Chapter 2 Analyzing and Recording Transactions

Required
l. Open the following ledger accounts in balance column format (account numbers are in pa.rentheses):
Cash (101); Accounts Receivable (102); Furniture (161); Store Equipment (165); Note Payable (240);
J. Worthy, Capital (301); J. Worthy, With&awals (302); Haircutting Services Revenue (403); Wages
Expense (623); and Rent Expense (640). Prepare general joumal entdes for the transactions.
2. Post the joumal entries from (1) to the ledger accounts.
3. Prcparc a trial balance as ofAugust 31.
4. Prcpare an income statement for August.
5. Prepare a statement of owner's equity for August.
6, Prepare a balance sheet as of August 31.
7. Determine the debt ratio as of August 31.

Extended Analysls
8. In the coming months, Expressions will experience a greater variety of business transactions. Identify
which accounts are debited and which are credited for the following transactions. (I1izl. We must use
some accounts not opened in part 1.)
a. Purchase supplies with cash.
b. Pay cash for future insumnce coverage.
c. Receive cash for services to be provided in the futue.
d. Purchase supplies on account.

Planning the Solution

. Analyze each transaction and use the debit and credit rules to prepare a joumal entry for each.
. Post each debit and each credit ftom journal entries to their ledger accounts and cross-reference each
amount in the posting reference (PR) columrs of the joumal and ledger
. Calculate each account balance and list the accounts with their balances on a tdal balance.
. Vedfy that total debits in the tdal balance equal total crcdits.
. To preparc the income statement, identify revenues and expenses. List those items on the statement,
compute the difference, and label the result as net income at tuet loss.
. Use information in the ledger to prepare the statement of owner's equity.
. Usc information in the ledger to prepare the balance sheet.
. Calculate the debt ratio by dividing total liabilities by total assets.
o Analyze the future tansactions to identify the accounts affected and apply debit and credit rules.

Solution to Demonstration Problem

L General journal enries:

Aug. I Cash ...... r0r 3,000

Store Equipment t65 15,000

J.worchy, Capiral 30t 18,000

Ownert ,nvestmenl
2 FurniNre t6t 600
Cash..... tor 600
Putchosed funiture for cosh.
3 Rent Expense 640
Cash . . l0t 500
Poid rcnt for AugusL
4 Store Equipment t65 r,200
Note Payable ... .. .. ... 240 r,200
Purahosed odditionol eguipment on crediL

lcontinued on next pagel

 Chapter 2 Analyzing and RecordingTransactions 69

lcontinued frcm previous pagel

15 Cash . l0l 825

Haircuttint Services Revenue . . ...... 403 825
Cosh re(eipa from ltrst holl o[AugusL
l5 Accounts Receivable . 102
Haircutting Services Revenue . . - .. .. .. 403 r00
To record revenue for services provided on occounL
17 Cash . lot
Accounts Receivable 102
To rccod cosh received os poyment on occounL
17 WaSes Expense . - ......... 623
Cash ... .. l0l
Poid wo8€s to ossistont
3l Cash . l0l 930
HaircuttinS Services Revenue . . .. . ... . 403
Cosh receipls From second holf ofAu9usl
3l Note Payable ............ 240 400
Cash...... l0l 400
Poid on instollment on the note poyoble.
3l J.Worthy,Withdrawals . . . . . . . . . 302
Cash . ..... l0l 900
Cosh withdrowol by owner

2. Post joumal entries from palt I to the ledger accounts:

Account No. l0l Note Payable Account No. 240

Date PR Debit Credit Balance Date PR Debit Credit Balance

Aus. I GI 3,000 3,000 Aug. 4 GI t,200 I,200

2 GI 600 2,400 3l GI 400 800
3 GI 500 1,900
,.Worthy, Capital Account No.30l
t5 GI 825 2,725
t7 GI r00 2,82s Date PR Debit Credit Balance
t7 GI t25 2,700
3t
AuE. GI 8,000 I t8,000
GI 930 3,530
3t GI 400 3,230 J.
\worthy, Withdrawals Account No,302
3t GI 900 2,330
Date PR Debit Credit Balance
Accounts Receivable Account No. 102
Aus- 3t Gi 900 900
Date PR Debit Credit Balance
Haircutting Services Revenue Account No.403
Au8. 15 GI t00 t00
Date PR Debit Credit Balance
GI 00 0
Aug. 15 GI 825 825
Furniture Account No. l6l t5 GI r00 925
3t GI 930 ,855
Date PR Debit Credit Balance
Vvages Expense Account No. 623
Au& G 500 600
Date PR Debit Credit Balance
Store Equipment Account No. 165

Atg. t7 GI t25 25
Date PR Debit Credit Balance
Rent Expense Account No. 640
Aug. I GI t5,000 r5,000
4 GI t,200 t6.200
6,200 Date PR Debit Credit Balanr€

Auc. 3 GI 500 500

70 Chapter 2 Analyzing and RecordinS Tran saclions

3. Prepare a trial balance from the ledger:

Cash . .. .. .. .. .. .. . $ 2,330
Accounts receivable. 0
Furniture . . 600
Store equipment 15,200
Note payable $ 800

J.Worthy, Capital t8,000

l. worthy, withdrat/als 900

HaircuttinS services revenue .,.,... r,855
Wages expense t25
Rent expense 500
Totals ..... $20,6s5 $20,655

$ r,8s5

$s00
125
625
$r,230

J.Worthy,Capital.August 1 .......... $0
Plus: lnvestments by owner ........ $18,000
Net incom€ 1,230 t9,230
t9,230
Less: Withdrawals by owner........ 900

l.Worrhy, Capital, August 3l ......... $r8,330

Assets Liabiliti€s
Cash..... $ 2,330 Note payable . ... $ 800
Furniture .. 600 Equity
Storeequipment ....... t6,200 J.Worthy, Capital .. 18,330

Total assets . $r9,t30 Toral liabilities and equity . . . . . .. $19,130

 Chapter
Total liabilities $800
7. Debt ratio : = 4.t8at
Total assets $r9.r30
8a. Supplies debited - 8c. Cash debited
Cash credited Unearned Services Revenue credited
Prepaid lnsurance debited 8d. Supplies debited
Cash credited Accounts Payable credited
Cl Explain the steps in processing transactions. The account-
ing process identifies business fansactions and events. ana
Iyzes and records their effects, and summarizes and prepares infor-
mation useful in making decisions. Transactions and events are the
stafting points in the accounting prccess. Source documents help in
their analysis. The effects of ransactions and events are rccorded
in joumals. Posting along with a trial balance helps summarize and
classify these effects.
f,f Describe source documents and their purpose. Source
documents identify and describe tmnsactions and events.
Examples are sales tickets, checks, purchase orders, bills, and bank
statements. Source documents provide objective and reliable evi
dence, making information more useful.
f,] Describe an accounl and its use in recording transactions.
An accounl is a detailed record o[ increa\e\ and decreese. in
a specific asset, liability, equity, revenue! or expense. Ilformation
from accounts is analyzed, summarized, and presented in reports
and financial statements for decision makers.
Describe a ledger and a chart of accounts. The ledger. (or
f,4[
geneml ledger) is a record containing all accounts used by a
company and their balances. [t is referled to as the boolrs. The
chart of accounts is a list of all accounts and usually includes an
identification number assigned to each account.
f$- Define debits and crcdrts and explain double-entr) accounl-
ing. Debi reler" ro lefl. and credir reler- lo right. Debils in-
crease assets, expenses, and withdrawals while credits decrease them.
Credits increase liabilities, owner capital, and rcvenues: debits de-
crease them. Double-entry accounting means each transaction affects at
least two accounts and has at least one debit and one credit. The sys,
tem for recording debits and credits follows from the accounting
GuidanceAnswerstoDeGisionMakerandDeGisionEthicsfr
Cashier The advantages to the process proposed by the assistant
manager ilclude improved customer service, fewer delays, and [ess
work for you. However, you should have serious concerns about in-
temal contlol and the potential for fraud. In partiqular, the assistalt
manager could steal cash and simply enter fewer sales to match the
remaining cash. You should reject her suggestion without the man
ager's approval. Moreover, you should have an ethical concern about
the assistant manager's suggestion to ignore store policy.
Entrepreneur We can use the accounting equation (Assets :
Liabilities + Equity) to help us identify risky custome$ to whom we
2 Analyzing and Recording Tran saction s 7t
equation. The left side of an account is the nomal balance for assets,
withdrawals, and expenses, and the right side is the nomal balance
for liabilities, capital, and revenues.
,{ Analyze the impact of transactions on accounts and finan-
|
cial stat€ments, We alalyze transactions using concepts of
double-entry accounting. This analysis is performed by determining
a transaction's effects on accounts. These effects are recorded in
joumals and posted to ledgers.
,\f, Compute the debt ratio and describe its use in analyzing
financial condition, A company's debt ratio is computed as
total liabilities divided by total assets. It reveals how much of the
assets are financed by creditor (nonowner) financing. The higher
this ratio, the more risk a company faces because liabilities must
be repaid at specific dates.
pl Record transactions in a journal and post entries to a
ledger. Transactions are recorded in a joumal. Each entry in a
journal is posted to the accounts in the ledger. This provides infor,
mation that is used to produce financial statements. Balance col-
umn accounts ale widely used and include columns for debits.
credits. and the account balance.
pf, Prepare and explain the use of a trial balance. A trial bal-
ance is a list of accounts ftom the ledger showing their debit
or credit balances in separate columns. The trial balance is a su:n-
mary of the ledger's contents and is useful in preparing financial
ilalemenl\ and in rerealing recordkeeping errors.
pJ Prepare financial stalements from business lransactions.
"The balance \heel. lhe \tatemenl ol o$ ner's equiry. rhe
income statement. and the statement of cash flows use data from
the trial balance (and other filancial statements) for their
preparation.
would likely not want to extend credit. A balance sheet provides
amounts for each of these key components. The lower a customer's
equity is relative to liabilities, the less likely you would extend credit.
A low equity means the business has little value that does not aheady
have creditor claims to it.
anvestor The debt ratio suggests the stock ofconverse is of higher
risk than normal and that this sk is fising. The average industry ra
tio of 0.40 further supports this conclusion. The 2008 debt ratio for'
Convelse is twice the industry norm. Also, a debt ratio approaching
1.0 indicates little to no equity.
,2 Chapter 2 Analyzing and Recording Transactions

Guidance Answers to Quick Checks

l. Examplcs ol-soulcc documcnts are sales tickets, checks, purchase
orden. charges to customers. bills from suppliers, employee earn
rnps recor'd.. ind hrrrk .lilrcmenl..
2, Sourcc docunrcnts scrvc many purposes, including record-
kccping and internal control. Source documents. especially if
obtirined fiorr outside the olganizalion. plovide objective and
reliable eviderce about transactions and their amounts.
12. A compound joumal enry affects three or more accounts.
13. Posting reference numbe$ are entered in the journal when post-
ing to the ledger as a cross-reference that allows the record-
keeper or auditol to race debits and credits from one record to
another.
14. At a mirimurn, dollar signs are placed beside the first and last
numbers in a column. It is also common to place dollar signs

t. Assets Lirbilitres beside any amount that appeaus aftel a ruled line to indicate that
EquitY
a,c.e b.d an addition or subtraction has occurred.
4. An accounl is a recold in an accorntiug system that rccords and 15. The Equipment account balance is incorrectly reported at
stores the increases and decreases in a spccific asset, liability, $20,000 it should be $28,000. The effect of this error un-
equily. revenue. ol expense. The ledger is a collection of all thc derstates the hial balance's Debit column total by $8,000. This
accounts oI a company. results in an $8.000 difference between the column totals.
5. A company's sizc and diversity aliecl the number of accollnts 16. An income statement reports a company's revenues and ex
in its accourlting system. The types of accounts dcpend on in- pelses along with the resulting net income ol loss. A statement
fonnation the company necds to both effectively operate and re- of owner's equity reports changes in equity, including that frorn
port its activities in finatcjal statenerts. nel income or loss. Both \lalerrenls report tmn\aclions occuf-
6. No. Dcbit and credit both can Drean increase or decrease. The ing over a period of time.
particula. Dreaning in a cilcumstance depends on rhe l)-pe oJ 17. The balance sheet describes a company's financial position (as-
a!(:(otott. Fot exanlple. a debit increases the balance of asset, sets, Iiabilities, and equity) at a point in time. The capital amount
withdrawals. and cxpcnsc accounts, but it decreases the balance in the balance sheet is obtained from the statement of owner's
of liability, capital, and revenue accounts. equity.
7. A chart of accounts is a list ol all ol'a cornpany's accounts and 18. Revenues are inllows of assets in exchange for products 01'
their identificition numbels. services provided to customers as part of the main operations
of a business. Expenses are outflows ot the using up of assets
8. Equity is increased by revenues and by ownel investments-
that result from providing products or services to customers.
Equity is decreased by expenses and owncr withdrawals.
9. The name.7.a/D/e cr?r1 is [sed because all transactions affect al
19. Assets are the resources a business owns or controls that carry
expected future benefits. Liabilities are the obligations of a busi-
least two accounts. There must be at least one debit in one ac-
ness, representing the claims of others against the assets ol a
count and at least onc crcdi( in another account.
business. Equity reflects the owner's claims on the assets ol the
I O, The answer is (.). business after deducting liabilities.
I t. rs,000
Equipment. 21,000
Owner. Caprul 38,000
lnvestment by owner of cosh ond equipnenL

Key Terms FAP l9e

Key Terms are available at the book's Website for learning and testing in an online Flashcard Format.

Account (p. 49) Debtors (p. 49) Posting (p, 54)

Account balance (p. 53) Debt ratio (p. 67) Posting reference (PR) column (p. 56)
Balance column account (p. 56) Double-entry accounting (p. 53) Source documents (p. 48)
Chart of accounts (p. -52) General journal (p. 54) T-account (p. 53)
Compound journal entry (p. 59) General ledger (p. 49) Trial balance (p. 63)
Credit (p. 53) Journal (p. 54) Unearned revenue (p. 50)
Creditors (p. 50) Journalizing (p. 54)
Debit (p. 53) Ledger (p. 49)
 Chapter 2 Analyzing and Recording Transactions 7t

Multiple Choice Quiz Answers on p. 89 mhhe.com/wildFAP l9e

Additional Quiz Questions are available at the book's Website. ,I3l

I . Amalia Company received its utility bjll for. the cunent period d. L. Shue, Capital . . . 750,000
-or
of $700 and immediately paid it. Its joumal entry to record Quiz2
Cash......... 250.000
this transaction includes a Land......... 500.000
a. Credir ro Urility Expense lbr $700. 4. A lrial balance prepared at year,end shows total credits ex-
b. Debit ro Utility Expense for $700. cccd total debits by $765. This discrcpancy could have becn
c. Debit to Accounts Payable for $700. caused by
d. Debit to Cash for $700. a. An eror in the general joumal where a $765 increase in
e. Credir ro capital lor $700. Accounts Payable was recorded as a $765 decrease in
2. On May l, Mattingly Lawn Serr'ice collected $2.500 cash from Accounts Payable.
a customerin advance of five lnonths oilawn sefr'ice. Mattinqlv's
-" b. The ledger balance for Accounts Payable of $7.650 being
journal entry to record this trarsaction includes , entered in the trial balance as $76-5.
a. Credit to Uneamed Lawn Service Fees for $2.500. c. A generaljorrrnal error where a 1i765 increase in Accounts
b. Debit to Lawn Service Fees Eamed for 92.500. Receivable was lecorded as a $765 increase in Cash.
c. Crcdit to Cash for 1i2.500. d. The ledger balance of $850 in Accounts Receivable was
d. Debit to Unearned Lawn Sewice Fees for $2.500. entered in the trial balance as $85.
e. Credit to capiral lor92,500. e. An error in recolding a $765 increase in Cash as a cr.edit.
3. Liang Shue contributed $250,000 cash and iand wonh $500.000 5. Bonaventure Company has total assets of $1,000,000, Iiabili-
to open his new business, Shue Consulting. Which of the fol- ties of $400,000, and equity of $600,000. whar is its debr ra-
lowing journal entries does Shue Consulting make to recold tio (rounded to a whole percent)?
this transaction? a. 250%
a. Cash Assets 750,000 b. 161Ea
.....
L. Shue, Capiral 750,000 c. 61qo
b. L. Shue, Capital ....... 750,000 <t. 150s,,
Assets . - . 750.000 e.40q.
c. Cash . 2s0,000
Land.... 500,000
L. Shue, Capital ..... 750,000

Discussion Questions
l. Provide the names of two (4) asset accounts, (D) liability 12. t Wly Oo". the user of an income statement need to know
accounts, and (c) equity accounts. the time period that it covers?
2. What is the difference between a note payable and an account 13. t
What information is reported in a balance sheet?
payable? t4. Define
(a) a.!.rel.r, (b) liabilities, (c) equi\), arLd (d) net ossets.
3. t Discuss the steps in processing business transactions. 15. Which lrnancial statement is sometimes called, the .ttatene l
4. What kinds oftransactions can be recorded in a gener.aljournal? oJ Jinancial position?
5. Are debits or credits typically listed first in gencral .journal en- 6.
l::r,Jt.*:::*::":ffi *::::: fiH:iff @
I
tries? Are the debits or the credits indented? I
6. If assets ale valuable resources and asset accounts have carry debit balances and three accounts on its balance sheet
debit balances, why do expense accounts also have debit that carry credit balances.
balances? 17, Reier lo ( ir'(.uil ( irr's balcnce.hecl in Appendi\ A. lL
7. Should a transaction be recorded first in ajournal or the ledger? What does Ci-rcuil Cirv tirle ils currenr liahilirv for ,t" tIl
whv? purchase of merchandise?

a. t Wry does the recordkeeper prepare a trial balance? l8' Rerien the RadioShut,l' bcltnce ,-\
.heer in Appendir A. ldenrilj nn '*r,'il RadiOShaCk.
9. If an incon'ect amount is joumalized and posted to the ac,
set with the word receivable il-I its".-
account title and a ]iabilitv
counts, how should the error be corrected?
u ith the word pay.rDlc in it\ cccount Litle.
I O. Identify the four financial statements of a business. I 9. Locate Apple's income statement in Appendix A. What
I l. I What informarion is reported in cn rncome \latemenl., is the title of its revenue account?

I Denotes Discussion Questions that involve decision mok ng.

 74 Chapter 2 Analyzing and Reco rd ing Transaccions

Available with Mccraw-Hills Homework M"""g", lo*tl355; :

QUICK STUDY Identify the items from the following list that are likely to serye as source documents.
a. Trial balance d. Income statement g. Prepaid insurance
qs 2-r b. Telephone bill e. Company revenue account h. Bank statement
ldentifying source documents c. Sales ticket f, Invoice ftom supplier l. Balance sheet
c2

QS 2-2 Identify the financial statement(s) where each of the following items appears. Use I for income state-
ldentifying financial ment, E for statement of owner's equity, and B for balance sheet.
statement i[ems a. eamed
Service fees d. Accounts payable g. Offrce supplies
C-l PJ b. owner
Cash withdrawal by e. Cash h. Prepaid rent
c. Office equipment t. Utilities expenses i. Uneamed fees

QS 2-3 Identify the normal balance (debit or credit) for each of the following accounts.
ldentitin8 normal balance a. Office supplies d. Wages Expense g. Wages payable
Ci b. Owner Withdrawals e. Cash h. Building
c, Fees Eamed f. Prepaid Insurance i. Owner Capital

QS 2-4 Indicate whether a debrt ot qedit decreases the normal balance of each of the following accounts.
Linking debit or credit with a. Repair Services Revenue e, Owner Capital i. Owner Withdrawals
normal balance b. Payable
Interest f. Prepaid lnsurance i. Uneamed Revenue
C5 c. AccountsReceivable g. Buildings k. Accounts Payable
d. Salaries Expense h. Interest Revenue l. Office Suppties

QS 2-5 Identify whether a debit or credit yields the indicated change for each of the following accounts.
Analyzing debit or credit a. To increase Land f. To decrease Prepaid Insurance
byaccount b. To decrease Cash g. To increase Notes Payable
", \I, , II
C5 c. Expense
To increase Utilities h.
To decrease Accounts Receivable
d. To increase FeesEamed L To increase Owner Capital
e. To decrease Uneamed Revenue i. To increase Store Equipment

QS 2-6 Prepare journal entdes for each of the following selected tansactions.
Preparing journal entries a. On January 13, DeShawn Tyler opens a landscaping company called Elegant Lawns by investing
pl $80,000 cash along with equipment having a $30,000 value.
b. On January 21, Elegant Lawns purchases office supplies on credit for $820.
c. On January 29, Elegant Lawns receives $8,700 cash for performing landscaping services.
d. On January 30, Elegant Lawns receives $4,000 cash in advance of providing landscaping services to
a customet

' QS 2-7 A rial balance has total debits of $20,000 and total credits of $24,500. Which one of the following er-
ldenrifring a postinS error rors would crcate this imbalance? Explain.
p2 I a. A $2,250 credit to Consulting Fees Earned ir a journal entry is incorrectly posted to the ledger as a
a $2,250 debit, leaving the Consulting Fees Eamed account with a $6,300 credit batance.
b. A $4,500 debit to Salaries Expense in a joumal entry is incoflectly posted to the tedger as a $4,500
credit, leaving the Salaries Expense account with a $750 debit balance.
c. A $2,250 debit to Rent Expense in a joumal entry is incorectly posted to the ledger as a $2,250
credit, leaving the Rent Expense account with a $3,000 debit balance.
rt. A $2,250 debit posting to Accounts Receivable was posted mistakenly to Cash.
e. A $4,500 debit posting to Equipment was posted mistakenly to Supplies.
f. An entry debiting Cash and crediting Notes Payable for $4,500 was mistakenly not posted.
 Chapter 2 Analyzing and Recording Transactions 75

lndicate the financial statement on which each of the following items appears. Use I for income state- QS 2-8
ment, E for statement of owller's equity, and B for balance sheet. Classifying accounts in
a. Rental Revenue e. Accounts Receivable i. Buildings financial slatements
b. Expense l. Salaries Expense
Insurance j. Intetest Revenue P3
c. Revenue g. Equipment
Services k. Owner Withdlawals
d. Interest Payable h. Plepaid Insurance l. Office Supplies

For each of the following (l) identify the type of account as an asset, liability, equiry, revenue, or ex- EXERCISES
pense, (2) enter delit (Dr) ot credit (Cr) to identify the kind of entry that would increase the account
balance, and (3) identify the normal balance of the account.
Exercise 2_ I
a. Owner Capital e. Equipment i. Accounts Payable ldentifying type and normal
b. Accounts Receivable f. Fees Eamed i. Postage Expense balances of accounts
c. Owner Withdrawals g. Wages ExpeiNe k. Prepaid Insurance C.i C5
d. Cash h. Unearned Revenue l. Land

Use the information in each of the following separate cases to calculate the unknown amount. Exercise 2-2
a. During October, Alcorn Company had $104.750 ofcash receipts and $101,607 ofcash disbursements. Analyzing accotrn! encries
The October 31 Cash balance was $17,069. Determine how much cash the company had at the close and balances
ol busines. on Seprernber J0. \t I
b. On September'30, Mordish Co. had a $83,250 balance in Accounts Recerrable. During Ocrober, the a
company collected 575,924 from its credit customers. The October 31 balance in Accounts Receivable
was $85,830. Determine the amount of sales on account that occuned in October.
c. Stong Co. had $148,000 of accounts payable on September 30 and $137,492 on October 31. Total
purchases on account during October wet e $271,876. Determine how much cash was paid on accounts
payable during October.

Nology Co. bills a client $65,000 for services provided and agrees to accept the following three iterns Exercise 2-3
in full payment: (l) $12,000 cash, (2) computer equipment worth $90,000, and (3) to assume responsi- Analyzing effecrs of
bility for a $37,000 note payable related to the computer equipment. The entry Nology makes to lecord rransactions on accounls
this transaction includes which one or more of the following'i
\I I
a. $37,000 increase in a liability account d. $65,000 increase in an asset account a
b. $12,000 increase in the Cash account e. $65.000 increase in a revenue account
c. $12,000 increase in a revenue account l. $37,000 increase in an equity Jccount

Prepare general joumal entries for the following transactions ofa new company called Special Pics. Exercise 2-4
Preparing general journal
Aug. I Madison Ha[is, the owner, invested $14,250 cash and $61,275 of phorograDhy equipmenr n en..res
the company.
2 The company paid $3,300 cash for an insurance policy covering the nexr 2,1 months. \l Pl
5 The company purchased office supplies for $2,707 cash.
20 The company received $3,250 cash in photography fees eamed.
3l The company paid $871 cash for August utilities.

Use the information in Exercise 2-,1 to prepale an August 31 trial balance for Special Pics. Begin by Exercise 2-J
opening these T-accounts: Cash; Office Supplies: Prepaid Insurance; Photography Equipment; preparing T-accounts (ledger)
M. Harris, Capital; Photoglaphy Fees Earned; and Utilities Expense. Then, post the general journal and a trial balance
entries to these T-accounts (which will serve as the ledger'), and plepare the trial balance.
CJ pj
76 Chapter 2 Analyzing and Recording Transactions

Exercise 2-6 Record the transactions below for Amena Company by recording the debit and credit ent es directly
Recording effects of transactions in the following T-accounts: Cash; Accounts Receivablei Office Suppliesi Office Equipment; Accounts
T-accounts
in Payable: S. Amena, Capital; S. Amena, Withdrawals; Fees Earned; and Rent Expense. Use the let-
C5 Al ters beside each transaction to identify entries. Determine the ending balance of each T-account.
a. Sergey Amena, owner, invested $14,000 cash in the company.
b. The company purchased office supplies for $406 cash.
c. The company purchased $7,742 of office equipment on credit.
d. The company received $1,652 cash as fees for services provided to a customer.
e. The company paid $7,742 cash to settle the payable for the office equipment pwchased in transaction c.
f. The company billed a customer $2,968 as fees for services provided.
g. The company paid $510 cash for the monthly rent.
h. The aompany collected $I ,246 cash as pafiial payment for the account receivable created in tansactionf
che.k cash ending balance, g7,o4o L S. Amena withdrew $1,200 cash from the company for personal use.

Exercise 2-7 After recording the tansactions of Exercise 2-6 in T-accounts and calculating the balance of each account,
Preparing a rrial balance P2 prepare a rrial balance. Use May 31, 2009, as its report date.

Exercise 2-8 Examine the following tmnsactions and identify those that create expenses for Thomas Services. Prepare
iournalizing
Analyzing and general joumal entries to record those expense transactions and explain why the other transactions did
lransactions
expense not create expenses.
Al p1 I a. The company paid $12,200 cash for office supplies that were purchased more than 1 year ago.
O 5. The company paid $1,233 cash for the just completed two-week salary of the receptionist.
c. The company paid $39,200 cash for equipment purchased.
d. The company paid $870 cash for this month's utilities.
e. Owner (Thomas) withdrew $4,500 cash from the company for personal use.

Exercise 2-9 Examine the following ffansactions and identify those that create revenues for Thomas Services, a com-
lournalizing
Analyzing and pany owned by Brina Thomas. Prepare general journal entries to rccord those revenue transactions and
tmnsactions
revenue explain why the other transactions did not create revenues.
{l Pl I a. Brina Thomas invests $39,350 cash in the company.
a D. The company provided $2,300 of seNices on credit.
c. The company provided services to a client and immediately received $875 cash.
d. The company received $10,200 cash from a client in payment for seryices to be provided next year
e. The company rcceived $3,500 cash from a client in partial payment of an account rcceivable.
l. The company borrowed $120,000 cash from the baIrk by signing a promissory note.

Exercise 2-lO On October 1, Diondre Shabazz organized a new consulting firm called Tech Talk. On October 31, the
PreparinS an income company's records show the following accounts and amounts. Use this information to preparc an October
statement income statement for the business.
C4 P3
Cash ..... .... $12,614 D Shabazz.Withdrawals ....... $ 2,000
Accounts receivable . . . . . . . . . 25,649 Consultin8 fees earned . . . . . . . . 25,620
OfIice supplies 4,903 Rent expense 6,859
tand...... 69,388 expense
Salaries .. 12,405

Oflice equipment 27,147 Telephone expense 560

Accounts payable 12,070 Miscellaneous expenses . .. ... . 280
D ShabaTz, Capital 124,].14
Check Net income, $5,516

Exercise 2- I I Use the informatiofl in Exercise 2-10 to prepare an October statement of owner's equity for Tech Talk.
Preparing a sratement (The owner invested $124,114 to launch the company.)
of ownert equity P3

Exercise 2-12 Use the information in Exercise 2-10 (if completed, you can also use your solution to Exercise 2-11) to
Preparing a balance sheet P3 prepare an October 3l balance sheet for Tech Talk.
 Chapter 2 Analyzing and RecordingTransacraons 77

A company had the following assets ard liabilities at the beginning and end of a recent year. Exercise 2- I 3
Computing ne! income
,\l P3
BeSinning of the year . . . . . . . . $131,000 $56,t59
I
End of the year . . 180,000 72,900

Determine the net income earned or net loss incurred by the business during the year for each of the fol
lowing .reparale cases:
a. Owner made no investments in the business and no withdrawals were made during the year
b. Owner made no investments in the business but withdrew $650 cash per month for personal use.
c. No withdrawals were made during the year but the owner invested an additional $45,000 cash.
d. Withdrcw $650 cash per month for personal use and the owner invested an additional $25,000 cash.

Compute the missing amount in each of the following separate companies a through d. Exercise 2- l4
Analyzing changes in a
companys equity
c5P3
I

Assume the following T-accounts reflect Belle Co.'s general ledger and that seven transactions a through g Exercise 2- l5

r(a)
are posted to them. Provide a short description of each bansaction- Include the amounts in your descriptions. lnterprering and describing
transactions from T-accounts

24.ooo
cr^rl
I

E(b) 4,800
|

ffi
Use information from the T-accounts in Exercise 2 15 to prepare geneml journal entries for each of the Exercise 2- l6
Seven transactions a through 8. Preparing general
iournal enrries ll Pl

Several posting errors are identified in the following table. In column (l ), enter the amount of the dif- Exercise 2- l7
ference between the two trial balance columns (debit and credit) due to the error. In column (2), identify ldenliting effecG of
the trial balance column (debit or credit) with the larger amount if they are not equal. In column (3), iden- posting errors on the
tify the account(s) affected by the eror. In column (4), indicate the amount by which the account(s) in trial balance Al P2
columl (3) is under- or overstated. Item (a) is completed as an example.
 7A Chapter 2 Analyzing and Record ing Tra n sactions

$1,870 debir ro Rent Expense is

as a $ 1,780 debit.
$3,560 credit to Cash is posted
twice as two credits to Cash-

$7.120 debit to the Wthdrawals a..ount is

$1,630 debit to Prepaid lnsurance

is posted as a debit ro lnsurance
$31,150 debit to l.4achinery is
as a debit to Accounts

$4,450 credit to Services ReYenue

is posted as a $445 cr€dir.

Exercise 2- 18 You are told the column totals in a trial balance are not equal. After careful analysis, you discover only
Analyzing a trial one enor. Specifically, a correctly journalized credit purchase of a computer for $1 1,250 is posted from
balance error the journal to the ledger with a $l 1,250 debit to oflice Equipment and another $ I1,250 debit to Accounts
\l P2
Payable. The office Equipinent account has a debit balance of $26.663 on the trial balance. Answer each
of the following questions and compute the dollar anount of any misstatement.
a. Is the debit column total of the trial balance overstated, understated, or corectly stated?
b. Is the credit column total of the trial balance overstated, understated, or correctly stated?
c. Is the Offtce Equipment account balance overstated. understated. or corectlv stated in the trial
balance?
d. Is the Accounts Payable account balance oventated. understated. or co[ectlv stated in the trial
balance?
e. If the debit column total of the trial balance is $236,250 before correcting the e[or, what is the total
of the credit column before couection?

Exercise 2- l9 a. Calculate the debt mtio and the return on assets using the year-end information for each of the fbl
lnterpreting the debr ratio lowing six separate companies ($ thousands).
and return on assets
.,,
I

b. Of the six companies, which business relies most heavily on creditor financing?
G. Of the six companies, which business relies most heavily on equity fulancing?
d. Which two companies indicate the greatest risk?
e. Which two companies eam the highest returfl on assets?
t. Which one company would investors likely prefer based oo the risk,return relation?
 Chapter 2 Analyzing and Recording Transactions ,9

-
["^T,TflX" ; Available with l,lccraw-Hills Homework Manager .'.'...
Lancet Engineering completed the following transactions in the month of June. PROBLEM SET A
a. Jenna Lancet, the ownet invested $19-5,000 cash, office equipment with a value of $8,200, and
$80,000 of drafting equipment to launch the company. Problem 2- I A
b. The company pulchased land worth $52,000 for an office by paying $8,900 cash and signing a long- Preparing and posting
term note payable for $43,100. journal entries; preparing a

c. The company purchased a portable building with $55,000 cash and moved it onlo the land acquired tr,al balance
in b. C4 C; .\l pl p2
d. The company paid $2,300 cash for the premium on an l8 month insurance policy.
e. The company completed and delivered a set of plans for a client and collected $6,600 cash.
,. The company purchased $24,000 of additional dratiing equipment by paying $9,600 cash and signing
a long-term note payable for $14,400.
g. The company completed $14,500 of engineering services fol a client. This amount is to be received
in 30 days.
h. The company purchased $1.100 of additional office equipment on credit.
i. The company completed engineering services for $23,000 on credit.
i. The company received a bill fbr rent of equipment that was used on a recently completed job. The
$1,410 rent cost must be paid within 30 days.
k. The company collected $8,000 cash in pa ial payment from the client described in transaction g.
l. The company paid $2,500 cash for wages to a drafting assistant.
m. The company paid $1,100 cash to settle the account payable created in transaction i.
n, The company paid $970 cash for minor maintenance of its drafting equipment.
o. J. Lancet withdrew $10.450 cash from the company for personal use.
p. The company paid $2,000 cash for wages to a drafting assistant.
q. The company paid $2,,100 cash fbr advertisements in the local newspaper during June.

Required
l. Prepare general journal entries to record these ffansactions (use the account titles listed in
parr 2).
2. Open the lbllowing ledger accounts-their account numbers are in parentheses (use the balance col- check (2) Ending ba arces: Cash,
umn format): Cash (101); Accounts Receivable (106); Prepaid Insurance (108); Office Equipment gl 4,380r Accounts Receivable,
(1 63); Drafting Equipment ( 1 64); B uilding ( 170); Land ( I 72); Accounts Payable (201 ); Notes Payable $2e,500r Accounts Payab e, $ 1,4 0
(250); J. Lancet, Capital (301); J. Lancet, Withdrawals (302)i Engineering Fees Earned (402); Wages
Expense (601); Equipment Rental Expense (602); Advertising Expense (603); and Repairs Expense
(604). Post the journal entries from part I to the accounts and enter the balance after each posting. (3)T.iat batance tolers,
3. Prepare a trial balance as of the end of June. $386,2 0

Denzel Brooks opens a Web consulting business called Venture Consultants and compietes the follow- Problem 2-2A
ing transactions in March. Preparing and posting journal
entries; preParing a trial balance
March I Brooks invested $180,000 cash along with $30,000 of oflice equipment in the company.
2 The company prepaid $8,000 cash fbr six months'rent for an office. (flirtr Debit Prepaid C4 C5 ,\l Pl P2

: ff:::TJ"1" ,?rld. .r"dit pu,.hur., of office equipmenr for $3,300 and office suppties for eXcetr
$1,400. Payment is due within 10 days.
6
9
12
The company completed services for a client and immediately received $6,000 cash.
The company completed a $9,200 project for a client, who must pay within 30 days.
The company paid $4,700 cash to settie the account payable created on March 3.
#
w
19 The company paid $7,500 cash for the premium on a 12-month insurance policy.
22 The company received $4,300 cash as partial payment for the work completed on March 9.
25 The company completed work for another client for $3,590 on credit.
29 Brooks withdrew 5.1,900 cash from the company for personal use.
30 The company purchased $ 1,700 of additional office supplies on credit.
3l The company paid $500 cash for this month's utility bill.
ao Chapter 2 Analyzing and Recording Transactions

Check (2) Endins balances:Cash,
$ I 64,700i Acco! nts Receivable, $8,490r
Accounts Payable, $ 1,700
(3) Total debits, $230,490
Required
l. Prepare general journal entries to record these transactions (use the account titles listed in part 2).
2. Open the following ledger accounts-their account numbers are in parentheses (use the balance col-
umn format): Cash (101); Accounts Receivable (106); Office Suppties (124); Prepaid Insurance (128);
Prepaid Rent (131): Office Equipment (163); Accounts Payable (201); D. Brooks, Capital (301);
D. Brooks, Withdmwals (302); Services Revenue (403); and Utiliries Expense (690). Post the jour-
nal entries from part 1 to the ledger accounts and enter the balance after each posting.
3. Prepare a trial balance as of the end of March.

Problem 2-3A Jayden Lanelle opens a computer consulting business calledMva Consultants and completes the following
Preparing and posting journal tmnsactions in its fiIst month of operations.
entries; preparing a rial balance
April I Lanelle invests $95,000 cash along with offlce equipment valued at $22,800 in the company.
C4 C5 {1 PI P2 2 The company prepaid $7,200 cash for twelve months'rcnt for office space. (I1i,?r.. Debit Prepaid
Rent for $7,200.)
3 The company made credit purchases for $ I 1,400 in office equipment and $2,280 in office sup-
plies. Payment is due within 10 days.
6 The company completed services for a client and immediately received $2,000 cash.
9 The company completed a $7,600 project for a client, who must pay within 30 days.
13 The company paid $13,680 cash to settle the account payable crcated on Ap l 3.
19 The company paid $6,000 cash for the premium on a l2-month insurance policy. (lli,xf Debit
Prepaid Insurance for $6,000.)
22 The company received $6,080 cash as partial payment for the work completed on April 9.
25 The company completed work for another client for $2,640 on credit.
28 Lanelle withdrew $6,200 cash from the company for personal use.
29 The company purchased $760 of additional office supplies on credit.
30 The company paid $700 cash for this month's utility bill.

Required
l. Prepare general joumal entries to record these transactions (use account titles listed in part 2).
Check (2) Endlng balances:Cash, 2. Open the following ledger accounts-their account numbers are in parentheses (use the balance col-
$69,300i Accounts Receivable, $4,l60i umn format): Cash (101); Accounts Receivable (106); Offlce Supplies (124); Prepaid Insurance (128);
A..ounts Payable, $750 Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); J. Lanelle, Capital (301);
J. Lanelle, With&awals (302); Services Revenue (403): and Utilities Expense (690). Post journal
entries from part 1 to the ledger accounts and enter the balance after each posting.
(3) Tolal debits. $l 30,800 3. Prepare a trial balance as ofApril 30.

Problem 2-4A The accounting records of Favia-na Shipping show the following assets and liabilities as of December 31,
Computing net income from 2008 and 2009.
equity analysis, preparing a
balance sheet, and computing the
debt ratio
c3 ,\r A2 P3 $
I Accounts receivable ..,.,..
$ 47,867
25,983
8,

70,370
t54

excel Office supplies 4,098 3,002

mhhe.com/wlldFAPl Office equipment ......... t25,8r6 r34,0r8

49,236 58,236
.. .
BuildinS 0 164,124
1and...... 0 40,956
Accounts payable .. . .. .. .. 68,3 t0 33,879
Note payable 0 85,080
 Chapter 2 Analyzing and Reco rd ing Transactio ns at

Llte in December 2009. the business purchased a small office building and land for $205,080. It paid
$120.000 cash toward the purchase and an $85,080 nore payable was signed for rhe balance. Ms. Faviana
had to invest $3.1,000 cash in the business to enable it to pay the $120,000 cash. The owner withdraws
$2,400 cash per month for personal use.

Required
I . Prepare balance sheets for the business as of December 3 I , 2008 and 2009. (F/inl.. Report only total
equity on the balance sheet and remernber that total equity cquals the difference between assets and
liabilities.)
2. By comparing equity amounts from the balance sheets and using the additional information presented check (2) Net ncome gt2o,ot I

in this problem, p|eparc a calculation to show how much net income was earned by the business dur
ing 2009.
3. Compute the 2009 year end debt ratio for the business. (3) Deb! rato.27.7%

Yi Min started an engineering finn called Min Engireering. He begar operations and completed seven Problem 2-5A
transactions in May, which included his initial investment of $ 18,000 cash. Alter those seven transactions, Analyzing account balances
the ledger included the tbllowing accounts with normal balances. and reconstructing
transactions
Cash..... ...... $44,132 cl c4 ,\l P2
Omce supplies 1,090 I
Prepaid insurance .. 4,700
OfJice equipment .. 11,200
Accounts payable .. 11,200
Y Min, Capital 18,000
Y Min,Withdrawals 432A
Engineering fees earned ....... 44,000
Rent expense 7,750

Required
l. Prepare a trial balance for this business as of the end of May. check (t)'t-r.ia batance totats,
$73,200
Analysis Components
2,. Analyze the accounts and their balances and prepare a list that describes each ofthe seven most likely
transactions and their amounts.
3. Prepare a report of cash received and cash paid showing how the seven tmnsactions in part 2 yield (3) cash paid, $t7,868
the $44,132 ending Cash balance.

Business transactions completed by Alanna Emitt during the month of September are as follows. Problem 2-6A
a. Emitt invested $82,000 cash along with office equipment valued at $22,000 in a new company named Recording transactions;
AE Consulting. posting to ledger;preparing a

b. The company purchased land valued at $40,000 and a building valued at $165,000. The purchase is trial balance
paid with $25,000 cash and a long-term note payable for $180,000. (14 .\t pl p2

c. The company purchased $1,700 of olTice supplies on credit.

d. Emitt invested her pefional automobile in the company. The automobile has a value of $ I 6,800 and
is to be u'ed exclusirely in the busine...
e. The company purchased $5,900 of additional office equipment on credit.
f. The company paid $1,500 cash salary to an assistant.
g. The company provided services to a client and collected $7,600 cash.
h. The company paid $630 cash for this month's utilities.
i. The company paid $ 1,700 cash to settle the accounr payable created in transaction c.
a2 Chapter 2 Analyzing and Recording Transactions

i. The company purchased $20,200 of new office equipment by paying $20,200 cash.
k. The company completed $6,750 of services for a client, who must pay within 30 days.
l. The company paid $2,000 cash salary to an assistant.
m. The company received $4,000 cash in partial payment on the rcceivable created in transaction ft.
n. Emitt withdrcw $2,900 cash from the company for personal use.

check (2) Ending balancesr
$39,670i office Equipment,
(3)Trial balance
$321,0s0
Required
l. Prepare general journal entries to rccord these fansactions (use account titles listed in pafl 2).
cash, 2. Open the following ledg€r accounts their account numbers are in parentheses (use the balance col-
$48,100 umn format): Cash (101); Accounts Receivable (106); Office Supplies (108)i Ofnce Equipment (163);
Automobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250);
A. Emitr, Capital (301); A. Emitt, withdrawals (302); Fees Earned (402); Salaries Expense (601);
and Utilities Expense (602). Post the joumal entries from part 1 to the ledger accounts and enter the
totals, balance after each postinS'
3. Prepare a t al balance as of the end of September.

PROBLEM SET B At the beginning of April,

Vanessa Wende launched a custom computer solutions company called
Softworks. The company had the following transactions during April.
problem 2- I B a. Vanessa Wende invested $ 155,000 cash, office equipment with a value of $5,100, and $78,000 of
Preparing and posting journal computer equipment in the company'
entriesi preparing a rrial balance b. The company purchased land wofih $55,000 for an office by paying $8,700 cash and signing a long-
C4 C5 Al pl p2 term note payable for $46,300.
c. The company purchased a portable building with $59,000 cash and moved it onto the land acquired
itt b.
d. The company paid $3,500 cash for the premium on a two-year insurance policy.
e. The company provided services to a client and immediately collected $7,000 cash.
l. The company purchased $26,000 of additional computer equipment by paying $11,800 cash and
signing a lorg-term note payable for $14,200.
g. The company completed $16,500 of services for a client. This amount is to be received within 30 days.
h. The company purchased $1,800 of additional ofEce equipment on credit.
L The company completed client services for $28,000 on credit.
i. The company received a bill for rent of a computer testing device that was used on a recently com-
pleted job. The $1,685 rent cost must be paid within 30 days.
k. The company collected $10,000 cash in partial payment from the client described in transaction i.
l. The company paid $1,300 cash for wages to al1 assistant.
m. The compaly paid $1,800 cash to settle the payable created in transaction r.
n. The company paid $985 cash for minor maintenance of the company's computer equipment.
o. V Wende withdrew $10,230 cash from the company for personal use.
p. The company paid $1,300 cash for wages to an assistant.
q. The company paid $4,300 cash for advertisements in the local newspaper during April.
Required
l. Prepare general journal entries to record these transactions (use account titles listed in part 2).
check (2) Ending balances:Cash, 2. Open the following ledger accounts-their account numbers are in parentheses (use the balance col-
$69,08siAccounts Rece,vable. $34,s00; umn format): Cash (l0l); Accounts Receivable (106); Prepaid Insurance (108); Offtce Equipment
Accounts Payable, $1,68s (163); Computer Equipment (164); Building (170); Land (172); Accounts Payable (201); Notes
Payable (250): V wende, Capital (301); V Wende, Withdrawals (302); Fees Earned (402); Wages
Expense (601); Computer Rental Expense (602); Advertising Expense (603); and Repairs Expense
(3) rriat batance rota s, (604). Post the journal entries from part I to the accounts and enter the balance after each posting.
$3s ,78s 3. Prepare a trial balance as of the end of April.
 Chapter 2 Analyzing and Reco rding Tran sactions a3

Kylan Management Selvices opens for business and completes these transactions in November Problem 2-28
Nov. I Preparint and Posting iournal
Rollie Kylan, the owner, invested $1g0,000 cash along with $2g,000 of olficc equipment in
thecompany'.''entries;PreParingalrialbalance
2 The company prepaid !i10,000 cash for six months'rent for an office. tHirlr Debir Prep.lid C4 C5 ,\l Pl P2
Rent for $ 10,000.)
4 The company made credit purchases of office equipment for $4,300 and of oftice supplies for
$2,100. Payment is due within l0 days.
8 The company completed work lbr a client and immediately received $7,000 cash.
12 The company completed a $9,200 project for a clicnt, who must pay within 30 days.
13 The company paid $6,400 cash to settle the payable created on November 4.
I9 The company paid $4,100 cash lbr the premium on a 24-month insurance policy.
22 The company received $3,700 cash as partial payment for the work completed on November I 2.
24 The company completed work for another client lbr $.1,010 on credit.
28 R. Kylan withdrerv $6,300 cash from the company for personal use.
29 The company purchased $1,200 of additional offtce supplies on credit.
30 The company paid $1,100 cash for this month's urility bjll.

Required
l. Prepare general journal entries to record these tmnsactions (use account titles listed in part 2). che.k (2) Endng batan.es:cash,
2. Open the lbllowing ledger accounts-their accoult numbers are in parentheses (use the ba]ance col- gl72,8o0r Accounrs Receivable,99.5 oi
umn format): Cash ( l0l ); Accounts Receivable ( I 06); Oftice S upplies ( 124); Prepaid lnsurance ( I 28); Acco!n.s Payable, $ 1,200
Prepaid Rent (131); Office Equipment (163); Accounts Payable (201); R. Kylan, Capital (301);
R. Kylan, Withdrawals (302); Services Revenue (403); and Utiliries Expense (690). post rhe joumal
ent es from part I to the ledger accounts and enter the balance after each posting. (J) tora debirs. $240.4 0
3. Prepare a trial balance as of the end o[ Novenber.

Hassan Management Services opens for business and completes these transactions in September Problem 2-38
Sepr. I Jamal Hassan, the owner. invests $130,000 cash along with oilice equipmenr \,rlued xt $31,200 !i:Li:'", -o PostinS iournal
inthecompany.enlries;Preparingatrialbalance
2 The company prepaid $7,200 cash for 12 months'rent for office space. (Hinr: Debit Prepaid C4 C5 ll Pl P2
Rent for $7,200.)
,1 The company made credit purchases tbr $ 15,600 in offrce equipment and $3,120 in ot'fice sup
plies. Payment is due within l0 days.
8 The company completed work tbr a client and immediately received Xi2,000 cash.
l2 The company completed a $10,400 project for a client, who must pay within 30 days.
13 The company paid $18,720 cash to settle the payable created on September .1.
l9 The company paid $6,000 cash for the prcmium on an l8 month insurance policy. (Hinl.. Debit
Prepaid Insurance for $6,000.)
22 The company received $8,320 cash as partial payment for the wo* completed on September 12.
24 The company completed work for another client for $2,640 on credit.
28 J. Hassan withdrew 56,200 cash from the company lbr personal use.
29 The company purchased $1,040 ol'additional offtce supplies on credit.
30 The company paid $700 cash for this month s utility bill.

Required
l. Prepare general joumal entries to record these transactions (use account titles iisted
i[ part 2).
2. Open the following ledger accounts their account numbers are in parentheses (use the balalrce check (2) Ending ba ances: cash,
column format): Cash (101); Accounts Receivable (106); Office Supplies (124); Prepaid Insurance gl0l,500rAccounts Receivab e, g4,72oi
(128); Prepaid Rent (l3l)i Office Equipment (163); Accounts Payable (201); J. Hassan, Capital A..oun* Payable, $1.040
(301); J. Hassan, Withdrawals (302); Service Fees Earned (401); and Uriliries Expense (690). post
journal entries from paft I to the ledger accounts and enter the balance after each posting.
3. Prepare a trial balance as of the end of September. (3)Toiat debits, $ 77,280
s4 Chapter 2 Analyzing and Recording Transactions

Problem 2-48 The accounting records of Trinity Co. show the following assets and liabilities as of December 31, 2008
Computing net income from and 2009.
equit/ analysis, preparing a
balance sheet, and computinS the
debt ratio
C.J ,\I A] PJ I Cash .. .. . $ s4,773 $ 10,629
a Accounts receivable . .. .. .. 29,73t 23,309
Offic€ supplies 4,689 3,435
Office equjpment ......... $r41,968 t53,353
Machinery . . 56,339 65,339
Building . .. 0 t87,802
1and...... 0 46,864
Accountr payable .. -...... 78,t55 38,767
Note payable 0 114,666

Late in December 2009, the business purchased a small office building and land for $234,666. It paid
$120,000 cash toward the purchase and a $1 14,666 note payable was signed for the balance. Ms. Trinity,
the owner, had to invest an additional $35,000 cash to enable it to pay the $120,000 cash toward the
purchase. The owner withdraws $4,000 cash per month for personal use.

Required
I . Prcpare balance sheets for the business as of December 31, 2008 and 2009. (I1irr. Repofi only total
equity on the balance sheet and remember that total equity equals the differcnce between assets and
liabilities.)
Check (2) Net income, $138,963 2. By comparing equity amounts from the balance sheets and using the additional information presented
in the problem, prepare a calculation to show how much net income was earned by the business dur-
ing 2009.
(3) Debt ratio,3l.3% 3. Calculate the December 31, 2009, debt ratio for the business.

Problem 2-58 Roshaun Gould started a Web consulting fiIm called Gould Solutions. He began opemtions and completed
Analyzing account balances seven aansactions in April ttrat rcsulted in the following accounts, which all have normal balances.
and reconstructing
transactions
Cash ...... ....
clc4 {r P2 I supplies
$46,518

a Ofiice 850
Prepaid rent 4,700
Offic€ equipment 11,300
Accounts payable .. 11,300
R. Gould, Capital 22,500
R. Gould,Withdrawals . . . . . . - . 4,177
Consulting fees earned . . . . . . . . 43,000
Operating expenses 9,260

Required
Check ( l) Trial balance total, $75,800 I . Prepare a trial balance for this business as of the end of Apdl.

(3) Cash pa,d. $18,982
Anatysls Component
2. Analyze the accounts and their balances and prcpare a list that describes each of the seven most likely
transactions and their amounts.
3. Prepare a report of cash received and cash paid showing how the seven transactions in part 2 yield
the $46,518 ending Cash balance.
 Chapter 2 Analyzing and RecordingTransacrions a5

Witter Consulting completed the following transactions during June. Problem 2-68
a. D. Witter, the owner, invested $82,000 cash along with office equipment valued at $23,000 in the Recording transactions; posdng to
new company. ledger; preparing a trial balance
b. The company purchased land valued at $50,000 and a building valued at $165,000. The purchase is C4 \] PI P2
paid with $30,000 cash and a long-term note payable for $185,000.
c. The company purchased $2,200 of office supplies on credit.
d. D. Witter invested his personal automobile in the company. The automobile has a value of $16,800
and is to be used exclusively ilr the business.
e. The company purchased $5,100 of additional off-rce equipment on credit.
l. The company paid $1,500 cash salary to an assistant.
g. The company provided services to a client and collected $8,000 cash.
h. The company paid $630 cash for this month's utilities.
i. The company paid $2,200 cash to settle the payable created in transacrion c.
i. The company purchased $20,400 of new office equipment by paying $20,400 cash.
k. The company completed $6,500 of services for a client, who must pay within 30 days.
l. The company paid 1i2,000 cash salary to an assistant.
m. The company received $4,000 cash in partial payment on the receivable created in rransaction t.
n. D. Witter withdrcw $2,700 cash from the company for personal use.

Required
l. Prepare general journal entries to record these transactions (use account titles listed in part 2).
2. Open the fbllowing ledger accounts their account numbers are in parentheses (use the balance col Che.k (2) EndinS balances:Cash.
umn format): Cash (101); Accounts Receivable (106); Office Supplies ( 108); Office Equipment ( 163); $34,570i Office Equipmen!, $48,500
Automobiles (164); Building (170); Land (172); Accounts Payable (201); Notes Payable (250):
D. Witter, Capital (301); D. Witter, Wirhdrawals (302): Fees Eamed (402); Salaries Expense (601);
and Utilities Expense (602). Post the journal entries from part I to the ledger accounts and enter the
balance after each posting.
(3) Tria balance totak.
3. Prepare a trial balance as of the end of June. $126,400

(This serial problem stated in Chapter 1 and continues through most oJ the chapters. If the Chopter I
SERIAL PROBLEM
segnxent was not completed, the problem can begin at this point. lt k helpful, blt n.)t necessary, tu use
the Wo*ing Papers that accompaq) this book.)
Success Systems

SP 2 On October 1, 2009, Adriana Lopez launched a computer services company called Success AI Pl P2
Systems, which provides consulting services, computer system installations, and custom program
development. Lopez adopts the calendar year for reporting purposes and expects to prepare the com
pany's first set of financial statements on December 31, 2009. The company's initial chart of accounts
follows.

Cash..... t0r A. Lopez, Capital l0l

Accounts Receivable ........ t06 A. Lopez,Withdrawals . . . . . . . . . . . . . 302
Computer Supplies ......... 126 Computer Services Revenue . . . . . . . . 403
Prepaid lnsurance t28 Wages Expense ....... 523
Prepaid Rent t3t Advertising Expense . .. . 655
Office Equipment t63 l,lileage Expense ....... 676
Computer Equipment ....... t67 Miscellaneous Expenses . . . . . . . . . , . , 677
Accounts Payable 20t RepairsExpense-Computer ..-.... 684
 Chapter 2 Analfzing and RecordingTransactions

Required
l. Prepare joumal entries to record each of the following transactions for Success Systems.

Oct. I Lopez invested $55,000 cash, a $20,000 computer system! and $8,000 of office equipment in
the company.
2 The company paid $3,300 cash for four months'reot. (Flirl. Debit Prepaid Rent for $3,300.)
3 The company purchased $1,420 of computer supplies on credit from Ha[is Office Products.
5 The company paid $2,220 cash for one year's premium on a property and liability insurance
policy. (Hint: Debit Prepaid Insumnce for $2,220.)
6 The company billed Easy Leasing $4,800 for services performed in installing a new Web server
8 The company paid $1,420 cash for the computer supplies purchased from Haris Office
Products on October 3.
10 The company hired Lyn Addie as a paft-time assistant for $125 per day, as needed.
12 The company billed Easy Leasing another $1,400 for seNices performed.
15 The company received $,1,800 cash from Easy Leasing as pa ial payment on its account.
l7 The company paid $805 cash to repair computer equipment that was damaged when moving it.
20 The company paid $1,940 cash for an advetisement in the local newspaper'
22 The company received $1,400 cash from Easy Leasing on its account.
28 The company bitled IFM Company $5,208 for services performed.
31 The company paid $875 cash for Lyn Addie's wages for seven days' work.
3l A. Lopez withdrew $3,600 cash from the company for personal use.
Nov. I The company reimbursed Lopez in cash for businoss automobile mileage allowance (Lopez
logged 1,000 miles at $0.32 per mile).
2 The company received $4,633 cash from Liu Corporation for computer services perfomed.
5 The company purchased computer supplies for $1,125 cash from Haris Office Products.
8 The company billed Gomez Co. $5,668 for services pedormed.
13 The company received notification from Alex's Engineering Co. that Success Systems' bid of
$3,950 for an upcoming project is accepted.
18 The company received $2,208 cash from IFM Company as partialpayment of the October 28 bill.
22 The company donated $250 cash to the United way in the company's name.
24 The company completed work for Alex's Engineering Co. and sent it a bill for $3,950.
25 The company sent another bill to IFM Company for the past-due amount of $3,000.
28 The company reimbursed Lopez in cash for business automobile mileage (1,200 miles aL $0.32
per mile).
30 The company paid $1,750 cash for Lyn Addie's wages for l4 days' work.
30 A. Lopez withdrcw $2,000 cash from the company for personal use.
(2) Cash, Nov 30 ba., $48,0522. Open ledger accounts (in balance column format) and post the journal e[tries ftom part I to them.
(3) Tria bal. torah, g l08,6ss 3. Prepare a trial balance as of the end of November

REPORTING IN BTN 2-t Refer to Best Buy's financial statements in Appendix A for the following questions.
ACTION Required
^ra2 I I . What amount of total liabilities does it report for each of the fiscal years ended February 25, 2006,
and March 3, 2007?
2. what amount of total assets does it report for each of the fiscal years ended February 25, 2006, and
March 3, 2007?
3. Compute its debt ratio for each of the fiscat years ended February 25, 2006, and March 3, 2007.
4. In which fiscal year did it employ more financial leverage (February 25,2006, ot Mrrch 3, 2OO7)1
Explain.

Fast Forwerd
5. Access its financial statements (10-K report) for a fiscal year ending after March 3, 2007, from
its Website (BestBuv.com) or the SEC'S EDGAR database (www.sEc.gqy). Recompute its debt ratio
for any subsequent year's data and compare it with the February 25,2006, debt ratio.
 Chapter 2 Analyuing and Recording Transactions 87

BTN 2-2 Key comparative figures for Bcst BuJ. Cir.cuit CitJ, and Rudi{)Shack follow. COMPARATIVE
ANALYSIS
Ar,ul
Total liabilities .... -.... $ 7,369
@
Total assets . . . , . , . . . . , t3,570

@
l. What is the debt ratio for Best Buy in the current year and for the prior year?
2. What is the debt mtio for Circuit City in the curent year and for the prior year?
@naaiostact,
3. What is the debt ratio for Radioshack in the current year and for the p or year?
4. Which of the three companies has the highest degree of financial leverage? What does this imply?

BTN 2-3 Review the Decision Ethics case from the first part of this chapter involving the cashier. ETHICS
The guidance answer suggests that you should not comply with the assistant manager's request.
CHALLENGE
Required ctc2t
Propose and evaluate two other courses of action you might considel and explain why.

BTN 2-4 Mora Stanley is an aspiring entrepreneur and your friend. She is having diffrculty under- COMMUNICATING
standing the purposes of financial statements and how they fit together across rime. IN PRACTICE
Required c1 c3AlP3
Write a one-page memomndum to Stanley explaining the purposes of the four financial statements and
I
how they are linked across time.

BTN 2-5 Access EDGAR online (wwwsl:c,gqy) and locate the 2006 year 10-K repo.t of TAKING IT TO
,\mazon.com (ticker AMZN) filed on February 16, 2007. Review its financial statements reported for THE NET
years ended 2006, 2005, and 2004 to answer the following questions.

Required
l. What are the amounts of its net income or net loss repolted for each of these thee years?
"lffi
2. Do Amazon's operations provide cash or use cash for each of these three years?
3. If Amazon has a 2005 net income, how is it possible that its cash balance at December 31, 2005,
shows a decrease relative to its balance at December 31, 2004?

BTN 2-6The expanded accounting equation consists of assets, liabilities, capital, withdrawals, TEAMWORK IN
revenues, and expenses. It can be used to reveal insights into changes in a company's financial position. ACTION
Required CI C3 C5 AI
1. FoII,]il learning teazs of six (or more) members. Each team member must select one of the six com-
ponents and each team must have at least one expert on each component: (ll) assets, (r) liabilities,
(c) capital, (d) withdrawals, (e) revenues, and (/) expenses.
88 Chapter 2 Analping and RecordingTransactions

2. Fo'I.\ qpert leams of individuals who selected the same component in paft 1. Expert teams
arc to draft a report that each expert will prcsent to his or her learning team addressing the
following:
a. Identify for its component the (i) increase and decrease side of the account and (ii) normat bal-
ance side of the account.
b. Desc be a transaction, with amounts, that incrcases its component.
c. Using the tansaction and amounts in (D), verify the equality ofthe accounting equation and then
explain any effects on the income statement and statement of cash flows.
d, Describe a transaction, with amounts, that decreases its component.
e. Using the transactior and amounts in (d), verify the equality of the accounting equation and then
explain any effects on the income statement and statement of cash flows.
3. Each expert should rctum to his/her tearning team. In rotation, each member presents his/her expert
team's rcport to the learning team. Team discussion is encouraged.

ENTREPRENEURIAL BTN 2-7 Angel Fender is a young entrepreneur who operates Fender Music Services, offering
DECISION singing lessons and insuuction on musical instruments. Fender wishes to expand but needs a $30,000
loan. The bank rcquests Fender to prepare a balance sheet and key financial ratios. Fender has not kept
.\r12P3pl formal records but is able to prcvide the following accounts and their amounts as of December 31, 2009.

$ 3.600 Accounts Receivable ... $ 9,600 Prepaid lnsurance..... $ 1,500

9,400 Store Suppljes ........ 6,600 Equipment 50,000

2,200 Unearned Lesson Fees . . 15,600 TotalEquiql......... 62,900
40.000

* The total equity amounl.eflecN al1 owner investments, wirhdrawals, revenues, and expenses as ot December 31,2009

Required
I . Prepare a balance sheet as of Decembe r 31, 20O9, for Fender Music Services. (Report only the total
equity amount on the balance sheet.)
2. Compute Fender's debt ratio and its rctum on assets (the latter ratio is defined in Chapter 1). Assume
average assets equal its ending balance.
3. Do you believe the prospects of a $30,000 bank loan are good? Why or why not?

BTN 2-8 Assume Sara Blakely of SPANX plans on expanding her business to acconmodate more
^rA2P3pl product lines. She is considering financing her expansion in one of two ways: (1) contributing more of
her own funds to the business or (2) borrowing the funds from a bank.

Required
Identify the issues that Blakely should consider when trying to decide on the method for hnanciag her
expansion.

HITTING THE BTN 2-9 Obtain a recent copy of the most prcminent newspaper distributed in your area. Research
ROAD the classified section and prepare a repolt answering the following questions (attach relevant classified
clippings to your report). Altematively, you may want to search the web for the required information.
cl One suitable website is Car€eronestop (www.CareerOneStoB,olg). For documentation, you should
print copies of Websites accessed.
I . Identify the number of listings for accounting positions and the various accounting job titles.
2. Identify the number of listings for other job titles, with examples, that require or prcfer accounting
knowledge/experience but are not specifically accounting positions.
3. Specify the salary range for the accounting and accounting-related positions if prcvided.
4. Indicate the job that appeals to you, the rcason for its appeal, and its requirements
 Chapter 2 Analyzing and Reco.ding Transactions 89

BTN 2-lO DSG international plc (rvyEDSGrplsaso) competes with several companies, includ_ GLOBAL DECISION
ing Iiest Rur and Radioshack. Key financial ratios for the current fiscal year follow.

"l
EE
Return on
Debt ratio
assets........
. 67.2% @
@Raatsrack"
Required
I . Which company is most profitable according to its retum on assets?
2. Which company is most dsky accordilg to the debt ratio?
3. which company deserves increased investment based on a joint analysis of retum on assets and the
debt rutio? Explain.

ANSYYERS TO MULTIPTE CHOTCE QUIZ

L b; debit Utility Expense for 9700, and credit Cash for $700. 4,d
2. a; debit Cash for $2,500, and credit Unearned Lawn Service Fees fot 5. e; Debt ratio : 9400,000/91,000,000 = 40Vo
$2,500.
3. c;debit Cash for $250,000, debit Land for $500,000, and credit L. Shue.
Capiral for $750,000.