Chapter 2 Transaction Analysis and the

Balance Sheet
A Principles and Assumptions of Accounting
B Transaction Analysis
 Principles of Transaction Analysis
 Examples
C How to Keep Track of Account Balances?
 T-accounts
 Double-entry accounting
D Journalizing and Posting Transactions
 Preparing Journal Entries
 Posting information to ledger accounts
E Classified Balance Sheet
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 A. Principles and Assumptions of Accounting

Revenue Recognition Principle

1. Recognize revenue when it is earned. Cost Principle
2. Proceeds need not be in cash. Accounting information is based on
3. Measure revenue by cash received actual cost. Actual cost is
plus cash value of items received. considered objective.

Matching Principle Full Disclosure Principle

A company must record its expenses A company is required to report the
incurred to generate the revenue details behind financial statements
reported. that would impact users’ decisions.

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 Principles and Assumptions of Accounting
Now Future
Going-Concern Assumption
Reflects assumption that the
business will continue operating
instead of being closed or sold.
Business Entity Assumption
A business is accounted for
separately from other business
entities, including its owner.
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Monetary Unit Assumption
Express transactions and events in
monetary, or money, units.
Time Period Assumption
Presumes that the life of a company can
be divided into time periods, such as
months and years.
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 B. Transaction Analysis
 Every transaction affects at least two
accounts (duality of effects).
 The accounting equation must remain in
balance after each transaction.

Assets = Liabilities + Equity

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 Expanded Accounting Equation

Assets
Assets
=
= Liabilities
Liabilities
+
+ Equity
Equity

Contributed Retained
Capital + Earnings

Revenues
_ Expenses

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 Accounts
An organized format used by companies
to accumulate the dollar effects of
transactions.

Cash Inventory

Notes
Equipment Payable

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 Ledger and Chart of Accounts
The ledger is a collection of all accounts for an information
system.

The chart of accounts is a list of all accounts and

includes an identifying number for each account.

Account Number Account Name Accounting Number Accounting Name

101 Cash 302 Retained earnings
106 Accounts receivable 403 Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounting payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 Contributed capital 690 Utilities expense

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 Transaction Analysis Example

ABC issued $20,000 common stock to

raise capital for the business.
The accounts involved are:
(1) Cash (asset)
(2) Contributed capital (or common Stock) (equity)

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 Transaction Analysis Example
ABC Company issued $20,000 common
stock to raise capital for the business.
Assets = Liabilities + Equity

Accounts Notes Contributed

Cash Supplies Equipment Payable Payable Capital
$ 20,000 $ 20,000

$ 20,000 $ - $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000

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 Transaction Analysis Example
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)

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 Transaction Analysis Example

Purchased supplies paying $1,000 cash.

Assets = Liabilities + Equity

Accounts Notes Contributed

Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000

$ 19,000 $ 1,000 $ - $ - $ - $ 20,000

$ 20,000 = $ 20,000

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 Transaction Analysis Example

Purchased equipment for $15,000 cash.

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

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 Transaction Analysis Example

Purchased equipment for $15,000 cash.

Assets = Liabilities + Equity
Accounts Notes Contributed
Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000

$ 4,000 $ 1,000 $ 15,000 $ - $ - $ 20,000

$ 20,000 = $ 20,000

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 Transaction Analysis Example
Purchased Supplies of $200 and
Equipment of $1,000 on account.

The accounts involved are:

(1) Supplies (asset)

(2) Equipment (asset)
(3) Accounts Payable (liability)

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 Transaction Analysis Example
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets = Liabilities + Equity

Accounts Notes Contributed

Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000
(4) 200 1,000 $ 1,200

$ 4,000 $ 1,200 $ 16,000 $ 1,200 $ - $ 20,000

$ 21,200 = $ 21,200

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 Transaction Analysis Example

Borrowed $4,000 from 1st American Bank.

The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)

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 Transaction Analysis Example

Borrowed $4,000 from 1st American Bank.

Assets = Liabilities + Equity

Accounts Notes Contributed

Cash Supplies Equipment Payable Payable Capital
(1) $ 20,000 $ 20,000
(2) (1,000) $ 1,000
(3) (15,000) $ 15,000
(4) 200 1,000 $ 1,200
(5) 4,000 $ 4,000
$ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 25,200 = $ 25,200

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 Transaction Analysis Example
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets = Liabilities + Equity

Accounts Notes Contributed

Cash Supplies Equipment Payable Payable Capital
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000

$ 25,200 = $ 25,200

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 Transaction Analysis Example
Provided services receiving $3,000 cash.

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

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 Transaction Analysis Example

Provided services receiving $3,000 cash.

Assets = Liabilities + Equity

Accounts Notes Contributed
Cash Supplies Equipment Payable Payable Capital Revenue
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000

$ 11,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000

$ 28,200 = $ 28,200

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 Transaction Analysis Example
Paid salaries of $800 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)

Remember that the balance in the salaries

expense account actually increases.
But, equity decreases because expenses
reduce equity.
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 Transaction Analysis Example
Paid salaries of $800 to employees.
Assets = Liabilities + Equity
Accounts Notes Contributed
Cash Supplies Equipment Payable Payable Capital Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000
(7) (800) $ (800)

$ 10,200 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $ (800)

$ 27,400 = $ 27,400

Remember that expenses decrease equity.

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 Transaction Analysis Example
Board of directors declares and pays $500 in
dividends (股利) to shareholders.

The accounts involved are:

(1) Cash (asset)
(2) Retained Earnings (equity)

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 Transaction Analysis Example

Pays $500 in dividends to shareholders.

Assets = Liabilities + Equity
Accounts Notes Owner Retained
Cash Supplies Equipment Payable Payable Capital Earnings Revenue Expenses
Bal. $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000
(6) 3,000 $ 3,000
(7) (800) $ (800)
(8) (500) $ (500)
$ 9,700 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (500) $ 3,000 $ (800)

$ 26,900 = $ 26,900

Dividend payments decrease equity.

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 C. How to Keep Track of Account
Balances?
A T-account represents a ledger account and is
a tool used to understand the effects of one or
more transactions.
T- Account

(left side) (right side)

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 Double-Entry Accounting
 When there is a debited account, there
must be a credited account.
 The total amount debited must be equal to
the total amount credited for each
transaction.

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 Double-Entry Accounting

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

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 Double-Entry Accounting
Equity Retained
Earnings

Contributed
+ Retained _
Capital Earnings Revenues Expenses

Capital Retained Revenues Expenses

Earnings

Debit Credit Debit Credit Debit Credit Debit Credit

- + - + - + + -
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 Double-Entry Accounting
An account balance is the difference between the
increases and decreases in an account.
Notice the T-Account

Cash
Beginning Balance 20,000 Purchase of supplies 2,500
Investment by shareholders 10,000 Purchase of equipment 26,000
Services revenues earned 4,200 Payment of rent 1,000
Collection of accounts receivable 1,900 Payment of salary 700
Payment of account payable 900
Payment of dividend 200
Total increases 36,100 Total decreases 31,300
Balance 4,800

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 D. Journalizing and Posting Transactions
 For each transaction, must go through these two steps:

 Journalizing – the process of recording transactions

in a general journal, i.e., preparing journal entries

 Posting – the process of transferring journal entry

information from the journal to the ledger accounts

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 Preparing Journal Entries
(Journalizing Transactions)
Transaction Titles of Affected
Date Accounts

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2007
Dec. 1 Cash 10,000
Contributed Capital 10,000
Investment by owner
Dollar amount of debits
Transaction and credits
explanation
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 Posting Information to Ledger Accounts
Transaction: FastForward Issued $10,000 common stocks on Dec. 1.

Double entry:
(1) Cash 101 10,000
Contributed Capital 301 10,000

Posting:
Cash 101 Contributed Capital 301
(1) 10,000 (1) 10,000

301

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 Posting Information to Ledger Accounts
FastForward purchases supplies by paying $2,500
Transaction: cash.

Double entry:
(2) Supplies 126 2,500
Cash 101 2,500

Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 10,000 (2) 2,500

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 Posting Information to Ledger Accounts
FastForward purchases equipment by paying $26,000
Transaction: cash.

Double entry:
(3) Equipment 167 26,000
Cash 101 26,000

Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 10,000 (2) 2,500
(3) 26,000

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 Posting Information to Ledger Accounts
Transaction: FastForward purchases $7,100 of supplies on credit.

Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100

Posting:
Supplies 126 Accounts Payable 201
(2) 26,000 (4) 7,100
(4) 7,100

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 Posting Information to Ledger Accounts
FastForward provides consulting services and
Transaction: immediately collects $4,200 cash.

Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200

Posting:
Cash Consulting Revenue
(1) 10,000 (2) 2,500 (5) 4,200
(5) 4,200 (3) 26,000

403 101

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 Dividend
Case 1 Declare and pay cash dividend

Retained earnings 500

Cash 500

Case 2 Declare dividend to be paid in the next month

Retained earnings 500
Dividend payable 500

When it is actually paid

Dividend payable 500
Cash 500

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 After processing its remaining transactions for December,
FastForward’s Trial Balance is prepared.

FastForward
Trial Balance
December 31, 2009 The trial balance lists
Debits Credits all account balances
Cash $ 4,350
Accounts receivable - in the general ledger.
Supplies 9,720 If the books are in
Prepaid Insurance 2,400
Equipment 26,000 balance, the total
Accounts payable $ 5,200 debits will equal the
Unearned consulting revenue 3,000
Contributed Capital 30,000 total credits.
Retained Earnings 800
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,100 $ 45,100

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 E. Classified Balance Sheet

In a classified balance sheet assets and liabilities

are classified into two categories – current and
noncurrent.
Current assets are
those to be used or
turned into cash within Current liabilities are
the upcoming year, those obligations to be
whereas noncurrent paid or settled within
assets are those that the next 12 months
will last longer than with current assets.
one year.

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 Key Ratio Analysis
Current Current Assets
Ratio =
Current Liabilities

Current ratio for Papa John’s:

2006 = 0.83
2007 = 0.68
2008 = 0.75
The current ratio for Papa John’s shows a low level
of liquidity, below 1.

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