SS2-3 Chapter 02 FN

ACC101- PRINCIPLE OF ACCOUNTING
CHAPTER 2: ANALYZING AND RECORDING

TRANSACTIONS (p1)
1
OBJECTIVES
ANALYZING AND RECORDING PROCESS
C1 Explain the steps in processing transactions and the role of source documents.
C2 Describe an account and its use in recording transactions
ANALYZING AND PROCESSING TRANSACTIONS
C3 Describe a ledger and a chart of accounts.
C4 Define debits and credits and explain double-entry accounting.
P1 Record transactions in a journal and post entries to a ledger.
A1 Analyze the impact of transactions on accounts and financial statements
TRIAL BALANCE AND THE FINANCIAL STATEMENTS
P2 Prepare and explain the use of a trial balance.
P3 Prepare financial statements from business transactions.
A2 Compute the debt ratio and describe its use in analyzing financial condition.
2
1. Analyzing and Recording Process
C1 1.1. Steps In Processing Transactions
Analyze each transaction and Record relevant transactions

event from source documents and events in a journal
Prepare and analyze the trial Post journal information to

balance ledger accounts
C1 1.2. Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records
Bank
Statements
Sales
Tickets
C2 1.3. The Account and its Analysis
An account is a record
of increases and The general ledger is a
decreases in a specific record containing all
asset, liability, equity, accounts used by the
revenue, or expense company.
item.
Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts
- An unclassified balance sheet broadly groups Owner, Capital

accounts into assets, liabilities, and equity. Owner, Withdrawals
Cash
Accounts
Land
Receivable
Asset Accounts
- resources owned or controlled
Notes
Buildings by a company, and those
Receivable
- resources have expected
future benefits
Prepaid
Equipment
Accounts
Supplies
Accounts Notes
Payable Payable
Liability Accounts
▪ claims (by creditors) against assets
▪ obligations to transfer assets or
provide products or services to
others.
Accrued Unearned
Liabilities Revenue
+ Owner’s
+
Revenues Capital
Equity Accounts Owner’s

Net Income ▪ owner’s claim on a company’s Equity
assets
– Owner’s
–
Expenses
Withdrawals
2. Analyzing and Processing Transactions
C3 2.1. Ledger and Chart of Accounts
The ledger is a collection of all accounts for an
information system. A company’s size and diversity
of operations affect the number of accounts needed.
The chart of accounts is a list of all accounts and

includes an identifying number for each account.
Account Number Account Name Accounting Number Accounting Name

101 Cash 302 C. Taylor, Withdrawals
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 C. Taylor, Capital 690 Utilities expense
C4 2.2. Debits and Credits
A T-account represents a ledger account and is a tool used to

understand the effects of one or more transactions.
- Do not make the error of thinking that the Account Title

terms debit and credit mean increase or (Left side) (Right side)
decrease.
Debit Credit
- When the sum of debits > the sum of credits,
the account has a debit balance.
- When the sum of credits > the sum of debits,
it has a credit balance .
- When the sum of debits = the sum of credits,
the account has a zero balance.
C4 2.3. Double-Entry Accounting
Assets = Liabilities + Equity
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal Normal Normal
The left side is the normal balance side for assets >< the right side is the normal balance
side for liabilities and equity.
Equity
Owner’s _ Owner's _
Capital Withdrawals + Revenues Expenses
Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
An account balance is the difference between the increases and

decreases in an account.
Notice the T-Account.
Cash
Investment by owner 30,000 Purchase of supplies 2,500
Consulting services revenues earned 4,200 Purchase of equipment 26,000
Collection of accounts receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of account payable 900
Withdrawal by owner 200
Total increases 36,100 Total decreases 31,300
Balance 4,800
P1 2.4. Journalizing & Posting Transactions

T- Account
(Left side) (Right side)
Debit Credit
Step 1: Analyze transactions Step 2: Apply double-

and source documents. entry accounting
ACCOUNT NAME: ACCOUNT No. GENERAL JOURNAL Page 123

Post.
Date Description PR Debit Credit Balance Date Description Ref. Debit Credit
Step 4: Post entry to ledger Step 3: Record journal entry

JOURNALIZING 1. Transaction 2. Titles of Affected

Date Accounts
▪ A journal: a complete record of
each transaction in one place.
GENERAL JOURNAL Page 1
▪ It also shows debits and
Date Description PR Debit Credit
credits for each transaction. 2009
▪ The process of recording Dec. 1 Cash 30,000
transactions in a journal icalled C. Taylor, Capital 30,000
journalizing Investment by owner
Dec. 2 Supplies 2,500

Cash
4. Transaction 2,500
3. Dollar amount of debits
Purchased supplies for cash
explanation and credits
JOURNALIZING
T-accounts are useful illustrations, but balance column ledger

accounts are used in practice.
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance

2009
Dec. 1 Initial investment 30,000 30,000
Dec. 2 Purchased supplies 2,500 27,500
Dec. 3 Purchased equipment 26,000 1,500
Dec. 10 Collection from customer 4,200 5,700
An account is assumed to have a normal balance.

POSTING

2009
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
1Dec.Identify
2 Supplies
the debit account in ledger 2,500
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

2009
Dec. 3 Purchased equipment G1 20,000.00 ########

POSTING

2009
Dec. 1 Cash 30,000
Investment by owner

2 Enter the date.
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
2009
Dec. 1
Dec. 3 Purchased equipment G1 20,000.00 ########

POSTING
2009
Dec. 1 Cash 30,000
Investment by owner

3 Enter the amount and description.
Cash 2,500
CASH for cash ACCOUNT No. 101

2009
Dec. 1 Investment by owner 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)

POSTING
2009
Dec. 1 Cash 30,000
Investment by owner
Dec. 2 Supplies
4 Enter the journal reference. 2,500
Cash 2,500
for cash

2009
Dec. 1 Investment by owner G1 30,000

POSTING

2009
Dec. 1 Cash 30,000
Investment by owner

5 Compute the balance.
Cash 2,500
for cash

2009
Dec. 1 Investment by owner G1 30,000 30,000

POSTING
2009
Dec. 1 Cash 101 30,000
Investment by owner
Dec.
6 Enter the ledger reference.
2 Supplies 2,500
Cash 2,500
for cash

2009
Dec. 1 Investment by owner G1 30,000 30,000

A1 2.5. Analyzing Transactions
1 Identify Transaction: Owner invested $30,000 in FastForward on Dec. 1.
Analysis:
2 Analyze Cash Capital
30,000 30,000
Double entry:
3 Record (1) Cash 101 30,000
C. Taylor, Capital 301 30,000
Posting:
Cash 101 C. Taylor, Capital 301 301
4 Post (1) 30,000 (1) 30,000
Transaction: FastForward purchases supplies by paying $2,500
1 Identify
cash.
Analysis:
2 Analyze Cash Supplies Capital
(2,500) 2,500
Double entry:
(2) Supplies 126 2,500
3 Record Cash 101 2,500
Posting:
Supplies 126 Cash 101
4 Post (2) 2,500 (1) 30,000 (2) 2,500

1 Identify Transaction: FastForward purchases equipment by paying $26,000
cash.
Analysis:
2 Analyze Cash Equipment Capital
(26,000) 26,000
Double entry:
(3) Equipment 167 26,000
3 Record Cash 101 26,000
Posting:
Equipment 167 Cash 101
4 Post (3) 26,000 (1) 30,000 (2) 2,500

(3) 26,000
1 Identify Transaction: FastForward purchases $7,100 of supplies on credit.
Analysis:
2 Analyze Supplies Accounts Payable Capital
7,100 7,100
Double entry:
(4) Supplies 126 7,100
3 Record Accounts payable 201 7,100
Posting:
Supplies 126 Accounts Payable 201
4 Post (2) 2,500 (4) 7,100

(4) 7,100
Debit Credit Rules
Accounts Increase Decrease

(normal bal.)
Asset Debit Credit
Liability Credit Debit
Capital Credit Debit
Withdrawal Debit Credit
Revenue Credit Debit
Expense Debit Credit
3. Preparing a Trial Balance
P2 A trial balance is a list of accounts and their balances at a point in time.
Three steps:
1. List each account title and its amount
(from ledger) in the trial balance. If an
account has a zero balance, list it with a
zero in the normal balance column (or omit
it entirely).
2. Compute the total of debit balances and
the total of credit balances.
3. Verify (prove) total debit balances equal
total credit balances.
P2 3.1. Searching for and Correcting Errors
If the trial balance does not balance, the error(s) must be found and corrected.
Make sure the trial balance Re-compute each account

columns are correctly added. balance in the ledger.
Make sure account balances are Verify that each journal entry is
correctly entered from the ledger. posted correctly.
See if debit or credit accounts

Verify that each original journal
are mistakenly placed on the trial
entry has equal debits and credits.
balance.
P3 3.2. Using a Trial Balance to Prepare Financial Statements
Point in Point in
Time Period of Time Time
Statement of Cash Flows
Statement of Owner’s Equity

Income Statement
Beginning Ending
Balance Balance
Sheet Sheet
P3 3.3. Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
P3 3.3. Statement Of Owner's Equity
FASTFORWARD
Statement of Owner's Equity
C. Taylor, Capital 12/1/09 $ -
Net income for December 3,470
Plus: Investments by Owner 30,000
Connections 33,470
Less: Owner Withdrawals 200
. C. Taylor, Capital, 12/31/09 $ 33,270
FASTFORWARD
Income Statement
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
P3 3.3. Balance Sheet
Statement of Owner's Equity
For the Month Ended December 31, 2009 FASTFORWARD
C. Taylor, Capital 12/1/09 $ - Balance Sheet
Net income for December 3,470
December 31, 2009
Plus: Investments by Owner 30,000
33,470
Assets
Less: Owner Withdrawals 200 Cash $ 4,350
C. Taylor, Capital, 12/31/09 $ 33,270 Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets $ 42,470
Connections Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Total liabilities 9,200
Equity
C. Taylor, Capital $ 33,270

Total equity 33,270
Total liabilities and equity $ 42,470
P3 3.4. Presentation Issues
1. Dollar signs are not used in journals and ledgers.

2. Dollar signs appear in financial statements and other reports such as
trial balances. The usual practice is to put dollar signs beside only the
first and last numbers in a column.
3. When amount are entered in the journal, ledger, or trial balance,
commas are optional to indicate thousands, millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to the nearest dollar,
or even to a higher level.
A2 3.5. Debt to Assets Ratio (Debt Ratio)
𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Ind. Assignment- Debt to Asset Ratio=
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
read Analysis, p.105
Evaluates the level of debt risk.

A higher ratio indicates that there is a
greater probability that a company will
not be able to pay it’s debt in the future.
Homework
HOMEWORK:
E2-6, 2-7, 2-8, pg.113; E-20, E2-23, pg. 116
Problem 2-2A, page 117; Problem 2-5A, 2-6A, page 119 (Wild 22nd
ed)
37

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ACC101- PRINCIPLE OF ACCOUNTING

CHAPTER 2: ANALYZING AND RECORDING

Analyze each transaction and Record relevant transactions

Prepare and analyze the trial Post journal information to

- An unclassified balance sheet broadly groups Owner, Capital

Equity Accounts Owner’s

The chart of accounts is a list of all accounts and

Account Number Account Name Accounting Number Accounting Name

A T-account represents a ledger account and is a tool used to

- Do not make the error of thinking that the Account Title

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

Debit Credit Debit Credit Debit Credit Debit Credit

An account balance is the difference between the increases and

Assets = Liabilities + Equity

Step 1: Analyze transactions Step 2: Apply double-

ACCOUNT NAME: ACCOUNT No. GENERAL JOURNAL Page 123

Step 4: Post entry to ledger Step 3: Record journal entry

JOURNALIZING 1. Transaction 2. Titles of Affected

Dec. 2 Supplies 2,500

T-accounts are useful illustrations, but balance column ledger

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

An account is assumed to have a normal balance.

GENERAL JOURNAL Page 1

Date Description PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000.00 ########

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Dec. 3 Purchased equipment G1 20,000.00 ########

Dec. 2 Supplies 2,500

Date Description PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000)

Date Description PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000)

GENERAL JOURNAL Page 1

Dec. 2 Supplies 2,500

Date Description PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000)

Date Description PR Debit Credit Balance

Dec. 3 Purchased equipment G1 20,000 (20,000)

4 Post (2) 2,500 (1) 30,000 (2) 2,500

4 Post (3) 26,000 (1) 30,000 (2) 2,500

4 Post (2) 2,500 (4) 7,100

Debit Credit Rules

Accounts Increase Decrease

Make sure the trial balance Re-compute each account

See if debit or credit accounts

Statement of Owner’s Equity

C. Taylor, Capital $ 33,270

1. Dollar signs are not used in journals and ledgers.

Evaluates the level of debt risk.

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