Chapter 02

ANALYZING AND RECORDING

TRANSACTIONS

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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C1
ANALYZING AND RECORDING
PROCESS

Analyze each transaction and Record relevant transactions

event from source documents and events in a journal

Prepare and analyze Post journal information

the trial balance to ledger accounts
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C1

SOURCE DOCUMENTS
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets
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C2

THE ACCOUNT AND ITS ANALYSIS

An account is a
record of
increases and The general
decreases in a ledger is a record
specific asset, containing all
liability, equity, accounts used by
revenue, or the company.
expense item.
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C2

THE ACCOUNT AND ITS ANALYSIS

Owner, Capital
Owner, Withdrawals
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C2

ASSET ACCOUNTS

Cash
Accounts
Land
Receivable

Buildings
Asset Notes
Receivable
Accounts
Prepaid
Equipment
Accounts
Supplies
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C2

LIABILITY ACCOUNTS

Accounts Notes
Payable Payable

Liability
Accounts
Accrued Unearned
Liabilities Revenue
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C2

EQUITY ACCOUNTS

Owner’s Owner’s
Capital Withdrawals

Equity
Accounts

Revenues Expenses
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C2

THE ACCOUNT AND ITS ANALYSIS

Assets = Liabilities + Equity

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C3

LEDGER AND CHART OF ACCOUNTS

The ledger is a collection of all accounts for an
information system. A company’s size and diversity
of operations affect the number of accounts needed.

The chart of accounts is a list of all accounts and includes an

identifying number for each account.
Account Number Account Name Account Number Account 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 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 C. Taylor, Capital 690 Utilities expense
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C4

DEBITS AND CREDITS

A T-account represents a ledger account and
is a tool used to understand the effects of
one or more transactions.

Account Title
(Left side) (Right side)
Debit Credit
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C4

DOUBLE-ENTRY ACCOUNTING

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal Normal Normal
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C4

DOUBLE-ENTRY ACCOUNTING

Equity
Owner’s _ Owner's _ Expenses
Capital Withdrawals + Revenues

Owner’s Owner's Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
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C4

DOUBLE-ENTRY ACCOUNTING
An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.
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P1
JOURNALIZING &
POSTING TRANSACTIONS
Assets = Liabilities + Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.

GENERAL JOURNAL Page 123

ACCOUNT NAME: ACCOUNT No.
Post.
Date Description Ref. Debit Credit
Date Description PR Debit Credit Balance

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

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P1

JOURNALIZING TRANSACTIONS
Transaction Titles of Affected
Date Accounts

Date Description Debit Credit

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

Dec. 2 Supplies 2,500

Cash 2,500
Purchased supplies for cash

Transaction Dollar amount of debits

explanation and credits
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P1

BALANCE COLUMN ACCOUNT

T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1 Initial investment G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 4,200 5,700
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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

1 Identify the debit account in ledger.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011

Dec. 3 Purchased equipment G1 20,000.00 (20,000.00)

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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

2 Enter the date.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1
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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

3 Enter the amount and description.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1 Investment by owner 30,000

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

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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

4 Enter the journal reference.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1 Investment by owner G1 30,000

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

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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner

5 Compute the balance.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1 Investment by owner G1 30,000 30,000
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P1

POSTING JOURNAL ENTRIES

2011
Dec. 1 Cash 101 30,000
C. Taylor, Capital 30,000
Investment by owner

6 Enter the ledger reference.

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2011
Dec. 1 Investment by owner G1 30,000 30,000

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

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A1

ANALYZING TRANSACTIONS
Transaction: Owner invested $30,000 in FastForward on Dec. 1.

Analysis:
Assets = Liabilities + Equity
Cash Capital
30,000 30,000

Posting:
Cash 101 C. Taylor, Capital 301 301
(1) 30,000 (1) 30,000
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A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases supplies by paying $2,500
cash.
Analysis:
Assets = Liabilities + Equity
Cash Supplies Capital
(2,500) 2,500

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

Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
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A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases equipment by paying $26,000
cash.
Analysis:
Assets = Liabilities + Equity
Cash Equipment Capital
(26,000) 26,000

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

Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
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A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases $7,100 of supplies on credit.
Analysis:
Assets = Liabilities + Equity
Supplies Accounts Payable Capital
7,100 7,100

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

Posting:
Supplies 126 Accounts Payable 201
(2) 2,500 (4) 7,100
(4) 7,100
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A1

ANALYZING TRANSACTIONS
Transaction: FastForward provides consulting services and
immediately collects $4,200 cash.

Analysis:
Assets = Liabilities + Equity
Cash Revenue
4,200 4,200

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

Posting:
Cash 101
403 Consulting Revenue 101
403
(1) 30,000 (2) 2,500 (5) 4,200
(5) 4,200 (3) 26,000
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P2 After processing its remaining transactions for

December, FastForward’s Trial Balance is prepared.

FastForward
Trial Balance The trial balance
December 31, 2011 lists all account
Debits Credits balances in the
Cash $ 4,350
Accounts receivable - general ledger. If
Supplies 9,720 the books are in
Prepaid Insurance 2,400
Equipment 26,000 balance, the total
Accounts payable $ 6,200 debits will equal the
Unearned consulting revenue 3,000
C. Taylor, Capital 30,000 total credits.
Owner's Withdrawals 200
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
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P2
PREPARING A TRIAL BALANCE

Preparing a trail balance involves 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.
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P2
SEARCHING FOR AND CORRECTING
ERRORS
If the trial balance does not balance, the
error(s) must be found and corrected.

Make sure the trial Re-compute each

balance columns are account balance in the
correctly added. ledger.

Make sure account Verify that each journal

balances are correctly entry is posted correctly.
entered from the ledger.

See if debit or credit Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
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P3
USING A TRIAL BALANCE TO PREPARE
FINANCIAL STATEMENTS
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P3

INCOME STATEMENT
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
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P3

STATEMENT OF OWNER'S EQUITY

FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2011
C. Taylor, Capital 12/1/11 $ -
Net income for December 3,470
Connections Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
C. Taylor, Capital, 12/31/11 $ 33,270

FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
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P3

BALANCE SHEET
FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2011
FASTFORWARD
C. Taylor, Capital 12/1/11 $ -
Balance Sheet
December 31, 2011
Net income for December 3,470
Assets
Plus: Investments by Owner 30,000
Cash $ 4,350
33,470
Supplies 9,720
Less: Owner Withdrawals 200
Prepaid insurance 2,400
C. Taylor, Capital, 12/31/11 $ 33,270
Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Connections Total liabilities 9,200
Equity

C. Taylor, Capital $ 33,270

Total equity 33,270
Total liabilities and equity $ 42,470
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P3
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 amounts 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.
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READINGS AND EXERCISES

Readings
Chapter Two (pages 45-61)

Exercises for the tutorial

EX. 2-4, 2-7 & 2-8

Chapter Exercises:

QS 2-10, 2-11
Priority
Ex 2-4, 2-7, 2-8, 2-13, 2-14, 2-15
1
Pr 2-1A
Priority
Pr 2-2A, 2-3A, 2-4 A
2
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END OF CHAPTER 02