Chapter 2

ANALYZING AND RECORDING

TRANSACTIONS

PowerPoint Authors:
Winston Kwok, Ph.D., MBA, CA
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

Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved.

 2-2

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
 2-3

C1

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

Sales
Tickets
 2-4

C2 THE ACCOUNT AND ITS

ANALYSIS

An
An account
account is is aa
record
record of of
increases The
The general
general
increases and and ledger
decreases
decreases in in aa ledger isis aa record
record
specific containing
containing all
all
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts usedused byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.item.
 2-5

C2 THE ACCOUNT AND ITS

ANALYSIS
 2-6

C2

ASSET ACCOUNTS

Cash
Cash
Accounts
Accounts
Land
Land Receivable
Receivable

Buildings
Asset
Asset Notes
Receivable
Receivable
Accounts
Accounts
Prepaid
Prepaid
Equipment
Accounts
Supplies
Supplies
 2-7

C2

LIABILITY ACCOUNTS

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue
 2-8

C2

EQUITY ACCOUNTS

Share
Share Dividends
Dividends
Capital
Capital

Equity
Accounts

Revenues
Revenues Expenses
Expenses
 2-9

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.
 2 - 10

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
 2 - 11

C4

DOUBLE-ENTRY ACCOUNTING

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal
Normal Normal
Normal Normal
Normal
 2 - 12

C4

DOUBLE-ENTRY ACCOUNTING
 2 - 13

C4 COMPUTING THE BALANCE FOR A T-

ACCOUNT
A business started with cash of $35. It used $12
to pay for supplies. There are no other cash
transactions for the period. Using a T-account,
what is the ending balance of the cash account?
Cash
Cash is an asset so Cash is an asset
an increase is on 35 12 so a decrease is on
the debit side. the credit side.
23 The
Theending
endingbalance
balanceisis
the
thedifference
differencebetween
between
the
thedebit
debitand
andcredit
credit
entries
entriesin inthe
theaccount.
account.
 2 - 14

P1
JOURNALIZING &
POSTING TRANSACTIONS

Assets
Assets = Liabilities
Liabilities + Equity
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

 2 - 15

P1 JOURNALIZING
TRANSACTIONS
 2 - 16

P1

BALANCE COLUMN ACCOUNT

T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
 2 - 17

P1

POSTING JOURNAL ENTRIES

 2 - 18

A1

ANALYZING TRANSACTIONS

301
 2 - 19

A1
ANALYZING TRANSACTIONS

Transaction: (2) FastForward purchases supplies by paying

$2,500 in cash

Analysis:
Assets = Liabilities + Equity
Cash Supplies

(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

2-19
 2 - 20

A1
ANALYZING TRANSACTIONS

(3) FastForward purchases equipment by paying

Transaction:
$26,000 cash

Analysis:
Assets = Liabilities + Equity
Cash Equipment

(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

2-20
 2 - 21

A1
ANALYZING TRANSACTIONS
(4) Fa stForw a rd purcha se s $7,100 of supplie s on cre dit.
Transac tion:

Analysis:
Assets = Liabilities + Equity
Supplies Accounts Payable
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

2-21
 2 - 22

A1
ANALYZING TRANSACTIONS
(5) Fa stForw a rd provide s consulting se rvice s a nd
Transaction:
imme dia te ly colle cts $4,200 ca sh.

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

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

Posting:
Cash 403 Consulting Revenue 101
(1) 30,000 (2) 2,500 (3) 4,200
(5) 4,200 (3) 26,000

2-22
 2 - 23

A1
ANALYZING TRANSACTIONS
Transaction: (6) Fa stForw a rd pa ys $1,000 ca sh for De ce mbe r re nt.

Analysis:
Assets = Liabilities + Equity
Cash Rent Expense
(1,000) 1,000

Double entry:
(6) Rent Expense 640 1,000
Cash 101 1,000
Posting:
Cash Rent Expense
403 (6) 1,000 101
(1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
(6) 1,000
2-23
 2 - 24

A1
ANALYZING TRANSACTIONS
Transaction: (7) Fa stForw a rd pa ys $700 ca sh for e mploye e sa la ry.

Analysis:
Assets = Liabilities + Equity
Cash Salaries Expense
(700) 700

Double entry:
(7) Salaries Expense 622 700
Cash 101 700

Posting:
Cash 403 Salaries Expense 101
(1) 30,000 (2) 2,500 (7) 700
(5) 4,200 (3) 26,000
(6) 1,000
(7) 700 2-24
 2 - 25

A1
ANALYZING TRANSACTIONS
(8) FastForw ard provides consulting service of $1,600 and
Transaction: rents its test facilities for $300. The customer is billed
$1,900 for these services.

Analysis:
Assets = Liabilities + Equity
Accounts Consulting
Receivable Revenue Rental Revenue
1,900 1,600 300
Double entry:
(8) Accounts Receivable 106 1,900  
    Consulting Revenue 403   1,600
    Rental Revenue 406   300
Posting:
Accounts Receivable Consulting Revenue
(8) 1,900 403 101
(8) 1,600
Rental Revenue
(8) 300
2-25
 2 - 26

A1
ANALYZING TRANSACTIONS
(9) FastForw ard receives $1,900 cash from the client billed
Transaction:
in transaction 8.

Analysis:
Assets = Liabilities + Equity

Cash Accounts
Receivable
1,900 -1,900

Double entry:
(9) Cash 106 1,900  
    Accounts Receivable 106   1,900

Posting:
Cash 403 Accounts Receivable101
(1) 30,000 (2) 2,500 (8) 1,900 (9) 1,900
(5) 4,200 (3) 26,000
(9) 1,900 (6) 1,000
(7) 700
2-26
 2 - 27

A1
ANALYZING TRANSACTIONS
(10) FastForw ard pays CalTech Supply $900 cash tow ard
Transaction:
the payable of transaction 4.

Analysis:
Assets = Liabilities + Equity

Cash Accounts
Payable
-900 -900

Double entry:
(10) Accounts Payable 201 900  
    Cash 101   900
Posting:
Cash Accounts Payable
(1) 30,000 (2) 2,500 (10) 900 (4) 900
101
403
(5) 4,200 (3) 26,000
(9) 1,900 (6) 1,000
(7) 700
(10) 900
2-27
 2 - 28

A1
ANALYZING TRANSACTIONS
Transaction: (11) FastForw ard pays $200 cash for dividends.

Analysis:
Assets = Liabilities + Equity

Cash Dividends

-200 -200
Double entry:
(11) Dividends 319 200  
    Cash 101   200
Posting:
Cash Dividends
(1) 30,000 (2) 2,500 (11) 200
(5) 4,200 (3) 26,000
(9) 1,900 (6) 1,000
403 101
(7) 700
(10) 900
(11) 200
2-28
 2 - 29

A1
ANALYZING TRANSACTIONS
(12) FastForw ard receives $3,000 cash in advance of
Transaction:
providing consulting services to a customer.

Analysis:
Assets = Liabilities + Equity
Unearned
Cash Consulting
Revenue
3,000 3,000
Double entry:
(12) Cash 101 3,000  
    Unearned Consulting Revenue 236   3,000
Posting:
Cash Unearned Consulting Revenue
(1) 30,000 (2) 2,500 (12) 3,000
(5) 4,200 (3) 26,000
(9) 1,900 (6) 1,000
403 101
(7) 700
(12) 3,000
(10) 900
(11) 200
2-29
 2 - 30

A1
ANALYZING TRANSACTIONS
(13) Fas tFor w ar d pays $2,400 cas h (ins ur ance pr e m ium ) for a
Transaction:
24-m onth ins ur ance policy. Cove r age be gins on De ce m be r 1.

Analysis:
Assets = Liabilities + Equity

Cash Prepaid
Insurance
-2,400 2,400

Double entry:
(13) Prepaid Insurance 128 2,400  
    Cash 101   2,400
Posting:
Cash Prepaid Insurance
(1) 30,000 (2) 2,500 (13) 2,400
(5) 4,200 (3) 26,000
(9) 1,900 (6) 1,000
403 101
(7) 700
(12) 3,000
(10) 900
(11) 200
(13) 2,400
2-30
 2 - 31

A1
ANALYZING TRANSACTIONS
Transaction: (14) FastForw a rd pa ys $120 ca sh for supplie s.

Analysis:
Assets = Liabilities + Equity

Cash Supplies

-120 120

Double entry:
(14) Supplies 126 120  
    Cash 101   120
Posting:
Cash Supplies
(1) 30,000 (2) 2,500 (2) 2,500  
(5) 4,200 (3) 26,000 (4) 7,100  
(9) 1,900 (6) 1,000 (14) 120  
(7) 700
403     101
(12) 3,000
(10) 900
(11) 200
(13) 2,400
(14) 120
2-31
 2 - 32

A1
ANALYZING TRANSACTIONS
(15) FastForw ard pays $230 cash for December utilities
Transaction:
expense.

Analysis:
Assets = Liabilities + Equity

Cash Utilities Expense

-230 230

Double entry:
(15) Utilities Expense 690 230  
    Cash 101   230
Posting:
Cash Utilities Expense
(1) 30,000 (2) 2,500 (15) 230  
(5) 4,200 (3) 26,000  
(9) 1,900 (6) 1,000  
(7) 700
403     101
(12) 3,000 (10) 900
(11) 200
(13) 2,400
(14) 120
(15) 230 2-32
 2 - 33

A1
ANALYZING TRANSACTIONS
(16) FastForw ard pays $700 cash in employee salary for
Transaction:
w ork performed in the latter part of December.

Analysis:
Assets = Liabilities + Equity
Cash Salaries Expense
-700 700
Double entry:
(16) Salaries Expense 622 700  
    Cash 101   700
Posting:
Cash Salaries Expense
(1) 30,000 (2) 2,500 (7) 700  
(5) 4,200 (3) 26,000 (16) 700  
(9) 1,900 (6) 1,000  
(7) 700    
(12) 3,000
(10) 900
(11) 403
200 101
(13) 2,400
(14) 120
(15) 230
(16) 700
2-33
 2 - 34

P2 After
After processing its remaining transactions
transactions for
for
December, FastForward’s Trial Balance is prepared.

The trial balance

lists all account
balances in the
general ledger. If
the books are in
balance, the total
debits will equal the
total credits.
 2 - 35

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.
 2 - 36

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
entered from the ledger. correctly.

 See if debit or credit  Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial debits and credits.
balance.
 2 - 37

P3
USING A TRIAL BALANCE TO PREPARE
FINANCIAL STATEMENTS
 2 - 38

P3
 2 - 39

P3
PRESENTATION ISSUES
1. Currency signs are not used in journals and ledgers.
2. Currency signs appear in financial statements and
other reports such as trial balances. The usual
practice is to put currency 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.
 2 - 40

END OF CHAPTER 2