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Transaction Analysis
Chapter 2

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Transactions
• Events that have a financial impact on the
business and can be measured reliably
▫ Selling products
▫ Paying expenses
• Have two sides:
▫ Giving
▫ Receiving
• Accounting records both sides of transactions

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The Account

Assets Liabilities Shareholders’

Equity

• Account is a record of all the changes in a

particular asset, liability and shareholders’
equity element
▫ Basic summary device of accounting

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Assets
Accounts &
Cash Notes Inventory
Receivable

Prepaid
Land Buildings
Expenses

Equipment,
Furniture &
Fixtures
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Liabilities

Accounts Notes Accrued

payable payable liabilities

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Shareholders’ Equity

Share Retained
Dividends
Capital Earnings

Revenues Expenses

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Learning Objective 1
Analyze transactions

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ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity
Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
1 50,000 50,000 issued share capital
2 -40000 40,000
10,000 40,000 50,000
3 3,700 3,700
10,000 3,700 40,000 3,700 50,000
4 7,000 7,000 revenue
17,000 - 3,700 40,000 3,700 50,000 7,000
5 3,000 3,000 revenue
17,000 3,000 3,700 40,000 3,700 50,000 10,000
6 -1100 -1100 expense
-1200 -1200 expense
-400 -400 expense
14,300 3,000 3,700 40,000 3,700 50,000 7,300

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ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity
Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
14,300 3,000 3,700 40,000 3,700 50,000 7,300
7 -1900 40,000 -1900
12,400 3,000 3,700 80,000 1,800 50,000 7,300
8 not a transaction by the company
12,400 3,000 3,700 80,000 1,800 50,000 7,300
9 1,000 -1000
13,400 2,000 3,700 80,000 1,800 50,000 7,300
10 22,000 -22000
35,400 2,000 3,700 58,000 1,800 50,000 7,300
11 -2100 -2100 Dividends
33,300 2,000 3,700 58,000 1,800 50,000 5,200

$57,000 $57,000
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 ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity

Statement of Changes in Equity Data

Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
1 50,000 50,000 issued share capital
Statement of Cash Flows Data

Income Statement Data

2 -40000 40,000
3 3,700 3,700
4 7,000 7,000 revenue
5 3,000 3,000 revenue
6 -1100 -1100 expense
-1200 -1200 expense
-400 -400 expense
7 -1900 -1900
9 1000
10 22000
5 -2100 (2,100) Dividends
Bal 33,300 3,000 3,700 40,000 1,800 50,000 5,200
$57,000
Balance Sheet Data
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Learning Objective Two
Understand how accounting works

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Double-Entry Accounting
• Business transactions include two parts
▫ Giving
▫ Receiving
• Accounting based on a double-entry system
▫ Each transaction affects at least two accounts

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T-Account

Account Title
Left side Right side

Debit Credit

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Rules of Debit and Credit
Shareholders’
Assets Liabilities Equity

Debit Credit Debit Credit Debit Credit

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Additional Shareholders’ Equity
Accounts: Revenues & Expenses

Liabilities
Share Capital
Assets +
Beginning Retained Earnings
Shareholders’ +
Revenues
Equity
Expenses

Dividends

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 Rules of Debit and Credit
Shareholders’ Equity
Assets Liabilities Share Capital Retained earnings

Debit Credit Debit Credit Debit Credit Debit Credit

- - - Dividends
-

Debit Credit
Revenue
- Expenses

Debit Credit Debit Credit

- -
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Learning Objective Three
Record transactions in the journal

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The Journal
• Chronological record of transactions
• Three steps
▫ Specify each account affected by the transaction
and classify by type
▫ Determine if each account is increased or
decreased
 Use debit credit rules
▫ Record in journal

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 Journal Entry

JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

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The Ledger
Cash

Ledger
Individual
asset Share
accounts Capital

Individual
equity
accounts
Accounts
payable Individual
liability
accounts

22
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 Posting
JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

Cash Share Capital

$50,000 $50,000

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Flow of Accounting Data
Transaction occurs

Transaction analyzed

Transaction journalized

Amounts posted to the ledger

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Learning Objective Four
Construct a trial balance

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Trial Balance
• Lists all accounts with their balances
• Assets listed first, then liabilities and
shareholders’ equity
• Shows that debits equal credits
• Usually prepared at the end of the period

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Analyzing Accounts
Cash
Beginning balance
Cash receipts Cash payments ?
Ending balance

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Analyzing Accounts
Accounts receivable
Beginning balance
Sales on account
Collections on account ?
Ending balance

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Analyzing Accounts
Accounts payable
Beginning balance

Payments on account ? Purchases on account

Ending balance

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Correcting Accounting Errors

Missing • Trace each account from journal to

account ledger

Divide out-of- • Reversing debits and credits doubles

balance the error
amount by 2
Divide out-of- • If even, error may be a
balance • Slide or
amount by 9 • Transposition

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Chart of Accounts
Balance Sheet Accounts

Assets Liabilities Shareholders’ Equity

101 Cash 201 Accts. payable 301 Share capital

111 Accts. receivable 231 Notes payable 311 Dividends

141 Office supplies 312 Retained earnings

151 Office furniture Income Statement Accounts

191 Land Revenues Expenses

401 Service revenue 501 Rent expense

502 Salary expense

503 Utilities expense

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Normal Balances of Accounts
Assets Debit
Liabilities Credit
Shareholders’ Equity overall Credit
Share capital Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit

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Learning Objective 5
Analyze transactions using only T-Accounts

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Using T-Accounts
• Decisions often are made without a complete
accounting system
• T-Accounts allow managers to analyze
transactions quickly

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 Short Exercise 2-13
Cash Computer Equipment
$140,000 $100,000

Accounts Payable Share Capital

$100,000 $140,000

Debits = $240,000 Credits = $240,000

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End of Chapter Two

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