Chapter 2

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
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. 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
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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.
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C2

The Account and its Analysis

Owner,
Owner, Capital
Capital
Owner,
Owner, Withdrawals
Withdrawals
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C2

Asset Accounts

Cash
Cash
Accounts
Accounts
Land
Land Receivable
Receivable

Buildings
Buildings
Asset
Asset Notes
Receivable
Receivable
Accounts
Accounts
Prepaid
Prepaid
Equipment
Equipment Accounts
Supplies
Supplies
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C2

Liability Accounts

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue
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C2

Equity Accounts

Owner’s
Owner’s Owner’s
Owner’s
Capital
Capital Withdrawals
Withdrawals

Equity
Accounts

Revenues
Revenues Expenses
Expenses
 2-9

C2

The Account and its Analysis

Assets = Liabilities + Equity

 2 - 10

C3

Ledger and Chart of Accounts

The
The ledger
ledger is
is aa collection
collection of
of all
all accounts
accounts for
for an
an
information
information system.
system. A A company
company’’ss size
size and
and diversity
diversity
of
of operations
operations affect
affect the
the number
number ofof accounts
accounts needed.
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
 2 - 11

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 - 12

C4

Double-Entry Accounting

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal
Normal Normal
Normal Normal
Normal
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C4

Double-Entry Accounting
Equity
Owner’’ss
Owner _ Owner's
Owner's _ Expenses
Capital
Capital Withdrawals
Withdrawals + Revenues
Revenues Expenses

Owner’s Owner's Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
 2 - 14

C4

Double-Entry Accounting
An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.
 2 - 15

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.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

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

 2 - 16

P1

Journalizing Transactions

Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
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
Transaction 
Dollar
Dollar amount
amount of
of debits
debits
explanation
explanation and
and credits
credits
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P1

Balance Column Account

T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
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P1

Posting Journal Entries

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

11 Identify the debit account in ledger.

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P1

Posting Journal Entries

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

22 Enter the date.

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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.

 2 - 21

P1

Posting Journal Entries

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

44 Enter the journal reference.

 2 - 22

P1

Posting Journal Entries

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

55 Compute the balance.

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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.

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A1

Analyzing Transactions

Analysis:

Posting:
Cash 101 C. Taylor, Capital 301 301
(1) 30,000 (1) 30,000
 2 - 25

A1

Analyzing Transactions

Analysis:

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 - 26

A1

Analyzing Transactions

Analysis:

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 - 27

A1

Analyzing Transactions

Analysis:

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

Analysis:

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
 2 - 29

P2 After
After processing
processing its
its remaining
remaining transactions
transactions for
for
December,
December, FastForward’s
FastForward’s Trial
Trial Balance
Balance is
is prepared.
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
 2 - 33

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
 2 - 34

P3

STATEMENT OF CHANGES IN EQUITY

FASTFORWARD
Statement of Changes in 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
 2 - 35

P3

Balance Sheet
FASTFORWARD
Statement of Changes in 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

Connections
Unearned revenue 3,000
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.
 2 - 37

A2

Debt Ratio
Total Liabilities
Debt Ratio =
Total Assets

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.
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END OF CHAPTER 2