ANALYZING AND RECORDING

TRANSACTIONS

Chapter 2

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 WHAT WE HAVE DONE SO FAR…
 Importance of accounting
 Fundamental principles of accounting
 Transaction analysis and the
accounting equation
 Financial statements
 Return on assets

Assets
Assets Liabilities
Liabilities Equity
Equity
= +

McGraw-Hill/Irwin Slide 2
 WHAT WE HAVE DONE SO FAR…
a. Purchased land for $4,000 cash.
b. Purchased $1,000 of office supplies on credit.
c. Billed a client $1,900 for services provided.
d. Paid the $1,000 account payable created by the credit purchase of office supplies
in transaction b.
e. Collected $1,900 cash for the billing in transaction c.
ASSETS = LIABILITIES + EQUITY
Cash + Accounts + Office + Land = Accounts + Trista, + Revenues
Receivable Supplies Payable Capital
$21,000 + $0 + $3,000 + $19,000 = $0 + $43,000 + $0

A - 4,000 + 4,000

B + 1,000 +1,000

C + 1,900 + 1,900

D - 1,000 - 1,000

E + 1,900 - 1,900

$17,900 + $0 + $4,000 + $23,000 = $0 + $43,000 + $1,900

McGraw-Hill/Irwin Slide 3
 CHAPTER OUTLINE
 Analyzing and recording process
 Analyzing and processing transaction

 Trial balance

McGraw-Hill/Irwin Slide 4
 C1 ANALYZING AND RECORDING
PROCESS

Record relevant transactions

Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
Prepare and analyze to ledger
the trial balance accounts

McGraw-Hill/Irwin Slide 5
C2

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

Sales
Tickets

McGraw-Hill/Irwin Slide 6
C3 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.

McGraw-Hill/Irwin Slide 7
McGraw-Hill/Irwin Slide 8
C3 THE ACCOUNT AND ITS
ANALYSIS

Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts

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

McGraw-Hill/Irwin Slide 9
C3

ASSET ACCOUNTS

Cash
Cash
Accounts
Accounts
Land
Land Receivable
Receivable

Buildings
Asset
Asset Notes
Accounts
Accounts Receivable
Receivable

Equipment Prepaid
Prepaid
Accounts
Accounts
Supplies

McGraw-Hill/Irwin Slide 10
C3

LIABILITY ACCOUNTS

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable
Compared to Compared to
Accounts
Receivable? Liability
Liability Notes Receivable?

Accounts
Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue
EX: wage payable, tax EX: magazine
payable, interest payable subscriptions
McGraw-Hill/Irwin Slide 11
C3

EQUITY ACCOUNTS

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

Equity
Accounts

Revenues
Revenues Expenses
Expenses

McGraw-Hill/Irwin Slide 12
C3 THE ACCOUNT AND ITS
ANALYSIS

Assets = Liabilities
Liabilities + Equity
Equity

+ – + –
Owner’s
Owner’s Owner's
Owner's Revenues
Revenues Expenses
Expenses
Capital
Capital Withdrawals
Withdrawals

McGraw-Hill/Irwin Slide 13
C4 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.

McGraw-Hill/Irwin Slide 14
C5

DEBITS AND CREDITS

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

McGraw-Hill/Irwin Slide 15
 Rules for using accounts
Accounts are assigned balance sides (Debit or Credit).
To increase any account, use the balance side.
To decrease any account, use the side opposite the
balance.
 

Finding account balances

If total debits = total credits, the account balance is zero.
If total debits are greater than total credits, the account has
a debit balance equal to the difference of the two totals.
If total credits are greater than total debits, the account has
a credit balance equal to the difference of the two totals.
McGraw-Hill/Irwin Slide 16
C5

DOUBLE-ENTRY ACCOUNTING

Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

McGraw-Hill/Irwin Slide 17
C5

DOUBLE-ENTRY ACCOUNTING

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

Owner’s Owner's Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
McGraw-Hill/Irwin Slide 18
C5

DOUBLE-ENTRY ACCOUNTING
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account.

McGraw-Hill/Irwin Slide 19
P1
JOURNALIZING &
POSTING TRANSACTIONS

Assets
Assets = Liabilities
Liabilities + Equity
Equity

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

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

McGraw-Hill/Irwin Slide 20
P1 JOURNALIZING
TRANSACTIONS

Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts


Transaction
Transaction 
Dollar
Dollar amount
amount of
of debits
debits
explanation
explanation and
and credits
credits
McGraw-Hill/Irwin Slide 21
P1

BALANCE COLUMN ACCOUNT

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

McGraw-Hill/Irwin Slide 22
P1

POSTING JOURNAL ENTRIES

1 Identify the debit account in ledger.

McGraw-Hill/Irwin Slide 23
P1

POSTING JOURNAL ENTRIES

22 Enter the date.

McGraw-Hill/Irwin Slide 24
P1

POSTING JOURNAL ENTRIES

3 Enter the amount and description.

McGraw-Hill/Irwin Slide 25
P1

POSTING JOURNAL ENTRIES

44 Enter the journal reference.

McGraw-Hill/Irwin Slide 26
P1

POSTING JOURNAL ENTRIES

55 Compute the balance.

McGraw-Hill/Irwin Slide 27
P1

POSTING JOURNAL ENTRIES

6 Enter the ledger reference.

McGraw-Hill/Irwin Slide 28
A1

ANALYZING TRANSACTIONS

Analysis:

Double entry:

Posting:
101 301

McGraw-Hill/Irwin Slide 29
A1

ANALYZING TRANSACTIONS

Analysis:

Double entry:

Posting:
126 101

McGraw-Hill/Irwin Slide 30
A1

ANALYZING TRANSACTIONS

Analysis:

Double entry:

Posting:
167 101

McGraw-Hill/Irwin Slide 31
A1

ANALYZING TRANSACTIONS

Analysis:

Double entry:

Posting:
126 201

McGraw-Hill/Irwin Slide 32
A1

ANALYZING TRANSACTIONS

Analysis:

Double entry:

Posting:
403 101

McGraw-Hill/Irwin Slide 33
 A TRIAL BALANCE
FastForward
Trial Balance
December 31, 2009
Debits Credits
Cash $ 4,350
Accounts receivable -
Supplies 9,720
Prepaid Insurance 2,400
Equipment 26,000
Accounts payable $ 6,200
Unearned consulting revenue 3,000
C. Taylor, Capital 30,000
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
McGraw-Hill/Irwin Slide 34
 EXAMPLE: PREPARING GENERAL
JOURNAL ENTRIES
Prepare general journal entries for the following transactions of a
new company called Special Pics.
Aug. 1 Madison Harris, the owner, invested $14,250 cash and $61,275
of photography equipment in the company.
Aug. 2 The company paid $3,300 cash for an insurance policy covering
the next 24 months.
Aug. 5 The company purchased office supplies for $2,707 cash.
Aug. 20 The company received $3,250 cash in photography fees
earned.
Aug. 31 The company paid $871 cash for August utilities.
Quick analysis:
(1) Cash , Equipment , Capital
(2) Cash , Prepaid Insurance
(3) Cash , Supplies
(4) Cash , Revenue
(5) Cash , Utilities expense
McGraw-Hill/Irwin Slide 35
  GENERAL JOURNAL
 

Date   Account Titles and Explanation P.R. Debit Credit

Aug  1 Cash      14,250  

    Photography Equipment      61,275  
       M. Harris, Capital        75,525
       Owner investment in business      
   2  Prepaid Insurance     3,300  
       Cash         3,300
 Acquired 24 months of insurance
      coverage      
   5  Office Supplies    2,707  
       Cash        2,707
       Purchased office supplies      
   20  Cash     3,250  
       Photography Fees Earned       3,250
       Collected photography fees      
   31  Utilities Expense      871  
       Cash       871
       Paid for August utilities      
McGraw-Hill/Irwin Slide 36
 QUICK CHECK
1. The accounting process begins with: 
A. Analysis of business transactions and source documents.
B. Preparing financial statements and other reports.
C. Summarizing the recorded effect of business transactions.
D. Presentation of financial information to decision-makers.
E. Preparation of the trial balance.

2. A sales invoice: 
A. Is a type of source document.
B. Is used by sellers to record the sale.
C. Is used by buyers to record purchases.
D. Gives rise to an entry in the accounting process.
E. All of these.

McGraw-Hill/Irwin Slide 37
 QUICK CHECK
3. Source documents include all of the following except: 
A. Sales tickets.
B. Ledgers.
C. Checks.
D. Purchase orders.
E. Bank statements.

4. Unearned revenues are: 

A. Revenues that have been earned and received in cash.
B. Revenues that have been earned but not yet collected in cash.
C. Liabilities created when a customer pays in advance for products
or services before the revenue is earned.
D. Recorded as an asset in the accounting records.
E. Increases to owners' capital.

McGraw-Hill/Irwin Slide 38
 QUICK CHECK
5. Prepaid expenses are: 
A. Payments made for products and services that do not ever
expire.
B. Classified as liabilities on the balance sheet.
C. Decreases in equity.
D. Assets that represent prepayments of future expenses.
E. Promises of payments by customers.

6. A list of all accounts and the identification number assigned

to each account used by a company is called a: 
A. Source document.
B. Journal.
C. Trial balance.
D. Chart of accounts.
E. General Journal.

McGraw-Hill/Irwin Slide 39
 QUICK CHECK
7. A credit is used to record: 
A. A decrease in an expense account.
B. A decrease in an asset account.
C. An increase in an unearned revenue account.
D. An increase in a revenue account.
E. All of these.

8. Of the following accounts, the one that normally has a credit

balance is: 
A. Cash.
B. Office Equipment.
C. Sales Salaries Payable.
D. Owner, Withdrawals.
E. Sales Salaries Expense.

McGraw-Hill/Irwin Slide 40
 QUICK CHECK
9. Double-entry accounting is an accounting system: (journal)
A. That records each transaction twice.
B. That records the effects of transactions and other events in at least two
accounts with equal debits and credits.
C. In which each transaction affects and is recorded in two or more accounts
but that could include two debits and no credits.
D. That may only be used if T-accounts are used.
E. That insures that errors never occur.

10. On September 30, the Cash account of Value Company had a

normal balance of $5,000 ending balance. During September, the
account was debited for a total of $12,200 and credited for a total of
$11,500. What was the balance in the Cash account at the beginning of
September?
 Ending balance = beginning balance + số phát sinh tăng – phát sinh giảm
5000 = a + 12.200 – 11.500  a =
A. A $0 balance.
B. A $4,300 debit balance.
C. A $4,300 credit balance.
D. A $5,700 debit balance.
McGraw-Hill/Irwin Slide 41
 After
After processing its remaining transactions
transactions for
for
P2
December, FastForward’s Trial Balance is prepared.

FastForward
Trial Balance The trial balance
December 31, 2009
lists all account
Debits Credits
Cash $ 4,350
balances in the
Accounts receivable - general ledger. If
Supplies 9,720
Prepaid Insurance 2,400
the books are in
Equipment 26,000 balance, the total
Accounts payable $ 6,200
Unearned consulting revenue 3,000
debits will equal the
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

McGraw-Hill/Irwin Slide 42
P2
PREPARING A TRIAL BALANCE

McGraw-Hill/Irwin Slide 43
McGraw-Hill/Irwin Slide 44
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.
McGraw-Hill/Irwin Slide 45
McGraw-Hill/Irwin Slide 46
 Example 1: Unbalanced trial balance
Account Debit Credit

Cash 53

Accounts receivable 115

Accounts payable 106

Income 191

Wages expense 75

Marketing expense 54

Total 222 372

Difference 150

The difference of 150 is divided by 2 to provide the amount of 75.

=> wages expense acct has a credit balance of 75 => WRONG!!!
McGraw-Hill/Irwin Slide 47
 Example 1: Corrected trial balance
Account Debit Credit

Cash 53

Accounts receivable 115

Accounts payable 106

Income 191

Wages expense 75

Marketing expense 54

Total 297 297

Difference 0

McGraw-Hill/Irwin Slide 48
 Example 2: Transposition errors
An $89 payment for telephone bill was journalized as a debit to
telephone expense by $98 and credit to cash by $98.

Analysis: 
This is a transposition error; the digits are reversed in the
amount. The difference between $98 and $89 is 9 (divided by 9)
This error can be corrected as if debit to cash by $9 and credit
to telephone expense by $9.

McGraw-Hill/Irwin Slide 49
P3 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

McGraw-Hill/Irwin Slide 50
P3
INCOME STATEMENT

McGraw-Hill/Irwin Slide 51
P3
STATEMENT OF OWNER'S EQUITY
FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2009
C. Taylor, Capital 12/1/09 $ -

Connections
Net income for December 3,470
Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
. C. Taylor, Capital, 12/31/09 $ 33,270

McGraw-Hill/Irwin Slide 52
P3
BALANCE SHEET

Connections

McGraw-Hill/Irwin Slide 53
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 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.

McGraw-Hill/Irwin Slide 54
A2

Debt to Assets Ratio

Total Debt
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.

McGraw-Hill/Irwin Slide 55
 QUICK CHECK
1. A liability created by the receipt of cash from customers in payment for
products or services that have not yet been delivered to the customers is: 
A. Recorded as a debit to an unearned revenue account.
B. Recorded as a debit to a prepaid expense account.
C. Recorded as a credit to an unearned revenue account.
D. Recorded as a credit to a prepaid expense account.
E. Not recorded in the accounting records until the earnings process is complete.

2. On September 30, the Cash account of Value Company had a normal

balance of $5,000. During September, the account was debited for a total of
$12,200 and credited for a total of $11,500. What was the balance in the Cash
account at the beginning of September? 
A. A $0 balance.
B. A $4,300 debit balance.
C. A $4,300 credit balance.
D. A $5,700 debit balance.
E. A $5,700 credit balance.

McGraw-Hill/Irwin Slide 56
 QUICK CHECK
3. On April 30, Holden Company had an Accounts Receivable balance of
$18,000. During the month of May, total credits to Accounts Receivable were
$52,000 from customer payments. The May 31 Accounts Receivable balance
was $13,000. What was the amount of credit sales during May? 
A. $ 5,000.
B. $47,000.
C. $52,000.
D. $57,000.
E. $32,000.

4. During the month of February, Hoffer Company had cash receipts (NHẬN
TIỀN CASH) of $7,500 (and cash disbursements (CHI TIỀN CASH) of $8,600.
The February 28 cash balance was $1,800. () What was the January 31(ĐẦU
THÁNG 2) beginning cash balance? 
Ending balance = beginning balance + số phát sinh tăng – phát sinh giảm
1,800 = A + 7,500 – 8,600  A
A. $700.
B. $1,100.
C. $2,900.
D. $0.
E. $4,300.
McGraw-Hill/Irwin Slide 57
 QUICK CHECK
5. The following transactions occurred during July:
1. Received $900 cash for services provided to a customer during July.
2. Received $2,200 cash investment from Barbara Hanson, the owner of
the business.
3. Received $750 from a customer in partial payment of his account
receivable which arose from sales in June.
4. Provided services to a customer on credit, $375.
5. Borrowed $6,000 from the bank by signing a promissory note.
6. Received $1,250 cash from a customer for services to be rendered
next year.
What was the amount of revenue for July?  
A.  $ 900.
B.  $ 1,275.
C.  $ 2,525.
D.  $ 3,275.
E.  $11,100.

McGraw-Hill/Irwin Slide 58
 QUICK CHECK
6. Zed Bennett opened an art gallery and as a dealer completed these
transactions:
1. Started the gallery, Artery, by investing $40,000 (+) cash and equipment
valued at $18,000
2. Purchased $70 of office supplies on credit.
3. Paid $1,200 (-)cash for the receptionist's salary
4. Sold a painting for an artist and collected a $4,500 cash (+) commission
on the sale.
5. Completed an art appraisal and billed the client $200.
What was the balance of the cash account after these transactions were
posted?  
A.  $12,230.
B.  $12,430.
C.  $43,300.
D.  $43,430.
E.  $61,430.

McGraw-Hill/Irwin Slide 59
 QUICK CHECK
7. The debt ratio is used: 
A. To measure the relation of equity to expenses.
B. To reflect the risk associated with a company's debts.
C. Only by banks when a business applies for a loan.
D. To determine how much debt a firm should pay off.
E. All of these.

8. Which of the following is the formula used to calculate the debt

ratio? 
A. Total Equity/Total Liabilities.
B. Total Liabilities/Total Equity.
C. Total Liabilities/Total Assets.
D. Total Assets/Total Liabilities.
E. Total Equity/Total Assets.

McGraw-Hill/Irwin Slide 60
 QUICK CHECK
9. Which of the following statements is incorrect? 
A. Higher financial leverage involves higher risk.
B. Risk is higher if a company has more liabilities.
C. Risk is higher if a company has higher assets.
D. The debt ratio is one measure of financial risk.
E. Lower financial leverage involves lower risk.

10. At the end of the current year, Norman Company reported total
liabilities of $300,000 and total equity of $100,000. The company's debt
ratio on the last year-end was: 
A. 300%.
B. 33.3%
C. 75.0%.
D. $400,000.
E. Cannot be determined from the information provided.

McGraw-Hill/Irwin Slide 61
 END OF CHAPTER 2

McGraw-Hill/Irwin Slide 62