ANALYZING AND RECORDING

TRANSACTIONS

Chapter 2

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 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 2
C2

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

Sales
Tickets

McGraw-Hill/Irwin Slide 3
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 4
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 5
C3

ASSET ACCOUNTS

Cash
Accounts
Land
Receivable

Buildings
Asset
Asset Notes
Receivable
Accounts
Accounts
Prepaid
Equipment
Accounts
Supplies

McGraw-Hill/Irwin Slide 6
C3

LIABILITY ACCOUNTS

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue

McGraw-Hill/Irwin Slide 7
C3

EQUITY ACCOUNTS

Owner’s
Owner’s Owner’s
Owner’s
Equity
Equity Withdrawals
Withdrawals

Equity
Equity
Accounts
Accounts
Owner’s
Owner’s
Revenues
Revenues Expenses
Expenses Capital
Capital

McGraw-Hill/Irwin Slide 8
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 9
C4 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’s
company’s sizesize 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 Accounting Number Accounting 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 Accounting payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 C. Taylor, Capital 690 Utilities expense
McGraw-Hill/Irwin Slide 10
C4 LEDGER AND CHART OF
ACCOUNTS

Block Assigned Type of Account Block Assigned Type of Account

100-199 Assets 1000-1999 Assets

2000-2999 Liabilities
200-299 Liabilities
3000-3999 Owner's Equity
300-399 Owner's Equity
4000-4999 Revenues
400-499 Revenues
500-599 Costs of Goods Sold 5000-5999 Costs of Goods Sold
600-699 Expenses 6000-6999 Expenses
700-799 Other Revenue 7000-7999 Other Revenue
800-899 Other Expenses 8000-8999 Other Expenses

McGraw-Hill/Irwin Slide 11
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.

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

McGraw-Hill/Irwin Slide 12
C5

DOUBLE-ENTRY ACCOUNTING

Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

McGraw-Hill/Irwin Slide 13
C5

DOUBLE-ENTRY ACCOUNTING

Equity
Owner’s
Owner’s _ 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

- + + - - + + -
McGraw-Hill/Irwin Slide 14
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 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

McGraw-Hill/Irwin Slide 16
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 17
P1

BALANCE COLUMN ACCOUNT

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

McGraw-Hill/Irwin Slide 18
P1

POSTING JOURNAL ENTRIES

1 Identify the debit account in ledger.

McGraw-Hill/Irwin Slide 19
P1

POSTING JOURNAL ENTRIES

2 Enter the date.

McGraw-Hill/Irwin Slide 20
P1

POSTING JOURNAL ENTRIES

3 Enter the amount and description.

McGraw-Hill/Irwin Slide 21
P1

POSTING JOURNAL ENTRIES

4 Enter the journal reference.

McGraw-Hill/Irwin Slide 22
P1

POSTING JOURNAL ENTRIES

5 Compute the balance.

McGraw-Hill/Irwin Slide 23
P1

POSTING JOURNAL ENTRIES

6 Enter the ledger reference.

McGraw-Hill/Irwin Slide 24
A1

ANALYZING TRANSACTIONS

Analysis:

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

McGraw-Hill/Irwin Slide 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

McGraw-Hill/Irwin Slide 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

McGraw-Hill/Irwin Slide 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

McGraw-Hill/Irwin Slide 28
A1

ANALYZING TRANSACTIONS

Analysis:

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

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

McGraw-Hill/Irwin Slide 29
 After processing its remaining transactions 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 30
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.

McGraw-Hill/Irwin Slide 31
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 32
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 33
P3
INCOME STATEMENT
FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
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
McGraw-Hill/Irwin Slide 34
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 $ -
Net income for December 3,470
Connections Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
. C. Taylor, Capital, 12/31/09 $ 33,270

FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
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

McGraw-Hill/Irwin Slide 35
P3
BALANCE SHEET
Statement of Owner's Equity
For the Month Ended December 31, 2009 FASTFORWARD
C. Taylor, Capital 12/1/09 $ - Balance Sheet
Net income for December 3,470 December 31, 2009
Plus: Investments by Owner 30,000
Assets
33,470
Less: Owner Withdrawals 200 Cash $ 4,350
C. Taylor, Capital, 12/31/09 $ 33,270 Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Connections Total liabilities
Equity
9,200

C. Taylor, Capital $ 33,270

Total equity 33,270
Total liabilities and equity $ 42,470
McGraw-Hill/Irwin Slide 36
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 37
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 38
 END OF CHAPTER 2

McGraw-Hill/Irwin Slide 39