Chapter 2:

Transaction Analysis
 Transactions and Accounts
Transactions
• An event that has a financial
impact on the business and
can be measured reliably.
• Provides objective
information about the
financial impact on an
exchange
• Gives something
• Receives something
• Accounting records both
sides of the transaction
Accounts
• The basic summary device
of accounting
• The detailed record of all the
changes in a specific asset,
liability, or stockholders’
equity item as a result of
transactions.
 Recording Business Transactions
 Fundamental accounting equation

Stockholder’
Assets Liabilities s
Equity

Resources Amount of Amount of

business assets assets
owns that financed by financed by
have value lenders stockholders
Assets

Accounts Notes
Cash
Receivable Receivable

Prepaid
Land Buildings
Expenses

Equipment,
Furniture, and
Fixtures
Liabilities

Accounts Notes
Payable Payable
Accrued
Liabilitie
s
Stockholders’ Equity

Common Retained
Revenues
Stock Earnings

Dividend
Expenses
s
 Double-entry Accounting
Every transaction impacts at least two
accounts
◦ Each account has two sides
 One side increases and other decreases

Debit DOES NOT mean increase

Credit DOES NOT mean decrease
T-Account and Normal Balance
T-account

Account Title
Debit = left side Credit = right side
Dr. Cr.

Normal balance is the balance that

appears on the side of an account where
increases are recorded and is the expected
balance of an account.
 Normal Balance
Normal balance
Account Normal Balances
Debit normal balance: Credit normal balance:
Assets Liabilities
Expenses Common Stock
Dividend Retained Earnings
Revenues
Normal Balance
The side (debit or credit) where the account
total is posted.
It is always on the increasing side of an
account. Account Type Normal Balance
Assets Debit
Liabilities Credit
Common Stock Credit
Retained Earnings Credit
Revenue Credit
Expenses Debit
Dividends Debit
Debits and Credits
Increase with a Debit: Increase with a Credit:
◦ Assets ◦ Liabilities
◦ Dividends ◦ Common Stock
◦ Expenses ◦ Revenues
◦ Retained Earnings

A DE L
CR
Debits Credits
 General Journal

General journal is the chronological

accounting record of the transactions of a
business.
Recording is entering a transaction in a
journal; also called journalizing.
Transaction is an event that has a
financial impact on a business entity
Chronological record of transactions
 Steps in Entering Journal Entries

Record the credit

Record the debit
part of the entry
part of the entry
on the next line Write an
by entering the
by indenting the explanation
Record the date. account title and
account title and describing the
then entering the
then entering the entry.
amount in the
amount in the
debit column.
credit column.
 General Journal

Transaction:
◦ January 1, 2012: Osborne Consulting, Inc.
sold $10,000 of stock to Cindy Osborne, who
was investing in the business.
GENERAL JOURNAL Page 3
DATE ACCOUNTS DEBIT CREDIT

 Jan 1 Cash  10,000

Common Stock  10,000
 Sold Stock
General Ledger
 Grouping of all accounts with their balances

GENERAL LEDGER
Cash
BALANCE
DATE ITEM DEBIT CREDIT DEBIT CREDIT

 Posting
◦ Process of transferring information from journal to
ledger
 Transaction Analysis

What accounts are involved?

What type of account is it?

Does balance increase or decrease?

Debit or credit the account?

Record entry and post.

 Example
 Transaction 1: The business sold Cindy Osborne $10,000 of
common stock for cash
Step 1 Step 2 Step 3 Step 4
Cash Asset Increase Dr.

Common Stock Stockholders’ equity Increase Cr.

 General journal
Date Account Debit Credit

1 Cash $10,000

Common Stock $10,000

 Posting to General Ledger

Cash Common Stock
10,000 10,000
 Balancing the T-Accounts
After the transactions are recorded and posted to the T-
accounts, you will calculate each account’s balance
Balance is the difference between an account’s total
debits and total credits
 New business, no beginning balance
 Received $85,000 cash from sale of stock
 Paid $40,000 for building
Cash
 Ending Balance is $45,000  Bal 0
 85,000
40,000 

 Bal 45,000
Trial Balance
Once transactions have been recorded in
the journal and posted to accounts in the
ledger, a trial balance is prepared at the
end of an accounting period.
Trial balance is a list of all the accounts of
a business and their balances
Its purpose is to verify that total debits
equal total credits.
 The Trial Balance
ABC Company 
 Trial Balance
January 31, 2012
ACCOUNT DEBIT CREDIT
Cash $18,000
Accounts Receivable 8,000
Equipment 75,000
Accounts Payable $ 3,000
Notes Payable 4,500
 Common Stock 50,000
Retained Earnings 31,000
Service Revenue 20,000
Rent Expense 1,500
Salaries Expense 6,000
Total  $108,000 $108,000
Preparation of Financial Statements
Trial Balance shows Accounts with their
balances and is used to prepare, in sequence:

Income Statement
◦ Net Income is used to prepare…

Statement of Retained Earnings

◦ Retained Earnings is used to prepare…

Balance Sheet
 Income Statement
ABC Company
Income Statement
Month Ended January 31, 2012
Revenue:
Subtotal
Service Revenue $20,000
Expenses:
Rent Expense $1,500
Salaries Expense 6,000
Total Expenses Sub-amounts 7,500
Net Income $12,500

Total
 Note “left” and “right” columns
 NOT debits and credits
 Used for sub-amounts, subtotals and totals.
Statement of Retained Earnings
ABC Company
Statement of Retained Earnings
Month Ended January 31, 2012 From Income
Retained Earnings, January 1, 2012 Statement $31,000
Add: Net Income for the month 12,500
Subtotal 43,500
Less: Dividends 0
Retained Earnings, January 31, 2012 $43,500

To Balance
Sheet
Balance Sheet
ABC Company
Balance Sheet
January 31, 2012
ASSETS LIABILITIES
Cash $18,000 Accounts Payable $ 3,000
Accounts Receivable 8,000 Note Payable 4,500
Equipment 75,000 Total Liabilities 7,500

STOCKHOLDERS’ EQUITY
From Statement of Common Stock 50,000
Retained Earnings Retained Earnings 43,500
Total Stockholders’ Equity 93,500
Total Liabilities &
Total Assets $101,000 Stockholders’ Equity $101,000
QUESTIONS?