1

2

Analyzing Transactions

21-22-2

After studying this chapter, you should be able to:

Describe the characteristics of an account and a chart of accounts.

1

Analyzing Transactions

2-2

2 Describe and illustrate journalizing transactions using the double-entry accounting system.

3 Describe and illustrate the journalizing and posting of transactions to accounts.

4 Prepare an unadjusted trial balance and explain how it can be used to discover errors.

31-32-3

Describe the characteristics of an account and a chart of accounts.

1

2-3

41-42-4

The T account has a title.

The T Account

Title

1

51-52-5

The T Account

The left side of the account is

called the debit side.

Title

Debit

1

61-62-6

The T Account

Title

DebitThe right side of

the account is called the credit

side.

Credit

1

71-72-7

Cash(a) 25,000 (b) 20,000(d) 7,500 (e) 3,650

(f) 950(h) 2,000

Balance 5,900

Balance of the account

1

81-82-8

A group of accounts for a business entity is called a ledger.

1

Chart of Accounts

91-92-9

A list of the accounts in a ledger is called a chart of accounts.

1

Chart of Accounts

101-102-10

Assets are resources owned by the business entity.

• Cash• Supplies• Accounts receivable• Prepaid expenses• Buildings

1

Chart of Accounts

111-112-11

Liabilities are debts owed to outsiders (creditors).

• Accounts payable• Notes payable• Wages payable

1

Chart of Accounts

121-122-12

Owner’s equity is the owner’s right to the assets of the business. A drawing account represents the amount of withdrawals by the owner.

1

Chart of Accounts

131-132-13

Revenues are increases in owner’s equity as a result of selling services or products to customers.

• Fees earned• Commission revenue• Rent revenue

1

Chart of Accounts

141-142-14

The using up of assets or consuming services in the process of generating revenues results in expenses.

• Wages expense• Rent expense• Miscellaneous expense

1

Chart of Accounts

151-152-15

Describe and illustrate journalizing transactions using the double-entry accounting system.

2

2-15

161-162-16

Credit for increases (+)

Debit for decreases (–)

Owner’s Equity Accounts

Credit for decreases (–)

Debit for increases (+)

Asset Accounts

Credit for increases (+)

Debit for decreases (–)

Liability Accounts

Rules of Debit and Credit Normal Balances of Accounts

2

Balance Balance

Balance

171-172-17

Credit for increases

(+)

Debit for decreases

(–)

Revenue Accounts

Credit for decreases

(–)

Debit for increases (+)

Expense Accounts

Income Statement Accounts

2

181-182-18

Credit for decreases

(–)

Debit for increases

(+)

Drawing Account

Owner’s Withdrawals

2

191-192-19

Increase(Normal Bal.) Decreases

Balance sheet accounts:AssetDebit CreditLiability Credit DebitOwner’s Equity:

Capital Credit DebitDrawing Debit

CreditIncome statement accounts:

Revenue Credit DebitExpense DebitCredit

Normal Balances

2

201-202-20

State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate the normal balance.

1. Amber Saunders, Drawing2. Accounts Payable3. Cash4. Fees Earned5. Supplies6. Utilities Expense

2-20

Example Exercise 2-12

Rules of Debit and Credit and Normal Balances

211-212-21

2

1. Amber Saunders, Drawing Debit entries only; normal debit balance

2. Accounts Payable Debit and credit entries; normal credit

balance

3. CashDebit and credit entries; normal debit balance

(continued)

Follow My Example 2-1

2-21

Example Exercise 2-1 (continued)

221-222-22

2Example Exercise 2-1 (continued)

4. Fees Earned Credit entries only; normal credit balance

5. SuppliesDebit and credit entries; normal debit balance

6. Utilities Expense Debit entries only; normal debit balance

2-22

Follow My Example 2-1

For Practice: PE 2-1A, PE 2-1B

231-232-23

A transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing.

2

Journalizing

241-242-24

Journalizing requires the following steps:

1. The date of the transaction is entered in the Date column.

(continued)

2. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column.

2

Journalizing

251-252-25

3. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column.

4. A brief description may be entered below the credited account.

5. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded.

2

261-262-26

On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.

Transaction A

2

271-272-27

Date Description Debit Credit

Nov. 12009

Cash 25,000

Chris Clark, Capital 25,000

Invested cash in NetSolutions.

P.R.

JOURNAL Page 1

2

281-282-28

The effect of this entry is shown in the accounts of NetSolutions as follows:

CashNov. 1 25,000 Nov. 1 25,000

Chris Clark, Capital

2

291-292-29

On November 5, NetSolutions bought land for $20,000, paying cash.

Transaction B

2

301-302-30

On November 10, NetSolutions bought supplies on account for $1,350.

Transaction C

2

311-312-31

On November 18, NetSolutions received fees of $7,500 from customers for services rendered.

Transaction D

2

321-322-32

Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Transaction E

2

331-332-33

On November 30, NetSolutions paid creditors on account, $950.

Transaction F

2

341-342-34

Chris Clark determined that the cost of supplies on hand on November 30 was $550.

Transaction G

2

351-352-35

On November 30, Chris Clark withdrew $2,000 from NetSolutions for personal use.

Transaction H

2

361-362-36

Example Exercise 2-22

Prepare a journal entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder on account.

2-36

Follow My Example 2-2

June 3 Truck……………………….. 42,500Cash……………………. 8,500Accounts Payable……. 34,000

For Practice: PE 2-2A, PE 2-2B

Journal Entry for Asset Purchase

371-372-37

Describe and illustrate the journalizing and posting of transactions to accounts..

3

2-37

381-382-38

The process of transferring the debits and credits from the journal entries to the accounts is called posting.

3

Posting Journal Entries to Accounts

391-392-39

Dec. 1 NetSolutions paid a premium of $2,400 for an insurance policy for liability, theft and fire. The policy covers a one-year period.

3

401-402-40

Posting the previous entry requires the following steps:1. The date (Dec. 1) of the journal entry

is entered in the Date column of Prepaid Insurance.

(continued)

2. The amount ($2,400) is entered into the Debit column of Prepaid Insurance.

3

411-412-41

3. The journal page number (2) is entered in the Posting Reference (Post. Ref.) column of Prepaid Insurance.

4. The account number (15) is entered in the Posting Reference (Post. Ref.) column in the journal.

3

421-422-42

3

to Cash

Step 1

ep 3

Step 1

Step 2

Step 2

ep 3

(continued)

Exhibit 4 Diagram of the Recording and Posting of a Debit and a Credit

431-432-43

3

Step 1

ep 3

Step 2

Step 1

ep 4

Step 3

Step 3

Exhibit 4 Diagram of the Recording and Posting of a Debit and a Credit (continued)

441-442-44

Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the first of each month, rather than at the end of the month.

3

451-452-45

Dec. 1 NetSolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance.

(continued)

3

461-462-46

Dec. 1 NetSolutions receives $360 for three month’s rent for use of its land beginning December 1.

3

471-472-47

Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.

3

481-482-48

Dec. 6 NetSolutions paid $180 for a newspaper advertisement.

3

491-492-49

Dec. 11 NetSolutions paid creditors $400.

3

501-502-50

Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.

3

511-512-51

Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.

3

521-522-52

Example Exercise 2-33

Prepare a journal entry on August 7 for the fees earned on account, $115,000.

Follow My Example 2-3

Aug. 7 Accounts Receivable……... 115,000 Fees Earned……………… 115,000

2-52

Journal Entry for Fees Earned

For Practice: PE 2-3A, PE 2-3B

531-532-53

Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.

3

541-542-54

Dec. 21 NetSolutions received $650 from customers in payment of their accounts.

3

551-552-55

Dec. 23 NetSolutions paid $1,450 for supplies.

3

561-562-56

Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.

3

571-572-57

Dec. 31 NetSolutions paid its $310 telephone bill for the month.

3

581-582-58

Dec. 31 NetSolutions paid $225 for electric usage for the month.

3

591-592-59

Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.

3

601-602-60

Dec. 31 NetSolutions earned $1,120 on account for the second half of December.

3

611-612-61

Dec. 31 Chris Clark withdrew $2,000 for personal use.

3

621-622-62

Prepare a journal entry on December 29 for the payment of $12,000 to the owner of Smartstaff Consulting Services, Dominique Walsh, for personal use.

Example Exercise 2-43

Dec. 29 Dominique Walsh, Drawing….. 12,000 Cash…………………………… 12,000

Follow My Example 2-4

2-62

For Practice: PE 2-4A, PE 2-4B

Journal Entry for Owner’s Withdrawal

631-632-63

On March 1, the cash account balance was $22,350. During March, cash receipts totaled $241,880 and the March 31 balance was $19,125. Determine the cash payments made during March.

3 Example Exercise 2-5

Missing Amount from an Account

2-63

641-642-64

3Example Exercise 2-5 (continued)

Follow My Example 2-5

Using the following T-account solve for the amount of cash payment (indicated by ? below).

Cash

Mar. 1 Bal 22,350 ? Cash paymentsCash receipts 241,880Mar. 31 Bal. 19,125

$19,125 = $22,350 + $241,880 – Cash paymentsCash payments = $22,350 + $241,880 – $19,125 = $245,105

2-64

For Practice: PE 2-5A, PE 2-5B

651-652-65

3

Ledger NetSolutions

Exhibit 5 Ledger NetSolutions

661-662-66

3Exhibit 5 Ledger NetSolutions (continued)

671-672-67

3

Exhibit 5 Ledger NetSolutions (continued)

681-682-68

Prepare an unadjusted trial balance and explain how it can be used to discover errors.

4

2-68

691-692-69

The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance.

4

Trial Balance

701-702-70

The steps in preparing a trial balance are as follows:1. List the name of the company, the

title of the trial balance, and the date the trial balance is prepared.

2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance.

(continued)

4

711-712-71

3. Total the Debit and Credit columns of the trial balance.

4. Verify that the total of the Debit column equals the total of the Credit column.

4

721-722-72

4

Exhibit 6 Trial Balance

731-732-73

A transposition occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524.

4

Errors

741-742-74

In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $97.50 as $975.00.

Errors

751-752-75

For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much.a. Payment of a cash withdrawal of $5,600 was journalized and

posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash.

b. A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850.

c. A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash.

4 Example Exercise 2-6

2-75

Trial Balance Errors

761-762-76

24Example Exercise 2-6 (continued)

Follow My Example 2-6

a. The totals are equal since both the debit and credit entries were journalized and posted for $6,500.

2-76

For Practice: PE 2-6A, PE 2-6B

b. The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580).

c. The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500).

771-772-77

If an error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared.

4

781-782-78

Another type of error is a posting error. Assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500.

Errors Not Affecting the Trial Balance

4

791-792-79

Posted Correcting Entry

4

801-802-80

4 Example Exercise 2-7

The following errors took place in journalizing and posting transactions:

a. A withdrawal of $6,000 by Cheri Ramey, owner of the business, was recorded as a debit to Office Salaries Expense and a credit to Cash.

b. Utilities Expense of $4,500 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Accounts Payable.

Correcting Entries

2-80

811-812-81

Example Exercise 2-7 (continued)

Follow My Example 2-7

a. Cheri Ramey, Drawing……………………….. 6,000Office Salaries Expense……………..... 6,000

b. Accounts Payable…………………………….. 4,500Miscellaneous Expense………………..4,500

2-81

For Practice: PE 2-7A, PE 2-7B

4

Utilities Expense………………………………. 4,500Cash……………………………………..... 4,500

821-822-82