Analyzing Transactions

ACG 2021

Chapter 2

Steps in the Accounting Process

AnalyzeTransactions from source documents

Record relevant transactions in journal

Post journal info to general ledger

Prepare trial balance

Usefulness of an Account

• Account – shows increases and decreases in financial transactions

• Ledger – a group of accounts

• Chart of Accounts– List of accounts

Chart of Account Example• American Company• Chart of Accounts

• Assets• Cash

• Accounts receivable• Prepaid insurance

• Supplies • Equipment

• Liabilities• Accounts payable

• Notes payable

• Stockholder’s equity• Capital stock

• Retained earnings• Dividends

• Revenue• Fees Earned

• Expenses• Rent expense

• Salaries expense

Definition of Accounts

Account Definition

Cash Funds in the bank

Accounts receivable Amounts due from customers for services rendered

Prepaid expenses Represents a prepayment of a future expense

Accounts payable Amounts due to our suppliers. Usually with payment due in 30 days

Retained earnings Earnings from prior periods which have been kept in the business

Dividends Distribution of income to shareholders

Common Stock Shareholders investment in the business

Fees earned Revenues earned from the operation of the business

Characteristics of an Account

• Each account has a title which is the name of the item recorded in the account

• Each account has a space for recording increases in the amount of the item

• Each account has a space for recording the decreases in the amount of the item

T- Account

Debit CreditDR CR

Journal

• The first book in which a transactions is recorded.

• Chronological order

• Debit before credit

• Indent credit information

• Each entry debit = credit

Account

DebitIncrease

CreditDecrease

Assets Liabilities

DebitDecrease

CreditIncrease

Equity and revenues act like liabilitiesExpenses act like assets

Memorize

Mar 1: American Co received cash for company’s capital stock $20,000

Date Account PR

Debit Credit

Mar 1 Cash $20,000

Capital stock $20,000

Mar 5: Paid rent of $500

Date Account PR

Debit Credit

Mar 5 Rent expense 500

Cash 500

Mar 10: Purchased supplies for cash $1,000

Date Account PR

Debit Credit

Mar 10

Supplies 1,000

Cash 1,000

Mar 12: Received cash from customers for services rendered $2,500

Date Account PR

Debit Credit

Mar 12

Cash 2500

Fees earned 2500

Mar 15: Purchased equip on account $5,000

Date Account PR

Debit Credit

Mar 15

Equipment 5000

Accts payable 5000

Mar 20: Billed customers for services rendered $3,000

Date Account PR

Debit Credit

Mar 20

Accounts receivable 3000

Fees earned 3000

Mar 25: Paid amount due on account $400

Date Account PR

Debit Credit

Mar 25

Accounts payable 400

Cash 400

Mar 26: Paid dividends $1,000

Date Account PR

Debit Credit

Mar 26

Dividends 1,000

Cash 1,000

Mar 31: Received cash from customers billed $900

Date Account PR Debit Credit

Mar 31

Cash 900

Accts receivable

900

American CompanyTrial Balance

March 31, 2007

Cash $20,500

Accts rec 2,100

Supplies 1,000

Equip 5,000

Accts pay $ 4,600

Capital stock 20,000

Dividends 1,000

Fees earned 5,500

Rent expense 500

Total 30,100 30,100

Balance Sheet Accounts

Asset accounts……. Increase (+) Decrease (-)

Liability accounts.… Decrease (-) Increase (+)

Stockholders’ equity accounts… Decrease (-) Increase (+)

DEBIT CREDIT

Credit for increases

(+)

Debit for decreases

(–)

Stockholders’ Equity Accounts

Credit for decreases

(–)

Debit for increases

(+)

Asset AccountsCredit for increases

(+)

Debit for decreases

(–)

Liability Accounts

Balance Sheet Accounts2-1

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Debits Credits

Revenue accounts… Decrease (-) Increase (+)

Expense accounts… Increase (+) Decrease (-)

2-1Income Statement Accounts

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Credit for increases

(+)

Debit for decreases

(–)

Revenue AccountsIncome Statement Accounts

Credit for decreases

(–)

Debit for increases

(+)

Expense AccountsLess

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Equals

Net income (credit > debits) increases stockholders’ equity (retained earnings)

Net income (credit > debits) increases stockholders’ equity (retained earnings)

Net loss (debits > credits) decreases stockholders’ equity (retained earnings)

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