© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing and Recording Transactions Chapter 2 2

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Analyzing and Recording Transactions

Chapter

22


External Transactions occur between the

organization and an outside party.

Internal Transactions occur within the

organization.

Analyzing and Recording ProcessAnalyzing and Recording Process

Exchanges of economic consideration between two parties.


Analyze each transaction and event form source documents

Analyzing and Recording ProcessAnalyzing and Recording Process

Record relevant transactions and events in a journal

Post journal information to ledger accounts

Prepare and analyze the trial balance


Sales Tickets

Bank Statement

Purchase Orders

Checks

Source DocumentsSource DocumentsBills from Suppliers

Employee EarningsRecord


An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

The Account and its AnalysisThe Account and its Analysis

The general ledger is a record

containing all accounts used by

the company.

The general ledger is a record

containing all accounts used by

the company.


LiabilitiesAccountsLiabilitiesAccounts

EquityAccounts

EquityAccounts

AssetsAccounts

AssetsAccounts

= +



LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Notes Receivabl

e

Notes Receivabl

e

SuppliesSupplies

Prepaid AccountsPrepaid

Accounts

Accounts ReceivableAccounts

Receivable

AssetAccounts

AssetAccounts

Asset AccountsAsset Accounts


Accrued LiabilitiesAccrued

LiabilitiesUnearned RevenuesUnearned Revenues

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

LiabilityAccountsLiability

Accounts

Liability AccountsLiability Accounts


EquityAccounts

EquityAccounts

RevenuesRevenues

Owner’s Capital

Owner’s Capital

Owner’s Withdrawals


ExpensesExpenses

Equity AccountsEquity Accounts


LiabilitiesLiabilities EquityEquityAssetsAssets = +


Owner’s Capital

Owner’s Capital


Owner’s Withdrawals RevenuesRevenues ExpensesExpenses

+ +– –


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

transactions.

Debits and CreditsDebits and Credits

(Left side) (Right side)Debit Credit

T- Account



Double-Entry AccountingDouble-Entry Accounting

Debit Credit Debit Credit Debit Credit

ASSETS

+ - + -

LIABILITIES

- + - +

EQUITIES

- + - +


RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital



__ ++ __

Debit Credit

Capital

- + - + Debit Credit

Withdrawals

+ - + - Debit Credit

Expenses

+ - + -Debit Credit

Revenues

- + - +


EquityEquity

Exh.3.8



An account balance is the difference between the increases and decreases in an account.


Journalizing and Posting TransactionsJournalizing and Posting Transactions

Step 1: Analyze transactions and source

documents.


Step 2: Apply double-entry accounting

(Left side) (Right side)Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

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


Dollar amount of debits and credits

Dollar amount of debits and credits

Journalizing TransactionsJournalizing Transactions

Transaction Date

Transaction Date

Transaction explanation

Transaction explanation

Titles of Affected Accounts

Titles of Affected Accounts


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

Balance Column AccountBalance Column Account


11 Identify the account.

Posting Journal EntriesPosting Journal Entries


22 Enter the date.



33Enter the amount and description.



44Enter the journal reference.



55

Compute the balance.



Enter the ledger reference. 66



Analyzing Transactions – An IllustrationAnalyzing Transactions – An Illustration

Analysis:

(1) Cash 101 30,000 C. Taylor, Capital 301 30,000

Double entry:

(1) 30,000Cash 101

(1) 30,000C. Taylor, Capital 301

Posting:



Analysis:

(2) Supplies 126 2,500 Cash 101 2,500

Double entry:

(2) 2,500Supplies 126

(1) 30,000 (2) 2,500Cash 101

Posting:



Analysis:

(3) Equipment 167 26,000 Cash 101 26,000

Double entry:

(1) 30,000 (2) 2,500(3) 26,000

Cash(3) 26,000

Equipment 167 101

Posting:



Analysis:

(4) Supplies 126 7,100 Accounts payable 201 7,100

Double entry:

(2) 26,000(4) 7,100

Supplies 126

(4) 7,100Accounts Payable 201

Posting:



Analysis:

(5) Cash 101 4,200 Consulting Revenue 403 4,200

Double entry:

(1) 30,000 (2) 2,500(5) 4,200 (3) 26,000

Cash(5) 4,200

Consulting Revenue 403 101

Posting:


After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

Debits CreditsCash 3,950$ 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 C. Taylor, Withdrawals 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300$ 45,300$

FastForwardTrial Balance

December 31, 2004

The trial balance lists all account balances in the general ledger.

If the books are in balance, the total

debits will equal the total credits.

The trial balance lists all account balances in the general ledger.

If the books are in balance, the total

debits will equal the total credits.


Searching for and Correcting ErrorsSearching for and Correcting Errors

If the trial balance does not balance, the error(s) must be found and corrected.

Make sure the trial balance columns are correctly added.Make sure the trial balance columns are correctly added.

Make sure account balances are correctly entered into the ledger.

Make sure account balances are correctly entered into the ledger.

See if debit or credit accounts are mistakenly placed on the trial balance.

See if debit or credit accounts are mistakenly placed on the trial balance.

Recompute each account balance in the ledger.Recompute each account balance in the ledger.

Verify that each journal entry is posted correctly.Verify that each journal entry is posted correctly.

Verify that each original journal entry has equal debits and credits.

Verify that each original journal entry has equal debits and credits.


Using a Trial Balance to Prepare Financial StatementsUsing a Trial Balance to Prepare Financial Statements

Income Statement of Cash Flows

Income Statement

Statement of Owner’s Equity

Beginning Balance Sheet

Ending Balance Sheet

Period of TimePoint inTime

Point inTime


Income StatementIncome Statement

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$

FASTFORWARDIncome Statement

For the Month Ended December 31, 2004


Statement of Owner’s EquityStatement of Owner’s Equity

C. Taylor, Capital, December 1, 2004 -$ Plus: Investment by owner 30,000$ Net income 3,470 33,470

33,470 Less: Withdrawals by owner (600) C. Taylor, Capital, December 31, 2004 32,870$

FASTFORWARDStatement of Owner's Equity


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$

FASTFORWARDIncome Statement



Balance SheetBalance Sheet

AssetsCash 3,950$ Supplies 9,720 Prepaid insurance 2,400 Equipment 26,000 Total assets 42,070$

LiabilitiesAccounts payable 6,200$ Unearned revenue 3,000 Total liabilities 9,200

EquityC. Taylor, Capital 32,870 Total liabilities and equity 42,070$

FASTFORWARDBalance Sheet

December 31, 2004

C. Taylor, Capital, December 1, 2004 -$ Plus: Investment by owner 30,000$ Net income 3,470 33,470

33,470 Less: Withdrawals by owner (600) C. Taylor, Capital, December 31, 2004 32,870$

FASTFORWARDStatement of Owner's Equity



o Describes the relationship between the amounts of the company’s liabilities and assets.

o Helps to assess the risk that a company will fail to pay its debts.

Debt RatioDebt Ratio


End of Chapter 2End of Chapter 2