BMGT 220 - Chapter 2

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Analyzing and

Recording BusinessTransactions

C H A P T E R 2

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External Transactionsoccur between the

organization and anoutside party.

Internal Transactionsoccur within the

organization.

Analyzing and Recording Process

Exchanges of economic consideration betweentwo parties.

2-2

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Analyze each transactionand event from source

documents

Analyzing and Recording Process

Record relevant transactionsand events in a journal

Postjo

u

Prepare and analyzethe trial balance

2-3

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An account is arecord of

increases anddecreases in aspecific asset,

liability, equity,revenue, orexpense item.

The Account and its Analysis

The generalledger is a recordcontaining allaccounts used

by the company.

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Liabilities EquityAssets = +

The Account and its Analysis

Owners

Capital

Owners

Withdrawals Revenues Expenses

+ +

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Ledger and Chart of Accounts

The ledger is a collection of all accounts for aninformation system. A companys size anddiversity of operations affect the number

of accounts needed.

The chart of accounts is a list of all accounts andincludes an identifying number for each account.

Account Number Account Name Accounting Number Accounting Name

101 Cash 319 Dividends

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

307 Common stock 690 Utilities expense

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Debits and Credits

Debits aresimply

entries on

the left.

Credits aresimplyentries on

the right.

Remember:

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DR CR DR CR

(+) (-) (-) (+)

Rule of Debits and Credits

Assets Liabilities

Expenses Revenues

Dividends/ Withdrawals Owners Equity

Debit is an increase.Credit is a decrease.

Debit is a decrease.Credit is an increase.

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Determining Account Balances

Name of Account

Debit Credit

Accounts withtypical debit

balances are?

Accounts withtypical creditbalances are?

Expenses

AssetsDividends

Owners Equity

LiabilitiesRevenues

An accounts

balance is usually

on the side that

increasesthe

account. It is

referred to as the

Normal Balance.

Remember the mnemonic memory device,DEAD COLR

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A T-account represents a ledger account andis a tool used to understand the effects of

one or more transactions.

Debits and Credits

(Left side) (Right side)

Debit Credit

T- Account

Friends dont let friends do Accounting without t-accounts

-Anonymous

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The cash account has a beginning balanceof $50. A check for $20 is written to pay forsupplies. Using a T-account, what is the

ending balance of the cash account?

Using a T-Account

? ?

Cash

?

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Double-Entry Accounting

Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

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Revenues Expenses

Owners

Capital

Owners

Withdrawals

_+

_

Debit Credit

Capital

- +Debit Credit

Withdrawals

+ -Debit Credit

Expenses

+ -Debit Credit

Revenues

- +


Equity

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Investment by owner 30,000 Purchase of supplies 2,500

Consulting services revenues earned 4,200 Purchase of equipment 26,000

Collection of accounts receivable 1,900 Payment of rent 1,000

Payment of salary 700Payment of note payable 900

Withdrawal by owner 600

Total increases 36,100 Total decreases 31,700

Balance 4,400

Cash


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

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Journalizing 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

GENERAL JOURNAL Page 123

Date Description

Post.

Ref. Debit Credit

Step 3: Record journal entry

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GENERAL JOURNAL Page 1Date Description PR Debit Credit

2008

Dec. 1 Cash 30,000

Common stock 30,000Investment by shareholders

Dollar amount of

debits and credits

Journalizing Transactions

TransactionDate

Transaction

explanation

Titles of AffectedAccounts

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Transaction:

Shareholders invested $30,000 in FastForward on

Dec. 1.

Analyzing Transactions

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Transaction:

FastForward purchases supplies by paying $2,500cash.

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Transaction:

FastForward purchases equipment by paying $26,000cash.


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Transaction: FastForward purchases $7,100 of supplies on credit.


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Transaction:

FastForward provides consulting services and

immediately collects $4,200 cash.

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After processing its remaining transactions forDecember, FastForwards Trial Balance is prepared.

Debits Credits

Cash 3,950$

Accounts receivable -

Supplies 9,720Prepaid Insurance 2,400

Equipment 26,000

Accounts payable 6,200$

Unearned consulting revenue 3,000

Common stock 30,000

Dividends 600Consulting revenue 5,800

Rental revenue 300

Salaries expense 1,400

Rent expense 1,000

Utilities expense 230

Total 45,300$ 45,300$

FastForward

Trial Balance

December 31, 2008

The trial balancelists all account

balances in thegeneral ledger. Ifthe books are inbalance, the total

debits will equal the

total credits.

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Searching for and Correcting

ErrorsIf the trial balance does not balance, theerror(s) must be found and corrected.

Make sure the trial balance

columns are correctly added.

Make sure accountbalances are correctlyentered from the ledger.

See if debit or creditaccounts are mistakenlyplaced on the trial balance.

Recompute each account

balance in the ledger.

Verify that each journalentry is posted correctly.

Verify that each originaljournal entry has equaldebits and credits.

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Using a Trial Balance to Prepare Financial Statements

Income Statement ofCash Flows

Income Statement

Statement of Retained Earnings

BeginningBalanceSheet

EndingBalanceSheet

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End of Chapter 2

Documents

BMGT 220 - Chapter 2