1 2 Analyzing Transactions. 1-2 2-2 2 The T account has a title. The T Account Title 1.

1

2

Analyzing Transactions

1-22-22

The T account has a title.

The T Account

Title

1

1-32-33

The left side of the account is

called the debit side.

Title

Debit

1

The T Account

1-42-44

Title

DebitThe right side of

the account is called the credit

side.

Credit

1

The T Account

1-52-55

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

1

Chart of Accounts

1-62-66

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

1

Chart of Accounts

1-72-77

Assets are resources owned by the business entity.

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

1

Chart of Accounts

1-82-88

Liabilities are debts owed to outsiders (creditors).

• Accounts payable• Notes payable• Wages payable

1

Chart of Accounts

1-92-99

Stockholders’ equity is the stockholders’ right to the assets of the business. A dividends account represents distribution of earnings to stockholders.

1

Chart of Accounts

1-102-1010

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

1-112-1111

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

1-122-1212

2

Exhibit 3 Rules of Debit and Credit, Normal Balances of Accounts

(continued)

1-132-1313

Increase(Normal Bal.) Decreases

Balance sheet accounts:AssetDebit CreditLiability Credit DebitStockholders’ Equity:

Capital Stock Credit DebitDividends Debit

CreditIncome statement accounts:

Revenue Credit DebitExpense DebitCredit

2

Exhibit 3 Rules of Debit and Credit, Normal Balances of Accounts

1-142-1414

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. Dividends2. Accounts Payable3. Cash4. Fees Earned5. Supplies6. Utilities Expense

2-20

Example Exercise 2-12

Rules of Debit and Credit and Normal Balances

1-152-1515

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

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On November 1, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions in exchange for capital stock.

Transaction A

2

1-172-1717

2

Journalizing

1-182-1818

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

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

Capital Stock

2

1-192-1919

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

Transaction B

2

1-202-2020

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

Transaction C

2

1-212-2121

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

Transaction D

2

1-222-2222

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

Transaction E

2

1-232-2323

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

Transaction F

2

1-242-2424

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

Transaction G

2

1-252-2525

On November 30, NetSolutions paid $2,000 of dividends to stockholders.

Transaction H

2

1-262-2626

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

1-272-2727

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

3

Posting Journal Entries to Accounts

1-282-2828

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

1-292-2929

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

1-302-3030

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

1-312-3131

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

3

1-322-3232

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

3

1-332-3333

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

3

1-342-3434

Dec. 11 NetSolutions paid creditors $400.

3

1-352-3535

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

3

1-362-3636

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

3

1-372-3737

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

3

1-382-3838

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

3

1-392-3939

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

3

1-402-4040

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

3

1-412-4141

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

3

1-422-4242

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

3

1-432-4343

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

3

1-442-4444

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

3

1-452-4545

Dec. 31 NetSolutions paid $2,000 of dividends to stockholders.

3

1-462-4646

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