Analyzing Transactions - WordPress.com · 2014. 9. 20. · PRINCIPLES OF FINANCIAL ACCOUNTING PRINCIPLES OF ACCOUNTING ACCOUNTING PRINCIPLES Using excel for Success Reeve Warren Duchac

Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Student Version

Analyzing Transactions

Chapter 2 These slides should be viewed using the presentation mode (click the icon to start presentation).

PRINCIPLES OF FINANCIAL ACCOUNTING

PRINCIPLES OF ACCOUNTING

ACCOUNTING PRINCIPLES

Using excel for Success

Reeve Warren Duchac

Learning Objective 1

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

Using Accounts to Record Transactions

è Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account.

Assets = Liabilities + Owner's Equity Assets = Liabilities + Capital – Drawing + Revenues – Expenses Definitions of the elements: Ø Assets are resources owned by the

business. Ø  Liabilities are debts owed to outsiders

(creditors).

From Chapter 1: The accounting equation

Definitions of the elements:

è Owner’s equity is the owner’s right to the assets of the business after all liabilities have been paid. A drawing account represents the amount of withdrawals made by the owner.

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

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

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Accounting Cycle

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

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

Assets = Liabilities + Owner’s Equity Assets= Liabilities +Capital –Drawings +Revenues - Expenses Drawings+Expenses + Assets= Liabilities +Capital + Revenues

DEBIT ACCOUNT If Debit, and if Credit

CREDIT ACCOUNT If Credit, and if Debit

Elements of Accounting Equation

Journalizing

è A transaction is initially entered in a record called a journal.

è The process of recording a transaction in the journal is called journalizing.

è The entry in the journal is called a journal entry

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The T account has a title. Title

The T Account

The left side of the account is called the debit

Debit Credit The right side of

the account is called the credit

Using Accounts to Record Transaction

•  Ledger is A group of accounts for a business entity.

•  chart of accounts is A list of the accounts in the ledger.

•  Posting Journal Entries to accounts is the process of transferring the debits and credits from the journal entries to the accounts.

Double-Entry Accounting System

è  All businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires: §  Every business transaction to be

recorded in at least two accounts. §  The total debits recorded for each

transaction to be equal to the total credits recorded.

Normal Balances

è The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

Rules of Debit and Credit – Normal Balances of Accounts

Transaction A

Step 2 Step 3

Step 1 Step 4 Step 5

Step 3

Assets = Liabilities + Owner’s Equity (investment)

Accounting Equation Impact

increase increase

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

Journalizing requires the following steps:

Journalizing

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

Step 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.

(continued)

Journalizing

Step 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.

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

(continued)

Journalizing

Step 5. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later when the journal entry amounts are transferred to the accounts in the ledger.

Accounting Equation Impact Assets = Liabilities + Owner’s Equity

Transaction B

increase

decrease

On November 5, NetSolutions paid $20,000 for the purchase of land as a future building site.

Transaction C

increase increase

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

Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue)

Transaction D

increase increase

On November 18, NetSolutions received cash of $7,500 from customers for services provided.

On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Transaction E

Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense)

Transaction E

decrease

All four expense accounts increase

Transaction F

decrease decrease

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

Transaction G

decrease increase

NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550.

Transaction H

Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Drawing)

decrease

increase

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

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

Posting Journal Entries to Accounts

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

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

Posting Journal Entries to Accounts

increase

decrease

Recording and Posting of a Debit and a Credit

These steps for posting the credit to Cash are shown.

December Transactions

On December 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.

decrease increase

§  On December 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. NetSolutions received $360 for three months’ rent beginning December 1.

§  The liability created by receiving the cash in advance of providing the service is called unearned revenue.

increase increase

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

decrease increase

On December 6, NetSolutions paid $180 for a newspaper advertisement.

decrease decrease

On December 11, NetSolutions paid creditors $400.

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

decrease increase

increase increase

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

increase increase

Fees earned on account totaled $1,750 for the first half of December.

decrease decrease

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

increase

decrease

On December 21, NetSolutions received $650 from customers in payment of their accounts.

increase

decrease

On December 23, NetSolutions paid $1,450 for supplies.

increase decrease

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

increase decrease

On December 31, NetSolutions paid its $310 telephone bill for the month.

increase decrease

On December 31, NetSolutions paid its $225 electric bill for the month.

LO 3 LO 3

increase increase

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

increase increase

On December 31, fees earned on account totaled $1,120 for the second half of December.

Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Drawing)

increase decrease

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

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Account receivables Office equipment

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.

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Trial Balance and Trial Balance Errors

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

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

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

Student Version

Analyzing Transactions

The End

Analyzing Transactions - WordPress.com · 2014. 9. 20. · PRINCIPLES OF FINANCIAL ACCOUNTING PRINCIPLES OF ACCOUNTING ACCOUNTING PRINCIPLES Using excel for Success Reeve Warren Duchac

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