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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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Liabilities EquityAssets = +
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
- +
Double-Entry Accounting
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
Double-Entry Accounting
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.
Liabilities EquityAssets = +
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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Analyzing Transactions
Transaction:
FastForward purchases supplies by paying $2,500cash.
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Transaction:
FastForward purchases equipment by paying $26,000cash.
Analyzing Transactions
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Transaction: FastForward purchases $7,100 of supplies on credit.
Analyzing Transactions
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Analyzing Transactions
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