Chapter 2

AN A LY Z IN G A N D R E C O R D IN G
T R A N S A C T IO N S

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CA

Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved

 2-2

C2 TH E AC C O U N T A N D IT S
AN A LY S IS

An account is a
record of
increases and The general
decreases in a ledger is a record
specific asset, containing all
liability, equity, accounts used by
revenue, or the company.
expense item.
 2-3

C2 TH E AC C O U N T A N D IT S
AN A LY S IS

Owner, Capital
Owner, Withdrawals
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C2

AS S E T AC C O U N T S

Cash
Accounts
Land
Receivable

Buildings
Asset Notes
Receivable
Accounts
Prepaid
Equipment
Accounts
Supplies
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C2

LIA B IL IT Y AC C O U N T S

Accounts Notes
Payable Payable

Liability
Accounts
Accrued Unearned
Liabilities Revenue
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C2

EQ U IT Y AC C O U N T S

Owner s Owner s
Capital Withdrawals

Equity
Accounts

Revenues Expenses
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C2 TH E AC C O U N T A N D IT S
AN A LY S IS

Assets = Liabilities + Equity

+ – + –
Owner’s Owner's
Revenues Expenses
Capital Withdrawals
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C3
LE D G E R A N D CH A R T OF
AC C O U N T S
The ledger is a collection of all accounts for an
information system. A company s size and diversity
of operations affect the number of accounts needed.

The chart of accounts is a list of all accounts and includes an

identifying number for each account.
 2-9

1. DOUBLE-ENTRY ACCOUNTING AND THE

DEBIT/CREDIT CONVENTION
 2 - 10

TH E US E OF T-AC C O U N T S

Increases are
recorded on one Title of the Account
side of the T-
Left Right
account, and or or
decreases are Debit Credit
recorded on the Side Side

other side.
 2 - 11

DE B IT S AND CR E D IT S
— The act of entering an amount on the left side of
an account is called debiting the account and
making an entry on the right side is crediting the
account.

— When the debit amounts exceed the credits, an

account has a debit balance; when the reverse is
true, the account has a credit balance.
 2 - 12

DO U B L E EN T R Y SY S T E M
! In a double-entry system, equal debits and
credits are made in the accounts for each
transaction.

! Thus, the total debits will always equal the

total credits and the accounting equation will
always stay in balance.
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C4

DO U B L E -EN T R Y AC C O U N T IN G

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +
Normal Normal Normal
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C4

DO U B L E -EN T R Y AC C O U N T IN G
Equity
Owner s _ Owner s _ Expenses
Capital Withdrawals + Revenues

Owner s Owner s Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
 2 - 15

DE B IT A N D CR E D IT RU L E S –
EX A M P L E 1
Example 1: ABC Ltd received $15,000 and issued
shares. Cash is debited as the Share
Capital is credited.

Assets = Liabilities + Owners’ Equity

Cash Share Capital

15,000 15,000
 2 - 16

DE B IT AND CR E D IT RU L E S – EX A M P L E 2
Example 2: ABC Ltd paid monthly rent of $7,000. Cash is
credited as Rent Expense is debited.

Assets = Liabilities + Owners’ Equity

Cash Share Capital

15,000 7,000 15,000

Rent Expense

7,000
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C4

DO U B L E -EN T R Y AC C O U N T IN G
An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.
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2. RECORD BUSINESS TRANSACTIONS

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C1
AN A LY Z IN G A N D RE C O R D IN G
PR O C E S S

Analyze each transaction and Record relevant transactions

event from source documents and events in a journal

Prepare and analyze Post journal information

the trial balance to ledger accounts
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C1

SO U R C E DO C U M E N T S
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets
 2 - 21

JO U R N A L IZ IN G &
PO S T IN G TR A N S A C T IO N S

In an actual accounting system,

transactions are initially recorded in the
journal. Journal is a chronological
record of transactions.

Posting is the process of systematically

copying information from the journal to
the ledger accounts.
 JO U R N A L IZ IN G & PO S T IN G 2 - 22

TR A N S A C T IO N S
!Transaction
Date

Journal Entry

April 2 Cash 50,000

Ordinary Share Capital
50,000
Issued Ordinary Share Capital

Cash Ordinary Share capital

50,000 50,000
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P1

BA L A N C E CO L U M N AC C O U N T
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
 2 - 24

ANALYZING TRANSACTIONS
(Textbook p 59-63 demonstration)
Apply the debit and credit rules to record the following
transactions of FastForward in the accounts for the
month of December 2014.
1. On December 1, Chas Taylor invested $30,000
cash to start a consulting business: FastForward.
2. purchased supplies paying $2,500 cash.
3. purchased equipment paying $26,000 cash.
4. Purchased supplies of $7,100 on account from
CalTech Supply Co.
5. provided consulting services receiving $4,200 cash.
 2 - 25

ANALYZING TRANSACTIONS
6. Paid $1,000 rent to the landlord of the building
where its facilities are located.
7. Paid salary of $700 to its employees.
8. Provided consulting service of $1600 on credit and
rented its test facilities for $300 to a sports club.
9. Received the cash payment of $1,900 from the
sports club ten days later.
10. Paid CalTech Supply $900 cash as partial payment
for its earlier $7,100 purchase of supplies.
11. Withdraw of cash by owner of $200 for personal
use.
 2 - 26

ANALYZING TRANSACTIONS
12. Received $3,000 cash in advance of providing
consulting services to a customer
13. Paid $2,400 cash (insurance premium) for a 24-
e month insurance policy. Coverage begins on Dec 1.
14. Paid $120 cash for supplies.
15. Paid $230 cash for December utilities.
16. Paid $700 cash in employee salary for work
performed in the latter part of Dec.
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A1

AN A LY Z IN G TR A N S A C T IO N S

Analysis:

Posting:
101 301
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A1

AN A LY Z IN G TR A N S A C T IO N S

Analysis:

Double entry:

Posting:
126 101
 2 - 29

A1

AN A LY Z IN G TR A N S A C T IO N S

Analysis:

Double entry:

Posting:
167 101
 2 - 30

A1

AN A LY Z IN G TR A N S A C T IO N S

Analysis:

Double entry:

Posting:
126 201
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A1

AN A LY Z IN G TR A N S A C T IO N S

Analysis:

Double entry:

e Posting:
403 101
 2 - 32

o e
 2 - 33

The Trial Balance

! The trial balance
!lists all accounts with their balances
!summarizes account balances
!shows whether total debits equal total credits
!uncovers errors in journalizing and posting.

! The procedures for preparing a trial balance consist of:

1 Listing the account titles and their balances.
2 Totaling the debit and credit columns.
3 Proving the equality of the two columns.
 2 - 34

P2 After processing its remaining transactions for

December, FastForward s Trial Balance is prepared.

FastForward
Trial Balance The trial balance
December 31, 2015 lists all account
Debits Credits balances in the
Cash $ 4,350
Accounts receivable - general ledger. If
Supplies 9,720 the books are in
Prepaid Insurance 2,400
Equipment 26,000 balance, the total
Accounts payable $ 6,200 debits will equal the
Unearned consulting revenue 3,000
C. Taylor, Capital 30,000 total credits.
Owner's Withdrawals 200
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
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P2
SE A R C H IN G F O R A N D
CO R R E C T IN G ER R O R S
If the trial balance does not balance, the
error(s) must be found and corrected.

"Make sure the trial %Re-compute each

balance columns are account balance in the
correctly added. ledger.

#Make sure account &Verify that each journal

balances are correctly entry is posted correctly.
entered from the ledger.

$See if debit or credit 'Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
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P3
PR E S E N TAT IO N IS S U E S

i_
1. Dollar signs are not used in journals and ledgers.
2. Dollar signs appear in financial statements and other
reports such as trial balances. The usual practice is to
put dollar signs beside only the first and last numbers
in a column.
3. When amounts are entered in the journal, ledger, or
trial balance, commas are optional to indicate
thousands, millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to the
nearest dollar, or even to a higher level.
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END OF CHAPTER 2