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3 Analyzing and Recording Transactions

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Post to the ledger

Source documents

Record transactions

Prepare a trial balance

Prepare financial statements and

report

Transaction Analyze

Overview of the Accounting Process

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External Transactions occur between the

organization and an outside party.

Internal Transactions occur within the

organization.

Transactions and Events

Exchanges of economic consideration between two parties.

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Sales Invoices

Bank Statement

Purchase Orders

Checks

Source Documents

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Detailed record of increases and decreases in

specific assets, liabilities, equities,

revenues, or expenses.

Separate accounts are maintained for each item of importance.

Detailed record of increases and decreases in

specific assets, liabilities, equities,

revenues, or expenses.

Separate accounts are maintained for each item of importance.

The Account

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

Owner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

RevenuesRevenues ExpensesExpenses

Accounting Equation

+ +– –

Exh.3.3

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LandLand

EquipmentEquipmentBuildingsBuildings

CashCash

Prepaid Expenses

Prepaid Expenses

Office Supplies

Office Supplies

Store Supplies

Store Supplies

Prepaid Insurance

Prepaid Insurance Notes

Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

ASSETSASSETS

Asset Accounts

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Accrued Liabilities

Accrued Liabilities

Unearned Revenues

Unearned Revenues

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

LIABILITIESLIABILITIES

LiabilityAccounts

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EquitiesEquities

RevenuesRevenues

Owners’ Capital

Owners’ Capital

Owners’ Withdrawals

Owners’ Withdrawals

ExpensesExpenses

Equity Accounts

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Account Name

(Left Side) Debit

(Right Side) Credit

Used as a simple tool for illustrating the balance in a given account.

T-AccountExh.3.5

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Balance of an Account

An account balance is the difference between the increases and decreases in

an account.

Exh.3.6

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

Double-Entry AccountingExh.3.7

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RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Debit Credit

Capital

- +Debit Credit

Withdrawals

+ -Debit Credit

Expenses

+ -Debit Credit

Revenues

- +

Double-Entry Accounting - Detail of Effects on Equity

EquityEquity

Exh.3.8

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Analyze the transaction and its source.

Identify the impact of the transaction on account balances.Also identify the

financial statements that are impacted by the transaction.

Analyzing Transactions

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Post the transaction in the T-accounts and complete the transaction analysis.

Analyzing TransactionsExample - Transaction 1

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Analyzing TransactionsExample - Transaction 1

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Post the transaction in the T-accounts and complete the transaction analysis.

Analyzing TransactionsExample - Transaction 2

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Post the transaction in the T-accounts and complete the transaction analysis.

Analyzing TransactionsExample - Transaction 3

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Analyzing TransactionsExample - Transaction 4

Post the transaction in the T-accounts and complete the transaction analysis.

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Remember these two steps?Now let’s look at some

additional steps.

Steps in Processing Transactions

Step 1: Examine source documents.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Step 2: Analyze transactions.

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ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Record the journal information in a

ledger.

Step 3: Record transactions in a

journal.

Step 5: Prepare a trial balance.

Steps in Processing Transactions

Step 1: Examine source documents.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Step 2: Analyze transactions.

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Transaction Date

Transaction Date

Titles of Affected Accounts

Titles of Affected Accounts

Dollar amount of debits and credits

Dollar amount of debits and credits

Transaction explanation

Transaction explanation

General Journal for FastForward

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T-accounts are useful illustrations, but balance column ledger accounts are used

in practice.

Balance Column Ledger

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Balance Column Ledger

T-accounts are useful illustrations, but balance column ledger accounts are used

in practice.

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The last line in the balance column shows the current balance in the account.

The last line in the balance column shows the current balance in the account.

Exh. 3.16

Balance Column Ledger

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LiabilitiesLiabilities EquityEquityAssetsAssets = +

Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

Normal Balances

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Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Continue

Normal Balances

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RevenuesRevenues ExpensesExpensesOwner’s Capital

Owner’s Capital

Owner’s Withdrawals

Owner’s Withdrawals

_ + _

Normal Balances

Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

Note that the balance column ledger does not indicate whether the balance in an account is debit

or credit.

This is because each account has a normal balance.

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1 Identify the account.

Posting Journal EntriesExample

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2 Enter the date.

Posting Journal EntriesExample

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3Enter the amount.

Posting Journal EntriesExample

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4Enter the journal reference.

Posting Journal EntriesExample

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5

Compute the balance.

Posting Journal EntriesExample

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Enter the ledger reference. 6

Posting Journal EntriesExample

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A Trial Balance is a listing of all

accounts and their

balances at a point in

time.

A Trial Balance is a listing of all

accounts and their

balances at a point in

time.

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Generally, dollar signs ($) are not used in the journals

or ledgers.

Generally, dollar signs ($) are not used in the journals

or ledgers.

RoundingRoundingRound numbers in financial

statements to the nearest dollar.

Round numbers in financial statements to the nearest

dollar.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Formatting Conventions

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Describes the relationship between the amounts of the company’s liabilities and assets.

Helps to assess the risk that a company will fail to pay its debts.

Using the Information - Debt Ratio

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End of Chapter 3

Now, was that debits to the left or credits

to the left?I sure wish I had paid

more attention in class!