analyzing transactions

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Analyzing Analyzing TransactionsTransactions

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Accounting systems are designed to show the

increases and decreases in each financial statement item

as a separate record. This record is called an account.

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The T account has a title.

Title

2-1The T Account

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The left side of the account is

called the debit side.

Title

Debit

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The right side of the account is called the

credit side.

Title

Debit Credit

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6

Title

Debit Credit

Amounts entered on the

left side are debits.

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7

Title

Debit Credit

Amounts entered on the right side are

credits.

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Cash(a) 25,000 (b) 20,000(d) 7,500 (e) 3,650

(f) 950(h) 2,000

Balance 5,900

Balance of the accountBalance of the account

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A group of accounts for a business entity is

called a ledger.

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A list of the accounts in a ledger is called a

chart of accounts.

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Assets are resources owned by the business entity.

• Cash• Supplies• Prepaid expenses• Buildings

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Liabilities are debts owed to outsiders (creditors).• Accounts payable• Notes payable• Wages payable

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Owner’s equity is the owner’s right to the assets of the

business. A drawing account represents the amount of

withdrawals by the owner.

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Revenues are increases in owner’s equity as a result

of selling services or products to customers.

• Fees earned• Commission revenue• Rent revenue

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The using up of assets or consuming services in the

process of generating revenues results in expenses.

• Wages expense• Rent expense• Miscellaneous expense

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Every transaction affects at least two accounts.

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This transaction is initially entered in a record called a

journal. The process of recording a transaction in the

journal is called journalizing.

Journalizing 2-1

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Journalizing requires the following steps:

1. Record the date. If this is the first entry on the page, the year is inserted above the month. As long as the month does not change, the rest of the journal entries on the require on the day be recorded.

2. The title of the account debited is listed in the Description column.

(Continued)

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3. Enter the amount in the Debit column.

4. Record the credit account in the Description column.

5. Enter the amount in the Credit column.

Watch these steps take place as the entry to record Chris Clark’s deposit is

presented in the next slide.

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

Balance Sheet Accounts 2-1

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JOURNAL

Date Description Debit Credit

Page 1

1

2

3

4

Nov. 12007

Cash 25 000 00

Chris Clark, Capital 25 000 00

Invested cash in NetSolutions.

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P.R.

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

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

Chris Clark, Capital

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

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5 Land 20 000 00

Cash 20 000 00

Purchased land for

building site.

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

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10 Supplies 1 350 00

Accounts Payable 1 350 00

Purchased supplies on

account.

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

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30 Accounts Payable 950 00

Cash 950 00

Paid creditors on

account.

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Debits Credits

Asset accounts……. Increase (+) Decrease (-)

Liability accounts.… Decrease (-) Increase (+)

Owner’s equity (capital) accounts… Decrease (-) Increase (+)

Balance Sheet Accounts

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Credit for increases

(+)

Debit for decreases

(–)

Owner’s Equity Accounts

Credit for decreases

(–)

Debit for increases

(+)

Asset AccountsCredit for increases

(+)

Debit for decreases

(–)

Liability Accounts

Balance Sheet Accounts

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(d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.

Income Statement Accounts 2-1

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30 Cash 7 500 00

Fees Earned 7 500 00

Received fees from

customers.

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

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30 Wages Expense 2 125 00

Rent Expense 800 00

Utilities Expense 450 00

Miscellaneous Expense 275 00

Cash 3 650 00

Paid expenses.

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(g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.

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30 Supplies Expense 800 00

Supplies 800 00

Supplies used during

November.

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Debits Credits

Revenue accounts… Decrease (-) Increase (+)

Expense accounts… Increase (+) Decrease (-)

2-1Income Statement Accounts

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Credit for increases

(+)

Debit for decreases

(–)

Revenue AccountsIncome Statement Accounts

Credit for decreases

(–)

Debit for increases

(+)

Expense AccountsLess

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Continued

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Equals

Net Income (credit > debits) increases owners’ equity (capital)

Net Loss (debits > credits) decreases owners’ equity (capital)

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The owner of a proprietorship may withdraw cash from the business for

personal use. Such withdrawals have the effect of decreasing owner’s equity.

Drawing Account 2-1

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(h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.

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Cash 2 000 00

Chris Clark withdrew

cash for personal use.

Nov 30 Chris Clark, Drawing 2 000 002007

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Increase(Normal Bal.) Decreases

Balance sheet accounts:AssetDebit CreditLiability Credit DebitOwner’s Equity:

Capital Credit DebitDrawing Debit

CreditIncome statement accounts:

Revenue Credit DebitExpense DebitCredit

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The equality of debits and credits for each transaction is built into the

accounting equation: Assets = Liabilities + Owner’s Equity.

Because of this double equality, this system is called the double-

entry accounting system.

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2. For each account affected by the transaction, determine whether the account increases or decreases.

3. Determine whether each increase or decrease should be recorded as a debit or a credit.

1. Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction.

2-1Transaction Analysis

Continued

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4. Record the transaction using a journal entry.

5. Periodically post journal entries to the accounts in the ledger.

6. Prepare an unadjusted trial balance at the end of the period.

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The process of transferring the debits and credits from the journal entries to the

accounts is called posting.

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

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Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.

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1 Rent Expense 52 800 00

Cash 11 800 00

Paid rent for

December.

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An alternative approach is to debit Rent Expense for $800 on

December 1. This avoids having to transfer the balance to an expense account at the end of the month.

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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.

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

1 Cash 11 360 00

Unearned Rent 23 360 00

Received advance

payment for three

months’ rent on land.

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

4 Office Equipment 18 1 800 00

Accounts Payable 21 1 800 00

Purchased office

equipment on account.

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

6 Miscellaneous Expense 59 180 00

Cash 11 180 00

Paid for newspaper ad.

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Dec. 11 NetSolutions paid creditors $400.

11 Accounts Payable 21 400 00

Cash 11 400 00

Paid creditors on

account.

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

13 Wages Expense 51 950 00

Cash 11 950 00

Paid two weeks’ wages.

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

16 Cash 11 3 100 00

Fees Earned 41 3 100 00

Received fees from

customers.

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Dec. 16 Fees earned on account totaled $1,750 for the first half of December.

16 Accounts Receivable 12 1 750 00

Fees Earned 41 1 750 00

Recorded fees earned

on account.

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

20 Accounts Payable 21 900 00

Cash 11 900 00

Paid part of amount

owed to Executive

Supply Co.

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

21 Cash 11 650 00

Accounts Receivable 12 650 00

Received fees from

customers on account.

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

23 Supplies 14 1 450 00

Cash 11 1 450 00Purchased supplies.

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

27 Wages Expense 51 1 200 00

Cash 11 1 200 00

Paid two weeks’ wages.

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Dec. 31 NetSolutions paid $310 for telephone charges for the month.

31 Utilities Expense 54 310 00

Cash 11 310 00

Paid telephone charges.

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

Post. Ref.

JOURNAL

Date Description Debit Credit

Page 1

Dec 31 Utilities Expense 54 225 002007

Cash 11 225 00

Paid for electric usage.

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

31 Cash 11 2 870 00

Fees Earned 41 2 870 00

Received fees from

customers.

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

31 Accounts Receivable 12 1 120 00

Fees Earned 41 1 120 00

Recorded fees earned

on account.

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

31 Chris Clark, Drawing 32 2 000 00

Cash 11 2 000 00

Chris Clark withdrew

cash for personal use.

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The equality of debits and credits in the ledger should be proved at the end of each accounting period by preparing a trial balance. The heading should first list the name of the company, the statement’s title, and the date it is prepared.

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A transposition occurs when the order of the digits is

changed mistakenly, such as writing $542 as $452 or $524.

In a slide, the entire number is mistakenly moved one or more

spaces to the right or the left, such as writing $542.00 as $54.20.

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Another type of error is a posting error. Assume that on May 5 a

$12,500 purchase of office equipment on account was

incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,500.

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Entry to Correct Error

May 31 Office Equipment 18 12 500 00

Supplies 14 12 500 00

To correct erroneous

debit to Supplies on

May 5. See invoice

from Bell Office

Equipment Company.

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