Chapter 2 Analyzing Transactions

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1 1 Chapter 2 Analyzing Transactions Chapter 2 Analyzing Transactions From Chapter 1: The Accounting Equation Assets = Liabilities + Owner's Equity Assets = Liabilities + Capital Drawing + Revenues - Expenses Definitions for the Element Assets are resources owned by the business. Liabilities are debts owed to outsiders (creditors). Owner s equity is the owner s right to the assets of the business after all liabilities have been paid. Drawings account represents the amount of withdrawals made by the owner. Revenues are increases in owner s equity as a result of selling services or products to customers. Expenses The using up of assets or consuming services in the process of generating revenues. Accounting Cycle Transactions (economic activities & business condion) Journal (record transactions in the journal) Ledger (Posting transactons to ledger) Unadjusted trail balance (Prepar unadjusted trail balanc) Adjustment (journalizing & posting adjusting entries) Adjusted Trail Balance (Prepar adjusted trail balanc) Financial Statement (Prepar 4 financial statement) Closing Entries (journalizing & posting closing entries)

2 2 Chapter 2 Analyzing Transactions Rearranging the accounting equation Drawing + Expenses + Assets = Liabilities + Capital + Revenues Debit Accounts If Debit, and if Credit Credit Accounts If Credit, and if Debit Double-Entry Accounting System Every business transaction to be recorded in at least two accounts Journal Date Description Post Ref. Debit Credit Debit xxx Credit xxx Journalizing Total debit = Total Credit A transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing. The entry in the journal is called a journal entry. T Account Debit The left side of the account is called the debit side. Title Credit The right side of the account is called the credit side. Using Accounts to Record Transactions 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. 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.

3 3 Chapter 2 Analyzing Transactions Normal Balances 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 Unearned revenue the liability created by receiving the in advance of providing the service. Trial Balance and Trial Balance Errors The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance.

4 4 Chapter 2 Analyzing Transactions Example Transaction A. On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions. B. On November 5, NetSolutions paid $20,000 for the purchase of land as a future building site. C. On November 10, NetSolutions purchased supplies on account for $1,350. D. On November 18, NetSolutions received of $7,500 from customers for services provided. E. On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $; utilities, $450; and miscellaneous, $275. F. On November 30, NetSolutions paid creditors on account, $. G. NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550. H. On November 30, Chris Clark withdrew $ from NetSolutions for personal use. I. 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. J. On December 1, NetSolutions paid rent for December, $. 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. K. 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. L. On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for $1,. M. On December 6, NetSolutions paid $180 for a newspaper advertisement. N. On December 11, NetSolutions paid creditors $400. O. On December 13, NetSolutions paid a receptionist and a part-time assistant $ for two weeks wages. P. On December 16, NetSolutions received $3,100 from fees earned for the first half of December. Q. on account totaled $1,750 for the first half of December. R. On December 20, NetSolutions paid $900 to Executive Supply Co. on the $1, debt owed from the December 4 transaction.

5 5 Chapter 2 Analyzing Transactions S. On December 21, NetSolutions received $650 from customers in payment of their accounts. T. On December 23, NetSolutions paid $1,450 for supplies. U. On December 27, NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks wages. V. On December 31, NetSolutions paid its $310 telephone bill for the month. W. On December 31, NetSolutions paid its $225 electric bill for the month. X. On December 31, NetSolutions received $2,870 from fees earned for the second half of December. Y. On December 31, fees earned on account totaled $1,120 for the second half of December. Z. On December 31, Chris Clark withdrew $ for personal use. Instructions 1. Journalize 2. Prepare T account 3. Prepare an unadjusted trail balance JOURNALIZE Date Description Post. Ref. Debit Credit Nov.1 25,000 Chris Clark, Capital 25,000 Nov. 5 Land 20,000 20,000 Nov.10 Supplies 1,350 1,350 Nov. 18 7,500 7,500 Nov. 30 Nov. 30 Nov. 30 Nov. 30 Wages expenses Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses supplies Chris Clark, Drawing 2, ,650

6 6 Chapter 2 Analyzing Transactions Dec. 1 Prepaid insurance 2,400 2,400 Dec. 1 Rent expenses Dec. 1 unearned rent Dec. 4 office equipment 1, 1, Dec. 6 Miscellaneous expenses Dec Dec. 13 Wages expenses Dec. 16 3,100 3,100 Dec. 16 Account receivable 1,750 1,750 Dec Dec. 21 Account receivable Dec. 23 Supplies 1,450 1,450 Dec. 27 Wages expenses 1,200 1,200 Utilities expenses Utilities expenses ,870 2,870 Account receivable 1,120 1,120 Chris Clark, Drawing

7 7 Chapter 2 Analyzing Transactions 25,000 7, , ,870 Bal. 2,065 20,000 3,650 2, ,450 1, T ACCOUNTS Chris Clark, Capital 25,000 25,000 Bal. 7,500 3,100 1,750 2,870 1,120 16,340 Bal. Unearned Rent Bal. 1,350 1,450 Bal. Supplies ,350 1, 900 Bal. 20,000 Bal. 20,000 Land Wages expenses 2,125 1,200 Bal. 4,275 Miscellaneous expenses Bal. 455 Rent expenses Bal. 1,600 Bal. Supplies expenses Utilities expenses Bal. 985

8 8 Chapter 2 Analyzing Transactions Chris Clark, Drawing Bal. 4,000 Prepaid insurance 2,400 Bal. 2,400 Account receivables office equipment 1,750 1, , Bal. 2,220 Bal. 1, Net solutions Unadjusted trial balance December 30, 2011 Debit balances Credit balances 2,065 Account receivable 2,220 Supplies Land 20,000 office equipment 1, prepaid insurance 2, unearned rent 360 Chris Clark, Capital 25,000 Chris Clark, Drawing 16,340 Wages expenses 4,275 Rent expenses 1,600 Utilities expenses 985 Miscellaneous expenses 455 Supplies expenses 42,600 42,600 Illustrative Problem Page PR 2-2A Page 91 PR 2-2B Page 95

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