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. 1
2 2 Chapter 2 Analyzing Transactions Accounting Cycle Transactions (Economic activities & Business condition) Journal (record transactions in the journal) Ledger (Posting transactons to ledger) Unadjusted trail balance (Prepare unadjusted trail balance) Adjustment (Journalizing &posting adjusting entries) Adjusted Trail Balance (Prepare adjusted trail balance) Financial Statement (Prepare 4 financial statements) Closing Entries (Journalizing & posting closing entries) Rearranging the accounting equation Drawing + Expenses + Assets = Liabilities + Capital + Revenues Debit Accounts If Debit, and if Credit Double-Entry System Credit Accounts If Credit, and if Debit 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. 2
3 3 Chapter 2 Analyzing Transactions 3 Example Transaction A. On November 1, Chris Clark opens a new business and deposits $ in a bank account in the name of Net Solutions. B. On November 5, Net Solutions paid $ for the purchase of land as a future building site. C. On November 10, Net Solutions purchased supplies on account for $1,350. D. On November 18, Net Solutions received of $7,500 from customers for services provided. E. On November 30, Net Solutions incurred the following expenses: wages, $2,125; rent, $; utilities, $450; and miscellaneous, $275. F. On November 30, Net Solutions paid creditors on account, $. G. Net Solutions 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 Net Solutions for personal use. I. On December 1, Net Solutions paid rent for December, $. The company from which Net Solutions 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. J. On December 4, Net Solutions purchased office equipment on account from Executive Supply Co. for $1,. K. On December 6, Net Solutions paid $180 for a newspaper advertisement. L. On December 11, Net Solutions paid creditors $400. M. On December 13, Net Solutions paid a receptionist and a part-time assistant $ for two weeks wages. N. On December 16, Net Solutions received $3,100 from fees earned for the first half of December. O. on account totaled $1,750 for the first half of December. P. On December 20, Net Solutions paid $ to Executive Supply Co. on the $1, debt owed from the December 4 transaction. Q. On December 21, Net Solutions received $650 from customers in payment of their accounts. R. On December 23, Net Solutions paid $1,450 for supplies. S. On December 27, Net Solutions paid the receptionist and the part-time assistant $1,200 for two weeks wages. T. On December 31, Net Solutions paid its $310 telephone bill for the month. U. On December 31, Net Solutions paid its $225 electric bill for the month.
4 4 Chapter 2 Analyzing Transactions V. On December 31, Net Solutions received $2,870 from fees earned for the second half of December. W. On December 31, fees earned on account totaled $1,120 for the second half of December. X. On December 31, Chris Clark withdrew $ for personal use. Y. Instructions 1. Journalize 2. Prepare T account 3. Prepare an unadjusted trail balance Date Description Post. Ref. Debit Credit Nov.1 Chris Clark, Capital Nov. 5 Nov.10 Nov. 18 Nov. 30 Nov. 30 Nov. 30 Nov. 30 Dec. 1 Dec. 4 Dec. 6 Dec. 11 Land Supplies Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses supplies Chris Clark, Drawing Rent expenses office equipment Miscellaneous expenses 1,350 7,500 2, , ,350 7,500 3,650 1,
5 5 Chapter 2 Analyzing Transactions Dec. 13 Dec. 16 Dec. 16 Dec. 20 Dec. 21 Dec. 23 Dec. 27 Account receivable Account receivable Supplies Utilities expenses Utilities expenses Account receivable Chris Clark, Drawing 3,100 1, ,450 1, ,870 1,120 3,100 1, ,450 1, ,870 1,120 T Account Title Debit Credit The left side of the account is called The right side of the account is called the debit side. 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. 5
6 6 Chapter 2 Analyzing Transactions Posting Journal Entries to Accounts is the process of transferring the debits and credits from the journal entries to the accounts. Trial Balance The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance. 7,500 3, ,870 39,120 Bal. 4,105 3, ,450 1, ,015 T ACCOUNTS Chris Clark, Capital Bal. 7,500 3,100 1,750 2,870 1,120 16,340 Bal. 1,350 1,450 Bal. Supplies 400 1,350 1, Bal. Bal. Land 2,125 1,200 Bal. 4,275 6
7 7 Chapter 2 Analyzing Transactions Miscellaneous expenses Rent expenses Bal. 455 Bal. 1,600 Supplies expenses Utilities expenses Bal. 225 Bal. 985 Chris Clark, Drawing Bal. 4,000 office equipment 1, Bal. 1, Account receivables 1, ,120 Bal. 2,220 7
8 8 Chapter 2 Analyzing Transactions Account receivable Supplies Land office equipment Chris Clark, Capital Chris Clark, Drawing Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses Net solutions Unadjusted trial balance December 30, 2011 Debit balances 4,105 2,220 1, 4,000 4,275 1, Credit balances 16,340 42,240 42,240 Illustrative Problem Page PR 2-2A Page 91 PR 2-2B Page 95 8
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