Analyzing Transactions

Chapter 2
Student Version
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
These slides should be viewed using the presentation Pepperdine University
mode (click the icon to start presentation).

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1

 Describe the characteristics of an account and

a chart of accounts.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 1
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.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 1
The T Account

The T account
Title has a title.

Debit Credit
The left side of The right side of
the account is the account is
called the debit called the credit
side. side.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 1
Chart of Accounts

 A group of accounts for a business entity is

called a ledger.
 A list of the accounts in the ledger is called
a chart of accounts.
 Assets are resources owned by the
business.
 Liabilities are debts owed to outsiders
(creditors).

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 LO 1
Chart of Accounts

 Owner’s equity is the owner’s right to the

assets of the business after all liabilities
have been paid. A drawing 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.
 The using up of assets or consuming
services in the process of generating
revenues results in expenses.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2

1. Describe the characteristics of an account

and a chart of accounts.
2. Describe and illustrate journalizing
transactions using the double-entry
accounting system.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Double-Entry Accounting System

 All businesses use what is called the

double-entry accounting system. This
system is based on the accounting
equation and requires:
 Every business transaction to be
recorded in at least two accounts.
 The total debits recorded for each
transaction to be equal to the total
credits recorded.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
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.

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 LO 2
Rules of Debit and Credit – Normal Balances of Accounts

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 LO 2
Transaction A
On November 1, Chris Clark opens a new business and deposits $25,000
in a bank account in the name of NetSolutions.

Step 2
Step 3

Step 1 Step 4 Step 5

Step 3 Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (investment)

increase increase 11
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 LO 2
Journalizing
Journalizing requires the following steps:
Step 1. The date of the transaction is entered
in the Date column.
Step 2. The title of the account to be debited
is recorded at the left-hand margin
under the Description column, and the
amount to be debited is entered in the
Debit column.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Journalizing

Step 3. The title of the account to be credited

is listed below and to the right of the
debited account title, and the amount
to be credited is entered in the Credit
column.
Step 4. A brief description may be entered
below the credited account.

(continued)
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 LO 2
Journalizing

Step 5. The Post. Ref. (Posting Reference)

column is left blank when the journal
entry is initially recorded. This column
is used later when the journal entry
amounts are transferred to the
accounts in the ledger.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Journalizing

 A transaction is initially entered in a record

called a journal.
 The process of recording a transaction in
the journal is called journalizing.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Journalizing

 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.

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 LO 2
Transaction B

On November 5, NetSolutions paid $20,000 for the

purchase of land as a future building site.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

increase

decrease

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Transaction C

On November 10, NetSolutions purchased supplies

on account for $1,350.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

increase increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Transaction D

On November 18, NetSolutions received cash of

$7,500 from customers for services provided.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Revenue)

increase 19
increase
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 LO 2
Transaction E

On November 30, NetSolutions incurred the

following expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.

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 LO 2
Transaction E

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

All four
expense
decrease
accounts
increase

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Transaction F

On November 30, NetSolutions paid creditors on

account, $950.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

decrease decrease

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Transaction 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.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease
increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 2
Transaction H
On November 30, Chris Clark withdrew $2,000 from
NetSolutions for personal use.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Drawing)

decrease
24
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
increase
Learning Objective 3

1. Describe the characteristics of an account

and a chart of accounts.
2. Describe and illustrate journalizing
transactions using the double-entry
accounting system.
3. Describe and illustrate the journalizing and
posting of transactions to accounts.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
Posting Journal Entries to Accounts

 The process of transferring the debits and

credits from the journal entries to the
accounts is called posting.

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.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
Posting Journal Entries to Accounts

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

decrease

increase

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
Recording and Posting of a Debit and a Credit

These
steps for
posting
the credit
to Cash
are
shown.

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 LO 3
December Transactions

On December 1, NetSolutions paid rent for

December, $800. 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.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease increase

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

 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.
 The liability created by receiving the cash in
advance of providing the service is called
unearned revenue. 31
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 LO 3
December Transactions

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

increase increase

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 4, NetSolutions purchased office

equipment on account from Executive Supply Co.
for $1,800.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

increase increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 6, NetSolutions paid $180 for a

newspaper advertisement.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease
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increase 34
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 11, NetSolutions paid creditors $400.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

decrease decrease

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 13, NetSolutions paid a receptionist

and a part-time assistant $950 for two weeks’ wages.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease
increase

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 16, NetSolutions received $3,100 from

fees earned for the first half of December.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Revenue)

increase increase
38
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

Fees earned on account totaled $1,750 for the first

half of December.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Revenue)

increase
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increase
39
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 20, NetSolutions paid $900 to

Executive Supply Co. on the $1,800 debt owed from
the December 4 transaction.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

decrease decrease
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 21, NetSolutions received $650 from

customers in payment of their accounts.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

increase

decrease

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 23, NetSolutions paid $1,450 for

supplies.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity

decrease

increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 27, NetSolutions paid the receptionist

and the part-time assistant $1,200 for two weeks’
wages.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease increase 43
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 31, NetSolutions paid its $310

telephone bill for the month.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 31, NetSolutions paid its $225 electric

bill for the month.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Expense)

decrease increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 31, NetSolutions received $2,870 from

fees earned for the second half of December.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Revenue)

increase increase
46
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 31, fees earned on account totaled

$1,120 for the second half of December.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Revenue)

increase
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47
increase
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 3
December Transactions

On December 31, Chris Clark withdrew $2,000 for

personal use.

Accounting Equation Impact

Assets = Liabilities + Owner’s Equity (Drawing)

decrease increase
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4

1. Describe the characteristics of an account

and a chart of accounts.
2. Describe and illustrate journalizing
transactions using the double-entry
accounting system.
3. Describe and illustrate the journalizing and
posting of transactions to accounts.
4. Prepare an unadjusted trial balance and
explain how it can be used to discover
errors.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 4
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.
 A transposition occurs when the order of the
digits is changed by mistake, such as
writing $542 as $452 or $524.
 In a slide, the entire number is moved one
or more spaces to the right or the left by
mistake, such as writing $542.00 as $54.20
or $97.50 as $975.00.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 4
Errors Not Affecting the Trial Balance

 If an error has already been journalized and

posted to the ledger, a correcting journal
entry is normally prepared.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 4
Errors Not Affecting the Trial Balance

 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.
 The entry to correct the error is:

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 5

1. Describe the characteristics of an account and

a chart of accounts.
2. Describe and illustrate journalizing transactions
using the double-entry accounting system.
3. Describe and illustrate the journalizing and
posting of transactions to accounts.
4. Prepare an unadjusted trial balance and
explain how it can be used to discover errors.
5. Describe and illustrate the use of horizontal
analysis in evaluating a company’s
performance and financial condition.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 5
Horizontal Analysis

 In horizontal analysis, the amount of each

item on a current financial statement is
compared with the same item on an earlier
statement.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LO 5
Horizontal Analysis

 In horizontal analysis, the amount of each

item on a current financial statement is
compared with the same item on an earlier
statement.
 When two statements are being compared,
the earlier statement is used as the base for
computing the amount and the percent of
change.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analyzing Transactions

The End
Student Version
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.