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ANALYZING AND RECORDING TRANSACTIONS

Chapter 2

McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2

Analyze each transaction and event from source documents

ANALYZING AND RECORDING PROCESS

Record relevant transactions and events in a journal

Post journal information

to ledger accounts

Prepare and analyze the trial balance

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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3

Sales Tickets

Bank Statements

Purchase Orders

Checks

SOURCE DOCUMENTSBills from Suppliers

Employee EarningsRecords

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McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

THE ACCOUNT AND ITS ANALYSIS

The general ledger is a record

containing all accounts used by

the company.

The general ledger is a record

containing all accounts used by

the company.

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McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

Notes Receivable

Notes Receivable

SuppliesSupplies

Prepaid AccountsPrepaid

Accounts

Accounts ReceivableAccounts

Receivable

AssetAccounts

AssetAccounts

ASSET ACCOUNTSC3

McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6

Accrued LiabilitiesAccrued

LiabilitiesUnearned Revenue

Unearned Revenue

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

LiabilityAccountsLiability

Accounts

LIABILITY ACCOUNTSC3

McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7

EquityEquityAccountsAccounts

EquityEquityAccountsAccounts

RevenuesRevenues

Owner’s Equity

Owner’s Equity

Owner’s Withdrawals

Owner’s Withdrawals

ExpensesExpenses

EQUITY ACCOUNTS

Owner’s Capital

Owner’s Capital

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McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8

LiabilitiesLiabilities EquityEquityAssetsAssets = +

THE ACCOUNT AND ITS ANALYSIS

Owner’s Capital

Owner’s Capital

Owner's Withdrawals

Owner's Withdrawals RevenuesRevenues ExpensesExpenses

+ +– –

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McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin Slide 9

LEDGER AND CHART OF ACCOUNTS

The ledger is a collection of all accounts for anThe ledger is a collection of all accounts for aninformation system. A company’s size and diversityinformation system. A company’s size and diversityof operations affect the number of accounts needed.of operations affect the number of accounts needed.

The ledger is a collection of all accounts for anThe ledger is a collection of all accounts for aninformation system. A company’s size and diversityinformation system. A company’s size and diversityof operations affect the number of accounts needed.of operations affect the number of accounts needed.

The chart of accounts is a list of all accounts and includes anidentifying number for each account.

The chart of accounts is a list of all accounts and includes anidentifying number for each account.

Account Number Account Name Accounting Number Accounting Name101 Cash 302 C. Taylor, Withdrawals106 Accounts receivable 403 Revenues126 Supplies 406 Rental revenue128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense

201 Accounting payable 640 Rent expense

236 Unearned revenue 652 Supplies expense301 C. Taylor, Capital 690 Utilities expense

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McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin Slide 10

DEBITS AND CREDITS

A T-account represents a ledger account and is a A T-account represents a ledger account and is a tool used to understand the effects of one or more tool used to understand the effects of one or more

transactions. transactions.

(Left side) (Right side)Debit Credit

Account Title

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McGraw-Hill/Irwin Slide 11McGraw-Hill/Irwin Slide 11

LiabilitiesLiabilities EquityEquityAssetsAssets = +

DOUBLE-ENTRY ACCOUNTING

Debit Credit Debit Credit Debit Credit

ASSETS

+ - + -

LIABILITIES

- + - +

EQUITIES

- + - +

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McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin Slide 12

RevenuesRevenuesRevenuesRevenues ExpensesExpensesExpensesExpensesOwner’sOwner’sCapitalCapital

Owner’sOwner’sCapitalCapital

Owner's Owner's WithdrawalsWithdrawals

Owner's Owner's WithdrawalsWithdrawals

__ ++ __

Debit Credit

Owner’s Capital

- + - + Debit Credit

Owner's Withdrawals

+ - + - Debit Credit

Expenses

+ - + -Debit Credit

Revenues

- + - +

DOUBLE-ENTRY ACCOUNTING

EquityEquityEquityEquity

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McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin Slide 13

DOUBLE-ENTRY ACCOUNTING

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

Notice the T-Account.

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McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin Slide 14

JOURNALIZING & POSTING TRANSACTIONS

Step 1: Analyze transactions and source

documents.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Step 2: Apply double-entry accounting

(Left side) (Right side)Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

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McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15

BALANCE COLUMN ACCOUNT

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

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McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16

ANALYZING TRANSACTIONS

Analysis:

(1) Cash 101 30,000 C. Taylor, Capital 301 30,000

Double entry:

(1) 30,000Cash 101 301

(1) 30,000C. Taylor, Capital 301

Posting:

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McGraw-Hill/Irwin Slide 17McGraw-Hill/Irwin Slide 17

ANALYZING TRANSACTIONS

Analysis:

(2) Supplies 126 2,500 Cash 101 2,500

Double entry:

(2) 2,500Supplies 126

(1) 30,000 (2) 2,500Cash 101

Posting:

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McGraw-Hill/Irwin Slide 18McGraw-Hill/Irwin Slide 18

ANALYZING TRANSACTIONS

Analysis:

(3) Equipment 167 26,000 Cash 101 26,000

Double entry:

(1) 30,000 (2) 2,500(3) 26,000

Cash(3) 26,000

Equipment 167 101

Posting:

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McGraw-Hill/Irwin Slide 19McGraw-Hill/Irwin Slide 19

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

Debits CreditsCash 4,350$ Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200$ Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 Owner's Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300$ 45,300$

FastForwardTrial Balance

December 31, 2009The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

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McGraw-Hill/Irwin Slide 20McGraw-Hill/Irwin Slide 20

PREPARING A TRIAL BALANCE

Preparing a trail balance involves three steps:1.List each account title and its amount (from ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely).2.Compute the total of debit balances and the total of credit balances.3.Verify (prove) total debit balances equal total credit balances.

Preparing a trail balance involves three steps:1.List each account title and its amount (from ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely).2.Compute the total of debit balances and the total of credit balances.3.Verify (prove) total debit balances equal total credit balances.

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McGraw-Hill/Irwin Slide 21McGraw-Hill/Irwin Slide 21

END OF CHAPTER 2