Lecture 2

Analyzing Transactions and Double Entry

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Analyzing Business Transactions Using T Accounts

Section 1: Transactions That Affect

Assets, Liabilities, and Owners Equity

Section Objectives
1. 2. 3. Set up T accounts for assets, liabilities, and owners equity. Analyze business transactions and enter them in the accounts. Determine the balance of an account.
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Analyzing and Recording Process

Analyze each transaction and event from source documents

Record relevant transactions and events in a journal

Prepare and analyze the trial balance

Post journal information to ledger accounts

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Source Documents
Checks Employee Earnings Records Bills from Suppliers Purchase Orders

Bank Statements Sales Tickets

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The Accounting Equation

ASSETS
The property a business owns

LIABILITIES
The debts of the business

+
OWNERS EQUITY
The owners financial interest in the business

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Remembering Debits and Credits ALCREW

Account Type Assets Liabilities
Step 1
Write down the account types using ALCREW.

Capital
Revenue

Expenses
Withdrawals

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Remembering Debits and Credits ALCREW

Account Type Assets A ssets Liabilities L iabilities Normal Balance
Step 2 Write down the normal balance (debit) of A,E,W. The others are credits.

Capital C apital
Revenue R evenue

Expenses E xpenses
Withdrawals W ithdrawals

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Remembering Debits and Credits ALCREW

Account Type Assets A ssets Liabilities L iabilities Normal Balance Step 2 Dr
Write down the normal balance, debit, of A,E,W. The others are credits.

Capital C apital
Revenue R evenue

Expenses E xpenses
Withdrawals W ithdrawals

Dr
Dr

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Remembering Debits and Credits ALCREW

Account Type Assets A ssets Liabilities L iabilities Normal Balance Step 2 Dr Cr

Capital C apital
Revenue R evenue

Cr
Cr

Write down the normal balance, debit, of A,E,W. The others are credits.

Expenses E xpenses
Withdrawals W ithdrawals

Dr
Dr

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Remembering Debits and Credits ALCREW

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
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Remembering Debits and Credits ALCREW

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
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Dr Dr Dr

Remembering Debits and Credits ALCREW

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr Dr Dr Dr Dr Dr Cr Cr
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Set up T accounts for assets, liabilities and Objective 1 owners equity

T Accounts
ASSETS
+ Record Increases LEFT SIDE Record Decreases RIGHT SIDE

LIABILITIES
Record Decreases LEFT SIDE + Record Increases RIGHT SIDE

OWNERS EQUITY
Record Decreases LEFT SIDE + Record Increases RIGHT SIDE

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Objective 2

Analyze business transactions and enter them in the accounts

Effects of Business Transactions

Steps to analyze the effects of the business transactions:
1. Analyze the financial event.

Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account.

1. Apply the left-side-right side rules for each account affected. 2. Make the entry in T-account form.

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Objective 3

Determine the balance of an account

An account balance is the difference between the amounts recorded on the two sides of an account.

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Recording Account Balances

IF
the total on the right side is larger than the total on the left side,
the total on the left side is larger,

THEN
the balance is recorded on the right side.

the balance is recorded on the left side.

an account shows only one amount,

that amount is the balance.

an account contains entries on only one side,

the total of those entries is the account balance.

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Summary of Account Balances

ASSETS Cash = LIABILITIES Accounts Payable + OWNERS EQUITY Carolyn Wells, Capital

(a) 100,000 (b) 5,000 Account (d) 1,500 (e) 2,500 (f) 8,000 Bal. 83,000 17,000
Supplies

( e) 2,500 (c) 6,000 (b) 100,000 balances for Carter Consulting Services Bal. 3,500

SUMMARY OF ACCOUNT BALANCES (d) 1,500 ASSETS Prepaid Rent = LIABILITIES + OWNERS EQUITY 3,500 100,000

(f)

8,000
Equipment

83,000 1,500 8,000 11,000 103,500 =

3,500

100,000

(b) 5,000 (c) 6,000 Bal. 11,000

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Analyzing Business Transactions Using T Accounts

Section 2: Transactions That Affect Revenue, Expenses, and Withdrawals
Section Objectives
1. 2. 3. 4. Set up T accounts for revenue and expenses. Prepare a trial balance from T accounts. Prepare an income statement, a statement of owners equity, and a balance sheet. Develop a chart of accounts.
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The Rules of Debit and Credit

A debit is an entry on the left side of an account.
A credit is an entry on the right side of an account. A double-entry system is an accounting system that involves recording the effects of each transaction as debits and credits in separate accounts. Every transaction in a Double entry accounting system has at least one debit and one credit.

Every transaction must have at least one debit and one credit. The total of the debits and credits recorded in the separate accounts must be EQUAL.

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Any Account

Left Side

Right Side

Accountants

refer to the left side of an account as the debit side instead of saying the left side. The right side of the account is called the credit side.

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Rules for Debits and Credits

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Objective 5 Prepare a trial balance from T accounts

1. Use the proper heading to include who, what, and when information. 2. List the accounts in chart of account order or in the same order as they appear in the financial statement. 3. Enter the ending balance of each account in the appropriate Debit or Credit column.

4. Total the Debit column.

5. Total the Credit column. 6. Compare the column totals. They should be equal.
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(A) On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
JOURNAL
Date 1 Nov. 1 Cash 2 3 4 Chris Clark, Capital
2005

Page 1
Post. Ref.

Description

Debit 25 000 00

Credit

25 000 00

Invested cash in NetSolutions.

323

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

Effects of this entry in the Ledger

Cash
Nov. 1 25,000

Chris Clark, Capital

Nov. 1 25,000

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

4
5 6 7 8 9 10 5 Land 20 000 00

Cash
Purchased land for building site.

20 000 00

325

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

Effects of this entry in the Ledger

Cash
Nov. 1 25,000 Nov. 5 20,000 Nov. 5

Land
20,000

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

10 11 12 13 14 15 16 10 Supplies 1 350 00

Accounts Payable
Purchased supplies on account.

1 350 00

327

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

Effects of this entry in the Ledger

Supplies
Nov. 10 1,350

Accounts Payable
Nov. 10 1,350

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(D) On November 18, NetSolutions received fees of $7,500 from customers for services provided .
14
15 16 17 18 19 20 18 Cash 7 500 00

Fees Earned
Received fees from customers.

7 500 00

329

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

Effects of this entry in the Ledger

Cash
Nov. 1 18 25,000 Nov. 5 7,500 20,000

Fees Earned
Nov. 18 7,500

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(E) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 .
18
19 20 21 22 23 24 30 Wages Expense Rent Expense Utilities Expense Miscellaneous Expense 2 125 00 800 00 450 00 275 00

Cash
Paid expenses.

3 650 00

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

Effects of this entry in the Ledger

Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 20,000 Nov. 30 3,650

Wages Expense
2,125

Rent Expense
Nov. 30 800

Utilities Expense
Nov. 30 450

Miscellaneous Expense
Nov. 30 275
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(F) On November 30, NetSolutions paid creditors on account, $950.

30
31 32 33 34 35 36 30 Accounts Payable 950 00

Cash
Paid creditors on account.

950 00

333

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

Effects of this entry in the Ledger

Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 30 20,000 Nov. 30 3,650 950

Accounts Payable
950 Nov. 10 1,350

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(G) On November 30, a count revealed that $800 of the supplies inventory had been used.
25
26 27 28 29 30 31 30 Supplies Expense 800 00

Supplies
Supplies used during November.

800 00

335

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

Effects of this entry in the Ledger

Supplies
Nov. 10 1,350 Nov. 30 800 Nov. 30

Supplies Expense
800

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(H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
JOURNAL
Date
2005

Page 2 Post. Ref. Debit 2 000 00 2 000 00 Credit

Description

1 Nov. 30 Chris Clark, Drawing 2 3 4 Cash

Chris Clark withdrew cash for

personal use.

337

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

Effects of this entry in the Ledger

Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 30 30 20,000 Nov. 30 3,650 950 2,000

Chris Clark, Drawing

2,000 Nov. 10 1,350

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Flow of Business Transactions

Transaction authorized

Transaction takes place

Document prepared

Entry recorded in journal

Entry posted to ledger

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The End

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