Chapter 2

Analyzing and Recording

Transactions

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Conceptual Learning Objectives

C1: Explain the steps in processing
transactions
C2: Describe source documents and their
purpose
C3: Describe an account and its use in
recording transactions
C4: Describe a ledger and a chart of accounts
C5: Define debits and credits and explain their
role in double-entry accounting
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Analytical Learning Objectives

A1: Analyze the impact of transactions on

accounts and financial statements

A2: Compute the debt ratio and describe
its use in analyzing financial condition

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Procedural Learning Objectives

P1: Record transactions in a journal and

post entries to a ledger

P2: Prepare and explain the use of a trial
balance
P3: Prepare financial statements from
business transactions

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Analyzing and Recording

Process

C1

Exchanges of economic consideration

between two parties.

External Transactions
occur between the
organization and an
outside party.
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Internal Transactions
occur within the
organization.
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Analyzing and Recording

Process

C1

Analyze each transaction and

event from source documents

Prepare and analyze

the trial balance
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Record relevant transactions

and events in a journal

Post journal
information
to ledger
accounts
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Source Documents

C2

Checks
Employee
Earnings
Records

Bills from
Suppliers

Purchase
Orders

Bank
Statements
Sales
Tickets

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C3

The Account and its Analysis

An
An account
account is
is aa
record
record of
of
increases
increases and
and
decreases
decreases in
in aa
specific
specific asset,
asset,
liability,
liability, equity,
equity,
revenue,
revenue, or
or
expense
expense item.
item.
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The
The general
general
ledger
ledger is
is aa record
record
containing
containing all
all
accounts
accounts used
used by
by
the
the company.
company.

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C3

The Account and its Analysis

Assets
Assets
Assets
Accounts
Accounts
Accounts

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Liability
Liability
Liability
Accounts
Accounts
Accounts

Equity
Equity
Equity
Accounts
Accounts
Accounts

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Asset Accounts

C3

Cash
Land

Buildings

Asset
Asset
Accounts
Accounts

Equipment
Supplies

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Accounts
Receivable
Notes
Receivable

Prepaid
Accounts

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Liability Accounts

C3

Accounts
Accounts
Payable
Payable

Notes
Notes
Payable
Payable

Liability
Liability
Accounts
Accounts
Accrued
Accrued
Liabilities
Liabilities
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Unearned
Unearned
Revenue
Revenue
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Equity Accounts

C3

Common
Common
Stock
Stock

Retained
Retained
Earnings
Earnings
Dividends
Dividends

Equity
Equity
Accounts
Accounts
Revenues
Revenues

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Expenses
Expenses

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C3

The Account and its Analysis

Assets

+
Common
Common
Stock
Stock

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Liabilities
Liabilities

Dividends
Dividends

Equity
Equity

+
Revenues
Revenues

Expenses
Expenses

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C4

Ledger and Chart of Accounts

The ledger is a collection of all accounts for an
information system. A companys size and
diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.

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Debits and Credits

C5

A T-account represents a ledger account and is a tool

used to understand the effects of one or more
transactions.

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C5

Double-Entry Accounting
Assets
Assets
ASSETS

Debit

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Credit

Liabilities
Liabilities
LIABILITIES

Debit

Credit

Equity
Equity
EQUITIES

Debit

Credit

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Double-Entry Accounting

C5

Equity
Common
Common
Stock
Stock

Dividends
Dividends

Revenues
Revenues

Expenses
Expenses

Stock

Dividends

Revenues

Expenses

Debit Credit

Debit Credit

Debit Credit

Debit Credit

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C5

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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Journalizing &
Posting Transactions

P1

Assets
Assets

Step 1: Analyze
transactions and source
documents.

ACCOUNT NAME:
Date

Liabilities
Liabilities

Equity
Equity

Step 2: Apply doubleentry accounting

ACCOUNT No.
Description

PR

Debit

Credit

Balance

Step 4: Post entry to ledger

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Step 3: Record journal entry

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P1

Journalizing Transactions

Transaction
Transaction
Date
Date

Transaction
Transaction
explanation
explanation
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Titles
Titles of
of Affected
Affected
Accounts
Accounts

Dollar
Dollar amount
amount of
of debits
debits
and
and credits
credits
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P1

Balance Column Account

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

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Posting Journal Entries

P1

Identify the debit account in ledger.

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Posting Journal Entries

P1

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Enter the date.

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Posting Journal Entries

P1

Enter the amount and description.

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Posting Journal Entries

P1

Enter the journal reference.

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Posting Journal Entries

P1

Compute the balance.

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P1

Posting Journal Entries

Enter the ledger reference.

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A1

Analyzing Transactions

Analysis:

Double entry:

Posting:
101

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301

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A1

Analyzing Transactions

Analysis:

Double entry:
Posting:
126

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101

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A1

Analyzing Transactions

Analysis:

Double entry:
Posting:
167

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101

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A1

Analyzing Transactions
Analysis:

Double entry:

Posting:
126

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201

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A1

Analyzing Transactions

Analysis:

Double entry:

Posting:
403

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101

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After processing its remaining transactions for December,

FastForwards Trial Balance is prepared.

A1

FastForward
Trial Balance
December 31, 2009
Cash
Accounts receivable
Supplies
Prepaid Insurance
Equipment
Accounts payable
Unearned consulting revenue
Common stock
Dividends
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Total
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Debits
$ 4,350
9,720
2,400
26,000

Credits

6,200
3,000
30,000

200

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.

5,800
300
1,400
1,000
230
$ 45,300 $ 45,300
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P2

Six Steps for Searching for and

Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.

Make sure the trial balance

columns are correctly added.

Recompute each account

balance in the ledger.

Make sure account

balances are correctly
entered from the ledger.

Verify that each journal

entry is posted correctly.

See if debit or credit

accounts are mistakenly
placed on the trial balance.

Verify that each original

journal entry has equal
debits and credits.

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P3

Using a Trial Balance to Prepare Financial

Statements
Point in
Time

Point in
Time

Period of Time
Income Statement
Statement of Retained Earnings

Beginning
Balance
Sheet

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Statement of Cash
Flows

Ending
Balance
Sheet

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P3

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Income Statement

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P3

Statement of Retained Earnings

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P3

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Balance Sheet

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Debt Ratio

A2

Describes the relationship between the

amounts of the companys liabilities
and assets.

Helps to assess the risk that a

company will fail to pay its debts.

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End of Chapter 2

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