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ANALYZING AND RECORDING TRANSACTIONS

Chapter 2

2009 The McGraw-Hill Companies, Inc., All Rights Reserved

C1

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


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Post journal information to ledger accounts


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C2

SOURCE DOCUMENTS
Checks Employee Earnings Records Bills from Suppliers Purchase Orders

Bank Statements Sales Tickets

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THE ACCOUNT AND ITS ANALYSIS


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

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C3

THE ACCOUNT AND ITS ANALYSIS


Assets Assets Asset Accounts Accounts Accounts

Liability Liability Liability Accounts Accounts Accounts

Equity Equity Equity Accounts Accounts Accounts

Owner, Capital Owner, Withdrawals

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ASSET ACCOUNTS
Cash Land Accounts Receivable

Buildings

Asset Accounts
Supplies

Notes Receivable

Equipment

Prepaid Accounts

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C3

LIABILITY ACCOUNTS
Accounts Payable Notes Payable

Liability Accounts
Accrued Liabilities
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Unearned Revenue
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C3

EQUITY ACCOUNTS
Owners Equity Owners Withdrawals

Equity Accounts
Revenues Expenses Owners Capital
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C3

THE ACCOUNT AND ITS ANALYSIS

Assets

Liabilities

+
+

Equity

+
Owners Capital

Owner's Withdrawals

Expenses

Revenues

McGraw-Hill/Irwin

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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.
Account Number 101 106 126 128 167 201 236 301
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Account Name Cash Accounts receivable Supplies Prepaid insurance Equipment Accounting payable Unearned revenue C. Taylor, Capital

Accounting Number 302 403 406 622 637 640 652 690

Accounting Name C. Taylor, Withdrawals Revenues Rental revenue Salaries expense Insurance expense Rent expense Supplies expense Utilities expense
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C5

DEBITS AND CREDITS


A T-account represents a ledger account and is a Ttool used to understand the effects of one or more transactions.
Account Title (Left side) (Right side) Debit Credit

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C5

DOUBLE-ENTRY ACCOUNTING

Assets
ASSETS

Liabilities
LIABILITIES

Equity
EQUITIES

Debit

Credit

Debit

Credit

Debit

Credit

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C5

DOUBLE-ENTRY ACCOUNTING

Equity
Owners Capital
Owners Capital

Owner's Withdrawals
Owner's Withdrawals

Revenues
Revenues

_ Expenses
Expenses

Debit Credit

Debit Credit

Debit Credit

Debit Credit

McGraw-Hill/Irwin

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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.

Cash
Investment by owner Consulting services revenues earned Collection of accounts receivable 30,000 Purchase of supplies 4,200 Purchase of equipment 1,900 Payment of rent Payment of salary Payment of account payable Withdrawal by owner 36,100 Total decreases 4,800 2,500 26,000 1,000 700 900 200 31,300

Total increases Balance


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P1

JOURNALIZING & POSTING TRANSACTIONS


Assets

Liabilities

Equity

T- Account (Left side) (Right side) Debit Credit

Step 1: Analyze transactions and source documents.

Step 2: Apply doubleentry accounting

ACCOUNT NAME:
Date Description PR

ACCOUNT No.
Debit Credit Balance

GENERAL JOURNAL
Date Description Post. Ref.

Page
Debit

123
Credit

Step 4: Post entry to ledger


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Step 3: Record journal entry


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P1

JOURNALIZING TRANSACTIONS
Transaction Date Titles of Affected Accounts

GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner

Page 1
Credit

30,000

McGraw-Hill/Irwin

Transaction Dec. 2 Supplies Dollar amount2,500 of debits explanation and credits Cash 2,500 Purchased supplies for cash

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P1

BALANCE COLUMN ACCOUNT


T-accounts are useful illustrations, but balance column ledger accounts are used in practice.
CASH
Date 2009 Dec. 1 Dec. 2 Dec. 3 Dec. 10 Description PR

ACCOUNT No. 101


Debit Credit Balance

Initial investment Purchased supplies Purchased equipment Collection from customer

30,000 2,500 26,000 4,200

30,000 27,500 1,500 5,700

McGraw-Hill/Irwin

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P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner Dec. 2 Supplies Cash 1 Identify the debit account Purchased store supplies for cash 2,500 30,000

Page 1
Credit

in ledger.
ACCOUNT No.
PR Debit Credit

2,500

CASH

101
Balance

Date 2009

Description

McGraw-Hill/Irwin

Dec. 3

Dec. 10

Purchased equipment Collection from customer

G1 G1

20,000.00 2,200.00

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P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner Dec. 2 Supplies 2 Enter the date. Cash Purchased store supplies CASH for cash 2,500 2,500 30,000

Page 1
Credit

ACCOUNT No.
PR Debit Credit

101
Balance

Date 2009 Dec. 1


McGraw-Hill/Irwin

Description

Dec. 3

Purchased equipment

G1

20,000.00

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P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner Dec. 2 Supplies EnterCashamount and the Purchased store supplies CASH for cash 30,000

Page 1
Credit

description.

2,500 2,500

ACCOUNT No.
PR Debit Credit

101
Balance

Date 2009 Dec. 1


McGraw-Hill/Irwin

Description

Investment by owner Purchased equipment


G1

30,000 20,000
Slide 20 (20,000)

Dec. 3

P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner Dec. Enter the journal reference. 2 Supplies 4 Cash CASH Purchased store supplies for cash 2,500 2,500 30,000

Page 1
Credit

ACCOUNT No.
Debit Credit

101
Balance

Date 2009 Dec. 1 Dec. 3

Description

PR G1 G1 G1

Investment by owner Purchased equipment Collection from customer

30,000 20,000 2,200


Slide (20,000)21 (17,800)

McGraw-Hill/Irwin

Dec. 10

P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR Debit 30,000 C. Taylor, Capital Investment by owner Dec. 5 2 Supplies Compute the balance. Cash Purchased store supplies CASH for cash 2,500 2,500 30,000

Page 1
Credit

ACCOUNT No.
PR G1 G1 Debit Credit

101
Balance

Date 2009 Dec. 1


McGraw-Hill/Irwin

Description

Investment by owner Purchased equipment

30,000 20,000

30,000
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Dec. 3

P1

POSTING JOURNAL ENTRIES


GENERAL JOURNAL
Date 2009 Dec. 1 Cash Description PR 101 C. Taylor, Capital Investment by owner Dec. 6 2 Enter the ledger reference. Supplies Cash Purchased store supplies CASH for cash 2,500 2,500 Debit 30,000 30,000

Page 1
Credit

ACCOUNT No.
Debit Credit

101
Balance

Date 2009 Dec. 1 Dec. 3

Description

PR G1 G1 G1

Investment by owner Purchased equipment Collection from customer

30,000 20,000 2,200

30,000
Slide 23 (20,000) (17,800)

McGraw-Hill/Irwin

Dec. 10

A1

ANALYZING TRANSACTIONS
Transaction: Owner invested $30,000 in FastForward on Dec. 1.
Analysis:
Assets Cash 30,000 = Liabilities + Equity Capital 30,000

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

Posting:
(1) Cash 30,000
101

C. Taylor, Capital (1)

McGraw-Hill/Irwin

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A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases supplies by paying $2,500 cash.

Analysis:
Cash (2,500) Assets Supplies 2,500 = Liabilities + Equity Capital

Double entry:
(2) Supplies Cash 126 101 2,500 2,500

Posting:
(2) Supplies 2,500
126

(1)

Cash 30,000

101

(2)

2,500

McGraw-Hill/Irwin

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A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases equipment by paying $26,000 cash.

Analysis:
Assets Cash Equipment (26,000) 26,000 = Liabilities + Equity Capital

Double entry:
(3) Equipment Cash 167 101 26,000 26,000

Posting:
(3) Equipment 26,000
167

(1)

Cash 30,000

101

(2) (3)

2,500 26,000
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McGraw-Hill/Irwin

A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases $7,100 of supplies on credit.
Analysis:
Assets Supplies 7,100 = Liabilities Accounts Payable 7,100 + Equity Capital

Double entry:
(4) Supplies Accounts payable 126 201 7,100 7,100

Posting:
(2) (4)
McGraw-Hill/Irwin

Supplies 2,500 7,100

126

Accounts Payable (4)

201

7,100

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A1

ANALYZING TRANSACTIONS
Transaction: FastForward provides consulting services and immediately collects $4,200 cash.

Analysis:
Assets Cash 4,200 = Liabilities + Equity Revenue 4,200

Double entry:
(5) Cash Consulting Revenue 101 403 4,200 4,200

Posting:
(1) (5)
McGraw-Hill/Irwin

Cash 30,000 4,200

403

(2) (3)

2,500 26,000

Consulting Revenue 101 (5) 4,200

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P2

After processing its remaining transactions for December, FastForwards Trial Balance is prepared.
FastForward Trial Balance December 31, 2009 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue C. Taylor, Capital Owner's Withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Debits $ 4,350 9,720 2,400 26,000 Credits

6,200 3,000 30,000 5,800 300

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.

200

1,400 1,000 230 $ 45,300 $ 45,300


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P2

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.

McGraw-Hill/Irwin

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P2

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. Make sure account balances are correctly entered from the ledger. See if debit or credit accounts are mistakenly placed on the trial balance.
McGraw-Hill/Irwin

Re-compute each account balance in the ledger. Verify that each journal entry is posted correctly. 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 Period of Time
Statement of Cash Flows

Point in Time

Statement of Owners Equity

Income Statement

Beginning Balance Sheet

Ending Balance Sheet

McGraw-Hill/Irwin

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P3

INCOME STATEMENT
FASTFORWARD Income Statement For the Month Ended December 31, 2009 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ 6,100 Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income $ 3,470

McGraw-Hill/Irwin

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P3

STATEMENT OF OWNER'S EQUITY


FASTFORWARD Statement of Owner's Equity For the Month Ended December 31, 2009

Connections
FASTFORWARD Income Statement For the Month Ended December 31, 2009 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses Net income $
McGraw-Hill/Irwin

C. Taylor, Capital 12/1/09 Net income for December Plus: Investments by Owner Less: Owner Withdrawals . C. Taylor, Capital, 12/31/09

3,470 30,000 33,470 200 33,270

6,100

2,630 3,470

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P3

BALANCE SHEET
Statement of Owner's Equity For the Month Ended December 31, 2009

C. Taylor, Capital 12/1/09 Net income for December Plus: Investments by Owner Less: Owner Withdrawals C. Taylor, Capital, 12/31/09

3,470 30,000 33,470 200 33,270

Connections

Cash Supplies Prepaid insurance Equipment Total assets Liabilities Accounts payable Unearned revenue Total liabilities Equity

FASTFORWARD Balance Sheet December 31, 2009 Assets $

$ $

4,350 9,720 2,400 26,000 42,470 6,200 3,000 9,200

C. Taylor, Capital Total equity Total liabilities and equity


McGraw-Hill/Irwin

$ $

33,270 33,270 42,470


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P3

PRESENTATION ISSUES

1. Dollar signs are not used in journals and ledgers. 2. Dollar signs appear in financial statements and other reports such as trial balances. The usual practice is to put dollar signs beside only the first and last numbers in a column. 3. When amount are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4. Commas are always used in financial statements. 5. Companies commonly round amounts in reports to the nearest dollar, or even to a higher level.
McGraw-Hill/Irwin
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A2

Debt to Assets Ratio

Total Debt Total Assets


Evaluates the level of debt risk.
A higher ratio indicates that there is a greater probability that a company will not be able to pay its debt in the future.
McGraw-Hill/Irwin
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END OF CHAPTER 2

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