ANALYZING AND RECORDING

TRANSACTIONS

Chapter 2

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 C1 ANALYZING AND RECORDING
PROCESS

Record relevant transactions

Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
Prepare and analyze to ledger
the trial balance accounts

McGraw-Hill/Irwin Slide 2
C2

SOURCE DOCUMENTS
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets

McGraw-Hill/Irwin Slide 3
C3

THE ACCOUNT AND ITS ANALYSIS

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

McGraw-Hill/Irwin Slide 4
C3

THE ACCOUNT AND ITS ANALYSIS

Assets
Assets Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts

Owner, Capital
Owner, Withdrawals

McGraw-Hill/Irwin Slide 5
C3

ASSET ACCOUNTS

Cash
Accounts
Land
Receivable

Buildings
Asset Notes
Receivable
Accounts
Prepaid
Equipment
Accounts
Supplies

McGraw-Hill/Irwin Slide 6
C3

LIABILITY ACCOUNTS

Accounts Notes
Payable Payable

Liability
Accounts
Accrued Unearned
Liabilities Revenue

McGraw-Hill/Irwin Slide 7
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EQUITY ACCOUNTS

Owner’s Owner’s
Equity Withdrawals

Equity
Accounts

Owner’s
Revenues Expenses
Capital

McGraw-Hill/Irwin Slide 8
C3

THE ACCOUNT AND ITS ANALYSIS

Assets = Liabilities + Equity

+ – + –
Owner’s Owner's
Revenues Expenses
Capital Withdrawals

McGraw-Hill/Irwin Slide 9
C4

LEDGER AND CHART OF ACCOUNTS

The ledger is a collection of all accounts for an
information system. A company’s 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 Account Name Accounting Number Accounting Name
101 Cash 302 C. Taylor, Withdrawals
106 Accounts receivable 403 Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounting payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 C. Taylor, Capital 690 Utilities expense
McGraw-Hill/Irwin Slide 10
C5

DEBITS AND CREDITS

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

Account Title
(Left side) (Right side)
Debit Credit

McGraw-Hill/Irwin Slide 11
C5

DOUBLE-ENTRY ACCOUNTING

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

McGraw-Hill/Irwin Slide 12
C5

DOUBLE-ENTRY ACCOUNTING

Equity
Owner’s _ Owner's _ Expenses
Capital Withdrawals + Revenues

Owner’s Owner's Revenues Expenses

Capital Withdrawals

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
McGraw-Hill/Irwin Slide 13
 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 30,000 Purchase of supplies 2,500
Consulting services revenues earned 4,200 Purchase of equipment 26,000
Collection of accounts receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of account payable 900
Withdrawal by owner 200
Total increases 36,100 Total decreases 31,300
Balance 4,800

McGraw-Hill/Irwin Slide 14
P1 JOURNALIZING &
POSTING TRANSACTIONS
Assets = Liabilities + Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.

GENERAL JOURNAL Page 123

ACCOUNT NAME: ACCOUNT No. Post.
Date Description Ref. Debit Credit
Date Description PR Debit Credit Balance

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

McGraw-Hill/Irwin Slide 15
P1

JOURNALIZING TRANSACTIONS
ŒTransaction Titles of Affected
Date Accounts

GENERAL JOURNAL Page 1

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

Dec. 2 Supplies
Transaction ŽDollar amount2,500
of debits
explanation
Cash and credits 2,500
McGraw-Hill/Irwin Slide 16
P1

BALANCE COLUMN ACCOUNT

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

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009
Dec. 1 Initial investment 30,000 30,000
Dec. 2 Purchased supplies 2,500 27,500
Dec. 3 Purchased equipment 26,000 1,500
Dec. 10 Collection from customer 4,200 5,700

McGraw-Hill/Irwin Slide 17
P1

POSTING JOURNAL ENTRIES

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

Dec. 2 Supplies 2,500

1 Identify theCash 2,500
debit account
Purchased store supplies
in ledger.
for cash
CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009

McGraw-Hill/Irwin
Dec. 3 Purchased equipment G1 20,000.00 ########
Slide 18
P1

POSTING JOURNAL ENTRIES

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

Dec. 2 Supplies 2,500

2 Enter the date.
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009
Dec. 1

McGraw-Hill/Irwin Slide 19
Dec. 3 Purchased equipment G1 20,000.00 ########
P1

POSTING JOURNAL ENTRIES

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

Dec. 2 Supplies 2,500

EnterCash
3 the amount and description. 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009
Dec. 1 Investment by owner 30,000

McGraw-Hill/Irwin
Dec. 3 Purchased equipment G1 20,000 (20,000)
Slide 20
P1

POSTING JOURNAL ENTRIES

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

4 Enter
Dec. the journal reference.
2 Supplies 2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash

Date Description PR Debit Credit Balance

2009
Dec. 1 Investment by owner G1 30,000

Dec. 3
McGraw-Hill/Irwin Purchased equipment G1 20,000 (20,000)
Slide 21
P1

POSTING JOURNAL ENTRIES

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

Dec. 2 Supplies 2,500

5 Compute the balance.
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009
Dec. 1 Investment by owner G1 30,000 30,000

McGraw-Hill/Irwin
Dec. 3 Purchased equipment G1 20,000 (20,000)
Slide 22
P1

POSTING JOURNAL ENTRIES

GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2009
Dec. 1 Cash 101 30,000
C. Taylor, Capital 30,000
Investment by owner

Dec.
6 2 Enter the ledger reference.
Supplies 2,500
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance

2009
Dec. 1 Investment by owner G1 30,000 30,000

Dec. 3
McGraw-Hill/Irwin Purchased equipment G1 20,000 (20,000)
Slide 23
A1

ANALYZING TRANSACTIONS
Transaction: Owner invested $30,000 in FastForward on Dec. 1.

Analysis:
Assets = Liabilities + Equity
Cash Capital
30,000 30,000

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

McGraw-Hill/Irwin Slide 24
A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases supplies by paying $2,500
cash.
Analysis:
Assets = Liabilities + Equity
Cash Supplies Capital
(2,500) 2,500

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

Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500

McGraw-Hill/Irwin Slide 25
A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases equipment by paying $26,000
cash.
Analysis:
Assets = Liabilities + Equity
Cash Equipment Capital
(26,000) 26,000

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

Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000

McGraw-Hill/Irwin Slide 26
A1

ANALYZING TRANSACTIONS
Transaction: FastForward purchases $7,100 of supplies on credit.

Analysis:
Assets = Liabilities + Equity
Supplies Accounts Payable Capital
7,100 7,100

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

Posting:
Supplies 126 Accounts Payable 201
(2) 2,500 (4) 7,100
(4) 7,100

McGraw-Hill/Irwin Slide 27
A1

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

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

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

Posting:
Cash 403 Consulting Revenue 101
(1) 30,000 (2) 2,500 (5) 4,200
(5) 4,200 (3) 26,000

McGraw-Hill/Irwin Slide 28
 After processing its remaining transactions for
P2
December, FastForward’s Trial Balance is prepared.

FastForward
Trial Balance The trial balance
December 31, 2009
lists all account
Debits Credits
Cash $ 4,350
balances in the
Accounts receivable - general ledger. If
Supplies 9,720
Prepaid Insurance 2,400
the books are in
Equipment 26,000 balance, the total
Accounts payable $ 6,200
Unearned consulting revenue 3,000
debits will equal the
C. Taylor, Capital 30,000 total credits.
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

McGraw-Hill/Irwin Slide 29
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 Slide 30
P2 SEARCHING FOR AND CORRECTING
ERRORS
If the trial balance does not balance, the
error(s) must be found and corrected.

ŒMake sure the trial Re-compute each

balance columns are account balance in the
correctly added. ledger.

Make sure account Verify that each journal

balances are correctly entry is posted correctly.
entered from the ledger.

ŽSee if debit or credit ‘Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
McGraw-Hill/Irwin Slide 31
P3 USING A TRIAL BALANCE TO PREPARE
FINANCIAL STATEMENTS
Point in Point in
Time Period of Time Time
Statement of Cash Flows

Statement of Owner’s Equity

Income Statement
Beginning Ending
Balance Balance
Sheet Sheet

McGraw-Hill/Irwin Slide 32
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 Slide 33
P3
STATEMENT OF OWNER'S EQUITY
FASTFORWARD
Statement of Owner's Equity
For the Month Ended December 31, 2009
C. Taylor, Capital 12/1/09 $ -

Connections
Net income for December 3,470
Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
. C. Taylor, Capital, 12/31/09 $ 33,270

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 Slide 34
P3
BALANCE SHEET
Statement of Owner's Equity
For the Month Ended December 31, 2009 FASTFORWARD
C. Taylor, Capital 12/1/09 $ - Balance Sheet
Net income for December 3,470 December 31, 2009
Plus: Investments by Owner 30,000
Assets
33,470
Less: Owner Withdrawals 200 Cash $ 4,350
C. Taylor, Capital, 12/31/09 $ 33,270 Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Connections Total liabilities
Equity
9,200

C. Taylor, Capital $ 33,270

Total equity 33,270
Total liabilities and equity $ 42,470
McGraw-Hill/Irwin Slide 35
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 Slide 36
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 it’s debt in the
future.

McGraw-Hill/Irwin Slide 37
 END OF CHAPTER 2

McGraw-Hill/Irwin Slide 38