1-1

Analyzing and Recording

Transactions
CHAPTER 2
Electronic Presentations in Microsoft® PowerPoint® to accompany
Fundamental Accounting Principles, 17ce
Prepared by
Regula Lewis

© 2022 McGraw Hill Ltd.

 1-2

Learning Objectives

1. Explain the accounting cycle. (LO1)

2. Describe an account, its use, and its relationship to the ledger. (LO2)
3. Define debits and credits and explain their role in double-entry
accounting. (LO3)
4. Describe a chart of accounts and its relationship to the ledger. (LO4)
5. Analyze the impact of transactions on accounts, record transactions in
a journal and post entries to a ledger. (LO5)
6. Prepare and explain the use of a trial balance. (LO6)

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Accounting Is So Important!
At the young age of 18, Tyler Ferguson began developing her own luxury jewelry line –
MONOXIDE. Through her incredible talent, she aims to “tell tales of authenticity,
translating genuine stories through the creation of visual pieces.”
Tyler emphasizes clearly that “accounting is so important” and that the number one
thing you need to do as an entrepreneur is to “keep on top of your financials.”
At the beginning of her journey at the age of 18, when she started selling her jewelry,
she had no prior experience with managing the financial side of her business. She
began to realize that if she was going run a successful business understanding her cost
per item was critical to enable her to price products effectively at the retail and
wholesale level. She also values the ability to track the year-over-year growth of her
business so she is able to debrief and understand which products are performing best
and give her the highest return.

Interview with Tyler Ferguson, September 28, 2020:

https://monoxidestyle.com/pages/about-monoxide
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Critical Thinking Challenge

1. What does Tyler Ferguson mean when she says that the number one
thing you need to do as an entrepreneur is to keep on top of your
financials?

Interview with Tyler Ferguson, September 28, 2020:

https://monoxidestyle.com/pages/about-monoxide

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 1-5

LO1: The Accounting Cycle

Step 1: Analyze transactions

Step 2: Journalize
Step 3: Post
Step 4: Prepare unadjusted trial balance
Step 5: Adjust
Step 6: Prepare adjusted trial balance
Step 7: Prepare statements
Step 8: Close
Step 9: Prepare post-closing trial balance

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LO2: The Account

• A detailed record of increases and decreases in a specific asset, liability,

or equity item.
• Information is taken from accounts, analyzed, summarized, and
presented in useful reports and financial statements for users.

EXHIBIT 2.2
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The Ledger

• A record containing all individual accounts used by a business.

• Typically maintained electronically.
• Each company has its own unique set of accounts.

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Asset Accounts

Properties or economic resources held by a business with three key

attributes:
1. The transaction to acquire the asset has occurred.
2. The company has control over the asset.
3. A future benefit exists for the company as it is used in operations.

Assets have value and are used in the operations of the business to create
revenue.

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IMPORTANT TIP

Identifying Asset Accounts

Asset accounts are often intuitive in nature. For example, cash, supplies,
inventory, land (property), buildings, and equipment all are examples of
assets. Two other key words to watch for are “receivables” and
“prepaids.” A receivable is an asset because the company has the legal
right to collect the outstanding balance. Prepaids indicate the company
has paid in advance for a service or goods and will benefit from this in the
future. Assets have a debit balance.

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Accounts Receivable

• An asset that is created when services are performed for or goods are
sold to customers.
• The amount recorded as a receivable reflects a commitment from the
customer to pay in the future, instead of settling in cash today.
• These transactions are said to be on credit or on account.
• Accounts receivable are increased as services are performed or goods
are sold on credit and decreased when customers make payments.

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Notes Receivable

• Also called Promissory Notes.

• A formal contract signed by the customer or another party that owes a
specific sum of money to the company.
• The contract provides details regarding the total dollar value of the
commitment, when the payment is due, and any interest required to be
paid.

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Prepaid Expenses

• Occur when a company pays in advance for a service or goods for which
the benefit extends beyond the current accounting period.
• Examples include Office Supplies, Prepaid Rent, and Prepaid Insurance.
• As these assets are used up, the costs of the used assets become
expenses.
• Because the benefits of these goods/services are used in future periods,
they should be matched to the revenue in future periods.
• A prepaid cost can be initially recorded as an expense if it is used up
before the end of the period.

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Liability Accounts

Liabilities are obligations of the business that have two key attributes:
1.They are a present obligation as a result of a past event.
2.The company has an outstanding obligation to pay via a transfer of
assets or provision of services in the future.

An organization often has several different liabilities, each of which is

represented by a separate account that shows amounts owed to each
creditor.

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IMPORTANT TIP

Identifying Liability Accounts

Two words almost always identify liability accounts: “payable” and

“unearned.” Payable indicates the liability must be paid, and unearned
indicates the liability must be fulfilled through execution of the terms of a
contract. Liabilities have a credit balance.

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Accounts Payable

• Occur with the purchase of merchandise, supplies, equipment, or

services made with a commitment to pay later.

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Notes Payable

• Occur when an organization formally recognizes a promise to pay by

signing a contract referred to as a promissory note.

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Unearned Revenues

• Result when customers pay in advance for products or services.

• Because cash from these transactions is received before revenues are
earned, the seller considers them unearned.
• Unearned revenue is a liability because a service or product is owed to a
customer.
• Examples of unearned revenue include magazine subscriptions collected
in advance by a publisher, sales of gift certificates by stores, airline
tickets sold in advance, and rent collected in advance by a landlord.

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IMPORTANT TIP

Unearned Revenue is Not Yet Revenue

Unearned revenue is not a revenue account but is recorded as a liability. It

occurs when cash has already been received by the company for work
that has not yet been performed or goods not yet delivered. This account
appears as a current liability on the balance sheet, as an obligation exists
to perform the service or provide the goods.

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Equity Accounts

Four types of transactions that affect equity:

1. Investments by the owner
2. Withdrawals by the owner
3. Revenues
4. Expenses

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IMPORTANT TIP

Use the Appendix III and Appendix IV to Help Learn Common Accounts

Turn to Appendix III for examples of expense accounts including

Advertising Expense, Store Supplies Expense, Office Salaries Expense,
Office Supplies Expense, Rent Expense, Utilities Expense, and Insurance
Expense.

Turn to Appendix IV to find detailed information relating to accounts used

within the book including terminology for several types of expense
accounts.

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 1-21

CHECKPOINT
1. Explain the accounting cycle.
2. Classify the following accounts as either assets, liabilities, or equity:

1) Prepaid Rent 6) Owner Capital

2) Rent Expense 7) Wages Payable
3) Unearned Rent 8) Wages Expense
4) Rent Revenue 9) Office Supplies
5) Buildings 10) Owner Withdrawals

3. What is the difference among the accounts Rent Earned, Rent Revenue,
and Earned Rent?

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T-Accounts

• A learning tool representing an account in the ledger.

• The left side is always called the debit side, often abbreviated Dr.
• The right side is always called the credit side, abbreviated Cr.

Account Title
(Left Side) (Right Side)

Debit Credit

EXHIBIT 2.4

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Calculating the Balance of a T-Account

Exhibit 2.5 Cash

Investment by owner 10,000 2,500 Purchase of supplies
1,000 Payment of rent
Received from providing food services 2,200 700 Payment of salary
900 Payment of accounts payable
Collection of accounts receivable 1,900 600 Withdrawal by owner
Total increases 14,100 5,700 Total decreases
Less decreases -5,700
Balance 8,400

1. Calculate the total increases shown on one side (including the beginning balance.)
2. Calculate the total decreases shown on the other side.
3. Subtract the sum of decreases from the sum of the increases, and
4. Calculate the account balance.

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LO3: DEBITS AND CREDITS

Double-Entry Accounting 1

• Every transaction affects at least two accounts.

• The total amount debited must equal the total amount credited.
• Double-entry accounting helps to prevent errors by ensuring that debits
and credits for each transaction are equal.

Debits = Credits

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Double-Entry Accounting 2

Three important rules for recording transactions in a double-entry

accounting system:
1. Increases in assets are debited to asset accounts. Decreases in assets
are credited to asset accounts.
2. Increases in liabilities are credited to liability accounts. Decreases in
liabilities are debited to liability accounts.
3. Increases in equity are credited to equity accounts. Decreases in equity
are debited to equity accounts.

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CAUTION!

Do not assume the terms debit and credit mean increase or decrease.
For asset accounts debit means increase and credit means decrease.
When liabilities and equity are increased the related account is credited
and when they are decreased the related account is debited.

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IMPORTANT TIP

Identifying an Error in Recording a Transaction

In recording a single accounting transaction, as well as in a detailed
system of accounts (referred to as a ledger) and also in a trial balance
(summary of ending balance for each account in the ledger), the only
reason that the sum of debit balances would not equal the sum of credit
balances is if an error had occurred.

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Accounting Equation

• Like any mathematical equation, increases or decreases on one side

have equal effects on the other side.
• Some transactions affect only one side of the equation.

EXHIBIT 2.6

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Debit and Credit Affects for Accounts

EXHIBIT 2.7

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IMPORTANT TIP

Memorize Your Accounting Rules

Ensure you know the following rules as illustrated in EXHIBIT 2.7 before
reading Chapter 3.
For a helpful learning tool, review the video “Debit Credit Theory
(Accounting Rap Song)” on YouTube by Colin Dodds, an educational music
video enthusiast.

Video Link:
https://www.youtube.com/watch?v=j71Kmxv7smk

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Debit and Credit Effects for Accounts

Profit: Only
adjusts owner’s
capital after
financial
preparation to
prepare owner’s
capital for next
period.

EXHIBIT 2.8
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The Debit and Credit Summary

Debit and Credit Summary

Debits Record Credits Record
Assets Liabilities
Expenses / Losses Revenues / Profit
Withdrawals Owner’s Capital  Investments
Debits Decrease: Credits Decrease:
Existing Liabilities Existing Assets

EXHIBIT 2.9

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IMPORTANT TIP

Profit (loss) is booked by a journal entry to the Owner’s Capital account

only after financial statements have been prepared, during the closing
process discussed in Chapter 4.
Profit is added manually to equity in the statement of changes in owner’s
equity, as is shown in the end-of-chapter Demonstration Problem
featuring The Cutlery.
In preparing financial statements it is therefore important to start with the
income statement, and then prepare the statement of changes in equity,
and then finally the balance sheet. As a result, equity, as presented on the
balance sheet, reflects the profit for the current year.

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Normal Account Balances 1

Normal Account Balances

Debit Credit
Assets Liabilities
Withdrawals Owner’s Capital *
Expenses Revenue
* Used to record owner investments profit closing entry f/s preparation.

EXHIBIT 2.10

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Normal Balances 2

Increases in owner’s capital or revenues increase equity. Increases in

owner’s withdrawals or expenses decrease equity. These important
relations are reflected in the following four additional rules:
4. Investments in the company made by the owner are credited to
owner’s capital because they increase equity.
5. Revenues are credited to revenue accounts because they increase
equity, as they increase profit.
6. Expenses are debited to expense accounts because they decrease
equity, as they decrease profit.
7. Withdrawals made by the owner are debited to owner’s withdrawals
because they decrease equity.

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IMPORTANT TIP

The video “Trick to Remember Debits and Credits”* on the StudentsKnow

YouTube channel highlights a “Hand Game,” presenting a quick way to
remember your debits and credits.

Video Link:
https://www.youtube.com/watch?v=onq8AfjxjRo

*Thanks to Leanne Vig, MBA, CGA, Accounting Instructor, Red Deer College for sharing this helpful
learning tool.

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LO4: Chart of Accounts 1

• The collection of all accounts in a company’s accounting information

system is called a ledger.
• The number of accounts needed in the ledger is affected by a company’s
size and diversity of operations.
• A small company may have as few as 20 accounts, while a large
company may need several thousand.
• The chart of accounts is a list of all accounts used in the ledger by a
company. The chart includes an identification number assigned to each
account.

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Chart of Accounts 2

Appendix IV of the text uses the following numbering system for its
accounts:

101-199  Asset accounts

201-299  Liability accounts
301-399  Owner capital and withdrawals accounts
401-499  Revenue accounts
501-599  Cost of sales expense accounts
601-699  Operating expense accounts

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CHECKPOINT
4. What is the relationship of an account to the ledger and chart of
accounts?
5. What is the normal balance for assets, liabilities, revenue, expenses,
withdrawals, and capital accounts?

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LO5: Recording and Posting Transactions

Four big-picture steps of the accounting cycle:
• Transaction Analysis (Chapter 1)
• Journal Entry
• Posting
• Preparing a trial balance

EXHIBIT 2.11
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Journal Entry
• A record where journal entries are posted in chronological order.
• Gives us a complete record of each transaction entered in the
accounting information system.
• Refers to an individual transaction that has been entered in the journal;
provides information regarding the date the transaction is entered,
which accounts are debited, which accounts are credited, and the
corresponding transaction amounts.
• Includes the following information:
1. Date of transaction
2. Titles of affected accounts with corresponding account number
3. Dollar amount of each debit and credit
4. Explanation of transaction
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Posting Journal Entries

Key:
1. Identify account
2. Enter date
3. Enter journal page
4. Post the amount
5. Enter account balance
6. Enter account number

EXHIBIT 2.13

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Six-Step Process to Post a Manual Journal

Entry to the Ledger

1) Identify the ledger account that was debited in the journal entry.
2) Enter the date of the journal entry in this ledger account
3) Enter the source of the debit in the PR column, both the journal and
the page. The letter G shows it came from the general journal. *
4) Enter the amount debited from the journal entry into the Debit
column of the ledger account.
5) Calculate and enter the account’s new balance in the Balance column.
6) Enter the ledger account number in the PR column of the journal
entry.

* Other journals are identified by their own letters.

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Financial Statement Impact of Transaction

• This process serves as a double-check that the entry recorded is

keeping the accounting equation in balance.
• Determine which elements of the accounting equation are increasing
and which are decreasing.

Assets = Liabilities + Owner’s Equity

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CHECKPOINT

6. Assume Maria Sanchez, the owner of a new business called La Casa

de Café, invested $15,000 cash and equipment with a market value
of $23,000. Assume that La Casa de Café also took responsibility for
an $18,000 note payable issued to finance the purchase of
equipment. Prepare the journal entry to record Sanchez’s
investment.
7. Explain what a compound journal entry is.
8. Why are posting reference numbers entered in the journal when
entries are posted to accounts?

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Accounting Transactions in Action

Six micro steps:
• Step one analyzes a transaction.
• Step two applies double-entry accounting to identify the effect of a
transaction on account balances.
• Step three analyzes the journal entry required to record the
transaction.
• Step four records the journal entry and includes a description of a
journal entry.
• Step five uses T-accounts to post the transaction to ledger accounts
and identifies the effect of a transaction on account balances.
• Step six determines the big-picture financial statement impact of the
transaction on Assets, Liabilities, and Equity.

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Recording Transactions 1

Receive owner investment:

Date Account Titles and Explanations PR Debit Credit

Mar. 1 Cash 101 10,000 10,000
Hailey Walker, Capital 301

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Recording Transactions 2

Purchase supplies for cash:

Date Account Titles and Explanations PR Debit Credit

Mar. 1 Supplies 125 2,500
Cash 101 2,500

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Recording Transactions 3

Purchase equipment and supplies on credit:

Date Account Titles and Explanations PR Debit Credit

Mar. 4 Supplies 125 1,100
Equipment 167 6,000
Accounts Payable 201 1,100
Notes Payable 240 6,000

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Recording Transactions 4

Provide services for cash:

Date Account Titles and Explanations PR Debit Credit

Mar. 10 Cash 101 2,200
Food Services Revenue 403 2,200

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Recording Transactions 5

Payment of expenses in cash:

Date Account Titles and Explanations PR Debit Credit

Mar. 10 Rent Expense 641 1,000
Cash 101 1,000

Date Account Titles and Explanations PR Debit Credit

Mar. 10 Salaries Expense 622 700
Cash 101 700

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Recording Transactions 6

Provide consulting and rental services on credit:

Date Account Titles and Explanations PR Debit Credit

Mar. 17 Accounts Receivable 106 1,900
Food Services Revenue 403 1,600
Teaching Revenue 406 300

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Recording Transactions 7

Receipt of cash from receivable:

Date Account Titles and Explanations PR Debit Credit

Mar. 27 Cash 101 1,900
Accounts Receivable 106 1,900

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Recording Transactions 8

Partial payment of accounts payable:

Date Account Titles and Explanations PR Debit Credit

Mar. 27 Accounts Payable 201 900
Cash 101 900

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Recording Transactions 9

Withdrawal of cash by owner:

Date Account Titles and Explanations PR Debit Credit

Mar. 28 Hailey Walker, Withdrawals 302 600
Cash 101 600

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Recording Transactions 10

Receipt of cash for future services:

Date Account Titles and Explanations PR Debit Credit

Mar. 10 Cash 101 3,000
Unearned Consulting Revenue 236 3,000

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Recording Transactions 11

Pay cash for future insurance coverage:

Date Account Titles and Explanations PR Debit Credit

Mar. 30 Prepaid Insurance 128 2,400
Cash 101 2,400

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Accounting Equation Analysis

EXHIBIT 2.14 highlights three important points:

1. The totals for the three columns show that the accounting equation
is in balance.

2. The owner’s investment is recorded in the capital account and the

withdrawals, revenue, and expense accounts reflect the transactions
that change equity. Their ending balances make up the statement of
changes in equity.
3. The revenue and expense account balances are summarized and
reported in the income statement.
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CHECKPOINT
9. Does “debit” always mean increase and “credit” always mean
decrease?
10. What kinds of transactions increase equity? What kinds decrease
equity?
11. Why are most accounting systems called double-entry?
12. Double-entry accounting requires that (select the best answer):
a. All transactions that create debits to asset accounts must
create credits to liability or equity accounts.
b. A transaction that requires a debit to a liability account also
requires a credit to an asset account.
c. Every transaction must be recorded with total debits equity to
total credits.

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Ledgers
• Once journal entries are recorded in the appropriate journal,
transaction details need to be posted to the appropriate ledger.
• Ledgers contain financial statement activity for each specific account.
• A general ledger summarizes each financial statement account,
providing a total balance in each account used in the organization’s
chart of accounts.
• Detailed information on account activity is required to be maintained
in subsidiary ledgers.

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Cash Control Account in General Ledger

Cash Account No. 101

Date Explanation PR Debit Credit Balance

2023

Mar. 1 G1 10,000 10,000

1 G1 2,500 7,500

10 G1 2,200 9.700

EXHIBIT 2.15

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Abnormal Balance

• Unusual transactions can sometimes give an abnormal balance to

an account.

• An abnormal balance refers to a balance on the side where

decreases are recorded.

• For example, a customer might mistakenly overpay a bill. This

gives that customer’s account receivable an abnormal credit
balance.

• Be alert for abnormal balances as they may be as a result of an

error in recording a journal entry.

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Zero Balance

• A zero balance for an account is usually shown by writing zeros or

a dash in the Balance column.

• This practice avoids confusion between a zero balance and one

omitted in error.

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Personal Finance Series

Read full segment in book and identify 2 key takeaways.

How to Plan Ahead for Unexpected Expenses

• Common expenses that are not generally included in a detailed budget

include things such as a broken down car, an unexpected vet bill for a loved
pet, unexpected medical costs including dental bills, a broken cellphone
that needs replacing, budgeted costs that are not covered as a result of
missed work due to illness
• How much should I save in my contingency fund? A rule of thumb is you
should have 3 to 6 months worth of your budgeted monthly expenses. The
larger the cushion, the stronger you will be financially to withstand
unexpected emergencies.

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LO6: Preparing a Trial Balance

Involves five steps:

1. Identify each account balance from the ledger.
2. List each account and its balance (in the same order as in the
Chart of Accounts). Debit balances are entered in the Debit
column and credit balances are entered in the Credit column.
3. Calculate the total of debit balances.
4. Calculate the total of credit balances.
5. Verify that total debit balances equal total credit balances.

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Trial Balance
Organico Trial Balance March 31, 2023
Acct. No. Account Debit Credit
101 Cash……………………………………................. $ 8,070
106 Accounts receivable……………………………… 0
125 Supplies……………………………………………. 3,600
128 Prepaid insurance………………………………… 2,400
167 Equipment…………………………………………. 6,000
201 Accounts payable………………………………… $ 200
236 Unearned food services revenue………………... 3,000
240 Notes Payable……………………………………. 6,000
301 Hailey Walker, capital…………………………….. 10,000
302 Hailey Walker, withdrawals……………………… 600
403 Food service revenue……………………………. 3,800
406 Teaching revenue…………………………………. 300
622 Salaries expense…………………………………. 1,400
641 Rent expense…………………………………….. 1,000
690 Communication expense……………………….. 230
$ 23,300 $ 23,300

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EXHIBIT 2.16
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 1-67

ETHICAL IMPACT 1

International Ethics: Corporate Corruption vs. Cross-Cultural

Management
According to Transparency International, “68% of countries worldwide
have a serious corruption problem, and not one single country worldwide
is corruption free.”
Consider the following business scenario: you work for a water
distribution firm and recently won a contract to set up a new pump
system in a small village in East Africa. The dollar value of the contract is
$20 million and is going to be funded by a U.S. charity. How would you
respond if you were asked by the local East African government to
contribute $500,000 to help build a new hospital to support that region?
What would you do?
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ETHICAL IMPACT 2

Jeffrey Fadiman, in his article “A Traveller’s Guide to Gifts and Bribes,”

suggests that it is important to understand the culture of the region with
which you engage in business in order to understand how to manage
these types of requests. It would be prudent to understand the viewpoint
of the government and circumstances behind the request that is made, as
well as Canadian laws regarding foreign payments of this nature to
determine the appropriate action to take.

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Searching for Errors

If the trial balance does not balance the error (or errors) must be found
and corrected before financial statements are prepared.

1. Verify that the trial balance columns are correctly added. If this fails
to show the error, then
2. Verify that account balances are accurately copied from the ledger.
3. Determine if a debit or credit balance is mistakenly listed in the trial
balance as a credit or debit. Look for this when the difference
between total debits and total credits in the trial balance equals
twice the amount of the incorrect account balance.
4. Recalculate each account balance. If the error remains, then
5. Verify that each journal entry is properly posted to ledger accounts.
6. Verify that the original journal entry has equal debits and credits.

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Transposition Errors
• Two digits are switched or transposed within a number (e.g., 619
instead of 691).
• Adding or deleting a zero (or zeros) in a value (e.g., 32 instead of
320).

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Finding Transposition Errors

1. Subtract total debits in the trial balance from total credits.

Based on the transposition given above, the difference between
total debits and credits is $72 ($691 - $619).
2. Divide the difference by 9.
$72 ÷ 9 = 8
3. The quotient equals the difference between the two transposed
numbers.
8 is the difference between 9 and 1 in both 91 of 691 and 19 of 619.
4. The number of digits in the quotient tells us the location of the
transposition.
The quotient of 8 is only one digit, so the transposition can be
found by checking the first digit from the right in each number.

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Formatting Conventions
• Dollar signs are not used in journals and ledgers.
• They do appear in financial statements and other reports,
including trial balances, to identify the kind of currency being
used.
• When amounts are entered manually in a formal journal, ledger,
or trial balance, commas are not needed to indicate thousands,
millions, and so forth. Decimal points are not needed to separate
dollars and cents.
• Commas and decimal points are used in financial statements and
other reports.
• It is common for companies to round amounts to the nearest
dollar, and to an even higher level for certain accounts.

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CHECKPOINT
13. If a $4,000 debit to Equipment in a journal entry is incorrectly
posted as a $4,000 credit to the Equipment account in the
ledger, what is the effect of this error on the trial balance column
totals, assuming no other errors?
14. When are dollar signs typically used in accounting reports?

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Critical Thinking Challenge

Refer to the Critical Thinking Challenge questions at the beginning of
the chapter.

Did your answers change after reading the chapter?

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Summary 1

1. Explain the accounting cycle.

The accounting cycle includes the steps in preparing financial statements
for users that are repeated each reporting period.

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Summary 2

2. Describe an account, its use, and its relationship to the ledger.

An account is a detailed record of increases and decreases in a specific
asset, liability, or equity item. Information is taken from accounts,
analyzed, summarized, and presented in useful reports and financial
statements for users.

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Summary 3

3. Define debits and credits and explain their role in double-entry.

Double-entry accounting means that every transaction affects at least two
accounts. The total amount debited must equal the total amount credited for
each transaction. The system for recording debits and credits follows from the
accounting equation. The debit side is the normal balance for assets, owner’s
withdrawals, and expenses, and the credit side is the normal balance for liabilities,
owner’s capital, and revenues.
The following table summarizes debit and credit effects by account type:
Assets = Liabilities + Equity

Owner’s Owner’s Revenues Expenses

Capital Withdrawals
Increases Debits Credits Credits Debits Credits Debits

Decreases Credits Debits Debits Credits Debits Credits

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Summary 4

4. Describe a chart of accounts and its relationship to the ledger.

A ledger is a record that contains all accounts used by a company. This is
what is referred to as the books. The chart of accounts is a listing of all
accounts and usually includes an identification number that is assigned to
each account.

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Summary 5

5. Analyze the impact of transactions on accounts, record transactions

in a journal and post entries to a ledger.
We analyze transactions using the concepts of double-entry accounting.
This analysis is performed by determining a transaction’s effects on
accounts. We record transactions in a journal to give a record of their
effects. Each entry in a journal is posted to the accounts in the ledger. This
provides information in accounts that are used to produce financial
statements. General ledger accounts are widely used and include columns
for debits, credits, and the account balance after each entry.

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Summary 6

6. Prepare and explain the use of a trial balance.

A trial balance is a list of accounts in the ledger showing their debit and
credit balances in separate columns. The trial balance is a convenient
summary of the ledger’s contents and is useful in preparing financial
statements. It reveals errors of the kind that produce unequal debit and
credit account balances.

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End of Chapter

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