Analyzing and Recording Transactions © 2013 McGraw-Hill Ryerson Limited. PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College CHAPTER 2

Learning Objectives 1. Explain the accounting cycle. (LO 1 ) 2. Describe an account, its use, and its relationship to the ledger. (LO 2 ) 3. Define debits and credits and explain their role in double-entry accounting. (LO 3 ) 4. Describe a chart of accounts and its relationship to the ledger. (LO 4 ) 2 © 2013 McGraw-Hill Ryerson Limited.

Learning Objectives 5. Analyze the impact of transactions on accounts. ( LO 5 ) 6. Record transactions in a journal and post entries to a ledger. ( LO 6 ) 7. Prepare and explain the use of a trial balance. ( LO 7 ) 3 © 2013 McGraw-Hill Ryerson Limited.

Prepare post-closing trial balance Journalize Close Prepare unadjusted trial balance Post Analyze transactions Prepare adjusted trial balance Prepare statements Adjust The Accounting Cycle 7 5 LO 1 4 © 2013 McGraw-Hill Ryerson Limited. Ch 1-2 Ch 2 Ch 3 Ch 4 Ch 1-4 Ch 3

The Account A detailed record of increases and decreases in a specific asset, liability, or equity item. Examples: CashAccounts PayableV.Climb, Capital Accounts ReceivableNotes PayableV.Climb, Withdrawals SuppliesService Revenue FurnitureSalaries Expense 5 © 2013 McGraw-Hill Ryerson Limited. LiabilitiesEquityAssets =+ LO 2

A record containing all accounts used by a business. May be computerized or maintained manually. Each company has its own unique set of accounts. 6 © 2013 McGraw-Hill Ryerson Limited. The Ledger LO 2

The T Account 7 © 2013 McGraw-Hill Ryerson Limited. Represents an account in the ledger. Used as a learning tool. The difference between the debit side and credit side is the balance. LO 2

Calculating the Account Balance 8 © 2013 McGraw-Hill Ryerson Limited. Steps: 1.Add the amounts on the debit side. 2.Add the amounts on the credit side. 3.Calculate the difference between the debits and credits. Steps: 1.Add the amounts on the debit side. 2.Add the amounts on the credit side. 3.Calculate the difference between the debits and credits. Example: LO 2

Transactions are recorded using debits and credits. Every transaction affects at least two accounts. Equal debits and credits will keep the accounting equation in balance. 9 © 2013 McGraw-Hill Ryerson Limited. Double-Entry Accounting Debits = Credits Always ! LO 3

LiabilitiesEquityAssets =+ EquityAssetsLiabilities Double-Entry Accounting LiabilitiesAssets Equity Liabilities Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases 10 © 2013 McGraw-Hill Ryerson Limited. LO 3

Capital - + Equity Accounts Withdrawals + - Expenses + - Revenues - + Double-Entry Accounting Debit for decreases Credit for increases Debit for increases Credit for decreases 11 © 2013 McGraw-Hill Ryerson Limited. LO 3

LiabilitiesEquityAssets =+ An account’s normal balance is the debit or credit side where increases are recorded. 12 © 2013 McGraw-Hill Ryerson Limited. Normal Balances LO 3

Account Type Assets Liabilities Capital Revenue Expenses Withdrawals 13 © 2013 McGraw-Hill Ryerson Limited. Step 1 Write down the account types using ALCREW. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance Assets Liabilities Capital Revenue Expenses Withdrawals 14 © 2013 McGraw-Hill Ryerson Limited. Step 2 Write down the normal balance (debit) of A,E,W. The others are credits. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance AssetsDr Liabilities Capital Revenue ExpensesDr WithdrawalsDr 15 © 2013 McGraw-Hill Ryerson Limited. Step 2 Write down the normal balance, debit, of A,E,W. The others are credits. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance AssetsDr LiabilitiesCr CapitalCr RevenueCr ExpensesDr WithdrawalsDr 16 © 2013 McGraw-Hill Ryerson Limited. Step 2 Write down the normal balance, debit, of A,E,W. The others are credits. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance To ↑ Balance To ↓ Balance AssetsDr LiabilitiesCr CapitalCr RevenueCr ExpensesDr WithdrawalsDr 17 © 2013 McGraw-Hill Ryerson Limited. Step 3 Remember, increases are the same as the normal balances, decreases are the opposite. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance To ↑ Balance To ↓ Balance AssetsDr Cr LiabilitiesCr Dr CapitalCr Dr RevenueCr Dr ExpensesDr WithdrawalsDr 18 © 2013 McGraw-Hill Ryerson Limited. Step 3 Remember, increases are the same as the normal balances, decreases are the opposite. Remembering Debits and Credits ALCREW LO 3

Account Type Normal Balance To ↑ Balance To ↓ Balance AssetsDr Cr LiabilitiesCr Dr CapitalCr Dr RevenueCr Dr ExpensesDr Cr WithdrawalsDr Cr 19 © 2013 McGraw-Hill Ryerson Limited. Remembering Debits and Credits ALCREW LO 3

A list of all accounts used in the ledger by a company. Unique for each company. Accounts are usually numbered. 20 © 2013 McGraw-Hill Ryerson Limited. Chart of Accounts LO 4

Analyzing Transactions Steps: 1. Determine which accounts are being affected. 2. Determine if account balances are increasing or decreasing. 3. Apply rules of debits and credits. 21 © 2013 McGraw-Hill Ryerson Limited. LO 5

Analyzing Transactions Example #1: The owner invests $10,000 cash in the business. 22 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit 123 LO 5

Analyzing Transactions Example #1: The owner invests $10,000 cash in the business. 23 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit Cash V. Klimb, capital 123 LO 5

Analyzing Transactions Example #1: The owner invests $10,000 cash in the business. 24 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit CashIncrease V.Klimb, capital Increase 123 LO 5

Analyzing Transactions Example #1: The owner invests $10,000 cash in the business. 25 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit CashIncreaseDebit V.Klimb, capital IncreaseCredit 123 LO 5

Analyzing Transactions Example #1: The owner invests $10,000 cash in the business.  Debit cash for $10,000  Credit V.Klimb, capital for $10, © 2013 McGraw-Hill Ryerson Limited. LO 5

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. 27 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit 123 LO 5

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. 28 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit Supplies Cash 123 LO 5

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. 29 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncrease CashDecrease 123 LO 5

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. 30 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncreaseDebit CashDecreaseCredit 123 LO 5

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash.  Debit supplies for $2,500  Credit cash for $2, © 2013 McGraw-Hill Ryerson Limited. LO 5

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. 32 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit 123 LO 5

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. 33 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit Supplies Accounts Payable 123 LO 5

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. 34 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncrease Accounts Payable Increase 123 LO 5

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. 35 © 2013 McGraw-Hill Ryerson Limited. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncreaseDebit Accounts Payable IncreaseCredit 123 LO 5

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit.  Debit supplies for $1,100  Credit accounts payable for $1, © 2013 McGraw-Hill Ryerson Limited. LO 5

37 © 2013 McGraw-Hill Ryerson Limited. Entries are originally recorded in the General Journal. This process is called journalizing. The General Journal LO 6

General Journal information is transferred to the General Ledger. Account balances are updated. This process is called posting. 38 © 2013 McGraw-Hill Ryerson Limited. Posting Journal Entries LO 6

General journal information is transferred to the general ledger The Posting Process Steps: 1.Identify the account. 2.Enter date 3.Enter amount 4.Calculate new account balance 5.Enter posting references © 2013 McGraw-Hill Ryerson Limited. LO 6

A list of accounts and their balances at a point in time. Used to determine if total debits equals total credits. Also used to prepare financial statements. 40 © 2013 McGraw-Hill Ryerson Limited. Trial Balance LO 7

41 © 2013 McGraw-Hill Ryerson Limited. Trial Balance LO 7

End of chapter 42 © 2013 McGraw-Hill Ryerson Limited.