Analyzing Transactions CPA, MBA By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

1. Describe the characteristics of an account and record transactions using a chart of accounts and journal. 2. Describe and illustrate the posting of journal entries to accounts. 3. Prepare an unadjusted trial balance and explain how it can be used to discover errors. 4. Discover and correct errors in recording transactions. After studying this chapter, you should be able to:

Describe the characteristics of an account and record transactions using a chart of accounts and journal. Objective 1

Accounting systems are designed to show the increases and decreases in each financial statement line item as a separate record. This record is called an account.

LEDGER - A group of accounts for a business entity 2-1

CHART OF ACCOUNTS - A list of the accounts in a ledger. 2-1

Assets are resources owned by the business entity. Cash Supplies Prepaid expenses Buildings 2-1

Liabilities are debts owed to outsiders (creditors). Accounts payable Notes payable Wages payable 2-1

Owner’s equity is the owner’s right to the assets of the business. A drawing account represents the amount of withdrawals by the owner. 2-1

Revenues are increases in owner’s equity as a result of selling services or products to customers. Fees earned Commission revenue Rent revenue 2-1

The using up of assets or consuming services in the process of generating revenues results in expenses. Wages expense Rent expense Miscellaneous expense 2-1

Every transaction affects at least two accounts. 2-1

The transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing. 2-1

Journalizing requires the following steps: 1.Record the date. (Continued) The title of the account debited is listed in the Description column. 3.Enter the amount in the Debit column.

4.Record the credit account in the Description column. 5.Enter the amount in the Credit column. 2-1

Affect in “T” Accounts

2-1

Where Revenue > Expense. Net Income 2-1 and Credits >Debits Net Income Increases Owner’s Equity.

Where Revenue < Expense.. Net Loss (Deficit) 2-1 Credits < Debits Net Loss Decreases Owner’s Equity.

2-1

Balance sheet accounts: AssetDebitCredit LiabilityCreditDebit Owner’s Equity: Capital CreditDebit DrawingDebitCredit Income statement account s: RevenueCreditDebit Expense DebitCredit Increase (Normal Bal.) Decrease

Describe and illustrate the posting of journal entries to the accounts. Objective 2 2-2

POSTING is the process of transferring the debits and credits from the journal entries to the accounts 2-2

Prepare an unadjusted trial balance and explain how it can be used to discover errors. 2-3 Objective 3

TRIAL BALANCE is prepared to show the equality of debits and credits in the ledger. It is prepared as of a date in time. 2-3

2-2

Discover and correct errors in recording transactions. 2-4 Objective 4

A transposition error occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524. (usually divisible by 9) In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $ as $

2-2 Posting errors occur when posting from the journal to the ledger. Such as taking $1,200 from journal and entering it as $1,120 in Ledger.