1 2 Analyzing Transactions

2 Accounting systems are designed to show the increases and decreases in each financial statement item as a separate record. This record is called an account. 2-1

3 5 The T account has a title. Title 2-1 The T Account

4 6 The left side of the account is called the debit side. Title Debit 2-1

5 The right side of the account is called the credit side. Title DebitCredit 2-1 7

6 Title DebitCredit Amounts entered on the left side are debits

7 Title DebitCredit Amounts entered on the right side are credits

8 Cash (a)25,000(b)20,000 (d)7,500(e)3,650 (f)950 (h)2,000 Balance5,900 Balance of the account

9 A group of accounts for a business entity is called a ledger. 2-1

10 A list of the accounts in a ledger is called a chart of accounts. 2-1

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

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

13 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

14 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

15 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

16 Every transaction affects at least two accounts. 2-1

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

18 Journalizing requires the following steps: 1.Record the date. If this is the first entry on the page, the year is inserted above the month. As long as the month does not change, the rest of the journal entries on the require on the day be recorded. 2.The title of the account debited is listed in the Description column. (Continued) 2-1

19 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. Watch these steps take place as the entry to record Chris Clark’s deposit is presented in the next slide. 2-1

20 (a)On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions. Balance Sheet Accounts 2-1

21 23 JOURNAL DateDescriptionDebitCredit Page Nov Cash Chris Clark, Capital Invested cash in NetSolutions. 2-1 P.R.

22 The effect of this entry is shown in the accounts of NetSolutions as follows: Cash Nov. 125,000 Chris Clark, Capital 2-1

23 (b)On November 5, NetSolutions bought land for $20,000, paying cash. 2-1

Land Cash Purchased land for building site. 2-1

25 ( c)On November 10, NetSolutions purchased supplies on account for $1,

Supplies Accounts Payable Purchased supplies on account. 2-1

27 (f)On November 30, NetSolutions paid creditors on account, $

28 30Accounts Payable Cash Paid creditors on account

29 Debits Credits Asset accounts…….Increase (+)Decrease (-) Liability accounts.…Decrease (-)Increase (+) Owner’s equity (capital) accounts…Decrease (-)Increase (+) Balance Sheet Accounts

30 Credit for increases (+) Debit for decreases (–) Owner’s Equity Accounts Credit for decreases (–) Debit for increases (+) Asset Accounts Credit for increases (+) Debit for decreases (–) Liability Accounts Balance Sheet Accounts

31 (d)On November 18, NetSolutions received fees of $7,500 from customers for services provided. Income Statement Accounts 2-1

32 30Cash Fees Earned Received fees from customers

33 (e)Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $

34 30Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses

35 (g)On November 30, a count revealed that $800 of the supplies inventory had been used during the month. 2-1

36 30Supplies Expense Supplies Supplies used during November

37 Debits Credits Revenue accounts…Decrease (-)Increase (+) Expense accounts…Increase (+)Decrease (-) 2-1 Income Statement Accounts 40

38 Credit for increases (+) Debit for decreases (–) Revenue Accounts Income Statement Accounts Credit for decreases (–) Debit for increases (+) Expense Accounts Less Continued

39 Equals Net Income (credit > debits) increases owners’ equity (capital) Net Loss (debits > credits) decreases owners’ equity (capital)

40 The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity. Drawing Account 2-1

41 (h)On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use. 2-1

42 Cash Chris Clark withdrew cash for personal use. Nov 30Chris Clark, Drawing

43 Increase (Normal Bal.) Decreases Balance sheet accounts: AssetDebitCredit LiabilityCreditDebit Owner’s Equity: Capital CreditDebit DrawingDebitCredit Income statement accounts: RevenueCreditDebit ExpenseDebitCredit

44 The equality of debits and credits for each transaction is built into the accounting equation: Assets = Liabilities + Owner’s Equity. Because of this double equality, this system is called the double- entry accounting system. 2-1

45 2.For each account affected by the transaction, determine whether the account increases or decreases. 3.Determine whether each increase or decrease should be recorded as a debit or a credit. 1.Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction. 2-1 Transaction Analysis Continued

46 4.Record the transaction using a journal entry. 5.Periodically post journal entries to the accounts in the ledger. 6.Prepare an unadjusted trial balance at the end of the period. 2-1

47 The process of transferring the debits and credits from the journal entries to the accounts is called posting. 2-2

48 Dec. 1NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period. 2-2

50 Dec. 1NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month. 2-2

51 1 Rent Expense Cash Paid rent for December

52 An alternative approach is to debit Rent Expense for $800 on December 1. This avoids having to transfer the balance to an expense account at the end of the month. 2-2

53 NetSolutions received an offer from a local retailer to rent the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance. 2-2

54 Dec. 1NetSolutions receives $360 for three month’s rent for use of its land beginning December 1. 1 Cash Unearned Rent Received advance payment for three months’ rent on land

55 Dec. 4NetSolutions purchased office equipment on account from Executive Supply Co. for $1, Office Equipment Accounts Payable Purchased office equipment on account

56 Dec. 6NetSolutions paid $180 for a newspaper advertisement. 6 Miscellaneous Expense Cash Paid for newspaper ad

57 Dec. 11NetSolutions paid creditors $ Accounts Payable Cash Paid creditors on account

58 Dec. 13NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages. 13 Wages Expense Cash Paid two weeks’ wages

59 Dec. 16NetSolutions received $3,100 from fees earned for the first half of December. 16 Cash Fees Earned Received fees from customers

60 Dec. 16Fees earned on account totaled $1,750 for the first half of December. 16 Accounts Receivable Fees Earned Recorded fees earned on account

61 Dec. 20NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction. 20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co

62 Dec. 21NetSolutions received $650 from customers in payment of their accounts. 21 Cash Accounts Receivable Received fees from customers on account

63 Dec. 23NetSolutions paid $1,450 for supplies. 23 Supplies Cash Purchased supplies

64 Dec. 27NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages. 27Wages Expense Cash Paid two weeks’ wages

65 Dec. 31NetSolutions paid $310 for telephone charges for the month. 31Utilities Expense Cash Paid telephone charges

66 Dec. 31NetSolutions paid $225 for electric usage for the month. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 1 Dec 31Utilities Expense Cash Paid for electric usage

67 Dec. 31NetSolutions received $2,870 from fees earned for the second half of December. 31Cash Fees Earned Received fees from customers

68 Dec. 31NetSolutions earned $1,120 on account for the second half of December. 31Accounts Receivable Fees Earned Recorded fees earned on account

69 Dec. 31Chris Clark withdrew $2,000 for personal use. 31Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use

70 The equality of debits and credits in the ledger should be proved at the end of each accounting period by preparing a trial balance. The heading should first list the name of the company, the statement’s title, and the date it is prepared. 2-3

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

73 Another type of error is a posting error. Assume that on May 5 a $12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for $12,

74 Entry to Correct Error May 31Office Equipment Supplies To correct erroneous debit to Supplies on May 5. See invoice from Bell Office Equipment Company