1. Analyzing Transactions
PRINCIPLES OF FINANCIAL ACCOUNTING
12e
PRINCIPLES OF ACCOUNTING
24e
ACCOUNTING PRINCIPLES
Using excel for Success
Chapter 2 2e
These slides should be viewed using the presentation mode (click the icon to start presentation).
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reeve Warren Duchac

2. Learning Objective 1
Describe the characteristics of an account and a chart of accounts.

3. LO 1
Using Accounts to Record Transactions
Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account.

4. Assets = Liabilities + Owner's Equity
From Chapter 1: The accounting equation
Assets = Liabilities + Owner's Equity
Assets = Liabilities + Capital – Drawing + Revenues – Expenses
Definitions of the elements:
Assets are resources owned by the business.
Liabilities are debts owed to outsiders (creditors).

5. Definitions of the elements:
LO 1
Definitions of the elements:
Owner’s equity is the owner’s right to the assets of the business after all liabilities have been paid. A drawing account represents the amount of withdrawals made by the owner.
Revenues are increases in owner’s equity as a result of selling services or products to customers.
The using up of assets or consuming services in the process of generating revenues results in expenses.

6. Accounting Cycle

7. Learning Objective 2
Describe the characteristics of an account and a chart of accounts.
Describe and illustrate journalizing transactions using the double-entry accounting system.

8. Elements of Accounting Equation
Assets = Liabilities + Owner’s Equity
Assets= Liabilities +Capital –Drawings +Revenues - Expenses
Drawings+Expenses + Assets= Liabilities +Capital + Revenues
DEBIT ACCOUNT
If Debit, and if Credit
CREDIT ACCOUNT
If Credit, and if Debit

9. A transaction is initially entered in a record called a journal.
LO 2
Journalizing
A transaction is initially entered in a record called a journal.
The process of recording a transaction in the journal is called journalizing.
The entry in the journal is called a journal entry

10. The T account has a title.
LO 1
The T Account
The T account has a title.
Title
Debit
Credit
The right side of the account is called the credit side.
The left side of the account is called the debit side.

11. Using Accounts to Record Transaction
Ledger is A group of accounts for a business entity.
chart of accounts is A list of the accounts in the ledger.
Posting Journal Entries to accounts is the process of transferring the debits and credits from the journal entries to the accounts.

12. Double-Entry Accounting System
LO 2
Double-Entry Accounting System
All businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires:
Every business transaction to be recorded in at least two accounts.
The total debits recorded for each transaction to be equal to the total credits recorded.

13. LO 2
Normal Balances
The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the account. Thus, the normal balance of an account is either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

14. Rules of Debit and Credit – Normal Balances of Accounts
LO 2
Rules of Debit and Credit – Normal Balances of Accounts

15. Accounting Equation Impact
LO 2
Transaction A
On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.
Step 2
Step 3
Step 1
Step 4
Step 5
Assets = Liabilities Owner’s Equity (investment)
Accounting Equation Impact
increase
increase

16. Journalizing requires the following steps:
Step 1. The date of the transaction is entered in the Date column.
Step 2. The title of the account to be debited is recorded at the left-hand margin under the Description column, and the amount to be debited is entered in the Debit column.
(continued)

17. Step 4. A brief description may be entered below the credited account.
Journalizing
Step 3. The title of the account to be credited is listed below and to the right of the debited account title, and the amount to be credited is entered in the Credit column.
Step 4. A brief description may be entered below the credited account.
(continued)

18. LO 2
Journalizing
Step 5. The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded. This column is used later when the journal entry amounts are transferred to the accounts in the ledger.

19. Accounting Equation Impact
LO 2
Transaction B
On November 5, NetSolutions paid $20,000 for the purchase of land as a future building site.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
increase
decrease

20. Accounting Equation Impact
LO 2
Transaction C
On November 10, NetSolutions purchased supplies on account for $1,350.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
increase
increase

21. Accounting Equation Impact
LO 2
Transaction D
On November 18, NetSolutions received cash of $7,500 from customers for services provided.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Revenue)
increase
increase

22. LO 2
Transaction E
On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

23. Accounting Equation Impact
LO 2
Transaction E
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
All four expense accounts increase
decrease

24. Accounting Equation Impact
LO 2
Transaction F
On November 30, NetSolutions paid creditors on account, $950.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
decrease
decrease

25. Accounting Equation Impact
LO 2
Transaction G
NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

26. Accounting Equation Impact
LO 2
Transaction H
On November 30, Chris Clark withdrew $2,000 from NetSolutions for personal use.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Drawing)
decrease
increase

27. Learning Objective 3
Describe the characteristics of an account and a chart of accounts.
Describe and illustrate journalizing transactions using the double-entry accounting system.
Describe and illustrate the journalizing and posting of transactions to accounts.

28. Posting Journal Entries to Accounts
LO 3
Posting Journal Entries to Accounts
The process of transferring the debits and credits from the journal entries to the accounts is called posting.
On December 1, NetSolutions paid a premium of $2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-year period.

29. Accounting Equation Impact
LO 3
Posting Journal Entries to Accounts
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
decrease
increase

30. Recording and Posting of a Debit and a Credit
LO 3
Recording and Posting of a Debit and a Credit
These steps for posting the credit to Cash are shown.

31. December Transactions
LO 3
December Transactions
On December 1, NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space now requires the payment of rent on the first of each month, rather than at the end of the month.

32. December Transactions
LO 3
December Transactions
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

33. December Transactions
LO 3
December Transactions
On December 1, 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. NetSolutions received $360 for three months’ rent beginning December 1.
The liability created by receiving the cash in advance of providing the service is called unearned revenue.

34. December Transactions
LO 3
December Transactions
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
increase
increase

35. Accounting Equation Impact
LO 3
LO 3
December Transactions
On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
increase
increase

36. Accounting Equation Impact
LO 3
December Transactions
On December 6, NetSolutions paid $180 for a newspaper advertisement.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

37. Accounting Equation Impact
LO 3
December Transactions
On December 11, NetSolutions paid creditors $400.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
decrease
decrease

38. December Transactions
LO 3
December Transactions
On December 13, NetSolutions paid a receptionist and a part-time assistant $950 for two weeks’ wages.

39. Accounting Equation Impact
LO 3
December Transactions
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

40. December Transactions
LO 3
December Transactions
On December 16, NetSolutions received $3,100 from fees earned for the first half of December.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Revenue)
increase
increase

41. Accounting Equation Impact
LO 3
December Transactions
Fees earned on account totaled $1,750 for the first half of December.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Revenue)
increase
increase

42. December Transactions
LO 3
December Transactions
On December 20, NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
decrease
decrease

43. December Transactions
LO 3
December Transactions
On December 21, NetSolutions received $650 from customers in payment of their accounts.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
increase
decrease

44. Accounting Equation Impact
LO 3
December Transactions
On December 23, NetSolutions paid $1,450 for supplies.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity
decrease
increase

45. Accounting Equation Impact
LO 3
December Transactions
On December 27, NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks’ wages.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

46. December Transactions
LO 3
December Transactions
On December 31, NetSolutions paid its $310 telephone bill for the month.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

47. Accounting Equation Impact
LO 3
December Transactions
On December 31, NetSolutions paid its $225 electric bill for the month.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Expense)
decrease
increase

48. Accounting Equation Impact
LO 3
LO 3
December Transactions
On December 31, NetSolutions received $2,870 from fees earned for the second half of December.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Revenue)
increase
increase

49. December Transactions
LO 3
December Transactions
On December 31, fees earned on account totaled $1,120 for the second half of December.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Revenue)
increase
increase

50. Accounting Equation Impact
LO 3
December Transactions
On December 31, Chris Clark withdrew $2,000 for personal use.
Accounting Equation Impact
Assets = Liabilities Owner’s Equity (Drawing)
decrease
increase

51. Cash
Chris Clark, Capital
Fees earned
Unearned rent

52. Supplies
Account payable
Land
Wages expenses
Miscellaneous expenses
Rent expenses

53. Supplies expenses
Utilities expenses
Chris Clark, Drawing
Prepaid insurance
Account receivables
Office equipment

54. Learning Objective 4
Describe the characteristics of an account and a chart of accounts.
Describe and illustrate journalizing transactions using the double-entry accounting system.
Describe and illustrate the journalizing and posting of transactions to accounts.
Prepare an unadjusted trial balance and explain how it can be used to discover errors.

55. 42,600
42,600

56. Trial Balance and Trial Balance Errors
LO 4
Trial Balance and Trial Balance Errors
The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance.
A transposition occurs when the order of the digits is changed by mistake, such as writing $542 as $452 or $524.
In a slide, the entire number is moved one or more spaces to the right or the left by mistake, such as writing $ as $54.20 or $97.50 as $

57. Analyzing Transactions
The End