1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 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. Student Version 1 Analyzing Transactions Chapter 2

2. © 2011 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. 2 Learning Objective 1  Describe the characteristics of an account and a chart of accounts.

3. © 2011 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. 3 Using Accounts to Record Transactions LO 1  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.  Such account is reported in financial statements

4. © 2011 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. A group of accounts for a business entity is called a ledger.

5. © 2011 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. A list of the accounts in a ledger is called a chart of accounts.

6. © 2011 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. Major Account Classifications Assets are resources owned by the business. Liabilities are debts owed to outsiders (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable Liabilities are often identified on the balance sheet by titles that include payable.

7. © 2011 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. Owner’s equity is the owner’s right to the assets of the business. Revenues are increases in owner’s equity as a result of selling services or products. Chris Clark, Capital Chris Clark, Drawing Fees Earned Fares Earned Commission Revenue Expenses are the using up of assets or consuming of services to generate revenue. Rent Expense Salary Expense Utilities Expense Major Account Classifications

8. © 2011 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. 8 LO 1 Chart of Accounts  A group of accounts for a business entity is called a ledger.  A list of the accounts in the ledger is called a chart of accounts.  Assets are resources owned by the business.  Liabilities are debts owed to outsiders (creditors).

9. © 2011 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. 9 Chart of Accounts  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. LO 1  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.

10. © 2011 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. 10 Learning Objective 2 1.Describe the characteristics of an account and a chart of accounts. 2.Describe and illustrate journalizing transactions using the double-entry accounting system.

11. © 2011 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. 11 Double-Entry Accounting System LO 2  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.

12. © 2011 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. 12 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. LO 2

13. © 2011 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. 13 Rules of Debit and Credit – Normal Balances of Accounts LO 2

14. © 2011 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. 14 The T account has a title. Title The T Account LO 1 The left side of the account is called the debit side. Debit Credit The right side of the account is called the credit side.

15. © 2011 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. The T-Account Cash 3,750 4,300 2,900 850 1,400 700 2,900 Typical entries

16. © 2011 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. Balancing a T-Account

17. © 2011 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. Cash 3,750 4,300 2,900 850 1,400 700 2,900 10,950 First, foot the debit side.

18. © 2011 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. 850 1,400 700 2,900 Cash 3,750 4,300 2,900 10,9505,850 Next, foot the credit side. Next, foot the credit side.

19. © 2011 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. 850 1,400 700 2,900 Cash 3,750 4,300 2,900 10,9505,850 Subtract total credits from total debits to obtain the account balance. 5,100

20. © 2011 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. 20 Journalizing requires the following steps: Journalizing 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 D e bit column. (continued) LO 2

21. © 2011 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. 21 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. LO 2 (continued)

22. © 2011 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. 22 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. LO 2

23. © 2011 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. 23 Journalizing LO 2  A transaction is initially entered in a record called a journal.  The process of recording a transaction in the journal is called journalizing.

24. © 2011 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. 24 Journalizing LO 2  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.

25. © 2011 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. 25 Transaction A LO 2 Step 2 Step 3 Step 1 Step 4 Step 5 Step 3 Assets = Liabilities + Owner’s Equity (investment) Accounting Equation Impact increase On November 1, Chris Clark opens a new business and deposits P25,000 in a bank account in the name of NetSolutions.

26. © 2011 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. 26 LO 2 Accounting Equation Impact Assets = Liabilities + Owner’s Equity Transaction B increase decrease On November 5, NetSolutions paid P20,000 for the purchase of land as a future building site.

27. © 2011 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. 27 LO 2 Accounting Equation Impact Assets = Liabilities + Owner’s Equity Transaction C increase On November 10, NetSolutions purchased supplies on account for P1,350.

28. © 2011 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. 28 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) LO 2 Transaction D increase On November 18, NetSolutions received cash of $7,500 from customers for services provided.

29. © 2011 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. 29 On November 30, NetSolutions incurred the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275. LO 2 Transaction E

30. © 2011 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. 30 LO 2 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) Transaction E decrease All four expense accounts increase

31. © 2011 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. 31 LO 2 Transaction F Accounting Equation Impact Assets = Liabilities + Owner’s Equity decrease On November 30, NetSolutions paid creditors on account, P950.

32. © 2011 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. 32 LO 2 Transaction G Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) decrease increase NetSolutions purchased P1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was P550.

33. © 2011 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. 33 LO 2 Transaction H Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Drawing) decrease increase On November 30, Chris Clark withdrew P2,000 from NetSolutions for personal use.

34. © 2011 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. 34 Learning Objective 3 1.Describe the characteristics of an account and a chart of accounts. 2.Describe and illustrate journalizing transactions using the double-entry accounting system. 3.Describe and illustrate the journalizing and posting of transactions to accounts.

35. © 2011 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. Journalizing and Posting

36. © 2011 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. ACCOUTING CYCLE 1.Transactions are analyzed and recorded in the journal. 2.Transactions are posted to the ledger. 3.A trial balance is prepared, adjustment data are assemble and optional work sheet is completed. 4.Financial Statements are prepared. 5.Adjusting entries are journalized and posted to the ledger. 6.Closing entries are journalized and posted to the ledger. 7.A post closing trial balance is prepared.

37. © 2011 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. CHART OF ACCOUNTS Balance Sheet Accounts 1. Assets 11Cash 12Accounts Receivable 14 Supplies 15Prepaid Insurance 17Land 18Office Equipment 2. Liabilities 21Accounts Payable 23Unearned Rent 3.Owner’s Equity 31Chris Clark, Capital 32Chris Clark, Drawing Income Statement Accounts 4. Revenue 41 Fees Earned 5. Expenses 51Wages Expense 52Rent Expense 54Utilities Expense 55Supplies Expense 59 Miscellaneous Expense

38. © 2011 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. 38 LO 3 Posting Journal Entries to Accounts On December 1, NetSolutions paid a premium of P2,400 for an insurance policy for liability, theft, and fire. The policy covers a one-year period.  The process of transferring the debits and credits from the journal entries to the accounts is called posting.

39. © 2011 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. 39 LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity Posting Journal Entries to Accounts increase decrease

40. © 2011 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. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 2 12341234 Dec.1 2011 Prepaid Insurance2 400 00 Cash2 400 00 ACCOUNT Prepaid Insurance ACCOUNT NO. 15 Balance Debit Credit Date Debit Credit Item Post. Ref. 2 400 00 Dec.1 2011 Paid premium on two-year policy.

41. © 2011 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. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 2 12341234 Dec.1 2011 Prepaid Insurance2 400 00 Cash2 400 00 ACCOUNT Prepaid Insurance ACCOUNT NO. 15 Balance Debit Credit Date Debit Credit Item Post. Ref. 2 400 00 Dec.1 2011 2 15 Paid premium on two-year policy.

42. © 2011 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. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 2 12341234 Dec.1 2011 Prepaid Insurance2 400 00 Cash2 400 00 Paid premium on two-year policy. 15 ACCOUNT Cash ACCOUNT NO. 11 Balance Debit Credit Date Debit Credit Item Post. Ref. 2 000 00 5 900 00 Nov.30 2011 2 Dec. 1 2 400 003 500 00

43. © 2011 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. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 2 12341234 Dec.1 2011 Prepaid Insurance2 400 00 Cash2 400 00 Paid premium on two-year policy. 15 ACCOUNT Cash ACCOUNT NO. 11 Balance Debit Credit Date Debit Credit Item Post. Ref. 2 000 00 5 900 00 Nov.30 2011 2 2 400 003 500 00 Dec. 1 11 2

44. © 2011 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. 44 December Transactions On December 1, NetSolutions paid rent for December, P800. 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. LO 3

45. © 2011 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. 45 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) decreaseincrease

46. © 2011 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. 46 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 P360 for three months’ rent beginning December 1.  The liability created by receiving the cash in advance of providing the service is called unearned revenue.

47. © 2011 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. 47 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity increase

48. © 2011 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. 48 LO 3 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity increase On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for P1,800.

49. © 2011 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. 49 LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) decrease increase December Transactions On December 6, NetSolutions paid P180 for a newspaper advertisement.

50. © 2011 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. 50 LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity decrease December Transactions On December 11, NetSolutions paid creditors P400.

51. © 2011 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. 51 LO 3 December Transactions On December 13, NetSolutions paid a receptionist and a part-time assistant P950 for two weeks’ wages.

52. © 2011 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. 52 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) decrease increase

53. © 2011 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. 53 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) increase On December 16, NetSolutions received P3,100 from fees earned for the first half of December.

54. © 2011 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. 54 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) increase Fees earned on account totaled P1,750 for the first half of December.

55. © 2011 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. 55 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity LO 3 decrease On December 20, NetSolutions paid P900 to Executive Supply Co. on the P1,800 debt owed from the December 4 transaction.

56. © 2011 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. 56 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity increase decrease On December 21, NetSolutions received P650 from customers in payment of their accounts.

57. © 2011 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. 57 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity increase decrease On December 23, NetSolutions paid P1,450 for supplies.

58. © 2011 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. 58 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) increasedecrease On December 27, NetSolutions paid the receptionist and the part-time assistant P1,200 for two weeks’ wages.

59. © 2011 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. 59 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) increase decrease On December 31, NetSolutions paid its P310 telephone bill for the month.

60. © 2011 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. 60 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Expense) increase decrease On December 31, NetSolutions paid its P225 electric bill for the month.

61. © 2011 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. 61 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) increase On December 31, NetSolutions received P2,870 from fees earned for the second half of December.

62. © 2011 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. 62 December Transactions LO 3 Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Revenue) increase On December 31, fees earned on account totaled P1,120 for the second half of December.

63. © 2011 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. 63 LO 3 December Transactions Accounting Equation Impact Assets = Liabilities + Owner’s Equity (Drawing) increase decrease On December 31, Chris Clark withdrew P2,000 for personal use.

64. © 2011 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. 64 Learning Objective 4 1.Describe the characteristics of an account and a chart of accounts. 2.Describe and illustrate journalizing transactions using the double-entry accounting system. 3.Describe and illustrate the journalizing and posting of transactions to accounts. 4.Prepare an unadjusted trial balance and explain how it can be used to discover errors.

65. © 2011 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. Trial Balance

66. © 2011 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. NetSolutions Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 220 00 Supplies2 000 00 Prepaid Insurance2 400 00 Land20 000 00 Office Equipment1 800 00 Accounts Payable900 00 Unearned Rent360 00 Chris Clark, Capital25 000 00 Chris Clark, Drawing4 000 00 Fees Earned16 340 00 Wages Expense4 275 00 Rent Expense1 600 00 Utilities Expense985 00 Supplies Expense800 00 Miscellaneous Expense455 0042 600 00

67. © 2011 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. NetSolutions Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 220 00 Supplies2 000 00 Prepaid Insurance2 400 00 Land20 000 00 Office Equipment1 800 00 Accounts Payable900 00 Unearned Rent360 00 Chris Clark, Capital25 000 00 Chris Clark, Drawing4 000 00 Fees Earned16 340 00 Wages Expense4 275 00 Rent Expense1 600 00 Utilities Expense985 00 Supplies Expense800 00 Miscellaneous Expense455 0042 600 00 Balance Sheet Items

68. © 2011 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. NetSolutions Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 220 00 Supplies2 000 00 Prepaid Insurance2 400 00 Land20 000 00 Office Equipment1 800 00 Accounts Payable900 00 Unearned Rent360 00 Chris Clark, Capital25 000 00 Chris Clark, Drawing4 000 00 Fees Earned16 340 00 Wages Expense4 275 00 Rent Expense1 600 00 Utilities Expense985 00 Supplies Expense800 00 Miscellaneous Expense455 0042 600 00 Statement of Owner’s Equity Item

69. © 2011 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. NetSolutions Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 220 00 Supplies2 000 00 Prepaid Insurance2 400 00 Land20 000 00 Office Equipment1 800 00 Accounts Payable900 00 Unearned Rent360 00 Chris Clark, Capital25 000 00 Chris Clark, Drawing4 000 00 Fees Earned16 340 00 Wages Expense4 275 00 Rent Expense1 600 00 Utilities Expense985 00 Supplies Expense800 00 Miscellaneous Expense455 00 42 600 00 Income Statement Items

70. © 2011 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. 70 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. LO 4  A transposition occurs when the order of the digits is changed by mistake, such as writing P542 as P452 or P524.  In a slide, the entire number is moved one or more spaces to the right or the left by mistake, such as writing P542.00 as P54.20 or P97.50 as P975.00.

71. © 2011 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. 71 Errors Not Affecting the Trial Balance  If an error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared. LO 4

72. © 2011 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. 1.Failure to record a transaction or to post a transaction. 2.Recording the same erroneous amount for both the debit and the credit parts of a transaction. 3.Recording the same transaction more than once. 4.Posting a part of a transaction correctly as a debit or credit but to the wrong account. Errors that will not cause the trial balance to be unequal:

73. © 2011 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. 73  Another type of error is a posting error.  Assume that on May 5 a P12,500 purchase of office equipment on account was incorrectly journalized and posted as a debit to Supplies and a credit to Accounts Payable for P12,500.  The entry to correct the error is: Errors Not Affecting the Trial Balance LO 4

74. © 2011 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. Error Correction Procedure 1.Journal entry is incorrectDraw a line through the error but not posted.and insert correct title or amount. Error Correction Procedure Correction of Errors

75. © 2011 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. Error Correction Procedure 1.Journal entry is incorrectDraw a line through the error but not posted.and insert correct title or amount. Error Correction Procedure 2.Journal entry is correctDraw a line through the but posted incorrectly.posted error and post correctly. Correction of Errors

76. © 2011 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. Error Correction Procedure 3.Journal entry is incorrectJournalize and post a and postedcorrecting entry. Correction of Errors

77. © 2011 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. 77 Learning Objective 5 1.Describe the characteristics of an account and a chart of accounts. 2.Describe and illustrate journalizing transactions using the double-entry accounting system. 3.Describe and illustrate the journalizing and posting of transactions to accounts. 4.Prepare an unadjusted trial balance and explain how it can be used to discover errors. 5.Describe and illustrate the use of horizontal analysis in evaluating a company’s performance and financial condition.

78. © 2011 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. 78 Horizontal Analysis  In horizontal analysis, the amount of each item on a current financial statement is compared with the same item on an earlier statement. LO 5

79. © 2011 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. 79 Horizontal Analysis  In horizontal analysis, the amount of each item on a current financial statement is compared with the same item on an earlier statement.  When two statements are being compared, the earlier statement is used as the base for computing the amount and the percent of change. LO 5

80. © 2011 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. J Holmes, Attorney-at-Law Income Statement For the Year Ended December 31, 2005 and 2006 Increase (Decrease ) 2011 2010 Amount Percent Fees earnedP187,500P150,000P37,50025.0% Operating expenses: Wages expenseP 60,000P 45,000P15,00033.3% Rent expense15,00012,0003,00025.0% Utilities expense12,5009,0003,50038.9% Supplies expense2,7003,000(300)(10.0)% Misc. expense 2,300 1,800 50027.8% Total operating expensesP 92,500P 70,800P21,70030.6% Net incomeP 95,000P 79,200P15,80019.9%

81. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 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. Student Version 81 Analyzing Transactions The End