1. Analyzing and Recording Transactions C H A P T E R 2 The Beginning 1

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 ) 3-2

3. 5.Analyze the impact of transactions on accounts. (LO5) 6.Record transactions in a journal and post entries to a ledger. (LO6) 7.Prepare and explain the use of a trial balance. (LO7) Learning Objectives 3-3

4. A detailed record of increases and decreases in a specific asset, liability, or equity item. Liabilities Equity Assets =+ Examples: CashAccounts PayableV.Climb, Capital Accounts ReceivableNotes PayableV.Climb, Withdrawals SuppliesWages OwingService Revenue FurnitureSalaries Expense The Account 3-4 LO 2

5. 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. Double-Entry Accounting Debits = Credits Always ! 3-5 LO 3

6. Represents an account in the ledger. Used as a learning tool. The difference between the debit side and credit side is the balance. The T Account 3-6 LO 2

7. 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: 1 Calculating the Account Balance 3 2 3-7 LO 2

8. 3-8 Focussed Workout QS 2-2 8

9. Liabilities Equity Assets =+ Double-Entry Accounting Liabilities Assets Equity Liabilities EquityAssetsLiabilities + - - + Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases 3-9 LO 3

10. Capital - + Equity Accounts Withdrawals + - Expenses + - Revenues - + Double-Entry Accounting Debit for decreases Credit for increases Debit for increases Credit for decreases 3-10 LO 3

11. Capital - + Equity Accounts Withdrawals + - Expenses + - Revenues - + Double-Entry Accounting Debit for decreases Credit for increases Debit for increases Credit for decreases 3-11 LO 3

12. Liabilities Equity Assets = = + + An account’s normal balance is the side (debit or credit) where increases are recorded. Normal Balances 3-12 LO 3

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

14. Account Type Normal Balance Assets Liabilities Capital Revenue Expenses Withdrawals Step 2 Write down the normal balance (debit) of A,E,W. Remembering Debits and Credits ALCREW 3-14 LO 3

15. Account Type Normal Balance AssetsDr Liabilities Capital Revenue ExpensesDr WithdrawalsDr Step 2 Write down the normal balance (debit) of A,E,W. Remembering Debits and Credits ALCREW 3-15 LO 3

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

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

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

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

20. Mini-Quiz Indicate whether a debit or credit is needed to: Increase Rent Expense Decrease Accounts Payable Decrease Accounts Receivable Decrease Cash Increase Withdrawals 3-20 Debit Credit Debit LO 3

21. 3-21 Focussed Workout QS 2-1, 2-3, and 2-4 21

22. A list of all accounts used in the ledger by a company. Unique for each company. Accounts are usually numbered. Chart of Accounts 3-22 LO 4

23. 23 Page 71

24. Steps: Determine which accounts are being affected. Determine if account balances are increasing or decreasing. Apply rules of debits and credits. Analyzing Transactions 3-24 LO 5

25. Example #1: The owner, V. Klimb, invests $10,000 in the business. Accounts affected Increase/ Decrease Debit/ Credit 1 Analyzing Transactions 23 3-25 LO 5

26. Example #1: The owner, V. Klimb, invests $10,000 in the business. Accounts affected Increase/ Decrease Debit/ Credit Cash V.Klimb, capital 123 Analyzing Transactions 3-26 LO 5

27. Example #1: The owner, V. Klimb, invests $10,000 in the business. Accounts affected Increase/ Decrease Debit/ Credit CashIncrease V.Klimb, capital Increase 123 Analyzing Transactions 3-27 LO 5

28. Example #1: The owner, V. Klimb, invests $10,000 in the business. Accounts affected Increase/ Decrease Debit/ Credit CashIncreaseDebit V.Klimb, capital IncreaseCredit Analyzing Transactions 123 3-28 LO 5

29. Example #1: The owner invests $10,000 in the business.  Debit Cash for $10,000  Credit V.Klimb, Capital for $10,000 Analyzing Transactions 3-29 LO 5

30. A credit entry: A) Increases asset and expense accounts, or decreases liability, equity, and revenue accounts. B) Is recorded on the left side of a T-account. C) Decreases asset and expense accounts, or increases liability, equity, and revenue accounts. D) Decreases asset, expense and revenue accounts. E) Increases the withdrawals account. 30

31. Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease Debit/ Credit Analyzing Transactions 123 3-31 LO 5

32. Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease Debit/ Credit Supplies Cash Analyzing Transactions 123 3-32 LO 5

33. Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncrease CashDecrease Analyzing Transactions 123 3-33 LO 5

34. Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncreaseDebit CashDecreaseCredit Analyzing Transactions 123 3-34 LO 5

35. Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash.  Debit supplies for $2,500  Credit cash for $2,500 3-35 LO 5

36. Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease Debit/ Credit Analyzing Transactions 123 3-36 LO 5

37. Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease Debit/ Credit Supplies Accounts Payable Analyzing Transactions 123 3-37 LO 5

38. Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncrease Accounts Payable Increase Analyzing Transactions 123 3-38 LO 5

39. Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease Debit/ Credit SuppliesIncreaseDebit Accounts Payable IncreaseCredit Analyzing Transactions 123 3-39 LO 5

40. Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit.  Debit supplies for $1,100  Credit accounts payable for $1,100 3-40 LO 5

41. Focussed Workout QS 2-7, 2-8 EX 2-1, 2-2 41

42. Total Workout PR 2-1A 42