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1 2 Analyzing Transactions. 2 1. Describe the characteristics of an account and record transactions using a chart of accounts and journal. 2. Describe.

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Presentation on theme: "1 2 Analyzing Transactions. 2 1. Describe the characteristics of an account and record transactions using a chart of accounts and journal. 2. Describe."— Presentation transcript:

1 1 2 Analyzing Transactions

2 2 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:

3 3 2-1 Describe the characteristics of an account and record transactions using a chart of accounts and journal. Objective 1

4 4

5 5 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

6 6 Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each item of importance. Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each item of importance. The Account

7 7 5 The T account has a title. Title 2-1 The T Account

8 8 6 The left side of the account is called the debit side. Title Debit 2-1

9 9 The right side of the account is called the credit side. Title DebitCredit 2-1 7

10 10 Title DebitCredit Amounts entered on the left side are debits. 2-1 8

11 11 Title DebitCredit Amounts entered on the right side are credits. 2-1 9

12 12 Cash (a)25,000(b)20,000 (d)7,500(e)3,650 (f)950 (h)2,000 Balance5,900 Balance of the account 2-1 10

13 13 A group of accounts for a business entity is called a ledger. 2-1

14 14 A list of the accounts in a ledger is called a chart of accounts. 2-1

15 15 Assets are resources owned by the business entity. Cash Supplies Prepaid expenses Buildings 2-1

16 16 Land Equipment Buildings Cash Prepaid Expenses Office Supplies Store Supplies Prepaid Insurance Notes Receivable Accounts Receivable ASSETS Asset Accounts

17 17 Liabilities are debts owed to outsiders (creditors). Accounts payable Notes payable Wages payable 2-1

18 18 Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable LIABILITIES LiabilityAccounts

19 19 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

20 20 Equities Revenues Owners’ Capital Owners’ Withdrawals Expenses Equity Accounts

21 21 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

22 22 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

23 23

24 24 Debits Credits Asset accounts…….Increase (+)Decrease (-) Liability accounts.…Decrease (-)Increase (+) Owner’s equity (capital) accounts…Decrease (-)Increase (+) Balance Sheet Accounts 2-1 31

25 25 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 2-1 32

26 26 Liabilities Equity Assets =+ Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + Double-Entry Accounting Exh. 3.7

27 27 Debits Credits Revenue accounts…Decrease (-)Increase (+) Expense accounts…Increase (+)Decrease (-) 2-1 Income Statement Accounts 40

28 28 Credit for increases (+) Debit for decreases (–) Revenue Accounts Income Statement Accounts Credit for decreases (–) Debit for increases (+) Expense Accounts Less 2-1 41 Continued

29 29 Equals Net Income (credit > debits) increases owners’ equity (capital) Net Loss (debits > credits) decreases owners’ equity (capital) 2-1 42

30 30 Revenues Expenses Owner’s Capital Owner’s Withdrawals _ + _ Debit Credit Capital - + Debit Credit Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting - Detail of Effects on Equity Equity Exh. 3.8

31 31 Every transaction affects at least two accounts. 2-1

32 32 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

33 33 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

34 34 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

35 35 NetSolutions A Sole Proprietorship NetSolutions “ On November 1, 2007, I started a sole proprietorship called NetSolutions. I plan to use my knowledge of microcomputers and offer computer consulting services for a fee. The following double- entry transactions show how amounts received (debits) always equal amounts given (credits).” Chris Clark, Owner

36 36 (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

37 37 23 JOURNAL DateDescriptionDebitCredit Page 1 12341234 Nov.1 2007 Cash25 000 00 Chris Clark, Capital25 000 00 Invested cash in NetSolutions. 2-1 P.R.

38 38 The effect of this entry is shown in the accounts of NetSolutions as follows: Cash Nov. 125,000 Chris Clark, Capital 2-1

39 39 (b)On November 5, NetSolutions bought land for $20,000, paying cash. 2-1

40 40 26 5Land20 000 00 Cash20 000 00 Purchased land for building site. 2-1

41 41 ( c)On November 10, NetSolutions purchased supplies on account for $1,350. 2-1

42 42 28 10Supplies1 350 00 Accounts Payable1 350 00 Purchased supplies on account. 2-1

43 43 (d)On November 18, NetSolutions received fees of $7,500 from customers for services provided. Income Statement Accounts 2-1

44 44 18Cash7 500 00 Fees Earned7 500 00 Received fees from customers. 2-1 35

45 45 Example Exercise 2-2 Prepare a journal entry on August 7 for the fees earned on account, $115,000. Follow My Example 2-2 Aug. 7Accounts Receivable115,000 Fees Earned115,000 For Practice: PE 2-2A, PE 2-2B 2-1 43

46 46 (e)Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. 2-1

47 47 30Wages Expense2 125 00 Rent Expense800 00 Utilities Expense450 00 Miscellaneous Expense275 00 Cash3 650 00 Paid expenses. 2-1 37

48 48 (f)On November 30, NetSolutions paid creditors on account, $950. 2-1

49 49 30Accounts Payable950 00 Cash950 00 Paid creditors on account. 2-1 30

50 50 Example Exercise 2-1 Prepare a journal entry for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder on account. Follow My Example 2-1 June 3 Truck42,500 Cash8,500 Accounts Payable34,000 For Practice: PE 2-1A, PE 2-1B 2-1 33

51 51 (g)On November 30, a count revealed that $800 of the supplies inventory had been used during the month. 2-1

52 52 30Supplies Expense 800 00 Supplies 800 00 Supplies used during November. 2-1 39

53 53 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

54 54 (h)On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use. 2-1

55 55 Cash2 000 00 Chris Clark withdrew cash for personal use. Nov 30Chris Clark, Drawing2 000 00 2007 2-1 46

56 56 Example Exercise 2-3 Prepare a journal entry on December 29 for the payment of $12,000 to the owner of Smartstaff Consulting Services, Dominique Walsh, for personal use. Follow My Example 2-3 Dec. 29Dominique Walsh, Drawing12,000 Cash12,000 For Practice: PE 2-3A, PE 2-3B 2-1 47

57 57 Increase (Normal Bal.) Decreases Balance sheet accounts: AssetDebitCredit LiabilityCreditDebit Owner’s Equity: Capital CreditDebit DrawingDebitCredit Income statement accounts: RevenueCreditDebit ExpenseDebitCredit 2-1 48

58 58 Example Exercise 2-4 State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. Also, indicate its normal balance. 1.Amber Saunders, Drawing 2.Accounts Payable 3.Cash 4.Fees Earned 5.Supplies 6.Utilities Expense 2-1 49

59 59 For Practice: PE 2-4A, PE 2-4B Follow My Example 2-4 1.Debit entries only; normal debit balance 2.Debit and credit entries; normal credit balance 3.Debit and credit entries; normal debit balance 4.Credit entries only; normal credit balance 5.Debit and credit entries; normal debit balance 6.Debit entries only; normal debit balance 2-1 50

60 60 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

61 61 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

62 62 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

63 63 (continued)

64 64 (concluded)

65 65 Describe and illustrate the posting of journal entries to the accounts. Objective 2 2-2

66 66 The process of transferring the debits and credits from the journal entries to the accounts is called posting. 2-2

67 67 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

68 68 2-2 57

69 69 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

70 70 1 Rent Expense52800 00 Cash11800 00 Paid rent for December. 2-2 59

71 71 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

72 72 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

73 73 Dec. 1NetSolutions receives $360 for three month’s rent for use of its land beginning December 1. 1 Cash11360 00 Unearned Rent23360 00 Received advance payment for three months’ rent on land. 2-2 62

74 74 Dec. 4NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800. 4 Office Equipment181 800 00 Accounts Payable211 800 00 Purchased office equipment on account. 2-2 63

75 75 Dec. 6NetSolutions paid $180 for a newspaper advertisement. 6 Miscellaneous Expense59180 00 Cash11180 00 Paid for newspaper ad. 2-2 64

76 76 Dec. 11NetSolutions paid creditors $400. 11 Accounts Payable21400 00 Cash11400 00 Paid creditors on account. 2-2 65

77 77 Dec. 13NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages. 13 Wages Expense51950 00 Cash11950 00 Paid two weeks’ wages. 2-2 66

78 78 Dec. 16NetSolutions received $3,100 from fees earned for the first half of December. 16 Cash113 100 00 Fees Earned413 100 00 Received fees from customers. 2-2 67

79 79 Dec. 16Fees earned on account totaled $1,750 for the first half of December. 16 Accounts Receivable121 750 00 Fees Earned411 750 00 Recorded fees earned on account. 2-2 68

80 80 Dec. 20NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction. 20 Accounts Payable21900 00 Cash11900 00 Paid part of amount owed to Executive Supply Co. 2-2 69

81 81 Dec. 21NetSolutions received $650 from customers in payment of their accounts. 21 Cash11650 00 Accounts Receivable12650 00 Received fees from customers on account. 2-2 70

82 82 Dec. 23NetSolutions paid $1,450 for supplies. 23 Supplies141 450 00 Cash111 450 00 Purchased supplies. 2-2 71

83 83 Dec. 27NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages. 27Wages Expense511 200 00 Cash111 200 00 Paid two weeks’ wages. 2-2 72

84 84 Dec. 31NetSolutions paid $310 for telephone charges for the month. 31Utilities Expense54310 00 Cash11310 00 Paid telephone charges. 2-2 73

85 85 Dec. 31NetSolutions paid $225 for electric usage for the month. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 1 Dec 31Utilities Expense54225 00 2007 Cash11225 00 Paid for electric usage. 2-2 74

86 86 Dec. 31NetSolutions received $2,870 from fees earned for the second half of December. 31Cash112 870 00 Fees Earned412 870 00 Received fees from customers. 2-2 75

87 87 Dec. 31NetSolutions earned $1,120 on account for the second half of December. 31Accounts Receivable121 120 00 Fees Earned411 120 00 Recorded fees earned on account. 2-2 76

88 88 Dec. 31Chris Clark withdrew $2,000 for personal use. 31Chris Clark, Drawing322 000 00 Cash112 000 00 Chris Clark withdrew cash for personal use. 2-2 77

89 89 Example Exercise 2-5 On March 1, the cash account balance was $22,350. During March, cash receipts totaled $241,880 and the March 31 balance was $19,125. Determine the cash payments made during March. 2-2 78

90 90 Follow My Example 2-5 Using the following T-account solve for the amount of cash payment (indicated by ? below). Cash Mar. 1 Bal22,350?Cash payments Cash receipts241,880 Mar. 31 Bal.19,125 $19,125 = $22,350 + $241,880 – Cash payments Cash payments = $22,350 + $241,880 –$19,125 = $245,105 For Practice: PE 2-5A, PE 2-5B 2-2 79

91 91 Prepare an unadjusted trial balance and explain how it can be used to discover errors. 2-3 Objective 3

92 92 The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance. 4 Trial Balance

93 93 The steps in preparing a trial balance are as follows: 1.List the name of the company, the title of the trial balance, and the date the trial balance is prepared. 2.List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance. (continued) 4

94 94 3.Total the Debit and Credit columns of the trial balance. 4.Verify that the total of the Debit column equals the total of the Credit column. 4

95 95 2-3 82

96 96 Discover and correct errors in recording transactions. 2-4 Objective 4

97 97 Errors Not Affecting the Trial Balance Failure to record transaction or to post a transaction. Recording the same erroneous amount for both the debit and the credit parts of a transaction. Recording the same transaction more than once. Posting a part of a transaction correctly as debit or credit but to the wrong account.

98 98

99 99 A transposition occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524. 4 Errors

100 100 Example Exercise 2-6 For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. a.Payment of a cash withdrawal of $5,600 was journalized and posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash. b.A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850. c.A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash. 2-3 83

101 101 Follow My Example 2-6 a.The totals are equal since both the debit and credit entries were journalized and posted for $6,500. b.The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580). c.The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500). 2-3 For Practice: PE 2-6A, PE 2-6B 84

102 102 In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $97.50 as $975.00. Errors

103 103 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 $542.00 as $54.20. 2-4

104 104 For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. Also indicate the nature of error ( Transposition or Slide). a.Payment of a cash withdrawal of $5,600 was journalized and posted as a debit of $6,500 to Salary Expense and a credit of $6,500 to Cash. b.A fee of $2,850 earned from a client was debited to Accounts Receivable for $2,580 and credited to Fees Earned for $2,850. c.A payment of $3,500 to a creditor was posted as a debit of $3,500 to Accounts Payable and a debit of $3,500 to Cash. 4 Example Exercise 2-6 2-75 Trial Balance Errors

105 105 24 Example Exercise 2-6 (continued) Follow My Example 2-6 a.The totals are equal since both the debit and credit entries were journalized and posted for $6,500. 2-76 For Practice: PE 2-6A, PE 2-6B b.The totals are unequal. The credit total is higher by $270 ($2,850 – $2,580). c.The totals are unequal. The debit total is higher by $7,000 ($3,500 + $3,500).

106 106 If an error has already been journalized and posted to the ledger, a correcting journal entry is normally prepared. 4

107 107 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 $12,500. Errors Not Affecting the Trial Balance 4

108 108 Entry to Correct Error May 31Office Equipment1812 500 00 Supplies1412 500 00 To correct erroneous debit to Supplies on May 5. See invoice from Bell Office Equipment Company. 2-4 88

109 109 Example Exercise 2-7 a.A withdrawal of $6,000 by Cheri Ramey, owner of the business, was recorded as a debit to Office Salaries Expense and a credit to Cash. b.Utilities Expense of $4,500 paid for the current month was recorded as a debit to Miscellaneous Expense and a credit to Accounts Payable. The following errors took place in journalizing and posting transactions: Journalize the entries to correct the errors. Omit explanations. 2-4 89

110 110 Follow My Example 2-7 a.Cheri Ramey, Drawing6,000 Office Salaries Expense6,000 b.Accounts Payable4,500 Miscellaneous Expense4,500 Utilities Expense4,500 Cash4,500 Note: The first entry in (b) reverses the incorrect entry, and the second entry records the correct entry. For Practice: PE 2-7A, PE 2-7B 2-4 90

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