1| Chapter 2 Analyzing Transactions

Chapter 2 Analyzing Transactions

From Chapter 1: The Accounting Equation

Assets = Liabilities + Owner's Equity

Assets = Liabilities + Capital – Drawing + Revenues - Expenses

Definitions for the Element

 Assets are resources owned by the business.

 Liabilities are debts owed to outsiders (creditors).
 Owner’s equity is the owner’s right to the assets of the business after all
liabilities have been paid.
 Drawings 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.
 Expenses The using up of assets or consuming services in the process of
generating revenues.

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Accounting Cycle

Transactions Journal Ledger

(Economic activities & (record transactions (Posting transactons
Business condition) in the journal) to ledger)

Unadjusted trail Adjusted Trail

Adjustment
balance Balance
(Journalizing &posting
(Prepare unadjusted adjusting entries) (Prepare adjusted
trail balance) trail balance)

Financial
Closing Entries
Statement
(Journalizing & posting
(Prepare 4 financial closing entries)
statements)

 The accounting process that begins with analyzing and journalizing transactions
and ends with preparing the accounting records for the next period’s transactions
is called the accounting cycle. There are ten steps in the accounting cycle.

1. Transactions are analyzed and recorded in the journal.

2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and analyzed.
5. An optional end-of-period spreadsheet (work sheet) is prepared.
6. Adjusting entries are journalized and posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to the ledger.
10. A post-closing trial balance is prepared

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Rearranging the accounting equation

Drawing + Expenses + Assets = Liabilities + Capital + Revenues

Debit Accounts Credit Accounts

If  Debit, and if  Credit If  Credit, and if  Debit

Every business transaction

Double-Entry
to be recorded in at least
System two accounts
Journal
Date Description Post Ref. Debit Credit Total debit
Debit xxx =
Credit xxx
Total Credit
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.

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Example Transaction
A. On November 1, Chris Clark opens a new business and deposits $25,000 in a
bank account in the name of NetSolutions.
B. On November 5, NetSolutions paid $20,000 for the purchase of land as a
future building site.
C. On November 10, NetSolutions purchased supplies on account for $1,350.
D. On November 18, NetSolutions received cash of $7,500 from customers for
services provided.
E. On November 30, NetSolutions incurred the following expenses: wages,
$2,125; rent, $800; utilities, $450; and miscellaneous, $275.
F. On November 30, NetSolutions paid creditors on account, $950.
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.
H. On November 30, Chris Clark withdrew $2,000 from NetSolutions for
personal use.
I. 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.
J. On December 4, NetSolutions purchased office equipment on account from
Executive Supply Co. for $1,800.
K. On December 6, NetSolutions paid $180 for a newspaper advertisement.
L. On December 11, NetSolutions paid creditors $400.
M. On December 13, NetSolutions paid a receptionist and a part-time assistant
$950 for two weeks’ wages.
N. On December 16, NetSolutions received $3,100 from fees earned for the
first half of December.
O. Fees earned on account totaled $1,750 for the first half of December.
P. On December 20, NetSolutions paid $900 to Executive Supply Co. on the
$1,800 debt owed from the December 4 transaction.
Q. On December 21, NetSolutions received $650 from customers in payment of
their accounts.
R. On December 23, NetSolutions paid $1,450 for supplies.
S. On December 27, NetSolutions paid the receptionist and the part-time
assistant $1,200 for two weeks’ wages.
T. On December 31, NetSolutions paid its $310 telephone bill for the month.
U. On December 31, NetSolutions paid its $225 electric bill for the month.

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V. On December 31, NetSolutions received $2,870 from fees earned for the
second half of December.
W. On December 31, fees earned on account totaled $1,120 for the second
half of December.
X. On December 31, Chris Clark withdrew $2,000 for personal use.
Y. Instructions
1. Journalize
2. Prepare T account
3. Prepare an unadjusted trail balance

Date Description Post. Ref. Debit Credit

Cash 25,000
Nov.1
Chris Clark, Capital 25,000
Land 20,000
Nov. 5
Cash 20,000
Supplies 1,350
Nov.10
Account payable 1,350
Cash 7,500
Nov. 18
Fees earned 7,500
Wages expenses 2,125
Rent expenses 800
Nov. 30 Utilities expenses 450
Miscellaneous expenses 275
cash 3,650
Account payable 950
Nov. 30
cash 950
Supplies expenses 800
Nov. 30
supplies 800
Chris Clark, Drawing 2,000
Nov. 30
Cash 2,000
Rent expenses 800
Dec. 1
Cash 800
office equipment 1,800
Dec. 4
Account payable 1,800
Miscellaneous expenses 180
Dec. 6
cash 180
Account payable 400
Dec. 11
cash 400

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Wages expenses 950

Dec. 13
cash 950
Cash 3,100
Dec. 16
Fees earned 3,100
Account receivable 1,750
Dec. 16
Fees earned 1,750
Account payable 900
Dec. 20
cash 900
cash 650
Dec. 21
Account receivable 650
Supplies 1,450
Dec. 23
Cash 1,450
Wages expenses 1,200
Dec. 27
cash 1,200
Utilities expenses 310
Dec. 31
cash 310
Utilities expenses 225
Dec. 31
cash 225
Cash 2,870
Dec. 31
Fees earned 2,870
Account receivable 1,120
Dec. 31
Fees earned 1,120
Chris Clark, Drawing 2,000
Dec. 31
Cash 2,000

T Account
Title
Debit Credit
The left side of the account is called The right side of the account is called
the debit side. the credit side.

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.
 Ledger is a group of accounts for a business entity.
 Chart of accounts is a list of the accounts in the ledger.

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 Posting Journal Entries to Accounts is the process of transferring the

debits and credits from the journal entries to the accounts.

Trial Balance

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

T ACCOUNTS
cash Chris Clark, Capital
25,000 20,000 25,000
7,500 3,650 25,000 Bal.
3,100 950
650 2,000 Fees earned
2,870 800 7,500
180 3,100
400 1,750
950 2,870
900 1,120
1,450 16,340 Bal.
1,200
310
225
2,000
39,120 35,015
Bal. 4,105

Supplies Account payable

1,350 800 950 1,350
1,450 400 1,800
Bal. 2,000 900
900 Bal.

Land Wages expenses

2,125
20,000
950
1,200
Bal. 20,000
Bal. 4,275

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Miscellaneous expenses Rent expenses

275 800
180 800
Bal. 455 Bal. 1,600

Supplies expenses Utilities expenses

800 450
310
Bal. 800 225
Bal. 985

Chris Clark, Drawing office equipment

2,000 1,800
2,000
Bal. 4,000 Bal. 1,800

Account receivables
1,750 650
1,120
Bal. 2,220

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Net solutions
Unadjusted trial balance
December 30, 2011
Debit balances Credit balances
Cash 4,105
Account receivable 2,220
Supplies 2,000
Land 20,000
office equipment 1,800
Account payable 900
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees earned 16,340
Wages expenses 4,275
Rent expenses Utilities 1,600
expenses Miscellaneous 985
expenses Supplies 455
expenses 800

42,240 42,240

PR 2-2A – Page 91

PR 2-2B – Page 95

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