Accounting Chapter 2

Analyzing Transactions
Financial Accounting

Lecturer: Yasin F.saleban

 Objectives
Objectives
1. Explain why accounts are used to record
and summarize the effects of transactions
on financial statements.
2. Describe the characteristics of an account.
3. List the rules of debit and credit and the
normal balances of accounts.
4. Analyze and summarize the financial
statement effects of transactions.
 Balance Sheet Accounts
ASSETS LIABILITIES
Asset Accounts Liability Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (–) (–) (+)

OWNERS’ EQUITY
Stockholders’ Equity
Accounts
Debit for Credit for
decreases increases
(–) (+)
 Rules of Debit / Credit Balance
Sheet Accounts
Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)
 Each
Each financial
financial statement
statement
item,
item, called
called an
an account,
account,
isis included
included in
in the
the ledger.
ledger.
 AA group
group of of
accounts
accounts forfor aa
business
business entity
entity isis
called
called aa ledger.
ledger.
AA list
list of
of the
the accounts
accounts
in
in aa ledger
ledger isis called
called aa
chart
chart of of accounts.
accounts.
 Major Account Classifications

Assets
Assets are
are Liabilities
Liabilities are
are debts
debts
resources
resources owned
owned owed
owed toto outsiders
outsiders
by
by the
the business.
business. (creditors).
(creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable
 Major Account Classifications
Liabilities
Liabilities are
are often
often identified
identified
Assets are on
Assets are on the
the balance sheet
Liabilities
balance by
sheetare
Liabilities titles
bydebts
are titles
debts
resources
resources owned
owned that owed
owed to
that include
include payable
outsiders
payable
to ..
outsiders
by
by the
the business.
business. (creditors).
(creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable
 Major Account Classifications
Owners’
Owners’ Revenues
Revenues are are Expenses
Expenses areare the
the
(stockholders’)
(stockholders’) increases
increases inin using
using up
up of
of assets
assets
equity
equity isis the
the owner’s
owner’s equity
equity asas or
or consuming
consuming of of
owner’s
owner’s right
right toto aa result
result of
of selling
selling services
services to
to
the
the assets
assets ofof the
the services
services or
or generate
generate revenue.
revenue.
business.
business. products.
products. Rent Expense
Capital Stock
Fees Earned Salary Expense
Retained
Fares Earned Utilities
Earnings
Commission Expense
Dividends
Revenue
To
To assist
assist you
you in
in learning,
learning,
an
an account
account can
can be
be drawn
drawn
to
to resemble
resemble the
the letter
letter T.
T.
The
The T-Account
T-Account
Cash

The
The T-account
T-account has
has aa title.
title.
 The
The T-Account
T-Account
Cash
Left side
debit

The
The left
left side
side of
of the
the account
account isis the
the debit
debit side.
side.
 Transactions and
Balance Sheet Accounts
 (A) On
(A) On November
November 1, 1, Chris
Chris Clark
Clark
deposits $25,000
deposits $25,000 inin aa bank
bank account
account
in the
in the name
name of
of NetSolutions
NetSolutions in in
exchange for
exchange for capital
capital stock.
stock.

JOURNAL Page
Post.
1
Date Description Debit Credit
2005 Ref.
1 Nov. 1 Cash 25 000 00
2 Capital Stock 25 000 00
3 Issued capital stock for cash.
4
 (A) On
(A) On November
November 1, 1, Chris
Chris Clark
Clark
deposits $25,000
deposits $25,000 inin aa bank
bank account
account
in the
in the name
name of
of NetSolutions
NetSolutions in in
exchange for
exchange for capital
capital stock.
stock.

Effects of this entry in the Ledger

Cash Capital Stock

Nov. 1 25,000 Nov. 1 25,000
 (B) On
(B) On November
November 5,5,
NetSolutions bought
NetSolutions bought land
land
for $20,000,
for $20,000, paying
paying cash.
cash.

4
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10
 (B) On
(B) On November
November 5,5,
NetSolutions bought
NetSolutions bought land
land
for $20,000,
for $20,000, paying
paying cash.
cash.

Effects of this entry in the Ledger

Cash Land
Nov. 1 25,000 Nov. 5 20,000 Nov. 5 20,000
 (C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions
purchased supplies
purchased supplies on
on account
account
for $1,350.
for $1,350.

10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16
 (C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions
purchased supplies
purchased supplies on
on account
account
for $1,350.
for $1,350.

Effects of this entry in the Ledger

Supplies Accounts Payable
Nov. 10 1,350 Nov. 10 1,350
 (F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, $950.
$950.

30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36
 (F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, $950.
$950.

Effects of this entry in the Ledger

Cash Accounts Payable
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 950 Nov. 10 1,350
18 7,500 30 3,650
30 950
 (D) On
(D) On November
November 18, 18, NetSolutions
NetSolutions
received fees
received fees of
of $7,500
$7,500 from
from
customers for
customers for services
services provided
provided ..

14
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20
 (D) On
(D) On November
November 18, 18, NetSolutions
NetSolutions
received fees
received fees of
of $7,500
$7,500 from
from
customers for
customers for services
services provided
provided ..

Effects of this entry in the Ledger

Cash Fees Earned
Nov. 1 25,000 Nov. 5 25,000 Nov. 18 7,500
18 7,500
 (E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions
incurred the
incurred the following
following expenses:
expenses:
wages, $2,125;
wages, $2,125; rent,
rent, $800;
$800; utilities,
utilities,
$450; and
$450; and miscellaneous,
miscellaneous, $275
$275 ..
18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 275 00
23 Cash 3 650 00
24 Paid expenses.
 (E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions
incurred the
incurred the following
following expenses:
expenses:
wages, $2,125;
wages, $2,125; rent,
rent, $800;
$800; utilities,
utilities,
$450; and
$450; and miscellaneous,
miscellaneous, $275
$275 ..
Effects of this entry in the Ledger
Cash Wages Expense
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 2,125
18 7,500 30 3,650

Rent Expense Utilities Expense

Nov. 30 800 Nov. 30 450

Miscellaneous Expense
Nov. 30 275
In
In every
every entry
entry the
the sum
sum ofof
the
the debits
debits always
always equal
equal
the
the sum
sum of
of the
the credits.
credits.
 (G) On
(G) On November
November 30, 30, aa count
count revealed
revealed
that $800
that $800 of
of the
the supplies
supplies inventory
inventory
had been
had been used.
used.

25
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31
 (G) On
(G) On November
November 30, 30, aa count
count revealed
revealed
that $800
that $800 of
of the
the supplies
supplies inventory
inventory
had been
had been used.
used.

Effects of this entry in the Ledger

Supplies Supplies Expense
Nov. 10 1,350 Nov. 30 800 Nov. 30 800
 Income Statement Accounts
Debits Credits
Revenue accounts…… Decrease (-) Increase (+)
Expense accounts…… Increase (+) Decrease (-)
Payment
Payment of
of
dividends
dividends
 (H) On
(H) On November
November 30,
30, Net
Net Solutions
Solutions paid
paid
dividends of
dividends of $2,000.
$2,000.

JOURNAL Page
Post.
2
Date Description Debit Credit
2005 Ref.
1 Nov. 30 Dividends 2 000 00
2 Cash 2 000 00
3 Paid dividends to stockholders.
4
 (H) On
(H) On November
November 30,
30, Chris
Chris Clark
Clark
withdrew $2,000
withdrew $2,000 inin cash
cash from
from
NetSolutions for
NetSolutions for personal
personal use.
use.

Effects of this entry in the Ledger

Cash Dividends
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 2,000
18 7,500 30 3,650
30 950
30 2,000
 Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

AssetDebit Credit
Liability Credit Debit
Owners’ (Stockholders’) Equity:
Capital Stock Credit Debit
Retained Earnings Credit Debit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Dividend accounts:
Dividends Debit Credit
 Flow
Flow of
of Business
Business Transactions
Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger