analyzing transactions
DESCRIPTION
0. 2. Analyzing Transactions. 0. 2-1. 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. 0. 2-1. The T Account. Title. The T account has a title. 5. 0. 2-1. Title. Debit. - PowerPoint PPT PresentationTRANSCRIPT
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Analyzing Analyzing TransactionsTransactions
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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.
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The T account has a title.
Title
2-1The T Account
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The left side of the account is
called the debit side.
Title
Debit
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The right side of the account is called the
credit side.
Title
Debit Credit
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Title
Debit Credit
Amounts entered on the
left side are debits.
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Title
Debit Credit
Amounts entered on the right side are
credits.
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Cash(a) 25,000 (b) 20,000(d) 7,500 (e) 3,650
(f) 950(h) 2,000
Balance 5,900
Balance of the accountBalance of the account
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A group of accounts for a business entity is
called a ledger.
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A list of the accounts in a ledger is called a
chart of accounts.
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Assets are resources owned by the business entity.
• Cash• Supplies• Prepaid expenses• Buildings
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Liabilities are debts owed to outsiders (creditors).• Accounts payable• Notes payable• Wages payable
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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.
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Revenues are increases in owner’s equity as a result
of selling services or products to customers.
• Fees earned• Commission revenue• Rent revenue
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The using up of assets or consuming services in the
process of generating revenues results in expenses.
• Wages expense• Rent expense• Miscellaneous expense
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Every transaction affects at least two accounts.
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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
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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)
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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.
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(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
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JOURNAL
Date Description Debit Credit
Page 1
1
2
3
4
Nov. 12007
Cash 25 000 00
Chris Clark, Capital 25 000 00
Invested cash in NetSolutions.
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P.R.
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The effect of this entry is shown in the accounts of NetSolutions as follows:
CashNov. 1 25,000 Nov. 1 25,000
Chris Clark, Capital
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(b) On November 5, NetSolutions bought land for $20,000, paying cash.
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5 Land 20 000 00
Cash 20 000 00
Purchased land for
building site.
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(c) On November 10, NetSolutions purchased supplies on account for $1,350.
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10 Supplies 1 350 00
Accounts Payable 1 350 00
Purchased supplies on
account.
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(f) On November 30, NetSolutions paid creditors on account, $950.
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30 Accounts Payable 950 00
Cash 950 00
Paid creditors on
account.
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Debits Credits
Asset accounts……. Increase (+) Decrease (-)
Liability accounts.… Decrease (-) Increase (+)
Owner’s equity (capital) accounts… Decrease (-) Increase (+)
Balance Sheet Accounts
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Credit for increases
(+)
Debit for decreases
(–)
Owner’s Equity Accounts
Credit for decreases
(–)
Debit for increases
(+)
Asset AccountsCredit for increases
(+)
Debit for decreases
(–)
Liability Accounts
Balance Sheet Accounts
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(d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.
Income Statement Accounts 2-1
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30 Cash 7 500 00
Fees Earned 7 500 00
Received fees from
customers.
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(e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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30 Wages Expense 2 125 00
Rent Expense 800 00
Utilities Expense 450 00
Miscellaneous Expense 275 00
Cash 3 650 00
Paid expenses.
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(g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.
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30 Supplies Expense 800 00
Supplies 800 00
Supplies used during
November.
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Debits Credits
Revenue accounts… Decrease (-) Increase (+)
Expense accounts… Increase (+) Decrease (-)
2-1Income Statement Accounts
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Credit for increases
(+)
Debit for decreases
(–)
Revenue AccountsIncome Statement Accounts
Credit for decreases
(–)
Debit for increases
(+)
Expense AccountsLess
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Continued
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Equals
Net Income (credit > debits) increases owners’ equity (capital)
Net Loss (debits > credits) decreases owners’ equity (capital)
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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
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(h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
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Cash 2 000 00
Chris Clark withdrew
cash for personal use.
Nov 30 Chris Clark, Drawing 2 000 002007
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Increase(Normal Bal.) Decreases
Balance sheet accounts:AssetDebit CreditLiability Credit DebitOwner’s Equity:
Capital Credit DebitDrawing Debit
CreditIncome statement accounts:
Revenue Credit DebitExpense DebitCredit
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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.
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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.
2-1Transaction Analysis
Continued
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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.
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The process of transferring the debits and credits from the journal entries to the
accounts is called posting.
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Dec. 1 NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period.
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Dec. 1 NetSolutions 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.
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1 Rent Expense 52 800 00
Cash 11 800 00
Paid rent for
December.
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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.
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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.
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Dec. 1 NetSolutions receives $360 for three month’s rent for use of its land beginning December 1.
1 Cash 11 360 00
Unearned Rent 23 360 00
Received advance
payment for three
months’ rent on land.
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Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.
4 Office Equipment 18 1 800 00
Accounts Payable 21 1 800 00
Purchased office
equipment on account.
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Dec. 6 NetSolutions paid $180 for a newspaper advertisement.
6 Miscellaneous Expense 59 180 00
Cash 11 180 00
Paid for newspaper ad.
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Dec. 11 NetSolutions paid creditors $400.
11 Accounts Payable 21 400 00
Cash 11 400 00
Paid creditors on
account.
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Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.
13 Wages Expense 51 950 00
Cash 11 950 00
Paid two weeks’ wages.
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Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.
16 Cash 11 3 100 00
Fees Earned 41 3 100 00
Received fees from
customers.
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Dec. 16 Fees earned on account totaled $1,750 for the first half of December.
16 Accounts Receivable 12 1 750 00
Fees Earned 41 1 750 00
Recorded fees earned
on account.
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Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.
20 Accounts Payable 21 900 00
Cash 11 900 00
Paid part of amount
owed to Executive
Supply Co.
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Dec. 21 NetSolutions received $650 from customers in payment of their accounts.
21 Cash 11 650 00
Accounts Receivable 12 650 00
Received fees from
customers on account.
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Dec. 23 NetSolutions paid $1,450 for supplies.
23 Supplies 14 1 450 00
Cash 11 1 450 00Purchased supplies.
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Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.
27 Wages Expense 51 1 200 00
Cash 11 1 200 00
Paid two weeks’ wages.
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Dec. 31 NetSolutions paid $310 for telephone charges for the month.
31 Utilities Expense 54 310 00
Cash 11 310 00
Paid telephone charges.
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Dec. 31 NetSolutions paid $225 for electric usage for the month.
Post. Ref.
JOURNAL
Date Description Debit Credit
Page 1
Dec 31 Utilities Expense 54 225 002007
Cash 11 225 00
Paid for electric usage.
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Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.
31 Cash 11 2 870 00
Fees Earned 41 2 870 00
Received fees from
customers.
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Dec. 31 NetSolutions earned $1,120 on account for the second half of December.
31 Accounts Receivable 12 1 120 00
Fees Earned 41 1 120 00
Recorded fees earned
on account.
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Dec. 31 Chris Clark withdrew $2,000 for personal use.
31 Chris Clark, Drawing 32 2 000 00
Cash 11 2 000 00
Chris Clark withdrew
cash for personal use.
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The equality of debits and credits in the ledger should be proved at the end of each accounting period by preparing a trial balance. The heading should first list the name of the company, the statement’s title, and the date it is prepared.
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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.
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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.
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Entry to Correct Error
May 31 Office Equipment 18 12 500 00
Supplies 14 12 500 00
To correct erroneous
debit to Supplies on
May 5. See invoice
from Bell Office
Equipment Company.
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