Chapter F2
Power Notes
Analyzing Transactions
Learning Objectives
1. Usefulness of an Account
2. Characteristics of an Account
3. Analyzing and Summarizing Transactions
4. Illustration of Analyzing and Summarizing
5. Trial Balance
6. Discovery and Correction of Errors
7. Financial Analysis and Interpretation
C2
C2 - 1
Chapter F2
Power Notes
Analyzing Transactions
Slide # Power Note Topics
3
11
36
40
43
50
57
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•
•
•
•
•
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Double-Entry Accounting
Analyzing and Recording Transactions
Chart of Accounts, Trial Balance
Journal, Ledger, and Trial Balance
Recording and Posting an Entry
Correcting Errors
Horizontal Analysis
Note: To select a topic, type the slide # and press Enter.
C2 - 2
Double-Entry Accounting
“ Double-entry accounting is based on a
simple concept: each party in a business
transaction will receive something and give
something in return. In bookkeeping terms,
what is received is a debit and what is given
is a credit. The T account is a representation
of a scale or balance.”
Scale or Balance
Luca Pacioli
Developer of
Double-Entry
Accounting
T account
Left Side
Receive
DEBIT
Receive
DEBIT
Right Side
Give
CREDIT
Give
CREDIT
C2 - 3
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
C2 - 4
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Assets
C2 - 5
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Assets
Expenses
C2 - 6
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Liabilities
Assets
Expenses
C2 - 7
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Liabilities
Assets
Owner’s Equity
Expenses
C2 - 8
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Liabilities
Assets
Expenses
Owner’s Equity
Revenues
C2 - 9
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”
DEBITS
received
=
CREDITS
given
Liabilities
Assets
Owner’s Equity
Net
Income
Expenses
Revenues
C2 - 10
NetSolutions
“ On November 1, 2002, I started a business
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
C2 - 11
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits
$25,000 in a bank
account for
NetSolutions in
exchange for capital
stock.
receive
Debit
NetSolutions
(investee)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/1
C2 - 12
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits
$25,000 in a bank
account for
NetSolutions in
exchange for capital
stock.
Cash
receive
Debit
NetSolutions
(investee)
give
give
Credit
Credit
General Journal
Date
Description
11/1
Cash
Debit
Credit
25,000
C2 - 13
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits
$25,000 in a bank
account for
NetSolutions in
exchange for capital
stock.
Capital
Stock
Cash
receive
Debit
NetSolutions
(investee)
give
give
Credit
Credit
General Journal
Date
Description
11/1
Cash
Capital Stock
Debit
Credit
25,000
25,000
C2 - 14
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys
land for $20,000.
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/5
C2 - 15
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys
land for $20,000.
Land
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
11/5
Land
Debit
Credit
20,000
C2 - 16
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys
land for $20,000.
Land
receive
Debit
Cash
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
11/5
Land
Cash
Debit
Credit
20,000
20,000
C2 - 17
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/10
C2 - 18
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
Supplies
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/10
Supplies
1,350
Credit
C2 - 19
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
Supplies
receive
Debit
A promise
to pay later
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/10
Supplies
1,350
Accounts Payable
Credit
1,350
C2 - 20
Business Transactions
Customer (buyer)
Entry D.
NetSolutions
earns fees of
$7,500, receiving
cash.
receive
Debit
NetSolutions
(seller)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/18
C2 - 21
Business Transactions
Customer (buyer)
Entry D.
NetSolutions
earns fees of
$7,500, receiving
cash.
Cash
receive
Debit
NetSolutions
(seller)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/18
Cash
7,500
Credit
C2 - 22
Business Transactions
Customer (buyer)
Entry D.
NetSolutions
earns fees of
$7,500, receiving
cash.
Cash
receive
Debit
Services
NetSolutions
(seller)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/18
Cash
Fees Earned
7,500
Credit
7,500
C2 - 23
Business Transactions
Various suppliers
Entry E.
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
C2 - 24
Business Transactions
Various suppliers
Entry E.
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
Services,
benefits
receive
Debit
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/18
Wages Expense
Rent Expense
Utilities Expense
Misc. Expense
2,125
800
450
275
Credit
C2 - 25
Business Transactions
Various suppliers
Entry E.
NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
Services,
benefits
receive
Debit
Cash
NetSolutions
(buyer)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/18
Wages Expense
Rent Expense
Utilities Expense
Misc. Expense
Cash
2,125
800
450
275
Credit
3,650
C2 - 26
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays
$950 to creditors
on account.
receive
Debit
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/30
C2 - 27
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays
$950 to creditors
on account.
Reduction in
obligation
receive
Debit
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
11/30
Accounts Payable
Debit
Credit
950
C2 - 28
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays
$950 to creditors
on account.
Reduction in
obligation
receive
Debit
Cash
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
11/30
Accounts Payable
Cash
Debit
Credit
950
950
C2 - 29
Business Transactions
Entry G.
Internal Transaction
(no external entity)
At the end of the
month, the cost of
supplies on hand
is $550.
receive
Debit
NetSolutions
(user)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/30
C2 - 30
Business Transactions
Entry G.
At the end of the
month, the cost of
supplies on hand
is $550.
Internal Transaction
(no external entity)
Use of
supplies
receive
Debit
NetSolutions
(user)
give
give
Credit
Credit
General Journal
Date
Description
11/30
Supplies Expense
Debit
Credit
800
Balance of Supplies account $1,350 less $550 on hand = $800 used
C2 - 31
Business Transactions
Entry G.
At the end of the
month, the cost of
supplies on hand
is $550.
Internal Transaction
(no external entity)
Use of
supplies
receive
Debit
Supplies
NetSolutions
(user)
give
give
Credit
Credit
General Journal
Date
Description
11/30
Supplies Expense
Supplies
Debit
Credit
800
800
Balance of Supplies account $1,350 less $550 on hand = $800 used
C2 - 32
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid
dividends of
$2,000.
receive
Debit
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
Debit
Credit
11/30
C2 - 33
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid
dividends of
$2,000.
Reduction in
equity
receive
Debit
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/30
Dividends
2,000
Credit
C2 - 34
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid
dividends of
$2,000.
Reduction in
obligation
receive
Debit
Cash
NetSolutions
(payor)
give
give
Credit
Credit
General Journal
Date
Description
Debit
11/30
Dividends
Cash
2,000
Credit
2,000
C2 - 35
NetSolutions
Chart of Accounts
1.
11
12
14
15
17
18
Balance Sheet
Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
2.
21
23
Liabilities
Accounts Payable
Unearned Rent
3.
31
32
33
Owner’s Equity
Capital Stock
Retained Earnings
Dividends
Income Statement
4.
Revenue
41
Fees Earned
5.
51
52
54
55
59
Expenses
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous
Expense
C2 - 36
NetSolutions
Trial Balance
November 30, 2002
11
14
17
21
31
33
41
51
52
54
55
59
Cash
Supplies
Land
Accounts Payable
Capital Stock
Dividends
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
C2 - 37
NetSolutions
Trial Balance
November 30, 2002
Balance
Sheet
11
14
17
21
31
33
41
51
52
54
55
59
Cash
Supplies
Land
Accounts Payable
Capital Stock
Dividends
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
C2 - 38
NetSolutions
Trial Balance
November 30, 2002
Income
Statement
11
14
17
21
31
33
41
51
52
54
55
59
Cash
Supplies
Land
Accounts Payable
Capital Stock
Dividends
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900
32,900
C2 - 39
Journal, Ledger, Trial Balance
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
C2 - 40
Journal, Ledger, Trial Balance
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal
Ledger
C2 - 41
Journal, Ledger, Trial Balance
1. Transactions are analyzed
and recorded in journal.
Documents
Journal
2. Transactions are posted
from journal to ledger.
Journal
Ledger
3. Trial balance is prepared.
Trial Balance
C2 - 42
Recording and Posting an Entry
General Journal
Date
Description
12/1
Prepaid Insurance
Cash
Page 1
Post.
Ref.
Debit
Credit
2,400
2,400
1. Analyze and record the transaction as shown.
2. Post the debit side of the transaction.
3. Post the credit side of the transaction.
C2 - 43
Recording and Posting an Entry
General Journal
1
Date
Description
12/1
Prepaid Insurance
Cash
Page 1
Post.
Ref.
Debit
Credit
2,400
2,400
General Ledger
Account: Prepaid Insurance
Post.
Date
Item
Ref.
Debit
Account No. 15
Balance
Credit
Debit Credit
12/1
1 Enter the transaction date in the ledger account.
C2 - 44
Recording and Posting an Entry
General Journal
Page 1
Post.
Ref.
Date
Description
12/1
Prepaid Insurance
Cash
Credit
2,400
2,400
2
General Ledger
Account: Prepaid Insurance
Post.
Date
Item
Ref.
Debit
12/1
Debit
1
Account No. 15
Balance
Credit
Debit Credit
2,400
2 Enter the debit amount in the ledger debit column.
C2 - 45
Recording and Posting an Entry
General Journal
Page 1
Post.
Ref.
Date
Description
12/1
Prepaid Insurance
Cash
Debit
Credit
2,400
2,400
General Ledger
Account: Prepaid Insurance
Post.
Date
Item
Ref.
Debit
12/1
1
Account No. 15
Balance
Credit
Debit Credit
2,400
2,400
3
3 Update the ledger account balance.
C2 - 46
Recording and Posting an Entry
General Journal
Page 1
Post.
Ref.
Date
Description
12/1
Prepaid Insurance
Cash
Credit
2,400
2,400
4
General Ledger
Account: Prepaid Insurance
Post.
Date
Item
Ref.
Debit
12/1
Debit
Account No. 15
Balance
Credit
Debit Credit
1
4 Enter the journal page in the ledger account.
C2 - 47
Recording and Posting an Entry
General Journal
Page 1
Date
Description
12/1
Prepaid Insurance
Cash
Debit
15
2,400
Credit
2,400
5
General Ledger
Account: Prepaid Insurance
Post.
Date
Item
Ref.
Debit
12/1
Post.
Ref.
1
2,400
Account No. 15
Balance
Credit
Debit Credit
2,400
5 Enter the ledger account number in the journal.
C2 - 48
Recording and Posting an Entry
General Journal
1
Page 1
Post.
Ref.
Date
Description
12/1
Prepaid Insurance
Cash
15
11
Account: Cash
Date
Item
11/30
12/1
Balance
Credit
2,400
2,400
5
4
General Ledger
Debit
2
Account No. 11
Post.
Ref.
1
Debit
Credit
2,400
Balance
Debit Credit
5,900
3,500
3
All five parts of the credit posting are shown.
C2 - 49
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
Ledger Posting
Correction Procedure
not posted
correct Journal
C2 - 50
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
2. correct
Ledger Posting
Correction Procedure
not posted
correct Journal
incorrectly posted
correct Ledger
C2 - 51
Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
2. correct
3. incorrect
Ledger Posting
Correction Procedure
not posted
correct Journal
incorrectly posted
correct Ledger
already posted
record and post
a correcting entry
Error 3 requires a correcting journal entry.
C2 - 52
Correcting Errors – An Example
On May 5 a purchase of office equipment on account
was incorrectly journalized and posted as shown.
General Journal – As recorded and posted
Date
Description
5/5
Supplies
Accounts Payable
Debit
Credit
12,500
12,500
What part of this entry is incorrect?
What correcting entry would you make?
C2 - 53
Correcting Errors – An Example
On May 5 a purchase of office equipment on account
was incorrectly journalized and posted as shown.
General Journal – As recorded and posted
Date
Description
5/5
Supplies
Debit
Credit
12,500
Accounts Payable
12,500
General Journal – A correcting entry
Date
Description
Debit
Credit
5/5
C2 - 54
Correcting Errors – An Example
On May 5 a purchase of office equipment on account
was incorrectly journalized and posted as shown.
General Journal – As recorded and posted
Date
Description
5/5
Supplies
Debit
Credit
12,500
Accounts Payable
12,500
General Journal – A correcting entry
Date
Description
5/5
Office Equipment
Debit
Credit
12,500
C2 - 55
Correcting Errors – An Example
On May 5 a purchase of office equipment on account
was incorrectly journalized and posted as shown.
General Journal – As recorded and posted
Date
Description
5/5
Supplies
Debit
Credit
12,500
Accounts Payable
12,500
General Journal – A correcting entry
Date
Description
5/5
Office Equipment
Supplies
Debit
Credit
12,500
12,500
C2 - 56
Financial Analysis and Interpretation
Objective: Use horizontal analysis to compare financial
statements from different periods.
Comparative Balance Sheet
December 31, 2003 and 2002
Assets
Current assets
Long-term investments
Plant assets (net)
Intangible assets
(Decrease)
2003
2002
$ 550,000
$ 533,000
95,000
177,500
444,500
470,000
50,000
50,000
$1,139,500 $1,230,500
Increase
Amount
Percent
C2 - 57
Financial Analysis and Interpretation
Objective: Use horizontal analysis to compare financial
statements from different periods.
Comparative Balance Sheet
December 31, 2003 and 2002
Assets
Current assets
Long-term investments
Plant assets (net)
Intangible assets
Increase
(Decrease)
2003
2002
Amount
$ 550,000
$ 533,000
$ 17,000 Percent
3.2%
95,000
177,500
(82,500) (46.5%)
Horizontal Analysis:
444,500
470,000
(25,500) (5.4%)
50,000
50,000$550,000 —
Current
year (2003)
= 103.2%
$1,139,500
$1,230,500$533,000
$ (91,000)
(7.4%)
Base year (1999)
Increase amount
Base year (2002)
$17,000
= 3.2%
$533,000
C2 - 58
Financial Analysis and Interpretation
Objective: Use horizontal analysis to compare financial
statements from different periods.
Comparative Income Statement
December 31, 2003 and 2002
(Decrease)
2003
2002
Amount
Sales
$1,530,500
$1,234,000
Sales returns
Net sales
Cost of goods sold
Gross profit
Increase
Percent
32,500
34,000
$1,498,000 $1,200,000
1,043,000
820,000
$ 455,000 $ 380,000
C2 - 59
Financial Analysis and Interpretation
Objective: Use horizontal analysis to compare financial
statements from different periods.
Comparative Income Statement
Increase
December 31, 2003 and 2002
(Decrease)
2003
2002
Amount
Sales
$1,530,500
$1,234,000
$296,500Percent
24.0%
Sales returns
32,500
34,000
(1,500) (4.4%)
Net sales
$1,498,000 $1,200,000 $298,000) 24.8%
Cost of goods sold
1,043,000
820,000
223,000 27.2%
Horizontal Analysis:
Gross profit
$ 455,000 $ 380,000
$ 75,000 19.7%
Current year (2003) $1,498,000
= 124.8%
Base year (2002)
$1,200,000
Increase amount
Base year (2002)
$298,000
= 24.8%
$1,200,000
C2 - 60
Chapter F2
Power Notes
Analyzing Transactions
This is the last slide in Chapter F2.
Note: To see the topic slide, type 2 and press Enter.
C2 - 61