Chapter 2: Analyzing Transactions
Usefulness of an Account



Account – shows the increases and decreases of a financial statement item
Ledger – a group of accounts for a business entity
Chart of accounts – list of the accounts in the ledger
o Listed in order of assets, liabilities, stockholder’s equity, revenue
and expenses
o Can change at any time
American Company
Chart of Accounts
Assets
Cash
Accounts receivable
Prepaid insurance
Supplies
Equipment
Liabilities
Accounts payable
Notes payable
Stockholder’s equity
Capital stock
Retained earnings
Dividends
Revenue
Fees Earned
Expenses
Rent expense
Salaries expense
Characteristics of an Account
1. Each account has a title which is the name of the item recorded
in the account
2. Each account has a space for recording increases in the amount
of the item
3. Each account has a space for recording decreases in the
amount of the item
Prepared by: Maria Mari
Fall, 2007
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Chapter 2: Analyzing Transactions
T Account
Debit
DR
Credit
CR
Balance of the account:
The side with the larger amount
DEBIT: Assets, Dividends, Expenses
CREDIT: Liabilities, Stockholder’s Equity, Revenue
Journal: the first book in which a transaction is recorded.
Information recorded in the chronological order
Journalizing – the process of recording transactions
Journal entry – for of recording a transactions
Memorize
Double entry accounting – debits always equal credits
Account
Asset
Liabilities
Stockholder’s equity:
Capital stock
Retained earnings
Dividends
Revenues
Expenses
Increase
Debit
Credit
Decrease
Credit
Debit
Credit
Credit
Debit
Credit
Debit
Debit
Debit
Credit
Debit
Credit
How to record journal entries:
Rules:
1. Chronological order
2. Debit before credit
3. Indent credit information
4. Each entry - Debit = Credit
Prepared by: Maria Mari
Fall, 2007
Page 2 of 4
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Chapter 2: Analyzing Transactions
Mar 1: American Company received cash for the company’s capital stock
$20,000.
Date
Account
PR
Debit
Credit
Mar 1 Cash
Capital stock
$20,000
$20,000
Mar 5: Paid rent of $500.
Date
Account
PR
Mar 5 Rent expense
Cash
Credit
$500
$500
Mar 10: Purchased supplies for cash $1,000.
Date
Account
PR
Mar 10
Debit
Supplies
Cash
Debit
Credit
$1,000
$1,000
Mar 12: Received cash from customers for services rendered $2,500.
Date
Account
PR
Debit
Credit
Mar 12
Cash
Fees earned
$2,500
$2,500
Mar 15: Purchased equipment on account $5,000.
Date
Account
PR
Debit
Mar 15
Equipment
Accounts payable
$5,000
$5,000
Mar 20: Billed customers for services rendered $3,000.
Date
Account
PR
Debit
Mar 20
Accounts receivable
Fees earned
Prepared by: Maria Mari
Fall, 2007
Page 3 of 4
Credit
Credit
$3,000
$3,000
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Chapter 2: Analyzing Transactions
Mar 25: Paid amount due on account $400.
Date
Account
PR
Mar 25
Accounts payable
Cash
Credit
$400
$400
Mar 26: Paid dividends $1,000.
Date
Account
Mar 26
Debit
PR
Dividends
Cash
Debit
Credit
$1,000
$1,000
Mar 31: Received cash from customers billed $900
Date
Account
PR
Debit
Mar 31
Cash
Accounts receivable
Credit
$900
$900
Once you finished the journal, the transactions are then posted to the
LEDGER.
After the ledger is completed, a TRIAL BALANCE is prepared.
A trial balance proves the accuracy of the posting
American Company
Trial Balance
March 31, 2000
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Capital stock
Dividends
Fees earned
Rent expense
TOTALS
Prepared by: Maria Mari
Fall, 2007
Page 4 of 4
$20,500
2,100
1,000
5,000
$ 4,600
20,000
1,000
5,500
500
30,100
4
30,100