Analyzing Transactions
ACG 2021
Chapter 2
Steps in the Accounting Process
Analyze
Transactions
from source
documents
Record relevant
transactions in
journal
Post
journal
info to
general
ledger
Prepare trial
balance
Usefulness of an Account
• Account – shows increases and decreases in
financial transactions
• Ledger – a group of accounts
• Chart of Accounts
– List of accounts
Chart of Account Example
• 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
Definition of Accounts
Account
Definition
Cash
Funds in the bank
Accounts receivable
Amounts due from customers for services
rendered
Prepaid expenses
Represents a prepayment of a future expense
Accounts payable
Amounts due to our suppliers. Usually with
payment due in 30 days
Retained earnings
Earnings from prior periods which have been
kept in the business
Dividends
Distribution of income to shareholders
Common Stock
Shareholders investment in the business
Fees earned
Revenues earned from the operation of the
business
Characteristics of an Account
• Each account has a title which is the name
of the item recorded in the account
• Each account has a space for recording
increases in the amount of the item
• Each account has a space for recording the
decreases in the amount of the item
T- Account
Debit
DR
Credit
CR
Journal
• The first book in which a transactions is
recorded.
• Chronological order
• Debit before credit
• Indent credit information
• Each entry  debit = credit
Memorize
Account
Assets
Debit
Increase
Liabilities
Debit
Credit
Credit
Decrease Decrease Increase
Equity and revenues act like liabilities
Expenses act like assets
Mar 1: American Co received cash for
company’s capital stock $20,000
Date
Account
Mar 1
Cash
Capital stock
P
R
Debit
Credit
$20,000
$20,000
Mar 5: Paid rent of $500
Date
Account
Mar 5 Rent expense
Cash
P
R
Debit
Credit
500
500
Mar 10: Purchased supplies for cash $1,000
Date
Mar
10
Account
Supplies
Cash
P
R
Debit
Credit
1,000
1,000
Mar 12: Received cash from customers for services
rendered $2,500
Date Account
Mar Cash
12
Fees earned
P
R
Debit
Credit
2500
2500
Mar 15: Purchased equip on account $5,000
Date Account
Mar Equipment
15
Accts payable
P
R
Debit
Credit
5000
5000
Mar 20: Billed customers for services rendered
$3,000
Date
Account
Mar
20
Accounts receivable
Fees earned
P
R
Debit
Credit
3000
3000
Mar 25: Paid amount due on account $400
Date Account
Mar Accounts payable
25
Cash
P
R
Debit
Credit
400
400
Mar 26: Paid dividends $1,000
Date Account
Mar Dividends
26
Cash
P
R
Debit
Credit
1,000
1,000
Mar 31: Received cash from customers billed $900
Date Account
PR
Mar Cash
31
Accts receivable
Debit
900
Credit
900
American Company
Trial Balance
March 31, 2007
Cash
Accts rec
Supplies
Equip
Accts pay
Capital stock
Dividends
Fees earned
Rent expense
Total
$20,500
2,100
1,000
5,000
$ 4,600
20,000
1,000
5,500
500
30,100
30,100
Balance Sheet Accounts
DEBIT
CREDIT
Asset accounts……. Increase (+) Decrease (-)
Liability accounts.… Decrease (-) Increase (+)
Stockholders’ equity
accounts…
Decrease (-) Increase (+)
2-1
Balance Sheet Accounts
Asset Accounts
Debit for
increases
(+)
Credit for
decreases
(–)
Liability Accounts
Debit for
decreases
(–)
Credit for
increases
(+)
Stockholders’ Equity
Accounts
Debit for
decreases
(–)
Credit for
increases
(+)
32
2-1
Income Statement Accounts
Debits
Revenue accounts… Decrease (-)
Expense accounts… Increase (+)
Credits
Increase (+)
Decrease (-)
40
2-1
Income Statement Accounts
Revenue Accounts
Debit for
Credit for
decreases
increases
(–)
(+)
Less
Expense Accounts
Debit for
increases
(+)
Credit for
decreases
(–)
(Continued)
41
2-1
Equals
Net income (credit > debits) increases
stockholders’ equity (retained earnings)
Net loss (debits > credits) decreases
stockholders’ equity (retained earnings)
42