Analyzing and
Recording
Transactions
CHAPTER 2
The
Beginning
1
Learning Objectives
1. Explain the accounting cycle. (LO1)
2. Describe an account, its use, and its
relationship to the ledger. (LO2)
3. Define debits and credits and explain
their role in double-entry accounting.
(LO3)
4. Describe a chart of accounts and its
relationship to the ledger. (LO4)
3-2
Learning Objectives
5. Analyze the impact of transactions on
accounts. (LO5)
6. Record transactions in a journal and post
entries to a ledger. (LO6)
7. Prepare and explain the use of a trial
balance. (LO7)
3-3
The Account
A detailed record of
increases and decreases in a specific
asset, liability, or equity item.
Assets
=
Liabilities
+
Equity
Examples:
Cash
Accounts Payable
V.Climb, Capital
Accounts Receivable
Notes Payable
V.Climb, Withdrawals
Supplies
Wages Owing
Service Revenue
Furniture
LO 2
Salaries Expense
3-4
Double-Entry Accounting
•
•
•
Transactions are recorded using debits
and credits.
Every transaction affects at least two
accounts.
Equal debits and credits will keep the
accounting equation in balance.
Debits = Credits
LO 3
Always !
3-5
The T Account
•
•
•
Represents an account in the ledger.
Used as a learning tool.
The difference between the debit side
and credit side is the balance.
Account Title
LO 2
(Left side)/Debit
(Right side)/Credit
Debit balance
Credit balance
3-6
Calculating the Account Balance
Example:
Cash
Cash sale
500
Ow ner's investment 1000
Total debits
Balance
1
3
1500
725
325 Paid salary
450 Paid rent
775 Total credits
2
Steps:
1. Add the amounts on the debit side.
2. Add the amounts on the credit side.
LO 2
3. Calculate the difference between the
debits and credits.
3-7
Focussed Workout
QS 2-2
3-8
8
Double-Entry Accounting
Assets
=
Assets
Debit for
increases
+
LO 3
Credit for
decreases
-
Liabilities
Liabilities
Debit for
decreases
-
Credit for
increases
+
+
Equity
Equity
Debit for Credit for
decreases increases
-
+
3-9
Double-Entry Accounting
Equity Accounts
Capital
Debit for
decreases
LO 3
Credit for
increases
+
Withdrawals
Debit for
increases
+
Revenues
Expenses
Credit for Debit for Credit for Debit for Credit for
decreases decreases increases increases decreases
-
-
+
+
3-10
Normal Balances
An account’s normal balance is
the side (debit or credit) where
increases are recorded.
Assets
Assets
Debit for
increase
Normal
balance
LO 3
Credit for
decrease
=
Liabilities
Liabilities
Debit for
decrease
Credit for
increase
Normal
balance
+
Equity
Owner's Capital
Debit for
decrease
Credit for
increase
Normal
Balance
3-12
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Step 1
Write down the account types
using ALCREW.
Liabilities
Capital
Revenue
Expenses
Withdrawals
LO 3
3-13
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Liabilities
Normal
Balance
Step 2
Write down the normal
balance (debit) of A,E,W.
Capital
Revenue
Expenses
Withdrawals
LO 3
3-14
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
Balance
Step 2
Dr
Write down the normal
balance (debit) of A,E,W.
Liabilities
Capital
Revenue
Expenses
Dr
Withdrawals
Dr
LO 3
3-15
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
Balance
Step 2
Dr
Liabilities
Cr
Capital
Cr
Revenue
Cr
Expenses
Dr
Withdrawals
Dr
LO 3
Write down the normal
balance (debit) of A,E,W.
The others are credits.
3-16
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
To ↑
To ↓
Balance Balance Balance
Dr
Dr
Liabilities
Cr
Cr
Capital
Cr
Cr
Revenue
Cr
Cr
Expenses
Withdrawals
LO 3
Dr
Dr
Step 3
Remember, increases are the
same as the normal balances,
decreases are the opposite.
3-17
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
To ↑
To ↓
Balance Balance Balance
Dr
Dr
Cr
Liabilities
Cr
Cr
Dr
Capital
Cr
Cr
Dr
Revenue
Cr
Cr
Dr
Expenses
Withdrawals
LO 3
Dr
Dr
Step 3
Remember, increases are the
same as the normal balances,
decreases are the opposite.
3-18
Remembering Debits and Credits
ALCREW
Account
Type
Assets
LO 3
Normal
To ↑
To ↓
Balance Balance Balance
Dr
Dr
Cr
Liabilities
Cr
Cr
Dr
Capital
Cr
Cr
Dr
Revenue
Cr
Cr
Dr
Expenses
Dr
Dr
Cr
Withdrawals
Dr
Dr
Cr
3-19
Mini-Quiz
Indicate whether a debit or credit is
needed to:
•
•
•
•
•
LO 3
Increase Rent Expense
Decrease Accounts Payable
Decrease Accounts Receivable
Decrease Cash
Increase Withdrawals
Debit
Debit
Credit
Credit
Debit
3-20
Focussed Workout
QS 2-1, 2-3,
and 2-4
3-21
21
Chart of Accounts
•
•
•
A list of all accounts used in the
ledger by a company.
Unique for each company.
Accounts are usually numbered.
LO 4
3-22
23
Analyzing Transactions
Steps:



LO 5
Determine which accounts are
being affected.
Determine if account balances
are increasing or decreasing.
Apply rules of debits and
credits.
3-24
Analyzing Transactions
Example #1:
The owner, V. Klimb, invests $10,000 in the
business.
1
LO 5
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
3-25
Analyzing Transactions
Example #1:
The owner, V. Klimb, invests $10,000 in the
business.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Cash
V.Klimb,
capital
LO 5
3-26
Analyzing Transactions
Example #1:
The owner, V. Klimb, invests $10,000 in the
business.
1
Accounts
affected
2
Increase/
Decrease
Cash
Increase
V.Klimb,
capital
Increase
LO 5
3
Debit/
Credit
3-27
Analyzing Transactions
Example #1:
The owner, V. Klimb, invests $10,000 in the
business.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Cash
Increase
Debit
V.Klimb,
capital
Increase
Credit
LO 5
3-28
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.


Debit Cash for $10,000
Credit V.Klimb, Capital for $10,000
Cash
10,000
LO 5
V.Klimb, Capital
10,000
3-29
A credit entry:
A) Increases asset and expense accounts, or
decreases liability, equity, and revenue
accounts.
B) Is recorded on the left side of a T-account.
C) Decreases asset and expense accounts, or
increases liability, equity, and revenue
accounts.
D) Decreases asset, expense and revenue
accounts.
E) Increases the withdrawals account.
30
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
LO 5
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
3-31
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Supplies
Cash
LO 5
3-32
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Cash
Decrease
LO 5
3
Debit/
Credit
3-33
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
Supplies
Increase
Debit/
Credit
Debit
Cash
Decrease
Credit
1
LO 5
Accounts
affected
2
Increase/
Decrease
3
3-34
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.


Debit supplies for $2,500
Credit cash for $2,500
Supplies
2,500
LO 5
Cash
2,500
3-35
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
LO 5
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
3-36
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Supplies
Accounts
Payable
LO 5
3-37
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Accounts
Payable
Increase
LO 5
3
Debit/
Credit
3-38
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Supplies
Increase
Debit
Accounts
Payable
Increase
Credit
LO 5
3-39
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.


Debit supplies for $1,100
Credit accounts payable for $1,100
Supplies
1,100
LO 5
Accounts Payable
1,100
3-40
Focussed Workout
QS 2-7, 2-8
EX 2-1, 2-2
41
Total Workout
PR 2-1A
42