NETA POWERPOINT PRESENTATIONS TO
ACCOMPANY
VOLUME 1
Accounting
Second Canadian Edition
BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER
Adapted by Sheila Elworthy
and Tana Kristjanson
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CHAPTER 2
Analyzing Transactions
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Analyzing Transactions
After studying this chapter, you should be able to:
1. Describe the characteristics of an
account and a chart of accounts.
2. Describe and illustrate journalizing
transactions using the doubleentry accounting system.
3. Describe and illustrate the posting
of transactions to accounts.
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Analyzing Transactions
After studying this chapter, you should be able to:
4. Prepare an unadjusted trial
balance and explain how it can be
used to discover errors.
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1
Describe the characteristics of
an account and a chart of
accounts.
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The T Account
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Ledger
A group of accounts for a business
entity is called a ledger.
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Chart of Accounts
A list of the accounts in a ledger is
called a chart of accounts.
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Chart of Accounts
The numbering system used in the chart of
accounts often indicates the major
account group of the ledger in which a
particular account is located. For example:
1000’s – Assets
2000’s – Liabilities
3000’s – Owner’s Equity
4000’s – Revenues
5000’s – Expenses
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Assets
Assets are resources owned by the
business entity.
• Cash
• Supplies
• Accounts receivable
• Prepaid expenses
• Buildings
• Intangible assets
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Liabilities
Liabilities are debts owed to
outsiders (creditors).
• Accounts payable
• Notes payable
• Wages payable
• Unearned revenue
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Owner’s accounts
Owner’s equity is the owner’s right
to the assets of the business. A
withdrawal account represents the
amount of withdrawals by the owner.
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Revenues
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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Expenses
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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2
Describe and illustrate
journalizing transactions using
the double-entry accounting
system.
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Double-Entry Accounting System
This system is based on the
accounting equation and requires
that every business transaction be
recorded in at least two accounts.
It has specific rules of debit and
credit for recording transactions in
the accounts.
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The double-entry accounting system is
based on the accounting equation and
specific rules for recording debits and
credits. The debit and credit rules for
balance sheet accounts are as follows:
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EXAMPLE EXERCISE 2-1
Rules of Debit and Credit and Normal Balances
Balances
Balances
State for each account on the next slide
whether it is likely to have (a) debit entries
only, (b) credit entries only, or (c) both debit
and credit entries. Also, indicate whether its
normal balance is a debit or a credit.
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EXAMPLE EXERCISE 2-1
Rules of Debit and Credit and Normal Balances
1.
2.
3.
4.
5.
6.
Amber Saunders, Withdrawals
Accounts Payable
Cash
Fees Earned
Supplies
Utilities Expense
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FOLLOW MY EXAMPLE 2-1
Rules of Debit and Credit and Normal Balances
1. Amber Saunders, Withdrawals
a. Debit entries only; normal debit balance
2. Accounts Payable
c. Debit and credit entries; normal debit balance
3. Cash
c. Debit and credit entries; normal debit balance
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FOLLOW MY EXAMPLE 2-1
Rules of Debit and Credit and Normal Balances
4. Fees Earned
b. Credit entries only; normal credit balance
5. Supplies
c. Debit and credit entries; normal debit balance
6. Utilities Expense
a. Debit entries only; normal debit balance
For Practice: PE 2-1
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Income Statement Accounts
Revenue Accounts
Debit for Credit for
decreases increases
(–)
(+)
Expense Accounts
Debit for Credit for
increases decreases
(–)
(+)
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Owner’s Withdrawals
Withdrawal Account
Debit for Credit for
decreases increases
(+)
(–)
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Owner’s Withdrawals
Increase
(Normal Bal.) Decreases
Balance sheet accounts:
Asset
Debit
Liability
Credit
Owner’s Equity:
Capital
Credit
Withdrawal
Debit
Income statement accounts:
Revenue
Credit
Expense
Debit
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Credit
Debit
Debit
Credit
Debit
Credit
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Journalizing
A transaction is initially entered in a
record called a journal.
The process of recording a
transaction in the journal is called
journalizing.
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Journalizing
Journalizing requires the following
steps:
1. The date of the transaction is
entered in the Date column.
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Journalizing
2. The title of the account to be
debited is recorded at the lefthand margin under the
Description column, and the
amount to be debited is entered
in the Debit column.
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Journalizing
3. The title of the account to be
credited is listed below and to the
right of the debited account title,
and the amount to be credited is
entered in the Credit column.
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Journalizing
4. A brief description may be
entered below the credited
account.
5. The Post. Ref. (Posting Reference)
column is left blank when the
journal entry is initially recorded.
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Transaction A
On November 1, Chris Clark opens a
new business and deposits $25,000
in a bank account in the name of
NetSolutions.
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Transaction B
On November 5, NetSolutions bought
land for $20,000, paying cash.
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Transaction C
On November 10, NetSolutions
bought supplies on account for
$1,350.
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EXAMPLE EXERCISE 2-2
Journal Entry for Asset Purchase
Prepare a journal entry for the purchase of a
truck on June 3 for $42,500, paying $8,500
cash and the remainder on account.
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FOLLOW MY EXAMPLE 2-2
Journal Entry for Asset Purchase
June 3
Truck.............................. 42,500
Cash...........................
Accounts Payable.......
8,500
34,000
For Practice: PE 2-2
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Transaction D
On November 18, NetSolutions
received fees of $7,500 from
customers for services rendered.
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EXAMPLE EXERCISE 2-3
Journal Entry for Fees Earned
Prepare a journal entry on August 7 for fees
earned on account, $115,000.
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FOLLOW MY EXAMPLE 2-3
Journal Entry for Fees Earned
Aug. 7
Accounts Receivable........ 115,000
Fees Earned.................
115,000
For Practice: PE 2-3
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Transaction E
Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275.
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Transaction F
On November 30, NetSolutions paid
creditors $950 of the accounts
payable.
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Transaction G
On November 30, Chris Clark
withdrew $2,000 from NetSolutions
for personal use.
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EXAMPLE EXERCISE 2-4
Journal Entry for Owner’s Withdrawal
Prepare a journal entry on December 29 for
the payment of $3,000 to the owner of
Smartstaff Consulting Services, Jessie Algeo,
for personal use.
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FOLLOW MY EXAMPLE 2-4
Journal Entry for Owner’s Withdrawal
Dec. 29 Jessie Algeo, Withdrawals...... 3,000
Cash..................................
3,000
For Practice: PE 2-4
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3
Describe and illustrate the
posting of transactions to
accounts.
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Posting Journal Entries to Accounts
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 an insurance
policy. The policy covers a
one-year period
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Posting the previous entry requires
the following steps:
1. The date (Dec. 1) of the journal
entry is entered in the Date
column on the Prepaid Insurance
line.
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2. The amount ($2,400) is entered into
the Debit column of Prepaid Insurance.
3. The journal page number (2) is entered
in the Posting Reference (Post. Ref.)
column of Prepaid Insurance.
4. The account number (1050) is entered
in the Posting Reference (Post. Ref.)
column in the journal.
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To accounts payable
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4
Prepare an unadjusted trial
balance and explain how it
can be used to discover errors.
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Trial Balance
The equality of debits and credits in
the ledger should be verified at the
end of each accounting period by
preparing a trial balance.
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The steps in preparing a trial balance
are as follows:
1. List the name of the company, the
title of the trial balance, and the
date the trial balance is prepared.
2. List the accounts from the ledger
and enter their debit or credit
balance in the Debit or Credit
column of the trial balance.
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3. Total the Debit and Credit
columns of the trial balance.
4. Verify that the total of the Debit
column equals the total of the
Credit column.
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Errors Affecting the Trial Balance
If the debit and credit balances of the
trial balance do not balance, there
are a number of possible reasons.
1. If the difference is divisible by 10,
it could be an addition error.
2. If the difference is divisible by 2, a
debit and credit may be switched.
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Errors Affecting the Trial Balance
3. If the difference is divisible by 9, it
could be a transposition or slide.
4. If the difference is not divisible by
2 or 9, an account could be
missing.
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Errors
A transposition occurs when the
order of the digits is changed
mistakenly, such as writing $542 as
$452 or $524.
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Errors
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 or $97.50
as $975.00.
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Errors Affecting the Trial Balance
If an accounting error is not
discovered with the preceding steps,
the accounting process must be
retraced, beginning with the last
entry.
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EXAMPLE EXERCISE 2-5
Trial Balance Errors
For each of the following errors on the next
slide, considered individually, indicate
whether the error would cause the trial
balance totals to be unequal. If the error
would cause the trial balance totals to be
unequal, indicate whether the debit or credit
total is higher and by how much.
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EXAMPLE EXERCISE 2-5
Trial Balance Errors
a. Payment of a cash withdrawal of $6,700 was
journalized and posted as a debit of $7,600 to
Salary Expense and a credit of $7,600 to Cash.
b. A fee of $3,280 earned from a client was debited
to Accounts Receivable for $3,820 and credited
to Fees Earned for $3,280.
c. A payment of $6,200 to a creditor was posted as
a debit of $6,200 to Accounts Payable and a
debit of $6,200 to Cash.
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FOLLOW MY EXAMPLE 2-5
Trial Balance Errors
a. The totals are equal since both the debit and
credit entries were journalized and posted for
$7,600.
b. The totals are unequal. The debit total is higher
by $540 ($3,820 − $3,280).
c. The totals are unequal. The debit total is higher
by $12,400 ($6,200 + $6,200).
For Practice: PE 2-5
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Errors Not Affecting the Trial Balance
An error may occur that does not
cause the trial balance totals to be
unequal.
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Errors Not Affecting the Trial Balance
To illustrate, 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. This
posting of the incorrect entry is
shown in the following T accounts.
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Errors Not Affecting the Trial Balance
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Errors Not Affecting the Trial Balance
Before making a correcting journal
entry, it is best to determine the
debit(s) and credit(s) that should
have been recorded. These are
shown in the following T accounts.
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Errors Not Affecting the Trial Balance
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Correcting Journal
Entries
If an error has already been
journalized and posted to the ledger,
correcting journal entries are
normally prepared.
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Correcting Entries
Once you have identified the
incorrect entry and correct entry,
apply a two-step process, using a
journal entry to remove the entry
that is wrong and then a correcting
journal entry.
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Correcting Entries
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EXAMPLE EXERCISE 2-6
Correcting Entries
The following errors took place in journalizing
transactions:
a. A withdrawal of $6,000 by Cheri Ramey, owner
of the business, was recorded as a debit to
Office Salaries Expense and a credit to Cash.
b. Utilities Expense of $4,500 paid for the current
month was recorded as a debit to Miscellaneous
Expense and a credit to Accounts Payable.
Journalize the entries to correct the errors.
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FOLLOW MY EXAMPLE 2-6
Correcting Entries
For Practice: PE 2-6
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The End
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