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Analyzing and
Recording
Transactions
CHAPTER 3
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
1.
2.
3.
4.
Explain the accounting cycle.
Describe an account, its use, and its
relationship to the ledger.
Define debits and credits and explain
their role in double-entry accounting.
Describe a chart of accounts and its
relationship to the ledger.
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
5.
6.
7.
Analyze the impact of transactions on
accounts.
Record transactions in a journal and post
entries to a ledger.
Prepare and explain the use of a trial
balance.
© 2007 McGraw-Hill Ryerson Ltd.
The Accounting Cycle
9 Prepare
1 Analyze
transactions
2 Journalize
3
post-closing
trial balance
8
Close
Post
7 Prepare
4 Prepare
statements
unadjusted
trial balance
5
6 Prepare
Adjust
adjusted
trial balance
© 2007 McGraw-Hill Ryerson Ltd.
The Account
A detailed record of increases and decreases
in a specific asset, liability, or equity item.
Assets
=
Liabilities
+
Equity
Examples:
Cash
Accounts Payable
Owner, Capital
Accounts Receivable
Notes Payable
Owner, Withdrawals
Supplies
Unearned Revenues
Service Revenue
Furniture
Rent Expense
© 2007 McGraw-Hill Ryerson Ltd.
The Ledger
A record containing all accounts used by a
business.
 May be computerized or maintained
manually.
 Each company has its own unique set of
accounts.

© 2007 McGraw-Hill Ryerson Ltd.
The T Account
Represents an account in the ledger.
 Used as a learning tool.
 The difference between the debit side
credit side is the balance.

Account Title
(Left side)/Debit
(Right side)/Credit
Debit balance
Credit balance
© 2007 McGraw-Hill Ryerson Ltd.
and
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.
3. Calculate the difference between the
debits and credits.
© 2007 McGraw-Hill Ryerson Ltd.
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
Always !
© 2007 McGraw-Hill Ryerson Ltd.
Double-Entry Accounting
Assets
Assets
=
Liabilities
Liabilities
+
Equity
Owner’s Equity
Debit
Credit
Debit
Credit
Debit
Credit
+
-
-
+
-
+
© 2007 McGraw-Hill Ryerson Ltd.
Double-Entry Accounting
Equity Accounts
Capital
Withdrawals
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
-
+
+
-
-
© 2007 McGraw-Hill Ryerson Ltd.
+
+
-
Normal Balances
An account’s normal balance is the debit or
credit side where increases are recorded.
Assets
Assets
Debit for
increase
Normal
balance
Credit for
decrease
=
Liabilities
Liabilities
Debit for
decrease
Credit for
increase
Normal
balance
© 2007 McGraw-Hill Ryerson Ltd.
+
Equity
Owner's Capital
Debit for
decrease
Credit for
increase
Normal
Balance
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Step 1
Write down the account types
using ALCREW.
Liabilities
Capital
Revenue
Expenses
Withdrawals
© 2007 McGraw-Hill Ryerson Ltd.
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Liabilities
Capital
Normal
Balance
Step 2
Write down the normal
balance (debit) of A,E,W. The
others are credits.
Revenue
Expenses
Withdrawals
© 2007 McGraw-Hill Ryerson Ltd.
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
Balance
Step 2
Dr
Write down the normal
balance, debit, of A,E,W. The
others are credits.
Liabilities
Capital
Revenue
Expenses
Dr
Withdrawals
Dr
© 2007 McGraw-Hill Ryerson Ltd.
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
Balance
Step 2
Dr
Liabilities
Cr
Capital
Cr
Revenue
Cr
Expenses
Dr
Withdrawals
Dr
Write down the normal
balance, debit, of A,E,W. The
others are credits.
© 2007 McGraw-Hill Ryerson Ltd.
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
Dr
Withdrawals
Dr
© 2007 McGraw-Hill Ryerson Ltd.
Step 3
Remember, increases are the
same as the normal balances,
decreases are the opposite.
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
Dr
Withdrawals
Dr
© 2007 McGraw-Hill Ryerson Ltd.
Step 3
Remember, increases are the
same as the normal balances,
decreases are the opposite.
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
Dr
Dr
Cr
Withdrawals
Dr
Dr
Cr
© 2007 McGraw-Hill Ryerson Ltd.
Mini-Quiz
Indicate whether a debit or credit is needed to:
 Increase Rent Expense
Debit
Debit
 Decrease Accounts Payable
 Decrease Accounts Receivable Credit
 Decrease Cash
Credit
 Increase Withdrawals
Debit
© 2007 McGraw-Hill Ryerson Ltd.
Chart of Accounts
A list of all accounts used in the ledger by
a company.
 Unique for each company.
 Accounts are usually numbered.

© 2007 McGraw-Hill Ryerson Ltd.
Analyzing Transactions
Steps:
1. Determine which accounts are being
affected.
2. Determine if account balances are
increasing or decreasing.
3. Apply rules of debits and credits.
© 2007 McGraw-Hill Ryerson Ltd.
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.
1
Accounts
affected
2
Increase/
Decrease
Cash
Owner, capital
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.
1
Accounts
affected
2
Increase/
Decrease
Cash
Increase
Owner, capital
Increase
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.
Cash
Increase
Debit/
Credit
Debit
Owner, capital
Increase
Credit
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Analyzing Transactions
Example #1:
The owner invests $10,000 in the business.


Debit cash for $10,000
Credit owner, capital for $10,000
Cash
Owner, Capital
10,000
10,000
© 2007 McGraw-Hill Ryerson Ltd.
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Cash
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Cash
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
Supplies
Increase
Debit/
Credit
Debit
Cash
Decrease
Credit
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.


Debit supplies for $2,500
Credit cash for $2,500
Supplies
Cash
2,500
2,500
© 2007 McGraw-Hill Ryerson Ltd.
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Accounts
Payable
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Accounts
Payable
Increase
© 2007 McGraw-Hill Ryerson Ltd.
3
Debit/
Credit
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
Supplies
Increase
Debit/
Credit
Debit
Accounts
Payable
Increase
Credit
1
Accounts
affected
2
Increase/
Decrease
© 2007 McGraw-Hill Ryerson Ltd.
3
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
Accounts Payable
1,100
1,100
© 2007 McGraw-Hill Ryerson Ltd.
The General Journal
Entries are originally recorded in the General
Journal. This process is called journalizing.
GENERAL JOURNAL
Date
2011
Jan.
1
Jan.
Jan.
5
10
Account Titles and Explanation
Cash
Carol Finlay, Capital
To record investment by owner
PR
Page 1
Debit
Credit
10 000
10 000
Supplies
Cash
Purchased supplies for cash
2 500
Supplies
Accounts Payable
Purchased supplies on credit
1 100
2 500
© 2007 McGraw-Hill Ryerson Ltd.
1 100
Posting Journal Entries
General Journal information is transferred
to the General Ledger.
 Account balances are updated.
 This process is called posting.

© 2007 McGraw-Hill Ryerson Ltd.
ThePosting
Posting Process
GENERAL JOURNAL
Date
Jan.
Account Titles and Explanation
1
PR
Cash
Carol Finlay, Capital
Investment by owner
101
301
General journal
information is
transferred to the
general ledger
Page 1
Debit
10
Credit
000
10
000
3
1
2
5
GENERAL LEDGER
5
Cash
DATE
EXPLANATION
PR
Jan. 1
G1
ACCOUNT NO. 101
DEBIT
CREDIT
10 0 0 0
BALANCE
10 0 0 0
4
Steps:
1. Identify the account.
2. Enter dateDATE
Carol Finlay, Capital
EXPLANATION
Jan . 1
3. Enter amount
ACCOUNT NO. 301
PR
G1
DEBIT
CREDIT
10 0 0 0
BALANCE
10 0 0 0
4. Calculate new account balance
5. Enter posting references
© 2007 McGraw-Hill Ryerson Ltd.
Trial Balance
A list of accounts and their balances at a
point in time.
 Used to determine if total debits equals
total credits.
 Also used to prepare financial statements.

© 2007 McGraw-Hill Ryerson Ltd.
Trial Balance
Finlay Interiors
Trial Balance
January 31, 2011
Cash
Accounts receivable
Prepaid insurance
Supplies
Equipment
Accounts payable
Unearned consulting revenue
Notes payable
Carol Finlay, Capital
Carol Finlay, Withdrawals
Consulting revenue
Rental revenue
Rent expense
Salaries expense
Utilities expense
Total
$
Debits
8,070
2,400
3,600
6,000
Credits
$
200
3,000
6,000
10,000
600
3,800
300
$
1,000
1,400
230
23,300
© 2007 McGraw-Hill Ryerson Ltd.
$
23,300
Review
What is journalizing?
What is posting?
What is the purpose of a trial
balance?
© 2007 McGraw-Hill Ryerson Ltd.
End of chapter
© 2007 McGraw-Hill Ryerson Ltd.