Analyzing
and
Recording
Transactions
CHAPTER
2
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Explain the accounting cycle. (LO1)
Describe an account, its use, and its
relationship to the ledger. (LO2)
Define debits and credits and explain
their role in double-entry accounting.
(LO3)
Describe a chart of accounts and its
relationship to the ledger. (LO4)
1.
2.
3.
4.
2
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Analyze the impact of transactions on
accounts. (LO5)
Record transactions in a journal and post
entries to a ledger. (LO6)
Prepare and explain the use of a trial
balance. (LO7)
5.
6.
7.
3
© 2013 McGraw-Hill Ryerson Limited.
The Accounting Cycle
Ch 4
9 Prepare
post-closing
trial balance
1 Analyze
transactions
2
Ch 4
8
Journalize
Ch 2
Post
Ch 2
Close
3
Ch 1-4
Ch 3
4
Ch 1-2
7 Prepare
statements
6 Prepare
adjusted
trial balance
© 2013 McGraw-Hill Ryerson Limited.
4 Prepare
unadjusted
trial balance
5
Adjust
Ch 2
Ch 3
LO 1
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
Service Revenue
Furniture
Salaries Expense
5
© 2013 McGraw-Hill Ryerson Limited.
LO 2
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.
6
© 2013 McGraw-Hill Ryerson Limited.
LO 2
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
7
(Left side)/Debit
(Right side)/Credit
Debit balance
Credit balance
© 2013 McGraw-Hill Ryerson Limited.
LO 2
Calculating the Account Balance
Example:
Cash
Cash sale
500
Ow ner's investment 1000
Total debits
balance
1
3
1500
325 Paid salary
450 Paid rent
775 Total credits
725
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.
8
© 2013 McGraw-Hill Ryerson Limited.
LO 2
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 !
9
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Double-Entry Accounting
Assets
=
Assets
Debit for
increases
+
10
Credit for
decreases
-
Liabilities
Liabilities
Debit for
decreases
-
Credit for
increases
+
© 2013 McGraw-Hill Ryerson Limited.
+
Equity
Equity
Debit for Credit for
decreases increases
-
+
LO 3
Double-Entry Accounting
Equity Accounts
Capital
Debit for
decreases
11
Credit for
increases
+
Withdrawals
Debit for
increases
+
Revenues
Expenses
Credit for Debit for Credit for Debit for Credit for
decreases decreases increases increases decreases
-
-
© 2013 McGraw-Hill Ryerson Limited.
+
+
LO 3
Normal Balances
An account’s normal balance is the debit or
credit side where increases are recorded.
Assets
Assets
Debit for
increase
Normal
balance
12
Credit for
decrease
=
Liabilities
Liabilities
Debit for
decrease
Credit for
increase
Normal
balance
© 2013 McGraw-Hill Ryerson Limited.
+
Equity
Owner's Capital
Debit for
decrease
Credit for
increase
Normal
Balance
LO 3
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Step 1
Write down the account types
using ALCREW.
Liabilities
Capital
Revenue
Expenses
Withdrawals
13
© 2013 McGraw-Hill Ryerson Limited.
LO 3
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
14
© 2013 McGraw-Hill Ryerson Limited.
LO 3
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
15
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Remembering Debits and Credits
ALCREW
Account
Type
Assets
Normal
Balance
Step 2
Dr
Liabilities
Cr
Capital
Cr
Revenue
Cr
Expenses
Dr
Withdrawals
Dr
16
Write down the normal
balance, debit, of A,E,W. The
others are credits.
© 2013 McGraw-Hill Ryerson Limited.
LO 3
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
17
Dr
Step 3
Remember, increases are the
Dr
same as the normal balances,
decreases are the opposite.
© 2013 McGraw-Hill Ryerson Limited.
LO 3
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
18
Dr
Step 3
Remember, increases are the
Dr
same as the normal balances,
decreases are the opposite.
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Remembering Debits and Credits
ALCREW
Account
Type
Assets
19
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
© 2013 McGraw-Hill Ryerson Limited.
LO 3
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
20
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Chart of Accounts
•
•
•
A list of all accounts used in the ledger by
a company.
Unique for each company.
Accounts are usually numbered.
21
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LO 4
Analyzing Transactions
Steps:
Determine which accounts are being
affected.
Determine if account balances are
increasing or decreasing.
Apply rules of debits and credits.
1.
2.
3.
22
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #1:
The owner invests $10,000 cash in the business.
1
23
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
Analyzing Transactions
Example #1:
The owner invests $10,000 cash in the business.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Cash
V. Klimb,
capital
24
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #1:
The owner invests $10,000 cash in the business.
1
25
Accounts
affected
2
Increase/
Decrease
Cash
Increase
V.Klimb,
capital
Increase
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
Analyzing Transactions
Example #1:
The owner invests $10,000 cash in the business.
Cash
Increase
Debit/
Credit
Debit
V.Klimb,
capital
Increase
Credit
1
26
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
LO 5
Analyzing Transactions
Example #1:
The owner invests $10,000 cash in the business.


Debit cash for $10,000
Credit V.Klimb, capital for $10,000
Cash
V.Klimb, Capital
10,000
27
10,000
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
28
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
Accounts
affected
2
Increase/
Decrease
3
Debit/
Credit
Supplies
Cash
29
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
1
30
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Cash
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
Analyzing Transactions
Example #2:
The company purchases supplies by paying
$2,500 cash.
Supplies
Increase
Debit/
Credit
Debit
Cash
Decrease
Credit
1
31
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
LO 5
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
32
Cash
2,500
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
33
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
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
34
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
1
35
Accounts
affected
2
Increase/
Decrease
Supplies
Increase
Accounts
Payable
Increase
© 2013 McGraw-Hill Ryerson Limited.
3
Debit/
Credit
LO 5
Analyzing Transactions
Example #3:
The company purchases supplies for $1,100
on credit.
Supplies
Increase
Debit/
Credit
Debit
Accounts
Payable
Increase
Credit
1
36
Accounts
affected
2
Increase/
Decrease
© 2013 McGraw-Hill Ryerson Limited.
3
LO 5
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
37
1,100
© 2013 McGraw-Hill Ryerson Limited.
LO 5
The General Journal
Entries are originally recorded in the General
Journal. This process is called journalizing.
GENERAL JOURNAL
Date
2014
Jan.
1
Jan.
Jan.
38
1
1
Account Titles and Explanation
Cash
V.Klimb, Capital
Investment by owner
PR
Page 1
Debit
Credit
10 000
10 000
Supplies
Cash
Purchased store supplies for cash
2 500
Supplies
Equipment
Accounts payable
Notes payable
Purchased supplies and equip. on credit
1 100
6 000
2 500
© 2013 McGraw-Hill Ryerson Limited.
1 100
6 000
LO 6
Posting Journal Entries
•
•
•
General Journal information is transferred
to the General Ledger.
Account balances are updated.
This process is called posting.
39
© 2013 McGraw-Hill Ryerson Limited.
LO 6
The Posting Process
GENERAL JOURNAL
Date
Jan.
Account Titles and Explanation
1
PR
Cash
Virgil Klimb, 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
Virgil Klimb, Capital
EXPLANATION
Jan . 1
3. Enter amount
PR
ACCOUNT NO. 301
DEBIT
G1
CREDIT
10 0 0 0
BALANCE
10 0 0 0
4. Calculate new account balance
5. Enter posting references
40
© 2013 McGraw-Hill Ryerson Limited.
LO 6
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.
41
© 2013 McGraw-Hill Ryerson Limited.
LO 7
Trial Balance
Vertically Inclined Rock Gym
Trial Balance
March 31, 2014
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accounts payable
Unearned teaching revenue
Notes payable
Virgil Klimb, capital
Virgil Klimb, withdrawals
Teaching revenue
Equipment rental revenue
Salaries expense
Rent expense
Utilities expense
Total
42
$
Debits
8,070
3,600
2,400
6,000
Credits
$
200
3,000
6,000
10,000
600
3,800
300
$
1,400
1,000
230
23,300
© 2013 McGraw-Hill Ryerson Limited.
$
23,300
LO 7
Review
What is journalizing?
What is posting?
What is the purpose of a trial
balance?
•
•
•
43
© 2013 McGraw-Hill Ryerson Limited.
End of chapter
44
© 2013 McGraw-Hill Ryerson Limited.