Chapter 2

Analyzing and Recording

Business Transactions

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 Conceptual Learning Objectives

C1: Explain the steps in processing

transactions
C2: Describe source documents and their
purpose
C3: Describe an account and its use in
recording transactions
C4: Describe a ledger and a chart of accounts
C5: Define debits and credits and explain their
role in double-entry accounting

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 Analytical Learning Objectives

A1: Analyze the impact of transactions on

accounts and financial statements
A2: Compute the debt ratio and describe
its use in analyzing financial
performance

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 Procedural Learning Objectives

P1: Record transactions in a journal and

post entries to a ledger
P2: Prepare and explain the use of a trial
balance
P3: Prepare financial statements from
business transactions

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 C1 Analyzing and Recording
Process

Exchanges of economic consideration

between two parties.

External Transactions Internal Transactions

occur between the occur within the
organization and an organization.
outside party.
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 C1 Analyzing and Recording
Process

Record relevant transactions

Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
to ledger
Prepare and analyze accounts
the trial balance
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 C2
Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets

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 C3

The Account and its Analysis

An account is a
record of
increases and The general
decreases in a ledger is a record
specific asset, containing all
liability, equity, accounts used by
revenue, or the company.
expense item.

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 C3
The Account and its Analysis

Assets
Assets Liability
Liability Equity
Equity
Assets
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts

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 C3
Asset Accounts

Cash
Accounts
Land
Receivable

Notes
Buildings
Asset Receivabl
Accounts e

Prepaid
Equipment
Accounts
Supplies

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 C3
Liability Accounts

Accounts Notes
Payable Payable

Liability
Accounts

Accrued Unearned
Liabilities Revenue

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 C3
Equity Accounts

Retained
Earnings
Common
Stock Dividends

Equity
Accounts
Revenues Expenses

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 C3
The Account and its Analysis

Assets = Liabilities + Equity

+ – + –
Common
Dividends Revenues Expenses
Stock

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 C4
Ledger and Chart of Accounts

The ledger is a collection of all accounts for an

information system. A company’s size and
diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.
101 Cash 319 Dividends
106 Accounts receivable 403 Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense

307 Common stock 690 Utilities expense

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 C5
Debits and Credits

A T-account represents a ledger account

and is a tool used to understand the effects
of one or more transactions.
T- Account
(Left side) (Right side)
Debit Credit

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 C5
Double-Entry Accounting

Assets = Liabilities + Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

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 C5
Double-Entry Accounting

Equity
Common _ _
Stock
Dividends
+ Revenues Expenses

Stock Dividends Revenues Expenses

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
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 C5
Double-Entry Accounting

An account balance is the difference between the

increases and decreases in an account.
Notice the T-Account

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 P1 Journalizing &
Posting Transactions
Assets = Liabilities + Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

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 P1
Journalizing Transactions
Transaction Titles of Affected
Date Accounts

Transaction Dollar amount of debits

explanation and credits
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 P1
Balance Column Account
T-accounts are useful illustrations, but
balance column ledger accounts are used
in practice.

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 P1
Posting Journal Entries

1 Identify the debit account in ledger.

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 P1
Posting Journal Entries

2 Enter the date.

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 P1
Posting Journal Entries

3 Enter the amount and description.

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 P1
Posting Journal Entries

4 Enter the journal reference.

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 P1 Posting Journal Entries

5 Compute the balance.

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 P1
Posting Journal Entries

6 Enter the ledger reference.

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 A1
Analyzing Transactions

Analysis:

Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000

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 A1
Analyzing Transactions

Analysis:

Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500

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 A1 Analyzing Transactions

Analysis:

Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000

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 A1
Analyzing Transactions

Analysis:

Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100

Posting:
Supplies 126 Accounts Payable 201
(2) 26,000 (4) 7,100
(4) 7,100

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 A1 Analyzing Transactions

Analysis:

Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200

Posting:
Consulting Revenue 403 Cash 101
(5) 4,200 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000

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 A1 After processing its remaining transactions for December,
FastForward’s Trial Balance is prepared.

FastForwar
drial Balance
T
December 31, 2007
Debits Credits The trial balance lists
Cash $ 4,350
Accounts receivable -
all account balances
Supplies 9,720 in the general ledger.
Prepaid Insurance 2,400
If the books are in
Equipment 26,000
Accounts payable $ 6,200 balance, the total
Unearned consulting revenue 3,000 debits will equal the
Common stock 30,000
Dividends 200
total credits.
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
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 P2 Six Steps for Searching for and
Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.
Make sure the trial balance Recompute each account
columns are correctly added. balance in the ledger.

Make sure account

balances are correctly Verify that each journal
entered from the ledger. entry is posted correctly.

See if debit or credit Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
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 P3 Using a Trial Balance to Prepare Financial
Statements
Point in Point in
Time Period of Time Time

Income Statement
Statement of Retained Earnings
Statement of Cash
Flows
Beginning Ending
Balance Balance
Sheet Sheet

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 P3
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2007
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470

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 P3
Statement of Retained Earnings
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2007
Balance, 1/1/07 $ -
Net income for December 3,470
3,470
Less: Dividends (200)
Balance, 12/31/07 $ 3,270

FASTFORWARD
Income Statement
For the Month Ended December 31, 2007
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470

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 P3
Balance Sheet
FASTFORWARD
Balance Sheet
FASTFORWARD
Statement of Retained Earnings
December 31, 2007
For the Month Ended December 31, 2007 Assets
Balance, 1/1/07 $ -Cash $ 4,350
Net income for December 3,470
Supplies 9,720
3,470
Less: Dividends
Prepaid insurance
200
2,400
Balance, 12/31/07 $ Equipment
3,270 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Total liabilities 9,200
Equity
Common stock 30,000
Retained earnings 3,270
Total equity 33,270
Total liabilities and equity $ 42,470
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 A2
Debt Ratio

o Describes the relationship between the

amounts of the company’s liabilities
and assets.

o Helps to assess the risk that a

company will fail to pay its debts.
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 End of Chapter 2

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