1.Usefulness of an Account

1
Power Notes
Chapter F2
Analyzing Transactions
Learning Objectives

• 1. Usefulness of an Account
• 2. Characteristics of an Account
• 3. Analyzing and Summarizing Transactions
• 4. Illustration of Analyzing and Summarizing
• 5. Trial Balance
• 6. Discovery and Correction of Errors
• 7. Financial Analysis and Interpretation

C2
2
Power Notes
Chapter F2
Analyzing Transactions
Slide Power Note Topics

• Double-Entry Accounting
• Analyzing and Recording Transactions
• Chart of Accounts, Trial Balance
• Journal, Ledger, and Trial Balance
• Recording and Posting an Entry
• Correcting Errors
• Horizontal Analysis

3 11 36 40 43 50 57
3
Double-Entry Accounting
Double-entry accounting is based on a simple
concept each party in a business transaction
will receive something and give something in
return. In bookkeeping terms, what is received is
a debit and what is given is a credit. The T
account is a representation of a scale or
balance.
Scale or Balance
T account
Right Side Give CREDIT
Left Side Receive DEBIT
Luca Pacioli Developer of Double-Entry Accounting
Give CREDIT
Receive DEBIT
4
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

5
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Assets
6
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Assets
Expenses
7
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Liabilities
Assets
Expenses
8
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Liabilities
Assets
Owners Equity
Expenses
9
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Liabilities
Assets
Owners Equity
Revenues
Expenses
10
Expanded Accounting Equation
The basic accounting equation can be expanded
to include all five financial categories
indicating what has been received and given.
DEBITS received
CREDITS given

Liabilities
Assets
Owners Equity
Net Income
Revenues
Expenses
11
NetSolutions
On November 1, 2002, I started a business
called NetSolutions. I plan to use my knowledge
of microcomputers and offer computer consulting
services for a fee. The following double-entry
transactions show how amounts received (debits)
always equal amounts given (credits).
Chris Clark, Owner
12
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits 25,000 in a bank account
for NetSolutions in exchange for capital stock.
give Credit
give Credit
NetSolutions (investee)

General Journal
Date Description Debit Credit 11/1
13
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits 25,000 in a bank account
for NetSolutions in exchange for capital stock.
Cash
give Credit
give Credit
NetSolutions (investee)

General Journal
Date Description Debit Credit 11/1 Cash 25,000
14
Business Transactions
Chris Clark (investor)
Entry A.
Chris Clark deposits 25,000 in a bank account
for NetSolutions in exchange for capital stock.
Capital Stock
Cash
give Credit
give Credit
NetSolutions (investee)

General Journal
Date Description Debit Credit 11/1 Cash 25,000
Capital Stock 25,000
15
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys land for 20,000.
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/5
16
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys land for 20,000.
Land
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/5 Land 20,000
17
Business Transactions
Land Owner (seller)
Entry B.
NetSolutions buys land for 20,000.
Land
Cash
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/5 Land 20,000
Cash 20,000
18
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys supplies for 1,350, agreeing
to pay in the near future.
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/10
19
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys supplies for 1,350, agreeing
to pay in the near future.
Supplies
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/10 Supplies
1,350
20
Business Transactions
Supplier (seller)
Entry C.
NetSolutions buys supplies for 1,350, agreeing
to pay in the near future.
Supplies
A promise to pay later
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/10 Supplies
1,350 Accounts Payable 1,350
21
Business Transactions
Customer (buyer)
Entry D.
NetSolutions earns fees of 7,500, receiving cash.
give Credit
give Credit
NetSolutions (seller)

General Journal
Date Description Debit Credit 11/18
22
Business Transactions
Customer (buyer)
Entry D.
NetSolutions earns fees of 7,500, receiving cash.
Cash
give Credit
give Credit
NetSolutions (seller)

General Journal
Date Description Debit Credit 11/18 Cash 7,500
23
Business Transactions
Customer (buyer)
Entry D.
NetSolutions earns fees of 7,500, receiving cash.
Cash
Services
give Credit
give Credit
NetSolutions (seller)

General Journal
Date Description Debit Credit 11/18 Cash 7,500
Fees Earned 7,500
24
Business Transactions
Various suppliers
Entry E.
NetSolutions paid wages, 2,125 rent, 800
utilities, 450 and miscellaneous, 275.
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit
25
Business Transactions
Various suppliers
Entry E.
NetSolutions paid wages, 2,125 rent, 800
utilities, 450 and miscellaneous, 275.
Services, benefits
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/18 Wages
Expense 2,125 Rent Expense 800 Utilities
Expense 450 Misc. Expense 275
26
Business Transactions
Various suppliers
Entry E.
NetSolutions paid wages, 2,125 rent, 800
utilities, 450 and miscellaneous, 275.
Services, benefits
Cash
give Credit
give Credit
NetSolutions (buyer)

General Journal
Date Description Debit Credit 11/18 Wages
Expense 2,125 Rent Expense 800 Utilities
Expense 450 Misc. Expense 275 Cash
3,650
27
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays 950 to creditors on account.
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30
28
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays 950 to creditors on account.
Reduction in obligation
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30 Accounts
Payable 950
29
Business Transactions
Supplier (payee)
Entry F.
NetSolutions pays 950 to creditors on account.
Reduction in obligation
Cash
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30 Accounts
Payable 950 Cash 950
30
Business Transactions
Entry G.
Internal Transaction (no external entity)
At the end of the month, the cost of supplies on
hand is 550.
give Credit
give Credit
NetSolutions (user)

General Journal
Date Description Debit Credit 11/30
31
Business Transactions
Entry G.
Internal Transaction (no external entity)
At the end of the month, the cost of supplies on
hand is 550.
Use of supplies
give Credit
give Credit
NetSolutions (user)

General Journal
Date Description Debit Credit 11/30 Supplies
Expense 800
32
Business Transactions
Entry G.
Internal Transaction (no external entity)
At the end of the month, the cost of supplies on
hand is 550.
Use of supplies
Supplies
give Credit
give Credit
NetSolutions (user)

General Journal
Date Description Debit Credit 11/30 Supplies
Expense 800 Supplies 800
33
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid dividends of 2,000.
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30
34
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid dividends of 2,000.
Reduction in equity
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30 Dividends
2,000
35
Business Transactions
Entry H.
Chris Clark (stockholder)
NetSolutions paid dividends of 2,000.
Reduction in obligation
Cash
give Credit
give Credit
NetSolutions (payor)

General Journal
Date Description Debit Credit 11/30 Dividends
2,000 Cash 2,000
36
NetSolutions Chart of Accounts
Balance Sheet
Income Statement
1. Assets 11 Cash 12 Accounts Receivable 14 Suppli
es 15 Prepaid Insurance 17 Land 18 Office
Equipment 2. Liabilities 21 Accounts
Payable 23 Unearned Rent 3. Owners
Equity 31 Capital Stock 32 Retained
Earnings 33 Dividends
4. Revenue 41 Fees Earned 5. Expenses 51 Wages
Expense 52 Rent Expense 54 Utilities
Expense 55 Supplies Expense 59 Miscellaneous
Expense
37
(No Transcript)
38
NetSolutions Trial Balance November 30, 2002
11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Ac
counts Payable 400 31 Capital Stock 25,000 33 Di
vidends 2,000 41 Fees Earned 7,500 51 Wages
Expense 2,125 52 Rent Expense 800 54 Utilities
Expense 450 55 Supplies Expense 800 59 Miscellaneo
us Expense 275 32,900 32,900
Balance Sheet
39
NetSolutions Trial Balance November 30, 2002
11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Ac
counts Payable 400 31 Capital Stock 25,000 33 Di
vidends 2,000 41 Fees Earned 7,500 51 Wages
Expense 2,125 52 Rent Expense 800 54 Utilities
Expense 450 55 Supplies Expense 800 59 Miscellaneo
us Expense 275 32,900 32,900
Income Statement
40
Journal, Ledger, Trial Balance
1. Transactions are analyzed and recorded in
journal.
Documents
Journal
41
Journal, Ledger, Trial Balance
1. Transactions are analyzed and recorded in
journal.
Documents
Journal
2. Transactions are posted from journal to
ledger.
Journal
Ledger
42
Journal, Ledger, Trial Balance
1. Transactions are analyzed and recorded in
journal.
Documents
Journal
2. Transactions are posted from journal to
ledger.
Journal
Ledger
3. Trial balance is prepared.
43
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 2,400 Cash 2,400
1. Analyze and record the transaction as
shown. 2. Post the debit side of the
transaction. 3. Post the credit side of the
transaction.
44
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 2,400 Cash 2,400
General Ledger
Account Prepaid Insurance Account
No. 15
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 12/1
Enter the transaction date in the ledger account.
45
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 2,400 Cash 2,400
General Ledger
Account Prepaid Insurance Account
No. 15
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 12/1 1 2,400
Enter the debit amount in the ledger debit column.
46
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 2,400 Cash 2,400
General Ledger
Account Prepaid Insurance Account
No. 15
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 12/1 1 2,400 2,400
Update the ledger account balance.
47
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 2,400 Cash 2,400
4
General Ledger
Account Prepaid Insurance Account
No. 15
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 12/1 1
Enter the journal page in the ledger account.
48
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 15 2,400 Cash 2,400
General Ledger
Account Prepaid Insurance Account
No. 15
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 12/1 1 2,400 2,400
Enter the ledger account number in the journal.
49
Recording and Posting an Entry
General Journal
Page 1
Post. Date Description Ref. Debit Credit 12/1 P
repaid Insurance 15 2,400 Cash 11 2,400
General Ledger
Account Cash Account No. 11
Post. Balance Date Item Ref. Deb
it Credit Debit Credit 11/30 Balance 5,900 12/
1 1 2,400 3,500
All five parts of the credit posting are shown.
50
Correcting Errors
Three Types of Errors
Journal Entry
Ledger Posting
Correction Procedure
1. incorrect not posted correct Journal
51
Correcting Errors
Three Types of Errors
Journal Entry
Ledger Posting
Correction Procedure
1. incorrect not posted correct
Journal 2. correct incorrectly posted correct
Ledger
52
Correcting Errors
Three Types of Errors
Journal Entry
Ledger Posting
Correction Procedure
1. incorrect not posted correct
Journal 2. correct incorrectly posted correct
Ledger 3. incorrect already posted record and
post a correcting entry

Error 3 requires a correcting journal entry.
53
Correcting Errors An Example
On May 5 a purchase of office equipment on
account was incorrectly journalized and posted as
shown.
General Journal As recorded and posted
Date Description Debit Credit 5/5 Supplies
12,500 Accounts Payable 12,500
What part of this entry is incorrect? What
correcting entry would you make?
54
Correcting Errors An Example
On May 5 a purchase of office equipment on
account was incorrectly journalized and posted as
shown.
General Journal As recorded and posted
Date Description Debit Credit 5/5 Supplies
12,500 Accounts Payable 12,500
General Journal A correcting entry
Date Description Debit Credit 5/5
55
Correcting Errors An Example
On May 5 a purchase of office equipment on
account was incorrectly journalized and posted as
shown.
General Journal As recorded and posted
Date Description Debit Credit 5/5 Supplies
12,500 Accounts Payable 12,500
General Journal A correcting entry
Date Description Debit Credit 5/5 Office
Equipment 12,500
56
Correcting Errors An Example
On May 5 a purchase of office equipment on
account was incorrectly journalized and posted as
shown.
General Journal As recorded and posted
Date Description Debit Credit 5/5 Supplies
12,500 Accounts Payable 12,500
General Journal A correcting entry
Date Description Debit Credit 5/5 Office
Equipment 12,500 Supplies 12,500
57
Comparative Balance SheetDecember 31, 2003 and
2002
Financial Analysis and Interpretation
Objective Use horizontal analysis to compare
financial statements from different periods.
Increase (Decrease) 2003 20
02 Amount Percent

• Assets
• Current assets 550,000 533,000
• Long-term investments 95,000 177,500
• Plant assets (net) 444,500 470,000
• Intangible assets 50,000 50,000
• 1,139,500 1,230,500

58
Comparative Balance SheetDecember 31, 2003 and
2002
Financial Analysis and Interpretation
Objective Use horizontal analysis to compare
financial statements from different periods.
Increase (Decrease) 2003 20
02 Amount Percent

• Assets
• Current assets 550,000 533,000 17,000
  3.2
• Long-term investments 95,000 177,500 (82,500) (46.
  5)
• Plant assets (net) 444,500 470,000 (25,500) (5.4)
  
• Intangible assets 50,000 50,000
• 1,139,500 1,230,500 (91,000) (7.4)

Horizontal Analysis
Current year (2003) 550,000 Base year
(1999) 533,000
103.2
Increase amount 17,000 Base year (2002) 533,000
3.2
59
Comparative Income StatementDecember 31, 2003
and 2002
Financial Analysis and Interpretation
Objective Use horizontal analysis to compare
financial statements from different periods.
Increase (Decrease) 2003 20
02 Amount Percent

• Sales 1,530,500 1,234,000
• Sales returns 32,500 34,000
• Net sales 1,498,000 1,200,000
• Cost of goods sold 1,043,000 820,000
• Gross profit 455,000 380,000

60
Comparative Income StatementDecember 31, 2003
and 2002
Financial Analysis and Interpretation
Objective Use horizontal analysis to compare
financial statements from different periods.
Increase (Decrease) 2003 20
02 Amount Percent

• Sales 1,530,500 1,234,000 296,500 24.0
• Sales returns 32,500 34,000 (1,500) (4.4)
• Net sales 1,498,000 1,200,000 298,000) 24.8
• Cost of goods sold 1,043,000 820,000 223,000
  27.2
• Gross profit 455,000 380,000 75,000
  19.7

Horizontal Analysis
Current year (2003) 1,498,000 Base year
(2002) 1,200,000
124.8
Increase amount 298,000 Base year
(2002) 1,200,000
24.8
61
Power Notes
Chapter F2
Analyzing Transactions
This is the last slide in Chapter F2.