02 analyzing transactions

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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

Power Notes Analyzing Transactions

Chapter 2

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• 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

Slide # Power Note Topics

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Chapter 2

Note: To select a topic, type the slide # and press Enter.

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Double-Entry AccountingDouble-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.”

Luca PacioliDeveloper ofDouble-EntryAccounting

Scale or Balance

ReceiveDEBIT

GiveCREDIT

T account

Left SideReceiveDEBIT

Right SideGive

CREDIT

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Expanded Accounting EquationExpanded Accounting Equation

“ The basic accounting equation can be

expanded to include all five financial categories

indicating what has been received and given.”

DEBITSreceived

CREDITSgiven=

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DEBITSreceived

CREDITSgiven=

Assets

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Assets

DEBITSreceived

CREDITSgiven=

Expenses

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Expenses

Assets

DEBITSreceived

CREDITSgiven=

Liabilities

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Expenses

Liabilities

Assets

DEBITSreceived

CREDITSgiven=

Owner’s Equity

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Expenses

Liabilities

Owner’s EquityAssets

DEBITSreceived

CREDITSgiven=

Revenues

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Expenses

Liabilities

Owner’s EquityAssets

DEBITSreceived

CREDITSgiven=

Revenues

NetIncome

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NetSolutionsA Sole Proprietorship

NetSolutionsA Sole Proprietorship

“ On November 1, 2002, I started a sole

proprietorship 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

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Chris Clark deposits $25,000 in a bank account for NetSolutions.

Business Transactions

General Journal

receiveDebit

giveCredit

NetSolutions(investee)

Chris Clark (investor)

giveCredit

Entry A.

Date Description Debit Credit

11/1

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General Journal

receiveDebit

giveCredit


Cash


giveCredit

Entry A.


11/1 Cash 25,000

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General Journal


11/1 Cash 25,000 Chris Clark, Capital 25,000

receiveDebit

giveCredit


Cash A promiseto the owner


giveCredit

Entry A.

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NetSolutions buys land for $20,000.


receiveDebit

giveCredit

NetSolutions(buyer)

Land Owner (seller)

giveCredit

Entry B.

General Journal


11/5

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receiveDebit

giveCredit

NetSolutions(buyer)

Land

Land Owner (seller)

giveCredit

Entry B.

General Journal


11/5 Land 20,000

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receiveDebit

giveCredit

NetSolutions(buyer)

Land Cash

Land Owner (seller)

giveCredit

Entry B.

General Journal


11/5 Land 20,000 Cash 20,000

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NetSolutions buys supplies for $1,350, agreeing to pay in the near future.


receiveDebit

giveCredit

NetSolutions(buyer)

Supplier (seller)

giveCredit

Entry C.

General Journal


11/10

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receiveDebit

giveCredit

NetSolutions(buyer)

Supplies

Supplier (seller)

giveCredit

Entry C.

General Journal


11/10 Supplies 1,350

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receiveDebit

giveCredit

NetSolutions(buyer)

Supplies

Supplier (seller)

giveCredit

Entry C.

A promiseto pay later

General Journal


11/10 Supplies 1,350 Accounts Payable 1,350

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NetSolutions earns fees of $7,500, receiving cash.


receiveDebit

giveCredit

NetSolutions(seller)

Customer (buyer)

giveCredit

Entry D.

General Journal


11/18

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receiveDebit

giveCredit


Cash

Customer (buyer)

giveCredit

Entry D.

General Journal


11/18 Cash 7,500

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receiveDebit

giveCredit


Cash

Customer (buyer)

giveCredit

Entry D.

Services

General Journal


11/18 Cash 7,500 Fees Earned 7,500

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NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.


General Journal

receiveDebit

giveCredit

NetSolutions(buyer)

Various suppliers

giveCredit

Entry E.

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11/18 Wages Expense 2,125Rent Expense 800Utilities Expense 450Misc. Expense 275



General Journal

receiveDebit

giveCredit

NetSolutions(buyer)

Services,benefits

Various suppliers

giveCredit

Entry E.

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11/18 Wages Expense 2,125Rent Expense 800Utilities Expense 450Misc. Expense 275 Cash 3,650



General Journal

receiveDebit

giveCredit

NetSolutions(buyer)

Services,benefits

Various suppliers

giveCredit

Entry E.

Cash

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NetSolutions pays $950 to creditors on account.


receiveDebit

giveCredit

NetSolutions(payor)

Supplier (payee)

giveCredit

Entry F.

General Journal


11/30

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receiveDebit

giveCredit

NetSolutions(payor)

Reduction in obligation

Supplier (payee)

giveCredit

Entry F.

General Journal


11/30 Accounts Payable 950

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receiveDebit

giveCredit

NetSolutions(payor)


Supplier (payee)

giveCredit

Entry F.

Cash

General Journal


11/30 Accounts Payable 950 Cash 950

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At the end of the month, the cost of supplies on hand is $550.


receiveDebit

giveCredit

NetSolutions(user)

Internal Transaction

(no external entity)

giveCredit

Entry G.

General Journal


11/30

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receiveDebit

giveCredit

NetSolutions(user)

Use of supplies



giveCredit

Entry G.

General Journal

Balance of Supplies account $1,350 less $550 on hand = $800 used


11/30 Supplies Expense 800

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receiveDebit

giveCredit

NetSolutions(user)

Use of supplies



giveCredit

Entry G.

Supplies

General Journal


11/30 Supplies Expense 800 Supplies 800

Balance of Supplies account $1,350 less $550 on hand = $800 used

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Chris Clark withdraws $2,000 in cash.


receiveDebit

giveCredit

NetSolutions(payor)

Chris Clark (payee)

giveCredit

Entry H.

General Journal


11/30

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receiveDebit

giveCredit

NetSolutions(payor)


Chris Clark (payee)

giveCredit

Entry H.

General Journal


11/30 Chris Clark, Drawing 2,000

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receiveDebit

giveCredit

NetSolutions(payor)


Chris Clark (payee)

giveCredit

Entry H.

Cash

General Journal


11/30 Chris Clark, Drawing 2,000 Cash 2,000

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NetSolutionsChart of Accounts

Balance Sheet Income Statement

1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment

2. Liabilities21 Accounts Payable23 Unearned Rent

3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing

4. Revenue41 Fees Earned

5. Expenses51 Wages Expense52 Rent Expense54 Utilities Expense55 Supplies Expense59 Miscellaneous

Expense

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NetSolutionsTrial Balance

November 30, 2002

11 Cash 5,90014 Supplies 55017 Land 20,00021 Accounts Payable 40031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 2,00041 Fees Earned 7,50051 Wages Expense 2,12552 Rent Expense 80054 Utilities Expense 45055 Supplies Expense 80059 Miscellaneous Expense 275

32,900 32,900

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November 30, 2002


32,900 32,900

BalanceSheet

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IncomeStatement


November 30, 2002


32,900 32,900

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1. Transactions are analyzed and recorded in journal.

DocumentsJournal

Journal, Ledger, Trial Balance

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DocumentsJournal

2. Transactions are posted from journal to ledger.

Journal Ledger


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DocumentsJournal

2. Transactions are posted from journal to ledger.

Journal Ledger

3. Trial balance is prepared.


Trial Balance

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Post. Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400 Cash 2,400

General Journal Page 1

Recording and Posting an Entry

1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.

3. Post the credit side of the transaction.

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Post. BalanceDate Item Ref. Debit Credit Debit Credit

12/1

Account: Prepaid Insurance Account No. 15

General Journal

General Ledger

Page 1


1

1 Enter the transaction date in the ledger account.

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12/1 1 2,400


General Journal

General Ledger

Page 1


2

2 Enter the debit amount in the ledger debit column.

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12/1 1 2,400 2,400


General Journal

General Ledger

Page 1


3

3 Update the ledger account balance.

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12/1 1


General Journal

General Ledger

Page 1


4

4 Enter the journal page in the ledger account.

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12/1 Prepaid Insurance 15 2,400 Cash 2,400


12/1 1 2,400 2,400


General Journal

General Ledger

Page 1


5

5 Enter the ledger account number in the journal.

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12/1 Prepaid Insurance 15 2,400 Cash 11 2,400


11/30 Balance 5,90012/1 1 2,400 3,500

Account: Cash Account No. 11

General Journal

General Ledger

Page 1

1 5 2

3

4

All five parts of the credit posting are shown.

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Correcting Errors

Three Types of ErrorsJournal Entry Ledger Posting Correction Procedure

1. incorrect not posted correct Journal

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Correcting Errors



2. correct incorrectly posted correct Ledger

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Correcting Errors


Error 3 requires a correcting journal entry.


2. correct incorrectly posted correct Ledger

3. incorrect already posted record and posta correcting entry

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General Journal – As recorded and posted

Correcting Errors – An Example

On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.

What part of this entry is incorrect? What correcting entry would you make?



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General Journal – A correcting entry





5/5

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5/5 Office Equipment 12,500

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5/5 Office Equipment 12,500 Supplies 12,500



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Objective: Use horizontal analysis to compare financial statements from different periods.

Financial Analysis and Interpretation

Comparative Balance SheetDecember 31, 2003 and 2002

AssetsCurrent assets $ 550,000 $ 533,000Long-term investments 95,000 177,500Plant assets (net) 444,500 470,000Intangible assets 50,000 50,000

$1,139,500 $1,230,500

Increase (Decrease)2003 2002 Amount Percent

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Comparative Balance SheetDecember 31, 2003 and 2002

AssetsCurrent 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) $550,000Base year (2002) $533,000

= 103.2%

Increase amount $17,000Base year (2002) $533,000

= 3.2%

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Comparative Income StatementDecember 31, 2003 and 2002

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


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Comparative Income StatementDecember 31, 2003 and 2002

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) $1,498,000Base year (2002) $1,200,000

= 124.8%

Increase amount $298,000Base year (2002) $1,200,000

= 24.8%

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This is the last slide in Chapter 2.


Chapter 2

02 analyzing transactions

Education