1 Chapter 2 Analyzing Transactions Chapter 2 Analyzing Transactions From Chapter 1: The Accounting Equation Assets = Liabilities + Owner's Equity Assets = Liabilities + Capital Drawing + Revenues - Expenses Definitions for the Element Assets are resources owned by the business. Liabilities are debts owed to outsiders (creditors). Owner s equity is the owner s right to the assets of the business after all liabilities have been paid. Drawings account represents the amount of withdrawals made by the owner. Revenues are increases in owner s equity as a result of selling services or products to customers. Expenses The using up of assets or consuming services in the process of generating revenues. Ghazal Zainy Page 1
2 Chapter 2 Analyzing Transactions Accounting Cycle Transactions (Economic activities & Business condition) Journal (record transactions in the journal) Ledger (Posting transactons to ledger) Unadjusted trail balance (Prepare unadjusted trail balance) Adjustment (Journalizing &posting adjusting entries) Adjusted Trail Balance (Prepare adjusted trail balance) Financial Statement (Prepare 4 financial statements) Closing Entries (Journalizing & posting closing entries) The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period s transactions is called the accounting cycle. There are ten steps in the accounting cycle. 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled and analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared. 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared Ghazal Zainy Page 2
3 Chapter 2 Analyzing Transactions Rearranging the accounting equation Drawing + Expenses + Assets = Liabilities + Capital + Revenues Debit Accounts If Debit, and if Credit Double-Entry System Credit Accounts If Credit, and if Debit Every business transaction to be recorded in at least two accounts Journal Date Description Post Ref. Debit Credit Debit xxx Credit xxx Journalizing Total debit = Total Credit A transaction is initially entered in a record called a journal. The process of recording a transaction in the journal is called journalizing. The entry in the journal is called a journal entry. Ghazal Zainy Page 3
4 Chapter 2 Analyzing Transactions Example Transaction A. On November 1, Chris Clark opens a new business and deposits $ in a bank account in the name of NetSolutions. B. On November 5, NetSolutions paid $ for the purchase of land as a future building site. C. On November 10, NetSolutions purchased supplies on account for $1,350. D. On November 18, NetSolutions received of $7,500 from customers for services provided. E. On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $; utilities, $450; and miscellaneous, $275. F. On November 30, NetSolutions paid creditors on account, $. G. NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined that the cost of supplies on hand on November 30 was $550. H. On November 30, Chris Clark withdrew $ from NetSolutions for personal use. I. On December 1, NetSolutions paid rent for December, $. The company from which NetSolutions is renting its store space now requires the payment of rent on the first of each month, rather than at the end of the month. J. On December 4, NetSolutions purchased office equipment on account from Executive Supply Co. for $1,. K. On December 6, NetSolutions paid $180 for a newspaper advertisement. L. On December 11, NetSolutions paid creditors $400. M. On December 13, NetSolutions paid a receptionist and a part-time assistant $ for two weeks wages. N. On December 16, NetSolutions received $3,100 from fees earned for the first half of December. O. on account totaled $1,750 for the first half of December. P. On December 20, NetSolutions paid $ to Executive Supply Co. on the $1, debt owed from the December 4 transaction. Q. On December 21, NetSolutions received $650 from customers in payment of their accounts. R. On December 23, NetSolutions paid $1,450 for supplies. S. On December 27, NetSolutions paid the receptionist and the part-time assistant $1,200 for two weeks wages. T. On December 31, NetSolutions paid its $310 telephone bill for the month. U. On December 31, NetSolutions paid its $225 electric bill for the month. Ghazal Zainy Page 4
5 Chapter 2 Analyzing Transactions V. On December 31, NetSolutions received $2,870 from fees earned for the second half of December. W. On December 31, fees earned on account totaled $1,120 for the second half of December. X. On December 31, Chris Clark withdrew $ for personal use. Y. Instructions 1. Journalize 2. Prepare T account 3. Prepare an unadjusted trail balance Date Description Post. Ref. Debit Credit Nov.1 Nov. 5 Nov.10 Nov. 18 Nov. 30 Nov. 30 Nov. 30 Nov. 30 Dec. 1 Dec. 4 Dec. 6 Dec. 11 Land Chris Clark, Capital Supplies Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses supplies Chris Clark, Drawing Rent expenses office equipment Miscellaneous expenses 1,350 7,500 2,125 450 275 1, 180 400 1,350 7,500 3,650 1, 180 400 Ghazal Zainy Page 5
6 Chapter 2 Analyzing Transactions Dec. 13 Dec. 16 Dec. 16 Dec. 20 Dec. 21 Dec. 23 Dec. 27 Account receivable Account receivable Supplies Utilities expenses Utilities expenses Account receivable Chris Clark, Drawing 3,100 1,750 650 1,450 1,200 310 225 2,870 1,120 3,100 1,750 650 1,450 1,200 310 225 2,870 1,120 T Account Title Debit Credit The left side of the account is called The right side of the account is called the debit side. the credit side. Using Accounts to Record Transactions Accounting systems are designed to show the increases and decreases in each accounting equation element as a separate record. This record is called an account. Ledger is a group of accounts for a business entity. Chart of accounts is a list of the accounts in the ledger. Ghazal Zainy Page 6
7 Chapter 2 Analyzing Transactions Posting Journal Entries to Accounts is the process of transferring the debits and credits from the journal entries to the accounts. Trial Balance The equality of debits and credits in the ledger should be proven at the end of each accounting period by preparing a trial balance. 7,500 3,100 650 2,870 39,120 Bal. 4,105 3,650 180 400 1,450 1,200 310 225 35,015 T ACCOUNTS Chris Clark, Capital Bal. 7,500 3,100 1,750 2,870 1,120 16,340 Bal. 1,350 1,450 Bal. Supplies 400 1,350 1, Bal. Bal. Land 2,125 1,200 Bal. 4,275 Ghazal Zainy Page 7
8 Chapter 2 Analyzing Transactions Miscellaneous expenses Rent expenses 275 180 Bal. 455 Bal. 1,600 Supplies expenses Utilities expenses 450 310 Bal. 225 Bal. 985 Chris Clark, Drawing Bal. 4,000 office equipment 1, Bal. 1, Account receivables 1,750 650 1,120 Bal. 2,220 Ghazal Zainy Page 8
9 Chapter 2 Analyzing Transactions Account receivable Supplies Land office equipment Chris Clark, Capital Chris Clark, Drawing Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses Net solutions Unadjusted trial balance December 30, 2011 Debit balances 4,105 2,220 1, 4,000 4,275 1,600 985 455 Credit balances 16,340 42,240 42,240 PR 2-2A Page 91 PR 2-2B Page 95 Ghazal Zainy Page 9