Chapter 2: Analyzing Transactions

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Chapter 2 Analyzing Transactions

• Recording transactions
• How transactions affect the financial statements
• How accounting errors occur
• How accounting errors are detected

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Definition of Account

• Record of all increases decreases in financial
  statement items

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All accounts listed on financial statements

• Account name important
• Each name refers to specific account

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Balancing Transactions

• Transaction
• financial exchange
• occurs when something is received and something
  of equal value is given up
• Amount received (debit) always equals amount
  given up (credit)

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Rules of Debit and Credit

• Debit amount received
• always on left
• Credit amount given up
• always on right

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Journal

• Record of every business transaction
• Only transactions recorded in journal become part
  of accounting record

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Before Journalizing Transactions.

• What was received?
• What was given up?

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Journalizing Transactions

• Debit cash for 40,000
• AND
• Credit Automobile for 40,000

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Speaking Accounting

• New language
• Q How do you journalize this transaction?
• A Debit (account name) for ( amount
  received) and Credit (account name) for (
  amount given up)

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Sample Transaction 1

• The following are 3 transactions that occurred
  at the Stick It To Them Real Estate Co
• Nov 15, 2006 received 5,000 from Gabbys Inc
  from for services performed

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Sample Transaction 2

• Nov 20 performed 12,000 in services for Duke
  Manoso and sent them a bill

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Sample Transaction 3

• Nov 30 received payment from Duke Manoso for
  services performed on Nov 20

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Boomerang Realty Company
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Accounting Equation
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Posting Journal Entries

• Transactions journalized
• Journal entries posted to ledgers
• Running balance kept for each account

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Posting to T Accounts

• Short cut used by students
• Instead of using ledger
• One T Account set up for each account
• Same rules of debit/credit apply
• Debits on left of T
• Credits on right of T

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Normal Balances
After Eating Dinner Lets Read the Comics
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Obtain Ending Balances

• Assets add up all debits and subtract all
  credits
• Revenues add up all credits and subtract all
  debits
• Double Underline ending balances

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Normal Balances

• Normal balances determined by classification of
  account
• Accounts increased with credits (normal balance)
• Liabilities
• Revenues
• Capital Stock

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Effect of Transactions on Financial Statements

• At least 2 accounts affected in each transaction
• All accounts listed on financial statements
• THEREFORE
• Every transaction affects financial statement(s)

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