Analyzing Transactions

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Analyzing Transactions
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After studying this chapter, you should be able
to

• Describe the characteristics of an account and
  record transactions using a chart of accounts and
  journal.

• Describe and illustrate the posting of journal
  entries to accounts.
• Prepare an unadjusted trial balance and explain
  how it can be used to discover errors.
• Discover and correct errors in recording
  transactions.

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Objective 1
Describe the characteristics of an account and
record transactions using a chart of accounts and
journal.
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Accounting systems are designed to show the
increases and decreases in each financial
statement item as a separate record. This record
is called an account.
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The T Account
Title
The T account has a title.
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Title
Debit
The left side of the account is called the debit
side.
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Title
Debit
Credit
The right side of the account is called the
credit side.
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Title
Debit
Credit
Amounts entered on the left side are debits.
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Title
Debit
Credit
Amounts entered on the right side are credits.
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Cash
(a) 25,000 (b) 20,000
(d) 7,500 (e) 3,650
(f) 950
(h) 2,000
Balance 5,900
Balance of the account
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A group of accounts for a business entity is
called a ledger.
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A list of the accounts in a ledger is called a
chart of accounts.
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Assets are resources owned by the business
entity.

• Cash
• Supplies
• Prepaid expenses
• Buildings

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Liabilities are debts owed to outsiders
(creditors).

• Accounts payable
• Notes payable
• Wages payable

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Stockholders equity is the stockholders right
to the assets of the business. A dividend
account represents a distribution of earnings to
stockholders.
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Revenues are increases in stockholders equity
(retained earnings) as a result of selling
services or products to customers.

• Fees earned
• Commission revenue
• Rent revenue

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The using up of assets or consuming services in
the process of generating revenues results in
expenses.

• Wages expense
• Rent expense
• Miscellaneous expense

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IMPORTANT NOTE
Every transaction affects at least two accounts.
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Journalizing
This transaction is initially entered in a record
called a journal. The process of recording a
transaction in the journal is called
journalizing.
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Journalizing requires the following steps

• Record the date. If this is the first entry on
  the page, the year is inserted above the month.
  As long as the month does not change, the rest of
  the journal entries require only the day be
  recorded.
• The title of the account debited is listed in the
  Description column.

(Continued)
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• Enter the amount in the Debit column.

• Record the credit account in the Description
  column.
• Enter the amount in the Credit column.

Note these steps in Slides 22 and 23 as an entry
is journalized to record the issuance of stock to
Chris Clark.
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Balance Sheet Accounts
a. Chris Clark deposits 25,000 in a bank
account in the name of NetSolutions in return for
shares of stock in the corporation.
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JOURNAL
Page 1
Date
Description
Debit
Credit
P.R.
2007
1 2 3 4
Nov. 1
Cash 25 000 00
Capital Stock 25 000 00
Issued capital stock for cash.
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The effect of this entry is shown in the accounts
of NetSolutions as follows
Cash
Capital Stock
Nov. 1 25,000
Nov. 1 25,000
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(b) On November 5, NetSolutions bought land for
20,000, paying cash.
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5 Land 20 000 00
Cash 20 000 00
Purchased land for building site.
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(c) On November 10, NetSolutions purchased
supplies on account for 1,350.
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10 Supplies 1 350 00
Accounts Payable 1 350 00
Purchased supplies on account.
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(f) On November 30, NetSolutions paid creditors
on account, 950.
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30 Accounts Payable 950 00
Cash 950 00
Paid creditors on account.
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Balance Sheet Accounts
Debits
Credits
Asset accounts. Increase () Decrease
(-) Liability accounts. Decrease (-) Increase
() Stockholders equity accounts Decrease
(-) Increase ()
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Balance Sheet Accounts
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Prepare a journal entry for the purchase of a
truck on June 3 for 42,500, paying 8,500 cash
and the remainder on account.
June 3 Truck 42,500 Cash 8,500 Accounts
Payable 34,000
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For Practice PE 2-1A, PE 2-1B
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Income Statement Accounts
(d) On November 18, NetSolutions received fees of
7,500 from customers for services provided.
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18 Cash 7 500 00
Fees Earned 7 500 00
Received fees from customers.
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(e) Throughout the month, NetSolutions incurred
the following expenses wages, 2,125 rent,
800 utilities, 450 and miscellaneous, 275.
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30 Wages Expense 2 125 00 Rent Expense 800
00 Utilities Expense 450 00 Miscellaneous
Expense 275 00
Cash 3 650 00
Paid expenses.
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(g) On November 30, a count revealed that 800 of
the supplies inventory had been used during the
month.
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30 Supplies Expense 800 00
Supplies 800 00
Supplies used during November.
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Income Statement Accounts
Debits
Credits
Revenue accounts Decrease (-) Increase
() Expense accounts Increase () Decrease (-)
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Income Statement Accounts
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(Continued)
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Equals
Net income (credit gt debits) increases
stockholders equity (retained earnings)
Net loss (debits gt credits) decreases
stockholders equity (retained earnings)
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Prepare a journal entry on August 7 for the fees
earned on account, 115,000.
Aug. 7 Accounts Receivable 115,000 Fees
Earned 115,000
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For Practice PE 2-2A, PE 2-2B
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2-1
Dividends Account
Dividends are the distribution of earnings to
stockholders. Since earnings (revenues minus
expenses) increase Retained Earnings, the
distribution of these earnings to stockholders
decreases Retained Earnings. Because dividend
transactions decrease retained earnings,
increases in dividends are recorded as debits.
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(h) On November 30, NetSolutions paid dividends
of 2,000.
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Cash 2 000 00
Paid dividends to stockholders.
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2-1
Prepare a journal entry on December 29 for the
payment of 12,000 of dividends.
Dec. 29 Dividends 12,000 Cash 12,000
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For Practice PE 2-3A, PE 2-3B
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2-1
Normal Balances of Accounts
Increase (Normal Bal.)
Decrease
Balance sheet accounts Asset Debit Credit Liabi
lity Credit Debit Stockholders
Equity Capital stock Credit Debit Dividends D
ebit Credit Income statement accounts Revenue Cr
edit Debit Expense Debit Credit
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State for each account whether it is likely to
have (a) debit entries only, (b) credit entries
only, or (c) both debit and credit entries.
Also, indicate its normal balance.

• Dividends
• Accounts Payable
• Cash
• Fees Earned
• Supplies
• Utilities Expense

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• Debit entries only normal debit balance
• Debit and credit entries normal credit balance
• Debit and credit entries normal debit balance
• Credit entries only normal credit balance
• Debit and credit entries normal debit balance
• Debit entries only normal debit balance

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For Practice PE 2-4A, PE 2-4B
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2-1
The equality of debits and credits for each
transaction is built into the accounting
equation Assets Liabilities Stockholders
Equity. Because of this double equality, this
system is called the double-entry accounting
system.
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Transaction Analysis
1. Determine whether an asset, liability, capital
stock, retained earnings, revenue, expense, or
dividends account is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases. 3. Determine whether each increase or
decrease should be recorded as a debit or a
credit.
(Continued)
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4. Record the transaction using a journal entry.

• Periodically post journal entries to the accounts
  in the ledger.
• Prepare an unadjusted trial balance at the end of
  the period.

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Objective 2
Describe and illustrate the posting of journal
entries to the accounts.
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Posting
The process of transferring the debits and
credits from the journal entries to the accounts
is called posting.
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Dec. 1 NetSolutions paid a premium of 2,400 for
a comprehensive insurance policy covering
liability, theft and fire. The policy covers a
one-year period.
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Dec. 1 NetSolutions paid rent for December, 800.
The company from which NetSolutions is renting
its store space requires the payment of rent on
the first of each month, rather than at the end
of the month.
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1 Rent Expense 52 800 00
Cash 11 800 00
Paid rent for December.
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NetSolutions received an offer from a local
retailer to rent the land purchased on November
5. The retailer plans to use the land as a
parking lot for its employees and customers.
NetSolutions agreed to rent the land to the
retailer for three months, with the rent payable
in advance.
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Dec. 1 NetSolutions receives 360 for three
months rent for use of its land beginning
December 1.
1 Cash 11 360 00
Unearned Rent 23 360 00
Received advance payment for three months rent
on land.
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Dec. 4 NetSolutions purchased office equipment on
account from Executive Supply Co. for 1,800.
4 Office Equipment 18 1 800 00
Accounts Payable 21 1 800 00
Purchased office equipment on account.
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Dec. 6 NetSolutions paid 180 for a newspaper
advertisement.
6 Miscellaneous Expense 59 180 00
Cash 11 180 00
Paid for newspaper ad.
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Dec. 11 NetSolutions paid creditors 400.
11 Accounts Payable 21 400 00
Cash 11 400 00
Paid creditors on account.
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Dec. 13 NetSolutions paid a receptionist and
part-time assistant 950 for two weeks wages.
13 Wages Expense 51 950 00
Cash 11 950 00
Paid two weeks wages.
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Dec. 16 NetSolutions received 3,100 from fees
earned for the first half of December.
16 Cash 11 3 100 00
Fees Earned 41 3 100 00
Received fees from customers.
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Dec. 16 Fees earned on account totaled 1,750 for
the first half of December.
16 Accounts Receivable 12 1 750 00
Fees Earned 41 1 750 00
Recorded fees earned on account.
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Dec. 20 NetSolutions paid 900 to Executive
Supply Co. on the 1,800 debt owed from the
December 4 transaction.
20 Accounts Payable 21 900 00
Cash 11 900 00
Paid part of amount owed to Executive Supply Co.
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Dec. 21 NetSolutions received 650 from customers
in payment of their accounts.
21 Cash 11 650 00
Accounts Receivable 12 650 00
Received fees from customers on account.
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Dec. 23 NetSolutions paid 1,450 for supplies.
23 Supplies 14 1 450 00
Cash 11 1 450 00
Purchased supplies.
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Dec. 27 NetSolutions paid the receptionist and
part-time assistant 1,200 for two weeks wages.
27 Wages Expense 51 1 200 00
Cash 11 1 200 00
Paid two weeks wages.
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Dec. 31 NetSolutions paid 310 for telephone
charges for the month.
31 Utilities Expense 54 310 00
Cash 11 310 00
Paid telephone charges.
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Dec. 31 NetSolutions paid 225 for electric usage
for the month.
JOURNAL
Page 1
Date
Description
Debit
Credit
2007
Dec 31 Utilities Expense 54 225 00
Cash 11 225 00
Paid for electric usage.
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Dec. 31 NetSolutions received 2,870 from fees
earned for the second half of December.
31 Cash 11 2 870 00
Fees Earned 41 2 870 00
Received fees from customers.
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Dec. 31 NetSolutions earned 1,120 on account for
the second half of December.
31 Accounts Receivable 12 1 120 00
Fees Earned 41 1 120 00
Recorded fees earned on account.
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Dec. 31 NetSolutions paid dividends of 2,000 to
stockholders.
31 Dividends 33 2 000 00
Cash 11 2 000 00
Paid dividends to stockholders.
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2-2
On March 1, the cash account balance was 22,350.
During March, cash receipts totaled 241,880
and the March 31 balance was 19,125. Determine
the cash payments made during March.
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Follow My Example 2-5
Using the following T-account solve for the
amount of cash payment (indicated by ? below).
Cash
Mar. 1 Bal 22,350 ? Cash payments Cash
receipts 241,880 Mar. 31 Bal. 19,125
19,125 22,350 241,880 Cash payments Cash
payments 22,350 241,880 19,125 245,105
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For Practice PE 2-5A, PE 2-5B
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2-3
Objective 3
Prepare an unadjusted trial balance and explain
how it can be used to discover errors.
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The equality of debits and credits in the ledger
should be proved at the end of each accounting
period by preparing a trial balance. The heading
should first list the name of the company, the
statements title, and the date it is prepared.
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Trial Balance
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For each of the following errors, considered
individually, indicate whether the error would
cause the trial balance totals to be unequal. If
the error would cause the trial balance total to
be unequal, indicate whether the debit or credit
total is higher and by how much.

• Payment of a dividend of 5,600 was journalized
  and posted as a debit of 6,500 to Salary Expense
  and a credit of 6,500 to Cash.
• A fee of 2,850 earned from a client was debited
  to Accounts Receivable for 2,580 and credited to
  Fees Earned for 2,850.
• A payment of 3,500 to a creditor was posted as a
  debit of 3,500 to Accounts Payable and a debit
  of 3,500 to Cash.

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Follow My Example 2-6

• The totals are equal since both the debit and
  credit entries were journalized and posted for
  6,500.
• The totals are unequal. The credit total is
  higher by 270 (2,850 2,580).
• The totals are unequal. The debit total is
  higher by 7,000 (3,500 3,500).

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For Practice PE 2-6A, PE 2-6B
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2-4
Objective 4
Discover and correct errors in recording
transactions.
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A transposition occurs when the order of the
digits is changed mistakenly, such as writing
542 as 452 or 524.
In a slide, the entire number is mistakenly moved
one or more spaces to the right or the left, such
as writing 542.00 as 54.20.
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Another type of error is a posting error. Assume
that on May 5 a 12,500 purchase of office
equipment on account was incorrectly journalized
and posted as a debit to Supplies and a credit to
Accounts Payable for 12,500.
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Correcting Entry
May 31 Office Equipment 18 12 500 00
Supplies 14 12 500 00
To correct erroneous debit to Supplies on May 5.
See invoice from Bell Office Equipment Company.
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The following errors took place in journalizing
and posting transactions

• Dividends of 6,000 were recorded as a debit to
  Office Salaries Expense and a credit to Cash.
• Utilities Expense of 4,500 paid for the current
  month was recorded as a debit to Miscellaneous
  Expense and a credit to Accounts Payable.

Journalize the entries to correct the errors.
Omit explanations.
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• Dividends 6,000
• Office Salaries Expense 6,000

• Accounts Payable 4,500
• Miscellaneous Expense 4,500

Utilities Expense 4,500 Cash 4,500
Note The first entry in (b) reverses the
incorrect entry, and the second entry records the
correct entry.
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For Practice PE 2-7A, PE 2-7B
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(No Transcript)