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.

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2| Chapter 2 Analyzing Transactions Accounting Cycle Transactions (Economic activities & Business condition)

Unadjusted trail balance (Prepare unadjusted trail balance)

Financial Statement (Prepare 4 financial statements)

Journal

Ledger

(record transactions in the journal)

(Posting transactons to ledger)

Adjustment

Adjusted Trail Balance

(Journalizing &posting adjusting entries)

(Prepare adjusted trail balance)

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

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3| Chapter 2 Analyzing Transactions Rearranging the accounting equation

Drawing + Expenses + Assets = Liabilities + Capital + Revenues Debit Accounts

Credit Accounts

If  Debit, and if  Credit

If  Credit, and if  Debit Every business transaction to be recorded in at least two accounts

Double-Entry System

Journal Date

Description Debit

Post Ref.

Debit

Credit

xxx Credit

xxx

Total debit = Total Credit

Journalizing  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.

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4| Chapter 2 Analyzing Transactions Example Transaction A. On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions. B. On November 5, NetSolutions paid $20,000 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 cash of $7,500 from customers for services provided. E. On November 30, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. F. On November 30, NetSolutions paid creditors on account, $950. 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 $2,000 from NetSolutions for personal use. I. On December 1, NetSolutions paid rent for December, $800. 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 $1,800. 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 $950 for two weeks’ wages. N. On December 16, NetSolutions received $3,100 from fees earned for the first half of December. O. Fees earned on account totaled $1,750 for the first half of December. P. On December 20, NetSolutions paid $900 to Executive Supply Co. on the $1,800 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

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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 $2,000 for personal use. Y. Instructions 1. Journalize 2. Prepare T account 3. Prepare an unadjusted trail balance

Date Nov.1 Nov. 5 Nov.10 Nov. 18

Nov. 30

Nov. 30 Nov. 30 Nov. 30 Dec. 1 Dec. 4 Dec. 6 Dec. 11

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Description Cash

Chris Clark, Capital

Land

Cash Supplies Account payable Cash Fees earned Wages expenses Rent expenses Utilities expenses Miscellaneous expenses cash Account payable cash Supplies expenses supplies Chris Clark, Drawing Cash Rent expenses Cash office equipment Account payable Miscellaneous expenses cash Account payable cash

Post. Ref.

Debit 25,000 20,000 1,350 7,500

Credit 25,000 20,000 1,350 7,500

2,125 800 450 275 3,650 950 800 2,000 800 1,800 180 400

950 800 2,000 800 1,800 180 400

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6| Chapter 2 Analyzing Transactions Dec. 13 Dec. 16 Dec. 16 Dec. 20 Dec. 21 Dec. 23 Dec. 27 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31

T Account

Wages expenses cash Cash Fees earned Account receivable Fees earned

950 3,100 1,750

Account payable cash cash Account receivable Supplies Cash Wages expenses cash Utilities expenses cash Utilities expenses cash

900 650 1,450 1,200 310 225

Cash

2,870

Fees earned Account receivable Fees earned Chris Clark, Drawing Cash

1,120 2,000

950 3,100 1,750 900 650 1,450 1,200 310 225 2,870 1,120 2,000

Title

Debit The left side of the account is called the debit side.

Credit The right side of the account is called 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.

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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.

T ACCOUNTS

cash 25,000 7,500 3,100 650 2,870

20,000 3,650 950 2,000 800 180 400 950 900 1,450 1,200 310 225 2,000 35,015

39,120 Bal. 4,105 Supplies 1,350 1,450 Bal. 2,000

800

Land 20,000 Bal. 20,000

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Chris Clark, Capital 25,000 25,000 Bal. Fees earned 7,500 3,100 1,750 2,870 1,120 16,340 Bal.

Account payable 950 1,350 400 1,800 900 900 Bal. Wages expenses 2,125 950 1,200 Bal. 4,275 Page 7

8| Chapter 2 Analyzing Transactions

Bal.

Miscellaneous expenses 275 180 455 Supplies expenses 800

Bal.

800

Chris Clark, Drawing 2,000 2,000 Bal. 4,000

Rent expenses 800 800 Bal. 1,600 Utilities expenses 450 310 225 Bal. 985 office equipment 1,800 Bal.

1,800

Account receivables 1,750 650 1,120 Bal. 2,220

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9| Chapter 2 Analyzing Transactions Net solutions Unadjusted trial balance December 30, 2011 Cash Account receivable Supplies Land office equipment Account payable Chris Clark, Capital Chris Clark, Drawing Fees earned Wages expenses Rent expenses Utilities expenses Miscellaneous expenses Supplies expenses

Debit balances 4,105 2,220 2,000 20,000 1,800

4,000 4,275 1,600 985 455 800 42,240

Credit balances

900 25,000 16,340

42,240

PR 2-2A – Page 91 PR 2-2B – Page 95

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