278046962-Accounting-Warren-21st-Edition.ppt

accounting

1. Chapter 2
Analyzing Transactions
Accounting,21
st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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2. Some of the action has been automated,
so click the mouse when you see this
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3. 1.Explain why accounts are used to record
and summarize the effects of transactions
on financial statements.
2.Describe the characteristics of an
account.
3.List the rules of debit and credit and the
normal balances of accounts.
4.Analyze and summarize the financial
statement effects of transactions.
Objectives
After studying this
chapter, you should
be able to:

4. 5.Prepare a trial balance and explain how
it can be used to discover errors.
6.Discover errors in recording
transactions and correct them.
7.Use horizontal analysis to compare
financial statements from different
periods.
Objectives

5. Each financial statement
item, called an account, is
included in the ledger.

6. A group of
accounts for a
business entity is
called a ledger.

7. A list of the
accounts in a ledger
is called a chart of
accounts.

8. Major Account Classifications
Assetsare
resources owned
by the business.
Liabilitiesare debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable

9. Major Account Classifications
Liabilitiesare debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable
Assetsare
resources owned
by the business.
Liabilities are often identified
on the balance sheet by titles
that include payable.

10. Owner’s
equityis the
owner’s right to
the assets of the
business.
Revenuesare
increases in
owner’s equity as
a result of selling
services or
products.
Chris Clark,
Capital
Chris Clark,
Drawing
Fees Earned
Fares Earned
Commission
Revenue
Expensesare the
using up of assets
or consuming of
services to
generate revenue.
Rent Expense
Salary Expense
Utilities
Expense
Major Account Classifications

11. To assist you in learning,
an account can be drawn
to resemble the letter T.

12. The T-Account
The T-account has a title.
Cash

13. The T-Account
The left side of the account is thedebitside.
Cash
Left side
debit

14. The T-Account
The right side of the account is the credit side.
Cash
Left side
debit
Right side
credit

15. The T-Account
Cash
3,750
4,300
2,900
850
1,400
700
2,900
Typical entries

16. Balancing a T-Account

17. Cash
3,750
4,300
2,900
850
1,400
700
2,90010,950
First, foot
the debit
side.

18. 850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Next, foot the
credit side.

19. 850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Subtract total credits
from total debits to
obtain the account
balance.
5,100

20. Transactions and Balance
Sheet Accounts

21. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 1
1
2
3
4
Nov.1
2005
Cash 25 000 00
Chris Clark, Capital 25 000 00
Invested cash in NetSolutions.
(A)On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.

22. (A)On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.
Effects of this entry in the Ledger
Cash
Nov. 125,000 Nov. 125,000
Chris Clark, Capital

23. 4
5
6
7
8
9
10
5Land 20 000 00
Cash 20 000 00
Purchased land for building
site.
(B)On November 5,
NetSolutions bought land
for $20,000, paying cash.

24. Effects of this entry in the Ledger
Cash
Nov. 125,000Nov. 520,000
Land
Nov. 520,000
(B)On November 5,
NetSolutions bought land
for $20,000, paying cash.

25. 10
11
12
13
14
15
16
10Supplies 1 350 00
Accounts Payable 1 350 00
Purchased supplies on account.
(C)On November 10, NetSolutions
purchased supplies on account
for $1,350.

26. (C)On November 10, NetSolutions
purchased supplies on account
for $1,350.
Effects of this entry in the Ledger
Supplies
Nov. 101,350
Accounts Payable
Nov. 101,350

27. 30Accounts Payable 950 00
Cash 950 00
Paid creditors on account.
30
31
32
33
34
35
36
(F)On November 30, NetSolutions
paid creditors on account, $950.

28. Cash
Nov. 125,000Nov. 525,000
18 7,50030 3,650
Effects of this entry in the Ledger
Accounts Payable
Nov. 101,350Nov. 30 950
30 950
(F)On November 30, NetSolutions
paid creditors on account, $950.

29. Debits Credits
Asset accounts……….Increase (+)Decrease (-)
Liability accounts……Decrease (-)Increase (+)
Owner’s equity
(capital) accounts….Decrease (-)Increase (+)
Rules of Debit / Credit Balance
Sheet Accounts

30. Credit for
increases
(+)
Credit for
increases
(+)
Credit for
decreases
(-)
Debit for
increases
(+)
Debit for
decreases
(-)
Debit for
decreases
(-)
ASSETS
Asset Accounts
LIABILITIES
Liability Accounts
Owner’s Equity Accounts
OWNER’S EQUITY
Balance Sheet Accounts

31. (D)On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .
18Cash 7 500 00
Fees Earned 7 500 00
Received fees from customers.
14
15
16
17
18
19
20

32. Effects of this entry in the Ledger
Cash
Nov. 125,000Nov. 525,000
Fees Earned
Nov. 187,500
18 7,500
(D)On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .

33. (E)Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
30Wages Expense 2 125 00
Rent Expense 800 00
Utilities Expense 450 00
Miscellaneous Expense 275 00
Cash 3 650 00
Paid expenses.
18
19
20
21
22
23
24

34. Effects of this entry in the Ledger
Cash
Nov. 125,000Nov. 525,000
Wages Expense
Nov. 302,125
18 7,500
Rent Expense
Nov. 30 800
Utilities Expense
Nov. 30 450
Miscellaneous Expense
Nov. 30 275
30 3,650
(E)Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .

35. In every entry the sum of
the debits always equal
the sum of the credits.

36. (G)On November 30, a count revealed
that $800 of the supplies inventory
had been used.
30Supplies Expense 800 00
Supplies 800 00
Supplies used during
November.
25
26
27
28
29
30
31

37. Effects of this entry in the Ledger
Supplies
Nov. 101,350
Supplies Expense
Nov. 30 800Nov. 30 800
(G)On November 30, a count revealed
that $800 of the supplies inventory
had been used.

38. Double-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 Pacioli
Developer of
Double-Entry
Accounting
Scale or Balance
Receive
DEBIT
Give
CREDIT
T account
Left Side
Receive
DEBIT
Right Side
Give
CREDIT

39. Credit for
increases
(+)
Credit for
decreases
(-)
Debit for
increases
(+)
Debit for
decreases
(-)
Expense Accounts Revenue Accounts
Rules of Debit / Credit Income
Statement Accounts

40. Debits Credits
Revenue accounts……Decrease (-)Increase (+)
Expense accounts……Increase (+)Decrease (-)
Income Statement Accounts

41. Withdrawals
by the
Owner

42. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Nov.30
2005
Chris Clark, Drawing 2 000 00
Cash 2 000 00
Chris Clark withdrew cash for
personal use.
(H)On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

43. 30 950
30 2,000
Cash
Nov. 125,000Nov. 525,000
18 7,50030 3,650
Effects of this entry in the Ledger
Chris Clark, Drawing
Nov. 101,350Nov. 302,000
(H)On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

44. Increase
(Normal Balances)Decreases
Balance sheet accounts:
Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Normal Balances of Accounts

45. Flow of Business Transactions
1
Transaction
authorized
2
Transaction
takes place
3
Document
prepared
4
Entry recorded
in journal 5
Entry posted to
ledger

46. 1.Determine whether an asset, a liability,
owner’s equity, revenue, or expense 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.
System to Analyze Transactions

47. Journalizing
and Posting

48. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec.31
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
Dec. 1NetSolutions paid a premium of
$2,400 for a comprehensive insurance
policy covering two years.

49. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec.1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
ACCOUNTPrepaid Insurance ACCOUNT NO. 15
Balance
Debit CreditDate Debit CreditItem
Post.
Ref.
2 400 00 2 400 00Dec.1
2005
Paid premium on two-year
policy.

50. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec.1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
ACCOUNTPrepaid Insurance ACCOUNT NO. 15
Balance
Debit CreditDate Debit CreditItem
Post.
Ref.
2 400 00 2 400 00Dec.1
2005
2
15
Paid premium on two-year
policy.

51. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec.1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
15
ACCOUNTCash ACCOUNT NO. 11
Balance
Debit CreditDate Debit CreditItem
Post.
Ref.
2 000 005 900 00Nov.30
2005
2
Dec. 1 2 400 003 500 00

52. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec.1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
15
ACCOUNTCash ACCOUNT NO. 11
Balance
Debit CreditDate Debit CreditItem
Post.
Ref.
2 000 005 900 00Nov.30
2005
2
2 400 003 500 00Dec. 1
11
2

53. 14
15
16
17
1Rent Expense 52 800 00
Cash 11 800 00
Paid rent for December.
Dec. 1NetSolutions paid rent for December,
$800.

54. 14
15
16
17
1Cash 14 360 00
Unearned Rent 23 360 00
Received advanced payment
For three months’ rent of land.
Dec. 1NetSolutions receives $360 for three
month’s rent beginning December 1.

55. Dec. 4NetSolutions purchased office
equipment on account from Executive
Supply Co. for $1,800.
18
19
20
21
4Office Equipment 181 800 00
Accounts Payable 21 1 800 00
Purchased office equipment on
account.

56. Dec. 6NetSolutions paid $180 for a
newspaper advertisement.
21
22
23
24
6Miscellaneous Expense 59 180 00
Cash 11 180 00
Paid for newspaper ad.

57. Dec. 11NetSolutions paid creditors $400.
24
25
26
27
11Accounts Payable 21 400 00
Cash 11 400 00
Paid creditors on account.

58. Dec. 13NetSolutions paid a receptionist and
part-time assistant $950 for two
weeks’ wages.
Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 3
1
2
3
4
Dec.13
2005
Wages Expense 51 950 00
Cash 11 950 00
Paid two week’s wages.

59. Dec. 16NetSolutions received $3,100 from
fees earned for the first half of
December.
5
6
7
8
16Cash 113 100 00
Fees Earned 41 3 100 00
Received fees from customers.

60. Dec. 16Fees earned on account totaled
$1,750 for the first half of
December.
9
10
11
12
16Accounts Receivable 121 750 00
Fees Earned 41 1 750 00
Received fees from customers.

61. Dec. 20NetSolutions paid $900 to Executive
Supply Co. on the $1,800 debt owed
from the December 4 transaction.
13
14
15
16
20Accounts Payable 21 900 00
Cash 11 900 00
Paid part of amount owed to
Executive Supply Co.

62. Dec. 21NetSolutions received $650 from
customers in payment of their
accounts.
18
19
20
21
21Cash 11 650 00
Accounts Receivable 12 650 00
Received cash from customer
on account.

63. Dec. 23NetSolutions paid $1,450 for
supplies.
22
23
24
25
23Supplies 141 450 00
Cash 11 1 450 00
Purchased supplies.

64. Dec. 27NetSolutions paid the receptionist
and part-time assistant $1,200 for
two weeks’ wages.
27
28
29
30
27Wages Expense 511 200 00
Cash 11 1 200 00
Paid two weeks’ wages.

65. Dec. 31NetSolutions paid its $310 telephone
bill for the month.
31
32
33
34
31Utilities Expense 54 310 00
Cash 11 310 00
Paid telephone bill.

66. Dec. 31NetSolutions paid its $225 electric
bill for the month.
Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 4
1
2
3
4
Dec.31
2005
Utilities Expense 54 225 00
Cash 11 225 00
Paid utility bill.

67. Dec. 31NetSolutions received $2,870 from
fees earned for the second half of
December.
5
6
7
8
31Cash 112 870 00
Fees Earned 41 2 870 00
Received fees from customers.

68. Dec. 31NetSolutions earned $1,120 on
account for the second half of
December.
9
10
11
12
31Accounts Receivable 121 120 00
Fees Earned 41 1 120 00
Recorded fees earned on
account.

69. Dec. 31Chris Clark withdrew $2,000 for
personal use.
14
15
16
17
31Chris Clark, Drawing 322 000 00
Cash 11 2 000 00
Chris Clark withdrew cash
for personal use.

70. Trial Balance

71. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 0042 600 00

72. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 0042 600 00
Balance
Sheet
Items

73. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 0042 600 00
Statement
of Owner’s
Equity
Item

74. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 0042 600 00
Income
Statement
Items

76. 1.Failure to record a transaction or to post a
transaction.
2.Recording the same erroneous amount
for both the debit and the credit parts of a
transaction.
3.Recording the same transaction more
than once.
4.Posting a part of a transaction correctly
as a debit or credit but to the wrong
account.
Errors that willnotcause the
trial balance to be unequal:

77. Error Correction Procedure
1.Journal entry is incorrectDraw a line through the error
but not posted. and insert correct title or
amount.
Error Correction Procedure
Correction
of Errors

78. Error Correction Procedure
1.Journal entry is incorrectDraw a line through the error
but not posted. and insert correct title or
amount.
Error Correction Procedure
2.Journal entry is correctDraw a line through the
but posted incorrectly.posted error and post
correctly.
Correction
of Errors

79. Error Correction ProcedureError Correction Procedure
3.Journal entry is incorrectJournalize and post a
and posted correcting entry.
Correction
of Errors

80. What would be the necessary
correcting entry?
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.
DateDescription Debit Credit
May 5Supplies 12,500
Accounts Payable 12,500

81. 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.
DateDescription Debit Credit
May 5Supplies 12,500
Accounts Payable 12,500
DateDescription Debit Credit
May 5Office Equipment 12,500

82. DateDescription Debit Credit
May 5Office Equipment 12,500
Supplies 12,500
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.
DateDescription Debit Credit
May 5Supplies 12,500
Accounts Payable 12,500

83. Financial Analysis and
Interpretation
Comparing an item in a current
statement with the same item in
prior statements is called
horizontal analysis.

84. J Holmes, Attorney-at-Law
Income Statement
For the Year Ended December 31, 2005 and 2006
Increase (Decrease)
2006 2005 Amount Percent
Fees earned $187,500$150,000$37,50025.0%
Operating expenses:
Wages expense$ 60,000$ 45,000$15,00033.3%
Rent expense 15,00012,0003,00025.0%
Utilities expense12,5009,0003,50038.9%
Supplies expense2,7003,000(300)(10.0)%
Misc. expense 2,3001,800 50027.8%
Total operating
expenses $ 92,500$ 70,800$21,70030.6%
Net income $ 95,000$ 79,200$15,80019.9%

85. The End
Chapter 2