Transaction Analysis
Chapter 2
会计学院;张娟
julia.0313@yahoo.com.cn
Learning objectives • analyze business transaction • understand how accounting works • record business transactions • use a trial balance
• analyze transactions for quick decisions
Transactions
• Any event that impacts the financial position of a business
• Can be measured reliably
• Two sides:
; Business gives something
; Business receives something
• Accounting records both sides of a transaction
The Account
• Record of all changes in a particular asset, liability or equity
• Remember the accounting equation
; Assets = Liabilities + Owner’s Equity
Common Asset Accounts • Cash
; Bank accounts, cash on hand
• Accounts Receivable
; Customer promise to pay for goods or services provided
; Represents future collection of cash • Notes receivable
; Written promise to pay
; Bear interest
Common Asset Accounts • Inventory
; Products held for sale
• Prepaid expenses
; Expenses paid for in advance
; Provide future benefit
; Includes prepaid rent, prepaid insurance and supplies • Land
Common Asset Accounts
• Buildings
• Equipment
• Furniture and Fixtures
Common Liability Accounts • Accounts payable
; Company’s promise to pay for goods or services received
• Notes payable
; Signed agreements to pay
; Include interest
• Accrued liabilities
; Expenses that have not been paid
; Include interest payable and salaries payable
Equity Accounts
• Common stock
; Shareholders’ investment in the company
• Retained earnings
; Earnings kept by the company
; Cumulative net income minus dividends paid to shareholders • Revenues
; Earned by providing goods or services
• Expenses
; Costs of operating a business
Learning Objective 1
Analyze Transactions
Transaction Analysis
• Every transaction has at least two parts • The accounting equation always balances before and after
each transaction
• A common transaction for a new business is to issue stock
to its owners
• How would this impact the accounting equation?
Example Transaction (1)
• Three friends decide to start a salon • They invest $40,000 to begin the business • The business issues common stock to the owners
Example Transaction (2)
• The salon purchases chairs and massage tables for $12,000
Example Transactions (3)
• The salon purchases hair styling and other supplies on account for $5,000
Example Transaction (4)
The salon earns $6,000 from providing services to customers. The business collected cash.
Example Transaction (5)
• The salon paid monthly rent of $4,000
Learning Objective 2
Understand how accounting works
Double-entry Accounting
• Each transaction affects at least two accounts
The T-account
Debit and Credit Rules • Debit and credit are neutral terms
; Not good or bad
• Mean either a decrease or increase depending on the type
of account
Debits and Credits
Stockholders’ Equity Debit & Credits
• Common stock and Retained Earnings are increased by
credits
• Dividends reduce Retained Earnings
; Dividends are increased by debits • Net income increases Retained Earnings
; Net Income = Revenues minus Expenses
• Revenues are increased by credits
• Expenses are increased by debits
Debits and Credits Debit to increase
; Assets
; Dividends
; Expenses
Credits to increase
; Liabilities
; Revenue
; Common stock
; Retained earnings
Practicing Debits and Credits • Increase cash
; Debit
• Increase accounts payable
; Credit
• Decrease accounts receivable
; Credit
• Increase revenue
; Credit
Practicing Debits and Credits
• Increase rent expense
; Debit
• Increase common stock
; Credit
• Decrease notes payable
; Debit
• Decrease cash
; __________________________
Learning Objective 3
Record transactions in the journal
The Journal
• Chronological record of transactions
• Three steps
; Identify accounts impacted by transaction
; Apply debit/credit rules for the increase or decrease in the
accounts
• You should have at least one debit and one credit
; Record transactions in journal
Journal entry
• Write the account debited first and the amount in the left
column
• Write (and indent) the account credited next and the amount in the right column
• Debits must equal credits
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• Apr 1 – Received $25,000 and issued common stock
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• April 2 - Purchased $800 of office supplies on account
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• April 4 - Paid $20,000 cash for land to use as a building site
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• April 6 - Performed service for customers and received cash of $2,000
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• April 9 Paid $100 on accounts payable
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• April 17 – Performed services for FedEx on account totaling $1,200
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• Apr 23 – Collected $900 from FedEx on account
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• Apr 30 – Paid the following expense: salary, $1,000; rent, $500
Posting
• Transferring information from the journal to the ledger
; The collection of accounts and their balances
Posting
Flow of Accounting Data
• Transaction occurs
• Transaction analyzed
; Accounts identified
; Debit/Credit rules applied
• Transaction recorded in the Journal
• Amounts posted to the Ledger
Determining Account Balance
• After transactions are posted, the amount in each ledger account is computed
• The debit side and credit side are totaled • The difference between the two sides is computed
; If the debit side is larger, the account has a debit balance
; If the credit side is larger, the account has a credit balance
Determining Account Balance
Learning Objective 4
Use a trial balance
Trial Balance
• Lists all accounts with their balance
; Debit amounts in the left column
; Credit amounts in the right column
• Begins with assets, then liabilities and stockholders’ equity
• The columns are totaled and should equal each other
; Shows if debits equal credits
Correcting Errors
• Sometimes the trial balance columns don’t equal
• Steps to find the error:
; Search for any missing accounts
; Divide the out-of-balance amount by two
• This will help find a debit that was listed as a credit, and vice versa
; Divide the out-of-balance amount by nine
• Slide – misstating an amount by omitting or adding a zero ($4000 as $400)
• Transposition – switching figures within a number ($1342 as $1423)
Chart of Accounts
• Each account is assigned a number
; Assets usually begin with 1
• 100s or 1000s
; Liabilities usually begin with 2
• 200s and 200s
; Stockholders’ Equity (Common Stock, Dividends and Retained
Earnings) begin with 3
; Revenues with a 4 and Expenses with a 5
Normal Balance
• What increases the account (debit or credit) is the normal balance
; Assets are increased by debits, so assets have a normal debit
balance
• If the balance is not “normal”, it indicates a negative amount
; If cash has a credit balance, it means the company has
overdrawn its bank account
Normal Balances
DEBITS
• Assets
• Dividends
• Expenses
CREDITS
• Liabilities
• Retained Earnings
• Common Stock
• Revenues
Learning Objective 5
Analyze transactions using only T-Accounts
T-Accounts
• A quick informal analysis • Helps users of financial information make decisions
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End of Chapter Two