Transaction Analysis3

By Troy Ferguson,2014-09-14 19:18
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    Transaction Analysis

    Chapter 2


    Learning objectives analyze business transaction understand how accounting works record business transactions use a trial balance

     analyze transactions for quick decisions


     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



     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


    ; 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


     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


     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


     Write (and indent) the account credited next and the amount in the right column

     Debits must equal credits


     Apr 1 Received $25,000 and issued common stock


     April 2 - Purchased $800 of office supplies on account


     April 4 - Paid $20,000 cash for land to use as a building site


     April 6 - Performed service for customers and received cash of $2,000


     April 9 Paid $100 on accounts payable


     April 17 Performed services for FedEx on account totaling $1,200


     Apr 23 Collected $900 from FedEx on account


     Apr 30 Paid the following expense: salary, $1,000; rent, $500


     Transferring information from the journal to the ledger

    ; The collection of accounts and their balances


    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


     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







     Retained Earnings

     Common Stock


    Learning Objective 5

    Analyze transactions using only T-Accounts


     A quick informal analysis Helps users of financial information make decisions







    End of Chapter Two

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