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PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA


Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA
Chapter 2
Analyzing and Recording
Transactions
McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.
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Analyze each transaction and
event from source documents
ANALYZING AND RECORDING
PROCESS
Record relevant transactions
and events in a journal
Post journal information
to ledger accounts
Prepare and analyze
the trial balance
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Sales
Tickets
Bank
Statements
Purchase
Orders
Checks
SOURCE DOCUMENTS
Bills from
Suppliers
Employee
Earnings
Records
C 1
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An account is a
record of
increases and
decreases in a
specific asset,
liability, equity,
revenue, or
expense item.
THE ACCOUNT AND ITS ANALYSIS
The general
ledger is a record
containing all
accounts used by
the company.
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THE ACCOUNT AND ITS ANALYSIS
Owner, Capital
Owner, Withdrawals
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Land
Equipment
Buildings
Cash
Notes
Receivable
Supplies
Prepaid
Accounts
Accounts
Receivable
Asset
Accounts
ASSET ACCOUNTS
C 2
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Accrued
Liabilities
Unearned
Revenue
Notes
Payable
Accounts
Payable
Liability
Accounts
LIABILITY ACCOUNTS
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Equity
Accounts
Revenues
Owners
Capital
Owners
Withdrawals
Expenses
EQUITY ACCOUNTS
C 2
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Liabilities Equity Assets
= +
THE ACCOUNT AND ITS ANALYSIS
Owners
Capital
Owner's
Withdrawals
Revenues Expenses
+ +

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LEDGER AND CHART OF ACCOUNTS
The ledger is a collection of all accounts for an
information system. A companys size and diversity
of operations affect the number of accounts needed.
The chart of accounts is a list of all accounts and includes an
identifying number for each account.
Account Number Account Name Account Number Account Name
101 Cash 302 C. Taylor, Withdrawals
106 Accounts receivable 403 Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
301 C. Taylor, Capital 690 Utilities expense
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DEBITS AND CREDITS
A T-account represents a ledger account and
is a tool used to understand the effects of
one or more transactions.
(Left side) (Right side)
Debit Credit
Account Title
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Liabilities Equity Assets
= +
DOUBLE-ENTRY ACCOUNTING
Debit Credit Debit Credit
Debit Credit
ASSETS
+ -
LIABILITIES
- +
EQUITIES
- +
C 4
Normal Normal Normal
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Revenues Expenses
Owners
Capital
Owner's
Withdrawals
_
+
_
Debit Credit
Owners
Capital
- +
Debit Credit
Owner's
Withdrawals
+ -
Debit Credit
Expenses
+ -
Debit Credit
Revenues
- +
DOUBLE-ENTRY ACCOUNTING
Equity
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DOUBLE-ENTRY ACCOUNTING
An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.

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JOURNALIZING &
POSTING TRANSACTIONS
Step 1: Analyze
transactions and source
documents.
Liabilities Equity Assets
= +
Step 2: Apply double-
entry accounting
(Left side) (Right side)
Debit Credit
T- Account
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record journal entry
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Date Description Debit Credit
2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
Dec. 2 Supplies 2,500
Cash 2,500
Purchased supplies for cash
Dollar amount of debits
and credits
JOURNALIZING TRANSACTIONS
Transaction
Date
Transaction
explanation
Titles of Affected
Accounts
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Initial investment G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 4,200 5,700
BALANCE COLUMN ACCOUNT
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
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2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 3 Purchased equipment G1 20,000.00 (20,000.00)
Dec. 10 Collection from customer G1 2,200.00 (17,800.00)
1
Identify the debit account in ledger.


POSTING JOURNAL ENTRIES
P 1
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2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1
Dec. 3 Purchased equipment G1 20,000.00 (20,000.00)
Dec. 10 Collection from customer G1 2,200.00 (17,800.00)
2
Enter the date.
POSTING JOURNAL ENTRIES
P 1
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2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Investment by owner 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
3
Enter the amount and description.
POSTING JOURNAL ENTRIES
P 1
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Investment by owner G1 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
4
Enter the journal reference.
POSTING JOURNAL ENTRIES
P 1
2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Investment by owner G1 30,000 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
5
Compute the balance.
POSTING JOURNAL ENTRIES
P 1
2011
Dec. 1 Cash 30,000
C. Taylor, Capital 30,000
Investment by owner
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2011
Dec. 1 Cash 101 30,000
C. Taylor, Capital 30,000
Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Investment by owner G1 30,000 30,000
Dec. 3 Purchased equipment G1 20,000 (20,000)
Dec. 10 Collection from customer G1 2,200 (17,800)
Enter the ledger reference.
6
POSTING JOURNAL ENTRIES
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Transaction:
Owner invested $30,000 in FastForward on Dec. 1.
ANALYZING TRANSACTIONS
Assets = + Equity
Cash Capital
30,000 30,000
Liabilities
Analysis:
(1) 30,000
Cash 101 301
(1) 30,000
C. Taylor, Capital 301
Posting:
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ANALYZING TRANSACTIONS
Transaction:
FastForward purchases supplies by paying $2,500
cash.
Assets = + Equity
Cash Supplies Capital
(2,500) 2,500
Liabilities
Analysis:
(2) Supplies 126 2,500
Cash 101 2,500
Double entry:
(2) 2,500
Supplies 126
(1) 30,000 (2) 2,500
Cash 101
Posting:
A 1
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Transaction:
FastForward purchases equipment by paying $26,000
cash.
ANALYZING TRANSACTIONS
Assets = + Equity
Cash Equipment Capital
(26,000) 26,000
Liabilities
Analysis:
(3) Equipment 167 26,000
Cash 101 26,000
Double entry:
(1) 30,000 (2) 2,500
(3) 26,000
Cash
(3) 26,000
Equipment 167 101
Posting:
A 1
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Transaction:
FastForward purchases $7,100 of supplies on credit.
ANALYZING TRANSACTIONS
Assets = + Equity
Supplies Accounts Payable Capital
7,100 7,100
Liabilities
Analysis:
(4) Supplies 126 7,100
Accounts payable 201 7,100
Double entry:
(2) 2,500
(4) 7,100
Supplies 126
(4) 7,100
Accounts Payable 201
Posting:
A 1
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ANALYZING TRANSACTIONS
Transaction:
FastForward provides consulting services and
immediately collects $4,200 cash.
Assets = + Equity
Cash Revenue
4,200 4,200
Liabilities
Analysis:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Double entry:
403 101
(1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
Cash 101
(5) 4,200
Consulting Revenue 403
Posting:
A 1
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After processing its remaining transactions for
December, FastForwards Trial Balance is prepared.
Debits Credits
Cash 4,350

$
Accounts receivable -
Supplies 9,720
Prepaid Insurance 2,400
Equipment 26,000
Accounts payable 6,200 $
Unearned consulting revenue 3,000
C. Taylor, Capital 30,000
Owner's Withdrawals 200
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total 45,300 $ 45,300

$
FastForward
Trial Balance
December 31, 2011
The trial balance
lists all account
balances in the
general ledger. If
the books are in
balance, the total
debits will equal the
total credits.
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PREPARING A TRIAL BALANCE
Preparing a trail balance involves three steps:
1.List each account title and its amount (from
ledger) in the trial balance. If an account has
a zero balance, list it with a zero in the
normal balance column (or omit it entirely).
2.Compute the total of debit balances and the
total of credit balances.
3.Verify (prove) total debit balances equal total
credit balances.
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SEARCHING FOR AND CORRECTING
ERRORS
If the trial balance does not balance, the
error(s) must be found and corrected.
Make sure the trial
balance columns are
correctly added.
Make sure account
balances are correctly
entered from the ledger.
See if debit or credit
accounts are mistakenly
placed on the trial balance.
Re-compute each
account balance in the
ledger.
Verify that each journal
entry is posted correctly.
Verify that each original
journal entry has equal
debits and credits.
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USING A TRIAL BALANCE TO PREPARE
FINANCIAL STATEMENTS
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INCOME STATEMENT
Revenues:
Consulting revenue 5,800 $
Rental revenue 300
Total revenues 6,100 $
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income 3,470 $
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
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STATEMENT OF CHANGES IN EQUITY
C. Taylor, Capital 12/1/11 - $
Net income for December 3,470
Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
C. Taylor, Capital, 12/31/11 33,270 $
Statement of Changes in Equity
For the Month Ended December 31, 2011
FASTFORWARD
Revenues:
Consulting revenue 5,800 $
Rental revenue 300
Total revenues 6,100 $
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income 3,470 $
FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Connections
P 3
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BALANCE SHEET
Assets
Cash 4,350 $
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets 42,470 $
Liabilities
Accounts payable 6,200 $
Unearned revenue 3,000
Total liabilities 9,200
Equity
C. Taylor, Capital 33,270 $
Total equity 33,270
Total liabilities and equity 42,470 $
FASTFORWARD
Balance Sheet
December 31, 2011
Connections
P 3
C. Taylor, Capital 12/1/11 - $
Net income for December 3,470
Plus: Investments by Owner 30,000
33,470
Less: Owner Withdrawals 200
C. Taylor, Capital, 12/31/11 33,270 $
Statement of Changes in Equity
For the Month Ended December 31, 2011
FASTFORWARD
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PRESENTATION ISSUES
1. Dollar signs are not used in journals and ledgers.
2. Dollar signs appear in financial statements and other
reports such as trial balances. The usual practice is to
put dollar signs beside only the first and last numbers
in a column.
3. When amounts are entered in the journal, ledger, or
trial balance, commas are optional to indicate
thousands, millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to the
nearest dollar, or even to a higher level.
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Debt Ratio
Evaluates the level of debt risk.
A higher ratio indicates that there is a
greater probability that a company will
not be able to pay its debt in the
future.
A 2
Total Liabilities
Total Assets
Debt Ratio =
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END OF CHAPTER 2