Chapter 2 Power Notes Analyzing Transactions Learning Objectives 1.

Chapter 2 Power Notes Analyzing Transactions Learning Objectives 1. Usefulness of an Account 2. Characteristics of an Account 3. Analyzing and Summarizing Transactions 4. Illustration of Analyzing and Summarizing 5. Trial Balance 6. Discovery and Correction of Errors 7. Financial Analysis and Interpretation C2 C2 - 1

Chapter 2 Power Notes Analyzing Transactions Slide # 3 11 36 40 43 50 57 Power Note Topics Double-Entry Accounting Analyzing and Recording Transactions Chart of Accounts, Trial Balance Journal, Ledger, and Trial Balance Recording and Posting an Entry Correcting Errors Horizontal Analysis Note: To select a topic, type the slide # and press Enter. C2 - 2

Double-Entry Double-Entry Accounting 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.” Scale or Balance Luca Pacioli Developer of Double-Entry Accounting T account Left Side Receive DEBIT Receive DEBIT Right Side Give CREDIT Give CREDIT C2 - 3

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded (diperluas) to include (mencakup) all five financial categories indicating what has been received and given.” DEBITS received CREDITS given C2 - 4

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Assets C2 - 5

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Assets Expenses C2 - 6

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Liabilities Assets Expenses C2 - 7

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Liabilities Assets Owner’s Equity Expenses C2 - 8

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Liabilities Assets Expenses Owner’s Equity Revenues C2 - 9

Expanded Expanded Accounting Accounting Equation Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given Liabilities Assets Owner’s Equity Net Income Expenses Revenues C2 - 10

NetSolutions NetSolutions A A Sole Sole Proprietorship Proprietorship “ On November 1, 2002, I started a sole proprietorship called NetSolutions. I plan to use my knowledge of microcomputers and offer computer consulting services for a fee. The following double-entry transactions show how amounts received (debits) always equal amounts given (credits).” Chris Clark, Owner C2 - 11

Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits 25,000 in a bank account for NetSolutions. receive Debit NetSolutions (investee) give give Credit Credit General Journal Date Description Debit Credit 11/1 C2 - 12

Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits 25,000 in a bank account for NetSolutions. Cash receive Debit NetSolutions (investee) give give Credit Credit General Journal Date Description 11/1 Cash Debit Credit 25,000 C2 - 13

Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits 25,000 in a bank account for NetSolutions. Cash receive Debit A promise to the owner NetSolutions (investee) give give Credit Credit General Journal Date Description 11/1 Cash Chris Clark, Capital Debit Credit 25,000 25,000 C2 - 14

Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for 20,000. receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit Credit 11/5 C2 - 15

Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for 20,000. Land receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description 11/5 Land Debit Credit 20,000 C2 - 16

Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for 20,000. Land receive Debit Cash NetSolutions (buyer) give give Credit Credit General Journal Date Description 11/5 Land Cash Debit Credit 20,000 20,000 C2 - 17

Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for 1,350, agreeing to pay in the near future. receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit Credit 11/10 C2 - 18

Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for 1,350, agreeing to pay in the near future. Supplies receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit 11/10 Supplies 1,350 Credit C2 - 19

Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for 1,350, agreeing to pay in the near future. Supplies receive Debit A promise to pay later NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit 11/10 Supplies Accounts Payable 1,350 Credit 1,350 C2 - 20

Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of 7,500, receiving cash. receive Debit NetSolutions (seller) give give Credit Credit General Journal Date Description Debit Credit 11/18 C2 - 21

Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of 7,500, receiving cash. Cash receive Debit NetSolutions (seller) give give Credit Credit General Journal Date Description Debit 11/18 Cash 7,500 Credit C2 - 22

Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of 7,500, receiving cash. Cash receive Debit Services NetSolutions (seller) give give Credit Credit General Journal Date Description Debit 11/18 Cash Fees Earned 7,500 Credit 7,500 C2 - 23

Business Transactions Various suppliers Entry E. NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit Credit C2 - 24

Business Transactions Various suppliers Entry E. NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Services, benefits receive Debit NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit 11/18 Wages Expense Rent Expense Utilities Expense Misc. Expense 2,125 800 450 275 Credit C2 - 25

Business Transactions Various suppliers Entry E. NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Services, benefits receive Debit Cash NetSolutions (buyer) give give Credit Credit General Journal Date Description Debit 11/18 Wages Expense Rent Expense Utilities Expense Misc. Expense Cash 2,125 800 450 275 Credit 3,650 C2 - 26

Business Transactions Supplier (payee) Entry F. NetSolutions pays 950 to creditors on account. receive Debit NetSolutions (payor) give give Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 27

Business Transactions Supplier (payee) Entry F. NetSolutions pays 950 to creditors on account. Reduction in obligation receive Debit NetSolutions (payor) give give Credit Credit General Journal Date Description 11/30 Accounts Payable Debit Credit 950 C2 - 28

Business Transactions Supplier (payee) Entry F. NetSolutions pays 950 to creditors on account. Reduction in obligation receive Debit Cash NetSolutions (payor) give give Credit Credit General Journal Date Description 11/30 Accounts Payable Cash Debit 950 Credit 950 C2 - 29

Business Transactions Entry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is 550. receive Debit NetSolutions (user) give give Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 30

Business Transactions Entry G. At the end of the month, the cost of supplies on hand is 550. Internal Transaction (no external entity) Use of supplies receive Debit NetSolutions (user) give give Credit Credit General Journal Date Description 11/30 Supplies Expense Debit Credit 800 Balance of Supplies account 1,350 less 550 on hand 800 used C2 - 31

Business Transactions Entry G. At the end of the month, the cost of supplies on hand is 550. Internal Transaction (no external entity) Use of supplies receive Debit Supplies NetSolutions (user) give give Credit Credit General Journal Date Description 11/30 Supplies Expense Supplies Debit 800 Credit 800 Balance of Supplies account 1,350 less 550 on hand 800 used C2 - 32

Business Transactions Entry H. Chris Clark (payee) Chris Clark withdraws 2,000 in cash. receive Debit NetSolutions (payor) give give Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 33

Business Transactions Entry H. Chris Clark (payee) Chris Clark withdraws 2,000 in cash. Reduction in obligation receive Debit NetSolutions (payor) give give Credit Credit General Journal Date Description Debit 11/30 Chris Clark, Drawing 2,000 Credit C2 - 34

Business Transactions Entry H. Chris Clark (payee) Chris Clark withdraws 2,000 in cash. Reduction in obligation receive Debit Cash NetSolutions (payor) give give Credit Credit General Journal Date Description Debit 11/30 Chris Clark, Drawing Cash 2,000 Credit 2,000 C2 - 35

NetSolutions Chart of Accounts 1. 11 12 14 15 17 18 Balance Sheet Assets Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment 2. 21 23 Liabilities Accounts Payable Unearned Rent 3. 31 32 Owner’s Equity Chris Clark, Capital Chris Clark, Drawing Income Statement 4. Revenue 41 Fees Earned 5. 51 52 54 55 59 Expenses Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense C2 - 36

NetSolutions Trial Balance November 30, 2002 11 14 17 21 31 32 41 51 52 54 55 59 Cash Supplies Land Accounts Payable Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 5,900 550 20,000 400 25,000 2,000 7,500 2,125 800 450 800 275 32,900 32,900 C2 - 37

NetSolutions Trial Balance November 30, 2002 Balance Sheet 11 14 17 21 31 32 41 51 52 54 55 59 Cash Supplies Land Accounts Payable Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 5,900 550 20,000 400 25,000 2,000 7,500 2,125 800 450 800 275 32,900 32,900 C2 - 38

NetSolutions Trial Balance November 30, 2002 Income Statement 11 14 17 21 31 32 41 51 52 54 55 59 Cash Supplies Land Accounts Payable Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 5,900 550 20,000 400 25,000 2,000 7,500 2,125 800 450 800 275 32,900 32,900 C2 - 39

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal C2 - 40

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal 2. Transactions are posted from journal to ledger. Journal Ledger C2 - 41

Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal 2. Transactions are posted from journal to ledger. Journal Ledger 3. Trial balance is prepared. Trial Balance C2 - 42

Recording and Posting an Entry General Journal Date Description 12/1 Prepaid Insurance Cash Page 1 Post. Ref. Debit Credit 2,400 2,400 1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction. 3. Post the credit side of the transaction. C2 - 43

Recording and Posting an Entry General Journal 1 Date Description 12/1 Prepaid Insurance Cash Page 1 Post. Ref. Debit Credit 2,400 2,400 General Ledger Account: Prepaid Insurance Post. Date Item Ref. Debit Account No. 15 Balance Credit Debit Credit 12/1 1 Enter the transaction date in the ledger account. C2 - 44

Recording and Posting an Entry General Journal Page 1 Post. Ref. Date Description 12/1 Prepaid Insurance Cash Credit 2,400 2,400 2 General Ledger Account: Prepaid Insurance Post. Date Item Ref. Debit 12/1 Debit 1 Account No. 15 Balance Credit Debit Credit 2,400 2 Enter the debit amount in the ledger debit column. C2 - 45

Recording and Posting an Entry General Journal Page 1 Post. Ref. Date Description 12/1 Prepaid Insurance Cash Debit Credit 2,400 2,400 General Ledger Account: Prepaid Insurance Post. Date Item Ref. Debit 12/1 1 Account No. 15 Balance Credit Debit Credit 2,400 2,400 3 3 Update the ledger account balance. C2 - 46

Recording and Posting an Entry General Journal Page 1 Post. Ref. Date Description 12/1 Prepaid Insurance Cash Credit 2,400 2,400 4 General Ledger Account: Prepaid Insurance Post. Date Item Ref. Debit 12/1 Debit Account No. 15 Balance Credit Debit Credit 1 4 Enter the journal page in the ledger account. C2 - 47

Recording and Posting an Entry General Journal Page 1 Date Description 12/1 Prepaid Insurance Cash Debit 15 2,400 Credit 2,400 5 General Ledger Account: Prepaid Insurance Post. Date Item Ref. Debit 12/1 Post. Ref. 1 2,400 Account No. 15 Balance Credit Debit Credit 2,400 5 Enter the ledger account number in the journal. C2 - 48

Recording and Posting an Entry General Journal 1 Page 1 Post. Ref. Date Description 12/1 Prepaid Insurance Cash 15 11 Account: Cash Date Item 11/30 Balance 12/1 Credit 2,400 2,400 5 4 General Ledger Debit 2 Account No. 11 Post. Ref. 1 Debit Credit 2,400 Balance Debit Credit 5,900 3,500 3 All five parts of the credit posting are shown. C2 - 49

Correcting Errors Three Types of Errors Journal Entry 1. incorrect Ledger Posting Correction Procedure not posted correct Journal C2 - 50

Correcting Errors Three Types of Errors Journal Entry 1. incorrect 2. correct Ledger Posting Correction Procedure not posted correct Journal incorrectly posted correct Ledger C2 - 51

Correcting Errors Three Types of Errors Journal Entry 1. incorrect 2. correct 3. incorrect Ledger Posting Correction Procedure not posted correct Journal incorrectly posted correct Ledger already posted record and post a correcting entry Error 3 requires a correcting journal entry. C2 - 52

Correcting Errors – An Example On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. General Journal – As recorded and posted Date Description 5/5 Supplies Accounts Payable Debit Credit 12,500 12,500 What part of this entry is incorrect? What correcting entry would you make? C2 - 53

Correcting Errors – An Example On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. General Journal – As recorded and posted Date Description 5/5 Supplies Accounts Payable Debit Credit 12,500 12,500 General Journal – A correcting entry Date Description Debit Credit 5/5 C2 - 54

Correcting Errors – An Example On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. General Journal – As recorded and posted Date Description 5/5 Supplies Accounts Payable Debit Credit 12,500 12,500 General Journal – A correcting entry Date Description 5/5 Office Equipment Debit Credit 12,500 C2 - 55

Correcting Errors – An Example On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown. General Journal – As recorded and posted Date Description 5/5 Supplies Accounts Payable Debit Credit 12,500 12,500 General Journal – A correcting entry Date Description 5/5 Office Equipment Supplies Debit Credit 12,500 12,500 C2 - 56

Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Assets Current assets Long-term investments Plant assets (net) Intangible assets 2003 2002 Increase (Decrease) Amount Percent 550,000 533,000 95,000177,500 444,500470,000 50,00050,000 1,139,500 1,230,500 C2 - 57

Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Assets Current assets Long-term investments Plant assets (net) Intangible assets 2003 2002 Increase (Decrease) Amount Percent 550,000 533,000 17,000 3.2% 95,000177,500(82,500) (46.5%) 444,500470,000(25,500) (5.4%) Horizontal Analysis: 50,00050,000 — 1,139,500 1,230,500 (91,000)(7.4%) Current year (2003) 550,000 103.2% Base year (2002) 533,000 Increase amount Base year (2002) 17,000 3.2% 533,000 C2 - 58

Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Income Statement December 31, 2003 and 2002 2003 Sales Sales returns Net sales Cost of goods sold Gross profit 2002 Increase (Decrease) Amount Percent 1,530,500 1,234,000 32,500 34,000 1,498,000 1,200,000 1,043,000 820,000 455,000 380,000 C2 - 59

Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Income Statement December 31, 2003 and 2002 2003 Sales Sales returns Net sales Cost of goods sold Gross profit 2002 Increase (Decrease) Amount Percent 1,530,500 1,234,000 296,500 24.0% 32,500 34,000 (1,500) (4.4%) 1,498,000 1,200,000 298,000) 24.8% 1,043,000 820,000 223,000 27.2% Horizontal Analysis: 455,000 380,000 75,000 19.7% Current year (2003) 1,498,000 124.8% Base year (2002) 1,200,000 Increase amount Base year (2002) 298,000 24.8% 1,200,000 C2 - 60

Chapter 2 Power Notes Analyzing Transactions This is the last slide in Chapter 2. Note: To see the topic slide, type 2 and press Enter. C2 - 61