1| Chapter 2 Analyzing Transactions
Chapter 2 Analyzing Transactions
From Chapter 1: The Accounting Equation
Assets = Liabilities + Owner's Equity
Assets = Liabilities + Capital – Drawing + Revenues - Expenses
Definitions for the Element
 Assets are resources owned by the business.
 Liabilities are debts owed to outsiders (creditors).
 Owner’s equity is the owner’s right to the assets of the business after all
liabilities have been paid.
 Drawings account represents the amount of withdrawals made by the
owner.
 Revenues are increases in owner’s equity as a result of selling services or
products to customers.
 Expenses The using up of assets or consuming services in the process of
generating revenues.
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2| Chapter 2 Analyzing Transactions
Accounting Cycle
Transactions
(Economic activities &
Business condition)
Unadjusted trail
balance
(Prepare unadjusted
trail balance)
Financial
Statement
(Prepare 4 financial
statements)
Journal
Ledger
(record transactions
in the journal)
(Posting transactons
to ledger)
Adjustment
Adjusted Trail
Balance
(Journalizing &posting
adjusting entries)
(Prepare adjusted
trail balance)
Closing Entries
(Journalizing & posting
closing entries)
 The accounting process that begins with analyzing and journalizing transactions
and ends with preparing the accounting records for the next period’s transactions
is called the accounting cycle. There are ten steps in the accounting cycle.
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and analyzed.
5. An optional end-of-period spreadsheet (work sheet) is prepared.
6. Adjusting entries are journalized and posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to the ledger.
10. A post-closing trial balance is prepared
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Rearranging the accounting equation
Drawing + Expenses + Assets = Liabilities + Capital + Revenues
Debit Accounts
Credit Accounts
If  Debit, and if  Credit
If  Credit, and if  Debit
Every business transaction
to be recorded in at least
two accounts
Double-Entry
System
Journal
Date
Description
Debit
Post Ref.
Debit
Credit
xxx
Credit
xxx
Total debit
=
Total Credit
Journalizing
 A transaction is initially entered in a record called a journal.
 The process of recording a transaction in the journal is called
journalizing.
 The entry in the journal is called a journal entry.
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Example Transaction
A. On November 1, Chris Clark opens a new business and deposits $25,000 in a
bank account in the name of NetSolutions.
B. On November 5, NetSolutions paid $20,000 for the purchase of land as a
future building site.
C. On November 10, NetSolutions purchased supplies on account for $1,350.
D. On November 18, NetSolutions received cash of $7,500 from customers for
services provided.
E. On November 30, NetSolutions incurred the following expenses: wages,
$2,125; rent, $800; utilities, $450; and miscellaneous, $275.
F. On November 30, NetSolutions paid creditors on account, $950.
G. NetSolutions purchased $1,350 of supplies on November 10. Chris Clark
determined that the cost of supplies on hand on November 30 was $550.
H. On November 30, Chris Clark withdrew $2,000 from NetSolutions for
personal use.
I. On December 1, NetSolutions paid rent for December, $800. The company
from which NetSolutions is renting its store space now requires the payment
of rent on the first of each month, rather than at the end of the month.
J. On December 4, NetSolutions purchased office equipment on account from
Executive Supply Co. for $1,800.
K. On December 6, NetSolutions paid $180 for a newspaper advertisement.
L. On December 11, NetSolutions paid creditors $400.
M. On December 13, NetSolutions paid a receptionist and a part-time assistant
$950 for two weeks’ wages.
N. On December 16, NetSolutions received $3,100 from fees earned for the
first half of December.
O. Fees earned on account totaled $1,750 for the first half of December.
P. On December 20, NetSolutions paid $900 to Executive Supply Co. on the
$1,800 debt owed from the December 4 transaction.
Q. On December 21, NetSolutions received $650 from customers in payment of
their accounts.
R. On December 23, NetSolutions paid $1,450 for supplies.
S. On December 27, NetSolutions paid the receptionist and the part-time
assistant $1,200 for two weeks’ wages.
T. On December 31, NetSolutions paid its $310 telephone bill for the month.
U. On December 31, NetSolutions paid its $225 electric bill for the month.
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V. On December 31, NetSolutions received $2,870 from fees earned for the
second half of December.
W. On December 31, fees earned on account totaled $1,120 for the second
half of December.
X. On December 31, Chris Clark withdrew $2,000 for personal use.
Y. Instructions
1. Journalize
2. Prepare T account
3. Prepare an unadjusted trail balance
Date
Nov.1
Nov. 5
Nov.10
Nov. 18
Nov. 30
Nov. 30
Nov. 30
Nov. 30
Dec. 1
Dec. 4
Dec. 6
Dec. 11
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Description
Cash
Chris Clark, Capital
Land
Cash
Supplies
Account payable
Cash
Fees earned
Wages expenses
Rent expenses
Utilities expenses
Miscellaneous expenses
cash
Account payable
cash
Supplies expenses
supplies
Chris Clark, Drawing
Cash
Rent expenses
Cash
office equipment
Account payable
Miscellaneous expenses
cash
Account payable
cash
Post. Ref.
Debit
25,000
20,000
1,350
7,500
Credit
25,000
20,000
1,350
7,500
2,125
800
450
275
3,650
950
800
2,000
800
1,800
180
400
950
800
2,000
800
1,800
180
400
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Dec. 13
Dec. 16
Dec. 16
Dec. 20
Dec. 21
Dec. 23
Dec. 27
Dec. 31
Dec. 31
Dec. 31
Dec. 31
Dec. 31
T Account
Wages expenses
cash
Cash
Fees earned
Account receivable
Fees earned
950
3,100
1,750
Account payable
cash
cash
Account receivable
Supplies
Cash
Wages expenses
cash
Utilities expenses
cash
Utilities expenses
cash
900
650
1,450
1,200
310
225
Cash
2,870
Fees earned
Account receivable
Fees earned
Chris Clark, Drawing
Cash
1,120
2,000
950
3,100
1,750
900
650
1,450
1,200
310
225
2,870
1,120
2,000
Title
Debit
The left side of the account is called
the debit side.
Credit
The right side of the account is called
the credit side.
Using Accounts to Record Transactions
 Accounting systems are designed to show the increases and decreases in
each accounting equation element as a separate record. This record is
called an account.
 Ledger is a group of accounts for a business entity.
 Chart of accounts is a list of the accounts in the ledger.
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 Posting Journal Entries to Accounts is the process of transferring the
debits and credits from the journal entries to the accounts.
Trial Balance
 The equality of debits and credits in the ledger should be proven at the
end of each accounting period by preparing a trial balance.
T ACCOUNTS
cash
25,000
7,500
3,100
650
2,870
20,000
3,650
950
2,000
800
180
400
950
900
1,450
1,200
310
225
2,000
35,015
39,120
Bal. 4,105
Supplies
1,350
1,450
Bal. 2,000
800
Land
20,000
Bal. 20,000
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Chris Clark, Capital
25,000
25,000 Bal.
Fees earned
7,500
3,100
1,750
2,870
1,120
16,340 Bal.
Account payable
950
1,350
400
1,800
900
900 Bal.
Wages expenses
2,125
950
1,200
Bal. 4,275
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Bal.
Miscellaneous expenses
275
180
455
Supplies expenses
800
Bal.
800
Chris Clark, Drawing
2,000
2,000
Bal. 4,000
Rent expenses
800
800
Bal. 1,600
Utilities expenses
450
310
225
Bal. 985
office equipment
1,800
Bal.
1,800
Account receivables
1,750
650
1,120
Bal. 2,220
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Net solutions
Unadjusted trial balance
December 30, 2011
Cash
Account receivable
Supplies
Land
office equipment
Account payable
Chris Clark, Capital
Chris Clark, Drawing
Fees earned
Wages expenses
Rent expenses Utilities
expenses Miscellaneous
expenses Supplies
expenses
Debit balances
4,105
2,220
2,000
20,000
1,800
4,000
4,275
1,600
985
455
800
42,240
Credit balances
900
25,000
16,340
42,240
PR 2-2A – Page 91
PR 2-2B – Page 95
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