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
Power Notes
Analyzing Transactions
Analyzing Transactions
•
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
Slide # Power Note Topics
3
11
36
40
43
50
57
Power Notes
Analyzing Transactions
Analyzing Transactions
Double-Entry Accounting
Double-Entry Accounting
Double-Entry Accounting
Double-Entry 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.”
Luca Pacioli Developer of
Scale or Balance T account
Left Side
Receive DEBIT
Right Side
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting 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
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting 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
=
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories indicating what has been received and given.”
Assets
DEBITS
received
CREDITS
given
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories indicating what has been received and given.”
Assets
DEBITS
received
CREDITS
given
=
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories indicating what has been received and given.”
Liabilities
Assets
DEBITS
received
CREDITS
given
=
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories indicating what has been received and given.”
Liabilities
Owner’s Equity Assets
DEBITS
received
CREDITS
given
=
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
Expanded Accounting Equation
“ The basic accounting equation can be
expanded to include all five financial categories indicating what has been received and given.”
Liabilities
Owner’s Equity Assets
DEBITS
received
CREDITS
given
=
Revenues
NetSolutions
NetSolutions
A Sole Proprietorship
A Sole Proprietorship
NetSolutions
NetSolutions
A Sole Proprietorship
A Sole 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
deposits $25,000 in a bank account for NetSolutions.
Business Transactions
Business Transactions
General Journal
receive Debit
give Credit
NetSolutions (investee)
Chris Clark (investor)
give Credit
Entry A.
Date Description Debit Credit
Chris Clark
deposits $25,000 in a bank account for NetSolutions.
Business Transactions
Business Transactions
General Journal
receive Debit
give Credit
NetSolutions (investee) Cash
Chris Clark (investor)
give Credit
Entry A.
Date Description Debit Credit
Chris Clark
deposits $25,000 in a bank account for NetSolutions.
Business Transactions
Business Transactions
General Journal
Date Description Debit Credit
11/1 Cash 25,000
Chris Clark, Capital 25,000 receive
Debit
give Credit
NetSolutions (investee)
Cash A promise
to the owner Chris Clark (investor)
give Credit
NetSolutions buys land for $20,000.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer)
Land Owner (seller)
give Credit
Entry B.
General Journal
Date Description Debit Credit
NetSolutions buys land for $20,000.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer) Land
Land Owner (seller)
give Credit
Entry B.
General Journal
Date Description Debit Credit
NetSolutions buys land for $20,000.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer)
Land Cash
Land Owner (seller)
give Credit
Entry B.
General Journal
Date Description Debit Credit
11/5 Land 20,000
NetSolutions buys supplies for
$1,350, agreeing to pay in the near
future.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer)
Supplier (seller)
give Credit
Entry C.
General Journal
Date Description Debit Credit
NetSolutions buys supplies for
$1,350, agreeing to pay in the near
future.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer) Supplies
Supplier (seller)
give Credit
Entry C.
General Journal
Date Description Debit Credit
NetSolutions buys supplies for
$1,350, agreeing to pay in the near
future.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (buyer) Supplies
Supplier (seller)
give Credit
Entry C.
A promise to pay later
General Journal
Date Description Debit Credit
11/10 Supplies 1,350
NetSolutions earns fees of
$7,500, receiving cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (seller)
Customer (buyer)
give Credit
Entry D.
General Journal
Date Description Debit Credit
NetSolutions earns fees of
$7,500, receiving cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (seller) Cash
Customer (buyer)
give Credit
Entry D.
General Journal
Date Description Debit Credit
NetSolutions earns fees of
$7,500, receiving cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (seller) Cash
Customer (buyer)
give Credit
Entry D.
Services
General Journal
Date Description Debit Credit
11/18 Cash 7,500
Date Description Debit Credit
NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Business Transactions
Business Transactions
General Journal
receive Debit
give Credit
NetSolutions (buyer)
Various suppliers
give Credit
Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Business Transactions
Business Transactions
General Journal
receive Debit
give Credit
NetSolutions (buyer) Services,
benefits
Various suppliers
give Credit
Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Business Transactions
Business Transactions
General Journal
receive Debit
give Credit
NetSolutions (buyer) Services,
benefits
Various suppliers
give Credit
Entry E.
NetSolutions pays $950 to creditors on account.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor)
Supplier (payee)
give Credit
Entry F.
General Journal
Date Description Debit Credit
NetSolutions pays $950 to creditors on account.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor) Reduction in
obligation
Supplier (payee)
give Credit
Entry F.
General Journal
Date Description Debit Credit
NetSolutions pays $950 to creditors on account.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor) Reduction in
obligation
Supplier (payee)
give Credit
Entry F.
Cash
General Journal
Date Description Debit Credit
11/30 Accounts Payable 950
At the end of the month, the cost of supplies on hand is $550.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (user)
Internal Transaction (no external entity)
give Credit
Entry G.
General Journal
Date Description Debit Credit
At the end of the month, the cost of supplies on hand is $550.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (user)
Use of supplies
Internal Transaction (no external entity)
give Credit
Entry G.
General Journal
Date Description Debit Credit
At the end of the month, the cost of supplies on hand is $550.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (user)
Use of supplies
Internal Transaction (no external entity)
give Credit
Entry G.
Supplies
General Journal
Date Description Debit Credit
11/30 Supplies Expense 800
Chris Clark
withdraws $2,000 in cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor)
Chris Clark (payee)
give Credit
Entry H.
General Journal
Date Description Debit Credit
Chris Clark
withdraws $2,000 in cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor) Reduction in
obligation
Chris Clark (payee)
give Credit
Entry H.
General Journal
Date Description Debit Credit
Chris Clark
withdraws $2,000 in cash.
Business Transactions
Business Transactions
receive Debit
give Credit
NetSolutions (payor) Reduction in
obligation
Chris Clark (payee)
give Credit
Entry H.
Cash
General Journal
Date Description Debit Credit
11/30 Chris Clark, Drawing 2,000
NetSolutions Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable 14 Supplies
15 Prepaid Insurance 17 Land
18 Office Equipment
2. Liabilities
21 Accounts Payable 23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital 32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
5. Expenses
51 Wages Expense 52 Rent Expense 54 Utilities Expense 55 Supplies Expense 59 Miscellaneous
NetSolutions Trial Balance November 30, 2002
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275
NetSolutions Trial Balance November 30, 2002
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275
32,900 32,900
Income
Statement
NetSolutions Trial Balance November 30, 2002
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275
1. Transactions are analyzed and recorded in journal.
Documents
Journal
1. Transactions are analyzed and recorded in journal.
Documents
Journal
2. Transactions are posted from journal to ledger.
Journal Ledger
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.
Journal, Ledger, Trial Balance
Journal, Ledger, Trial Balance
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400
Cash 2,400
General Journal Page 1
Recording and Posting an Entry
Recording and Posting an Entry
1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction.
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400
Cash 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1
Account: Prepaid Insurance Account No. 15
General Journal
General Ledger
Page 1
Recording and Posting an Entry
Recording and Posting an Entry
1
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400
Cash 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400
Account: Prepaid Insurance Account No. 15
General Journal
General Ledger
Page 1
Recording and Posting an Entry
Recording and Posting an Entry
2
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400
Cash 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400 2,400
Account: Prepaid Insurance Account No. 15
General Journal
General Ledger
Page 1
Recording and Posting an Entry
Recording and Posting an Entry
3
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400
Cash 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit
12/1 1
Account: Prepaid Insurance Account No. 15
General Journal
General Ledger
Page 1
Recording and Posting an Entry
Recording and Posting an Entry
4
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400
Cash 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400 2,400
Account: Prepaid Insurance Account No. 15
General Journal
General Ledger
Page 1
Recording and Posting an Entry
Recording and Posting an Entry
5
Recording and Posting an Entry
Recording and Posting an Entry
Post.
Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400
Cash 11 2,400
Post. Balance Date Item Ref. Debit Credit Debit Credit
11/30 Balance 5,900
12/1 1 2,400 3,500
Account: Cash Account No. 11
General Journal
General Ledger
Page 1
1 5 2
3 4
Correcting Errors
Correcting Errors
Three Types of Errors
Journal Entry
Journal Entry Ledger PostingLedger Posting Correction ProcedureCorrection Procedure
Correcting Errors
Correcting Errors
Three Types of Errors
Journal Entry
Journal Entry Ledger PostingLedger Posting Correction ProcedureCorrection Procedure
1. incorrect not posted correct Journal
Correcting Errors
Correcting Errors
Three Types of Errors
Journal Entry
Journal Entry Ledger PostingLedger Posting Correction ProcedureCorrection Procedure
Error 3 requires a correcting journal entry.
1. incorrect not posted correct Journal
2. correct incorrectly posted correct Ledger
General Journal – As recorded and posted
Correcting Errors – An Example
Correcting Errors – An Example
On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.
What part of this entry is incorrect?
What correcting entry would you make?
Date Description Debit Credit
5/5 Supplies 12,500
General Journal – As recorded and posted
On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.
General Journal – A correcting entry
Correcting Errors – An Example
Correcting Errors – An Example
Date Description Debit Credit
5/5 Supplies 12,500
Accounts Payable 12,500
General Journal – As recorded and posted
On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.
Correcting Errors – An Example
Correcting Errors – An Example
General Journal – A correcting entry
Date Description Debit Credit
5/5 Supplies 12,500
Accounts Payable 12,500
General Journal – As recorded and posted
On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.
Correcting Errors – An Example
Correcting Errors – An Example
General Journal – A correcting entry
Date Description Debit Credit Date Description Debit Credit
5/5 Supplies 12,500
Objective: Use horizontal analysis to compare financial statements from different periods.
Financial Analysis and Interpretation
Financial Analysis and Interpretation
Comparative Balance Sheet December 31, 2003 and 2002
Assets
Current assets $ 550,000$ 533,000 Long-term investments 95,000177,500 Plant assets (net) 444,500470,000 Intangible assets 50,00050,000
$1,139,500$1,230,500
Objective: Use horizontal analysis to compare financial statements from different periods.
Financial Analysis and Interpretation
Financial Analysis and Interpretation
Comparative Balance Sheet December 31, 2003 and 2002
Assets
Current assets $ 550,000$ 533,000$ 17,000 3.2% Long-term investments 95,000177,500(82,500) (46.5%) Plant assets (net) 444,500470,000(25,500) (5.4%) Intangible assets 50,00050,000 —
$1,139,500$1,230,500$ (91,000)(7.4%)
Increase (Decrease) 2003 2002 Amount Percent
Horizontal Analysis:
Horizontal Analysis:
Current year (2003) $550,000
Base year (2002) $533,000 = 103.2%
Objective: Use horizontal analysis to compare financial statements from different periods.
Financial Analysis and Interpretation
Financial Analysis and Interpretation
Comparative Income Statement December 31, 2003 and 2002
Sales $1,530,500 $1,234,000 Sales returns 32,500 34,000 Net sales $1,498,000 $1,200,000 Cost of goods sold 1,043,000 820,000 Gross profit $ 455,000 $ 380,000
Objective: Use horizontal analysis to compare financial statements from different periods.
Financial Analysis and Interpretation
Financial Analysis and Interpretation
Comparative Income Statement December 31, 2003 and 2002
Sales $1,530,500 $1,234,000 $296,500 24.0% Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000) 24.8% Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Increase (Decrease) 2003 2002 Amount Percent
Horizontal Analysis:
Horizontal Analysis:
Current year (2003) $1,498,000
Base year (2002) $1,200,000 = 124.8%
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This is the last slide in Chapter 2.
This is the last slide in Chapter 2.
Power Notes
Analyzing Transactions
Analyzing Transactions
