Chapter 2
Analyzing Transactions
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website, in whole or in part.
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.
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The T Account
(slide 1 of 2)
The T account has a title, which is the name of the
accounting equation element recorded in the account.
Title
The left side of The right side of
the account is the account is
called the debit called the credit
side. side.
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The T Account
(slide 2 of 2)
Cash
(a) 25,000 (b) 20,000
Debit (d) 7,500 (e) 3,650 Credit
Side of Side of
Account
(f) 950 Account
= should match the nature of the account!
Normal (h) 2,000
Balance 5,900
Balance of Account
Balance of Account = Sum of increases – Sum of decreases =
= (25,000+7,500) – (20,000+3,650+950+2,000) = 32,500 – 26,600 =
= 5,900 Balance = Sum of Dr. - Sum of Cr. Balance should be written under the side
that has a >SUM
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Chart of Accounts
• A group of accounts for a business entity is called a
ledger.
• A list of the accounts in the ledger is called a chart of
accounts.
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Assets
• Assets are resources owned by the business entity.
o Some examples of assets are:
Cash
Supplies
Accounts receivable
Buildings
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Liabilities
• Liabilities are debts owed to outsiders (creditors).
o Some examples of liabilities are:
Accounts payable
Notes payable
Wages payable
Interest payable
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Owner’s Equity
• Owner’s equity is the owner’s right to the assets of
the business after all liabilities have been paid. For a
proprietorship, the owner’s equity is represented by
the balance of the owner’s capital account.
• A drawing account represents the amount of
withdrawals made by the owner.
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Revenues
• Revenues are increases in assets and owner’s equity
as a result of selling services or products to customers.
o Some examples of revenues are:
Fees earned
Commissions revenue
Rent revenue
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Owner’s Equity
• Owner’s equity is the owner’s right to the assets of the business after all
liabilities have been paid. For a proprietorship, the owner’s equity is
represented by the balance of the owner’s capital account.
• A drawing account represents the amount of withdrawals made by the
owner.
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Revenues
• Revenues are increases in assets and owner’s equity as a result of selling
services or products to customers.
• Some examples of revenues are:
• Fees earned
• Commissions revenue
• Rent revenue
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Expenses
• The using up of assets or consuming services in the process of generating
revenues results in expenses.
• Some examples of expenses are:
• Wages expense
• Rent expense
• Miscellaneous expense
© 2021 Cengage Learning, Inc. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Chart of Accounts for NetSolutions
* -> O can
generate vo own Code !
1
A RI
A
E
vi
wh
All accounts cannot have the same
nature !
O 8 1
oh * L= A D every jound entry at leasi debind1rediz
# (ALICE) # Nature of Accounts RULES:
A - assets = Debit (Dr) ↑A = Dr / ↓A = Cr
L - liabilities = Credit (Cr) ↑L = Cr / ↓L = Dr
I - Income or revenue = Credit (Cr) ↑I = Cr Always !
C - capital = Credit (Cr) ↑C = Cr
E - expenses (trawing) = Debit (Dr) ↑E = Dr Always!
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Double-Entry Accounting System
• All businesses use what is called the double-entry
accounting system. This system is based on the
accounting equation and requires:
o Every business transaction to be recorded in at least two
accounts.
o The total debits recorded for each transaction to be equal
to the total credits recorded.
• The double-entry accounting system has specific rules
of debit and credit for recording transactions in the
accounts.
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Balance Sheet Accounts
• The debit and credit rules for balance sheet accounts
are as follows:
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Income Statement Accounts
• The debit and credit rules for income statement
accounts are based on their relationship with owner’s
equity.
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Owner Withdrawals
• The debit and credit rules for recording owner
withdrawals are based on the effect of owner
withdrawals on owner’s equity.
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Normal Balances
• The sum of the increases in an account is usually equal
to or greater than the sum of the decreases in the
account. Thus, the normal balance of an account is
either a debit or a credit depending on whether
increases in the account are recorded as debits or
credits.
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Journalizing
Journal
• Record where a transaction is initially entered
Journalizing
• Process of recording a transaction in the journal
Journal Entry
• Entry in the journal
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website, in whole or in part.
Steps to Record Transactions in Journal
• Ste
• Date of the transaction is entered in the Date column
p1
• Ste • Title of the account to be debited is recorded in the left-hand margin under the
p2 Description column, and the amount to be debited is entered in the Debit column
• Ste • Title of the account to be credited is listed below and to the right of the debited
p3 account title, and the amount to be credited is entered in the Credit column
• Ste
• Brief description may be entered below the credited account
p4
• Ste • Posting Reference column is left blank when the journal entry is initially recorded.
It is used later when the journal entry amounts are transferred to the accounts in
p5 the ledger.
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website, in whole or in part.
Rules of Debit and Credit,
Normal Balances of Accounts
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Example Exercise Rules of Debit and Credit
and Normal Balances
State for each account whether it is likely to have (a) debit
entries only, (b) credit entries only, or (c) both debit and credit
entries. Also indicate its normal balance.
1. Amber Saunders, Drawing
2. Accounts Payable
3. Cash
4. Fees Earned
5. Supplies
6. Utilities Expense
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Transaction A
• On November 1, Chris Clark deposited $25,000 in a
bank account in the name of NetSolutions.
• 1. Analyzing transaction:
• Cash (Assets) Increase Debit 25,000
• Chris Clark, Capital (Owner’s Capital) Increase Credit 25,000
• 2. Journalizing:
increase increase
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Transaction Terminology and
Related Journal Entry Accounts
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Transaction B
• On November 5, NetSolutions paid $20,000 for the
purchase of land as a future building site.
Analysis: Cash (Asset) decrease 20,000 credit
Land (Asset) increase 20,000 debit
increase
decrease
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Transaction C
• On November 10, NetSolutions purchased supplies on
Dr
account for $1,350. Supplies -+ = .
payable -> + Acct , : Cr .
• Analysis: Accounts Payable (Liability) increase 1,350 credit
• Supplies (Asset) increase 1,350 debit
ICrit
increase increase
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Transaction D
• On November 18, NetSolutions received cash of
$7,500 from customers for services provided.
• Analysis: Cash (Asset) increase 7,500 debit
• Fees Earned(Revenue) increase 7,500 credit
• Fees earned – a revenue from providing services
increase increase
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Transaction E
• On November 30, NetSolutions incurred the following
expenses: wages, $2,125; rent, $800; utilities, $450;
and miscellaneous, $275.
• Analysis: Cash (Asset) decrease 3,650 credit
• Wages Expense (Expense) increase debit 2,125
• Rent Expense(Expense) increase debit 800
• Utilities Expense(Expense) increase debit 450
• Miscellaneous Expense(Expense) increase debit 275
decrease
All four
expense
accounts
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Transaction F
• On November 30, NetSolutions paid creditors on
account, $950.
• Analysis: Accounts Payable (Liability) decrease 950 debit
• Cash (Asset) decrease 950 credit
decrease decrease
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Transaction H
• On November 30, Chris Clark withdrew $2,000 from
NetSolutions for personal use.
• Analysis: Chris Clark, Drawing (Owner’s Drawing) increase debit 2,000
• Cash (Asset) decrease credit 2,000
decrease increase
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Example Exercise Journal Entry for Asset Purchase
Prepare a journal entry for the purchase of a truck on
June 3 for $42,500, paying $8,500 cash and the
remainder on account.
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Example Exercise Journal Entry for Fees Earned
Prepare a journal entry on August 7 for the fees earned
on account, $115,000.
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Example Exercise Journal Entry for
Owner’s Withdrawal
Prepare a journal entry on December 29 for the
payment of $12,000 to the owner of Smartstaff
Consulting Services, Dominique Walsh, for personal
use.
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