Chapter 2
Analysing
Transactions
Objectives
Describe List Prepare
List the rules of
Describe the debit and credit and
Prepare a trial
characteristics of the normal
balance
an account balances of
accounts.
Debit and credit Rules
Steps in the Recording
Contents Process
Trial balance
What is an
Account and
its usefulness?
Debits ◆ Record of increases and decreases in
a specific asset, liability, stockholders’
and equity, revenue, or expense item.
Credits ◆ Debit = “Left”
◆ Credit = “Right”
An account can Account Name
be illustrated in a Debit / Dr. Credit / Cr.
T-account form.
Debits and Credits
DEBIT AND CREDIT PROCEDURES
Double-entry system
◆ Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.
◆ Recording done by debiting at least one account and
crediting at least one other account.
◆ DEBITS must equal CREDITS.
Debits and Credits
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
Debits and Credits
If the sum of Credit entries are greater than the sum of
Debit entries, the account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
Debits and Credits
Assets ◆ Assets - Debits should exceed
Debit / Dr. Credit / Cr.
credits.
◆ Liabilities – Credits should
Normal Balance
exceed debits.
Chapter
◆ Normal balance is on the
3-23
increase side.
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-24
LO 1
Debits and Credits
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance
Assets Chapter
3-24
Stockholders’ Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expenses Chapter
3-25
Revenues
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
LO 1
The Recording Process Illustrated
Follow these steps:
1. Determine what type of
account is involved.
2. Determine what items
increased or decreased
and by how much.
3. Translate the increases
and decreases into debits
and credits.
Example 1
• Deposit in bank account for initial capital investment ($1000)
• Purchase a machine by cash ($300)
• Sell goods ($280) to customer and receive cash ($500)
Accounts Increase or Debit or Accounting
effected decrease credit entries
Example 2: Company Z has following
transactions in June
1. Owner contributed 1 billion in cash as an initial investment.
2. Company purchased goods for 100 mil and paid in cash.
3. Company purchased a van on credit for 500 mil.
4. Borrowed 200 mil cash from bank
5. Made a 200 mil cash payment for the supplier in transaction 3.
6. Purchased goods at 200 mil on credit.
7. Interest from the bank loan has been reported at 10 mil (not yet paid).
Steps in the Recording Process
Analyze each transaction Enter transaction in a journal Transfer journal information to
ledger accounts
Business documents, such as a sales receipt, a check, or a
bill, provide evidence of the transaction.
Steps in the Recording Process
The Journal
◆ Book of original entry.
◆ Transactions recorded in chronological order.
◆ Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit
and credit amounts can be easily compared.
Steps in the Recording Process
JOURNALIZING - Entering transaction data in the journal.
On September 1, owner contributed $15,000 in cash as initial investment, and the
company purchased computer equipment for $7,000 cash.
GENERAL JOURNAL
Date Account Title Ref. Debit Credit
Sept. 1 Cash 15,000
Common Stock 15,000
Equipment 7,000
Cash 7,000
Steps in the Recording Process
On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000
cash now and agrees to pay the remaining $6,000 on account.
GENERAL JOURNAL
Date Account Title Ref. Debit Credit
July 1 PPE 14,000
Cash 8,000
Accounts Payable 6,000
LO 2
The Ledger
◆ General Ledger contains all the asset, liability, and stockholders’ equity accounts.
The Ledger
STANDARD FORM OF ACCOUNT
LO 3
Posting
Transferring
journal entries
to the ledger
accounts.
LO 3
Chart of Accounts
LO 3
Trial balance
Limitations of a Trial Balance
Trial balance may balance even when:
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amount of a
transaction.
