Lecture 2
Analyzing Transactions and Double Entry
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Analyzing Business Transactions Using T Accounts
Section 1: Transactions That Affect
Assets, Liabilities, and Owners Equity
Section Objectives
1. 2. 3. Set up T accounts for assets, liabilities, and owners equity. Analyze business transactions and enter them in the accounts. Determine the balance of an account.
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Analyzing and Recording Process
Analyze each transaction and event from source documents
Record relevant transactions and events in a journal
Prepare and analyze the trial balance
Post journal information to ledger accounts
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Source Documents
Checks Employee Earnings Records Bills from Suppliers Purchase Orders
Bank Statements Sales Tickets
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The Accounting Equation
ASSETS
The property a business owns
LIABILITIES
The debts of the business
+
OWNERS EQUITY
The owners financial interest in the business
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Remembering Debits and Credits ALCREW
Account Type Assets Liabilities
Step 1
Write down the account types using ALCREW.
Capital
Revenue
Expenses
Withdrawals
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Remembering Debits and Credits ALCREW
Account Type Assets A ssets Liabilities L iabilities Normal Balance
Step 2 Write down the normal balance (debit) of A,E,W. The others are credits.
Capital C apital
Revenue R evenue
Expenses E xpenses
Withdrawals W ithdrawals
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Remembering Debits and Credits ALCREW
Account Type Assets A ssets Liabilities L iabilities Normal Balance Step 2 Dr
Write down the normal balance, debit, of A,E,W. The others are credits.
Capital C apital
Revenue R evenue
Expenses E xpenses
Withdrawals W ithdrawals
Dr
Dr
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Remembering Debits and Credits ALCREW
Account Type Assets A ssets Liabilities L iabilities Normal Balance Step 2 Dr Cr
Capital C apital
Revenue R evenue
Cr
Cr
Write down the normal balance, debit, of A,E,W. The others are credits.
Expenses E xpenses
Withdrawals W ithdrawals
Dr
Dr
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Remembering Debits and Credits ALCREW
Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
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Remembering Debits and Credits ALCREW
Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
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Dr Dr Dr
Remembering Debits and Credits ALCREW
Account Type Assets Liabilities Capital Revenue Expenses Withdrawals Normal To To Balance Balance Balance Dr Dr Cr Cr Cr Cr Dr Dr Cr Cr Cr Dr Dr Dr Dr Dr Cr Cr
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Set up T accounts for assets, liabilities and Objective 1 owners equity
T Accounts
ASSETS
+ Record Increases LEFT SIDE Record Decreases RIGHT SIDE
LIABILITIES
Record Decreases LEFT SIDE + Record Increases RIGHT SIDE
OWNERS EQUITY
Record Decreases LEFT SIDE + Record Increases RIGHT SIDE
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Objective 2
Analyze business transactions and enter them in the accounts
Effects of Business Transactions
Steps to analyze the effects of the business transactions:
1. Analyze the financial event.
Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account.
1. Apply the left-side-right side rules for each account affected. 2. Make the entry in T-account form.
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Objective 3
Determine the balance of an account
An account balance is the difference between the amounts recorded on the two sides of an account.
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Recording Account Balances
IF
the total on the right side is larger than the total on the left side,
the total on the left side is larger,
THEN
the balance is recorded on the right side.
the balance is recorded on the left side.
an account shows only one amount,
that amount is the balance.
an account contains entries on only one side,
the total of those entries is the account balance.
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Summary of Account Balances
ASSETS Cash = LIABILITIES Accounts Payable + OWNERS EQUITY Carolyn Wells, Capital
(a) 100,000 (b) 5,000 Account (d) 1,500 (e) 2,500 (f) 8,000 Bal. 83,000 17,000
Supplies
( e) 2,500 (c) 6,000 (b) 100,000 balances for Carter Consulting Services Bal. 3,500
SUMMARY OF ACCOUNT BALANCES (d) 1,500 ASSETS Prepaid Rent = LIABILITIES + OWNERS EQUITY 3,500 100,000
(f)
8,000
Equipment
83,000 1,500 8,000 11,000 103,500 =
3,500
100,000
(b) 5,000 (c) 6,000 Bal. 11,000
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Analyzing Business Transactions Using T Accounts
Section 2: Transactions That Affect Revenue, Expenses, and Withdrawals
Section Objectives
1. 2. 3. 4. Set up T accounts for revenue and expenses. Prepare a trial balance from T accounts. Prepare an income statement, a statement of owners equity, and a balance sheet. Develop a chart of accounts.
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The Rules of Debit and Credit
A debit is an entry on the left side of an account.
A credit is an entry on the right side of an account. A double-entry system is an accounting system that involves recording the effects of each transaction as debits and credits in separate accounts. Every transaction in a Double entry accounting system has at least one debit and one credit.
Every transaction must have at least one debit and one credit. The total of the debits and credits recorded in the separate accounts must be EQUAL.
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Any Account
Left Side
Right Side
Accountants
refer to the left side of an account as the debit side instead of saying the left side. The right side of the account is called the credit side.
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Rules for Debits and Credits
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Objective 5 Prepare a trial balance from T accounts
1. Use the proper heading to include who, what, and when information. 2. List the accounts in chart of account order or in the same order as they appear in the financial statement. 3. Enter the ending balance of each account in the appropriate Debit or Credit column.
4. Total the Debit column.
5. Total the Credit column. 6. Compare the column totals. They should be equal.
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(A) On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
JOURNAL
Date 1 Nov. 1 Cash 2 3 4 Chris Clark, Capital
2005
Page 1
Post. Ref.
Description
Debit 25 000 00
Credit
25 000 00
Invested cash in NetSolutions.
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(A) On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
Effects of this entry in the Ledger
Cash
Nov. 1 25,000
Chris Clark, Capital
Nov. 1 25,000
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(B) On November 5, NetSolutions bought land for $20,000, paying cash.
4
5 6 7 8 9 10 5 Land 20 000 00
Cash
Purchased land for building site.
20 000 00
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(B) On November 5, NetSolutions bought land for $20,000, paying cash.
Effects of this entry in the Ledger
Cash
Nov. 1 25,000 Nov. 5 20,000 Nov. 5
Land
20,000
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(C) On November 10, NetSolutions purchased supplies on account for $1,350.
10 11 12 13 14 15 16 10 Supplies 1 350 00
Accounts Payable
Purchased supplies on account.
1 350 00
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(C) On November 10, NetSolutions purchased supplies on account for $1,350.
Effects of this entry in the Ledger
Supplies
Nov. 10 1,350
Accounts Payable
Nov. 10 1,350
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(D) On November 18, NetSolutions received fees of $7,500 from customers for services provided .
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15 16 17 18 19 20 18 Cash 7 500 00
Fees Earned
Received fees from customers.
7 500 00
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(D) On November 18, NetSolutions received fees of $7,500 from customers for services provided .
Effects of this entry in the Ledger
Cash
Nov. 1 18 25,000 Nov. 5 7,500 20,000
Fees Earned
Nov. 18 7,500
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(E) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 .
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19 20 21 22 23 24 30 Wages Expense Rent Expense Utilities Expense Miscellaneous Expense 2 125 00 800 00 450 00 275 00
Cash
Paid expenses.
3 650 00
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(E) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 .
Effects of this entry in the Ledger
Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 20,000 Nov. 30 3,650
Wages Expense
2,125
Rent Expense
Nov. 30 800
Utilities Expense
Nov. 30 450
Miscellaneous Expense
Nov. 30 275
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(F) On November 30, NetSolutions paid creditors on account, $950.
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31 32 33 34 35 36 30 Accounts Payable 950 00
Cash
Paid creditors on account.
950 00
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(F) On November 30, NetSolutions paid creditors on account, $950.
Effects of this entry in the Ledger
Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 30 20,000 Nov. 30 3,650 950
Accounts Payable
950 Nov. 10 1,350
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(G) On November 30, a count revealed that $800 of the supplies inventory had been used.
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26 27 28 29 30 31 30 Supplies Expense 800 00
Supplies
Supplies used during November.
800 00
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(G) On November 30, a count revealed that $800 of the supplies inventory had been used.
Effects of this entry in the Ledger
Supplies
Nov. 10 1,350 Nov. 30 800 Nov. 30
Supplies Expense
800
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(H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
JOURNAL
Date
2005
Page 2 Post. Ref. Debit 2 000 00 2 000 00 Credit
Description
1 Nov. 30 Chris Clark, Drawing 2 3 4 Cash
Chris Clark withdrew cash for
personal use.
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(H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
Effects of this entry in the Ledger
Cash
Nov. 1 18 25,000 Nov. 5 7,500 30 30 30 20,000 Nov. 30 3,650 950 2,000
Chris Clark, Drawing
2,000 Nov. 10 1,350
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Flow of Business Transactions
Transaction authorized
Transaction takes place
Document prepared
Entry recorded in journal
Entry posted to ledger
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The End
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