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Analyzing Transactions. By Rachelle Agatha, CPA, MBA. Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac. 0. After studying this chapter, you should be able to:.

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Analyzing transactions

Analyzing Transactions

By Rachelle Agatha, CPA, MBA

Slides by Rachelle Agatha, CPA,

with excerpts from Warren, Reeve, Duchac


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After studying this chapter, you should be able to:

Describe the characteristics of an account and record transactions using a chart of accounts and journal.

Describe and illustrate the posting of journal entries to accounts.

Prepare an unadjusted trial balance and explain how it can be used to discover errors.

Discover and correct errors in recording transactions.


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Objective 1

Describe the characteristics of an account and record transactions using a chart of accounts and journal.


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Accounting systems are designed to show the increases and decreases in each financial statement line item as a separate record. This record is called an account.


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LEDGER - A group of accounts for a business entity


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CHART OF ACCOUNTS - A list of the accounts in a ledger.


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Assetsare resources owned by the business entity.

  • Cash

  • Supplies

  • Prepaid expenses

  • Buildings


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Liabilitiesare debts owed to outsiders (creditors).

  • Accounts payable

  • Notes payable

  • Wages payable


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Owner’s equityis the owner’s right to the assets of the business. A drawingaccount represents the amount of withdrawals by the owner.


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Revenuesare increases in owner’s equity as a result of selling services or products to customers.

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  • Fees earned

  • Commission revenue

  • Rent revenue


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The using up of assets or consuming services in the process of generating revenues results in expenses.

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  • Wages expense

  • Rent expense

  • Miscellaneous expense


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IMPORTANT NOTE

Every transaction affects at least two accounts.


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The transaction is initially entered in a record called ajournal.

The process of recording a transaction in the journal is called journalizing.


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Journalizing requires the following steps:

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  • Record the date.

The title of the account debited is listed in the Description column.

  • Enter the amount in the Debit column.

(Continued)


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  • Record the credit account in the Description column.

  • Enter the amount in the Credit column.


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Affect in “T” Accounts

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Net Income

Where Revenue > Expense .

and Credits >Debits

Net Income Increases Owner’s Equity.


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Net Loss (Deficit)

Where Revenue < Expense..

Credits < Debits

Net Loss Decreases Owner’s Equity.


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Increase

(Normal Bal.)

Decrease

Balance sheet accounts:

Asset Debit Credit

Liability Credit Debit

Owner’s Equity:

Capital Credit Debit

Drawing Debit Credit

Income statement accounts:

Revenue Credit Debit

Expense Debit Credit


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Objective 2

Describe and illustrate the posting of journal entries to the accounts.


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POSTING is the process of transferring the debits and credits from the journal entries to the accounts


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Objective 3

Prepare an unadjusted trial balance and explain how it can be used to discover errors.


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TRIAL BALANCE is prepared to show the equality of debits and credits in the ledger . It is prepared as of a date in time.


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Objective 4

Discover and correct errors in recording transactions.


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A transposition error occurs when the order of the digits is changed mistakenly, such as writing $542 as $452 or $524. (usually divisible by 9)

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In a slide, the entire number is mistakenly moved one or more spaces to the right or the left, such as writing $542.00 as $54.20.


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Posting errorsoccur when posting from the journal to the ledger. Such as taking $1,200 from journal and entering it as $1,120 in Ledger.


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