Learning Objectives

1. Power Notes Chapter F2 Analyzing Transactions 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 Learning Objectives C2

2. Note: To select a topic, type the slide # and press Enter. Power Notes ChapterF2 Analyzing Transactions Slide # Power Note Topics • 3 • 11 • 36 • 40 • 43 • 50 • 57 • 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

3. 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.” Scale or Balance T account Right Side Give CREDIT Left Side Receive DEBIT Luca Pacioli Developer of Double-Entry Accounting Give CREDIT Receive DEBIT

4. 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 =

5. receive Debit Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for $20,000. Land Cash give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/5 Land 20,000 Cash 20,000

6. receive Debit Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for $1,350, agreeing to pay in the near future. Supplies A promise to pay later give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/10 Supplies 1,350 Accounts Payable 1,350

7. receive Debit Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of $7,500, receiving cash. Cash Services give Credit NetSolutions (seller) give Credit General Journal Date Description Debit Credit 11/18 Cash 7,500 Fees Earned 7,500

8. receive Debit Business Transactions Various suppliers Entry E. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Services, benefits Cash give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/18 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 Cash 3,650

9. receive Debit Business Transactions Supplier (payee) Entry F. NetSolutions pays $950 to creditors on account. Reduction in obligation Cash give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30 Accounts Payable 950 Cash 950

10. receive Debit Balance of Supplies account $1,350 less $550 on hand = $800 used Business Transactions Entry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is $550. Use of supplies Supplies give Credit NetSolutions (user) give Credit General Journal Date Description Debit Credit 11/30 Supplies Expense 800 Supplies 800

11. receive Debit Business Transactions Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. Reduction in obligation Cash give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30 Dividends 2,000 Cash 2,000

12. 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 Capital Stock 32 Retained Earnings 33 Dividends 4. Revenue 41 Fees Earned 5. Expenses 51 Wages Expense 52 Rent Expense 54 Utilities Expense 55 Supplies Expense 59 Miscellaneous Expense

13. NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 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

14. 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 = Assets

15. 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 = Assets Expenses

16. 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 = Liabilities Assets Expenses

17. 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 = Liabilities Assets Owner’s Equity Expenses

18. 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 = Liabilities Assets Owner’s Equity Revenues Expenses

19. Financial Analysis and Interpretation Comparative Balance SheetDecember 31, 2003 and 2002 Objective:Use horizontal analysis to compare financial statements from different periods. Assets Current assets $ 550,000 $ 533,000 $ 17,000 3.2% Long-term investments 95,000 177,500 (82,500) (46.5%) Plant assets (net) 444,500 470,000 (25,500) (5.4%) Intangible assets 50,000 50,000 — $1,139,500 $1,230,500 $ (91,000) (7.4%) Increase (Decrease) 2003 2002 Amount Percent Horizontal Analysis: Current year (2003) $550,000 Base year (1999) $533,000 = 103.2% Increase amount $17,000 Base year (2002) $533,000 = 3.2%

20. Financial Analysis and Interpretation Comparative Income StatementDecember 31, 2003 and 2002 Objective:Use horizontal analysis to compare financial statements from different periods. 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: Current year (2003) $1,498,000 Base year (2002) $1,200,000 = 124.8% Increase amount $298,000 Base year (2002) $1,200,000 = 24.8%

21. 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 = Liabilities Assets Owner’s Equity Net Income Revenues Expenses

22. NetSolutions “ On November 1, 2002, I started a business 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, Owner

23. receive Debit Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock. give Credit NetSolutions (investee) give Credit General Journal Date Description Debit Credit 11/1

24. receive Debit Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock. Cash give Credit NetSolutions (investee) give Credit General Journal Date Description Debit Credit 11/1 Cash 25,000

25. receive Debit Business Transactions Chris Clark (investor) Entry A. Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock. Capital Stock Cash give Credit NetSolutions (investee) give Credit General Journal Date Description Debit Credit 11/1 Cash 25,000 Capital Stock 25,000

26. receive Debit Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for $20,000. give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/5

27. receive Debit Business Transactions Land Owner (seller) Entry B. NetSolutions buys land for $20,000. Land give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/5 Land 20,000

28. receive Debit Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for $1,350, agreeing to pay in the near future. give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/10

29. receive Debit Business Transactions Supplier (seller) Entry C. NetSolutions buys supplies for $1,350, agreeing to pay in the near future. Supplies give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/10 Supplies 1,350

30. receive Debit Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of $7,500, receiving cash. give Credit NetSolutions (seller) give Credit General Journal Date Description Debit Credit 11/18

31. receive Debit Business Transactions Customer (buyer) Entry D. NetSolutions earns fees of $7,500, receiving cash. Cash give Credit NetSolutions (seller) give Credit General Journal Date Description Debit Credit 11/18 Cash 7,500

32. receive Debit Business Transactions Various suppliers Entry E. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit

33. receive Debit Business Transactions Various suppliers Entry E. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Services, benefits give Credit NetSolutions (buyer) give Credit General Journal Date Description Debit Credit 11/18 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275

34. receive Debit Business Transactions Supplier (payee) Entry F. NetSolutions pays $950 to creditors on account. give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30

35. receive Debit Business Transactions Supplier (payee) Entry F. NetSolutions pays $950 to creditors on account. Reduction in obligation give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30 Accounts Payable 950

36. receive Debit Business Transactions Entry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is $550. give Credit NetSolutions (user) give Credit General Journal Date Description Debit Credit 11/30

37. receive Debit Balance of Supplies account $1,350 less $550 on hand = $800 used Business Transactions Entry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is $550. Use of supplies give Credit NetSolutions (user) give Credit General Journal Date Description Debit Credit 11/30 Supplies Expense 800

38. receive Debit Business Transactions Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30

39. receive Debit Business Transactions Entry H. Chris Clark (stockholder) NetSolutions paid dividends of $2,000. Reduction in equity give Credit NetSolutions (payor) give Credit General Journal Date Description Debit Credit 11/30 Dividends 2,000

40. NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 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 Balance Sheet

41. NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Capital Stock 25,000 33 Dividends 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

42. Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal

43. Journal, Ledger, Trial Balance 1. Transactions are analyzed and recorded in journal. Documents Journal 2. Transactions are posted from journal to ledger. Journal Ledger

44. Trial Balance Journal, Ledger, Trial Balance 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.

45. Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction. 3. Post the credit side of the transaction.

46. 1 1 Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 GeneralLedger Account: Prepaid InsuranceAccount No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 Enter the transaction date in the ledger account.

47. 2 2 Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 GeneralLedger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 Enter the debit amount in the ledger debit column.

48. 3 3 Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 GeneralLedger Account: Prepaid InsuranceAccount No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 Update the ledger account balance.

49. 4 Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 4 GeneralLedger Account: Prepaid InsuranceAccount No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 Enter the journal page in the ledger account.

50. 5 5 Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400 Cash 2,400 GeneralLedger Account: Prepaid InsuranceAccount No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 Enter the ledger account number in the journal.