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Chapter 2: Analyzing Transactions

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  1. Chapter 2: Analyzing Transactions Recording transactions How transactions affect the financial statements How accounting errors occur How accounting errors are detected

  2. Definition of Account Record of all increases & decreases in financial statement items

  3. All accounts listed on financial statements • Account name important • Each name refers to specific account

  4. Balancing Transactions • Transaction • financial exchange • occurs when something is received and something of equal value is given up Amount received (debit) always equals amount given up (credit)

  5. Rules of Debit and Credit • Debit= amount received • always on left • Credit= amount given up • always on right

  6. Journal • Record of every business transaction • Only transactions recorded in journal become part of accounting record

  7. Before Journalizing Transactions……. • What was received? • What was given up?

  8. Journalizing Transactions Debit cash for $40,000 AND Credit Automobile for $40,000

  9. “Speaking” Accounting • New language • Q: “How do you journalize this transaction?” • A: “Debit (account name) for ($ amount received) and Credit (account name) for ($ amount given up)”

  10. Sample Transaction 1 The following are 3 transactions that occurred at the Stick It To Them Real Estate Co: • Nov 15, 2006: received $5,000 from Gabby’s Inc from for services performed

  11. Sample Transaction 2 • Nov 20: performed $12,000 in services for Duke Manoso and sent them a bill

  12. Sample Transaction 3 • Nov 30: received payment from Duke Manoso for services performed on Nov 20

  13. Boomerang Realty Company

  14. Accounting Equation

  15. Posting Journal Entries • Transactions journalized • Journal entries posted to ledgers • Running balance kept for each account

  16. Posting to “T” Accounts • Short cut used by students • Instead of using ledger • One “T” Account set up for each account • Same rules of debit/credit apply • Debits on left of “T” • Credits on right of “T”

  17. Normal Balances After Eating Dinner Let’s Read the Comics

  18. Obtain Ending Balances • Assets: add up all debits and subtract all credits • Revenues: add up all credits and subtract all debits • Double Underline ending balances

  19. Normal Balances Normal balances determined by classification of account • Accounts increased with credits (normal balance): • Liabilities • Revenues • Capital Stock

  20. Effect of Transactions on Financial Statements • At least 2accounts affected in each transaction • Allaccounts listed on financial statements • THEREFORE: • Every transaction affects financial statement(s)