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Chapter 2: Analyzing Transactions Recording transactions How transactions affect the financial statements How accounting errors occur How accounting errors are detected Definition of Account Record of all increases & decreases in financial statement items

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Chapter 2: Analyzing Transactions


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chapter 2 analyzing transactions

Chapter 2: Analyzing Transactions

Recording transactions

How transactions affect the financial statements

How accounting errors occur

How accounting errors are detected

definition of account
Definition of Account

Record of all increases & decreases in financial statement items

all accounts listed on financial statements
All accounts listed on financial statements
  • Account name important
    • Each name refers to specific account
balancing transactions
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)

rules of debit and credit
Rules of Debit and Credit
  • Debit= amount received
    • always on left
  • Credit= amount given up
    • always on right
journal
Journal
  • Record of every business transaction
    • Only transactions recorded in journal become part of accounting record
before journalizing transactions
Before Journalizing Transactions…….
  • What was received?
  • What was given up?
journalizing transactions
Journalizing Transactions

Debit cash for $40,000

AND

Credit Automobile for $40,000

speaking accounting
“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)”
sample transaction 1
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
sample transaction 2
Sample Transaction 2
  • Nov 20: performed $12,000 in services for Duke Manoso and sent them a bill
sample transaction 3
Sample Transaction 3
  • Nov 30: received payment from Duke Manoso for services performed on Nov 20
posting journal entries
Posting Journal Entries
  • Transactions journalized
  • Journal entries posted to ledgers
  • Running balance kept for each account
posting to t accounts
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”
normal balances
Normal Balances

After Eating Dinner Let’s Read the Comics

obtain ending balances
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
normal balances19
Normal Balances

Normal balances determined by classification of account

  • Accounts increased with credits (normal balance):
    • Liabilities
    • Revenues
    • Capital Stock
effect of transactions on financial statements
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)