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Chapter Two Transaction Analysis Transactions Business Transactions are events that have a financial impact on the business (assign a $$ amount) and can be measured reliably. Transactions will impact the Assets, Liabilities, and Owners’ Equity of a firm

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transactions
Transactions
  • Business Transactions are events that have a financial impact on the business (assign a $$ amount) and can be measured reliably.
  • Transactions will impact the Assets, Liabilities, and Owners’ Equity of a firm
  • To analyze, determine how this impacts the accounting equation (Assets = Liabilities + Owners’ Equity) of a firm
accounts
Accounts
  • Accounts are a summary device that record the changes that have occurred during a period.
    • Organizational system for businesses that allow them to analyze the cumulative effects of transactions.
    • Each account shows the effect of all of the increases and decreases during a period.
  • Accounts are organized via the basic accounting equation (Assets = Liabilities + Owners’ Equity.)
accounts4
Accounts
  • Use a separate account for each particular:
      • Asset
      • Liability
      • Stockholders’ Equity (Owners’ Equity)

that is involved in a transaction.

  • Each transaction will affect at least two accounts. This is reflective of the double-entry system used in accounting, which keeps the accounting equation in balance.

**Know the different types of accounts on pages 55-57. You should also review the lecture material for Chapter 1.

transaction analysis
Transaction Analysis
  • Remember, the accounting equation helps to analyze the impact of transactions on financial position:

Assets = Liabilities + Owners’ Equity

**There are many examples of the analysis of business transactions on pages 57-63 in the text. Make sure to study and understand these examples.

in class exercise
In-Class Exercise!
  • Form groups of 2-3 with people around you.
  • I will distribute an in-class exercise, in which you will analyze the effect of a series of events.
  • Nominate someone in your group to serve as a team spokesperson.
  • We will then discuss as a larger group.
  • Be sure to keep this handout, since we will build upon this later in the chapter.
debits and credits
Debits and Credits
  • Recall that each transaction affects at least two accounts.
  • In accounting, accounts can be represented by the letter “T” and referred to as T-accounts.
  • Accountants designate:
    • Left side of account = Debits
    • Right side of account = Credits

Total Debits alwaysequal total credits

debits and credits8
Debits and Credits

Visualization of the T-Account

Adapted from Harrison (2006)

debits and credits9
Debits and Credits
  • Rules for Assets – on the left-hand side of the accounting equation:
    • Assets have a normal debit balance.*
    • Increases in assets are recorded on the left (debit) side.
    • Decreases in assets are recorded on the right (credit) side.

*The “balance” in the account is calculated as the beginning balance (what was in the account at the beginning of the period) + increases - decreases

debits and credits10
Debits and Credits
  • Rules for Liabilities and Owners’ Equity – on the right-hand side of the accounting equation:
    • Liabilities and Owners’ Equity (LOE) have a normal credit balance.*
    • Increases in LOE are recorded on the right (credit) side.
    • Decreases in LOE are recorded on the left (debit) side.

*The “balance” in the account is calculated as the beginning balance (what was in the account at the beginning of the period) + increases - decreases

debits and credits11

Accounting

Equation:

Assets

=

Liabilities

+

Stockholders’

Equity

Rules of

Debit and

Credit:

Debit

+

Credit

Debit

Credit

+

Debit

Credit

+

Debits and Credits

Adapted from Harrison (2006)

debits and credits12
Debits and Credits
  • Rules of debit and credit for Stockholders’ Equity are slightly different, since stockholders’ equity is affected by different types of accounts.

Common Stock Retained Earnings Dividends

- + - + + -

Debit Credit Debit Credit Debit Credit

Expenses Revenues

+ - - +

Debit Credit Debit Credit

debits and credits13
Debits and Credits

The following types of accounts: (1) have a normal balance as a debit or credit and (2) increase with a debit or credit.

Normal Balance

Assets Liabilities

Expenses Revenues

Dividends Retained Earnings

Common Stock

(DEBIT) (CREDIT)

Remember: Debit Expenses Assets Dividends (DEAD)

All other accounts = Credit

Refer to Exhibit 2-7 on page 65 and Exhibit 2-14 on page 73 for charts summarizing these rules.

journal entries
Journal Entries
  • In addition to T-accounts, companies record transactions in a journal.
  • The journal gives a chronological record of all of a company’s transactions.

Steps

  • Specify accounts involved in the transaction,
  • Determine whether each account increased or decreased and apply the rules of debits and credits, and
  • Enter the transaction into the journal.
journal entries15
Journal Entries

The example below demonstrates proper journal entry form for the purchase of $500 of supplies for cash.

in class exercise16
In-Class Exercise!
  • Form groups of 2-3 with people around you.
  • I will distribute an in-class exercise. This builds off of the prior exercise, and asks you to prepare journal entries.
  • We will then discuss as a larger group.
  • Be sure to keep this handout.
posting journal entries
Posting Journal Entries
  • The General Ledger is a group of all T-accounts, with their balances.
  • The Posting process transfers information from the journal to the ledger.
    • (1) Record items via the journal, via journal entries.
    • (2) Post items to the ledger, by recording the journal entries in the T-accounts.
posting journal entries18

Cash

Common Stock

50,000

50,000

Posting Journal Entries

Adapted from Harrison (2006)

in class exercise19
In-Class Exercise!
  • We will perform another in-class exercise. This builds off of the prior exercise. Using T-accounts, you will post the journal entries that you just prepared.
  • Use the previous in-class activity (Chapter 2, Parts 1) for the transactions.
trial balance
Trial Balance
  • A trial balance lists all accounts with their balances in the following order:
    • Assets
    • Liabilities
    • Stockholders’ Equity
  • Goal: to ensure that total debits = total credits. Examine for recording or posting errors.
  • Provides that the ledger is in balance, but is not one of the financial statements.
chart of accounts
Chart of Accounts
  • A chart of accounts is a listing of all of a company’s accounts and their account numbers.
  • Referenced when posting journal entries or deciding how to code transactions.
  • Additional accounts may be added as a company participates in additional transactions.
questions
Questions?
  • Any questions or concerns?