Chapter two transaction analysis
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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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Chapter two transaction analysis l.jpg

Chapter TwoTransaction Analysis


Transactions l.jpg
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 l.jpg
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.)


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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 l.jpg
    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.


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    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.


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    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


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    Debits and Credits

    Visualization of the T-Account

    Adapted from Harrison (2006)


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    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


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    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


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    Accounting

    Equation:

    Assets

    =

    Liabilities

    +

    Stockholders’

    Equity

    Rules of

    Debit and

    Credit:

    Debit

    +

    Credit

    Debit

    Credit

    +

    Debit

    Credit

    +

    Debits and Credits

    Adapted from Harrison (2006)


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    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


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    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.


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    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.


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    Journal Entries

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


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    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.


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    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.


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    Cash

    Common Stock

    50,000

    50,000

    Posting Journal Entries

    Adapted from Harrison (2006)


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    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.


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    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.


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    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.


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    Questions?

    • Any questions or concerns?


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