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Analyzing Transactions PowerPoint Presentation
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Analyzing Transactions

Analyzing Transactions

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Analyzing Transactions

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  1. 0 2 Analyzing Transactions

  2. 0 2-1 Accounting systems are designed to show the increases and decreases in each financial statement item as a separate record. This record is called an account.

  3. 0 2-1 The T Account Title The T account has a title. 5

  4. 0 2-1 Title Debit The left side of the account is called the debit side. 6

  5. 0 2-1 Title Debit Credit The right side of the account is called the credit side. 7

  6. 0 2-1 Title Debit Credit Amounts entered on the left side are debits. 8

  7. 0 2-1 Title Debit Credit Amounts entered on the right side are credits. 9

  8. 0 2-1 Cash (a) 25,000 (b) 20,000 (d) 7,500 (e) 3,650 (f) 950 (h) 2,000 Balance 5,900 Balance of the account 10

  9. 0 2-1 A group of accounts for a business entity is called a ledger.

  10. 0 2-1 A list of the accounts in a ledger is called a chart ofaccounts.

  11. 0 2-1 Assets are resources owned by the business entity. • Cash • Supplies • Prepaid expenses • Buildings

  12. 0 2-1 Liabilities are debts owed to outsiders (creditors). • Accounts payable • Notes payable • Wages payable

  13. 0 2-1 Owner’s equity is the owner’s right to the assets of the business. A drawing account represents the amount of withdrawals by the owner.

  14. 0 2-1 Revenues are increases in owner’s equity as a result of selling services or products to customers. • Fees earned • Commission revenue • Rent revenue

  15. 0 2-1 The using up of assets or consuming services in the process of generating revenues results in expenses. • Wages expense • Rent expense • Miscellaneous expense

  16. 0 2-1 IMPORTANT NOTE Every transaction affects at least two accounts.

  17. 0 2-1 Journalizing This transaction is initially entered in a record called ajournal. The process of recording a transaction in the journal is called journalizing.

  18. 0 2-1 Journalizing requires the following steps: • Record the date. If this is the first entry on the page, the year is inserted above the month. As long as the month does not change, the rest of the journal entries on the require on the day be recorded. • The title of the account debited is listed in the Description column. (Continued)

  19. 0 2-1 • Enter the amount in the Debit column. • Record the credit account in the Description column. • Enter the amount in the Credit column. Watch these steps take place as the entry to record Chris Clark’s deposit is presented in the next slide.

  20. 0 2-1 Balance Sheet Accounts (a) On November 1, Chris Clark opens a new business and deposits $25,000 in a bank account in the name of NetSolutions.

  21. 0 2-1 JOURNAL Page 1 P.R. Date Description Debit Credit 2007 1 2 3 4 Nov. 1 Cash 25 000 00 Chris Clark, Capital 25 000 00 Invested cash in NetSolutions. 23

  22. 0 2-1 The effect of this entry is shown in the accounts of NetSolutions as follows: Cash Chris Clark, Capital Nov. 1 25,000 Nov. 1 25,000

  23. 0 2-1 (b) On November 5, NetSolutions bought land for $20,000, paying cash.

  24. 0 2-1 5 Land 20 000 00 Cash 20 000 00 Purchased land for building site. 26

  25. 0 2-1 (c) On November 10, NetSolutions purchased supplies on account for $1,350.

  26. 0 2-1 10 Supplies 1 350 00 Accounts Payable 1 350 00 Purchased supplies on account. 28

  27. 0 2-1 (f) On November 30, NetSolutions paid creditors on account, $950.

  28. 0 2-1 30 Accounts Payable 950 00 Cash 950 00 Paid creditors on account. 30

  29. 0 2-1 Balance Sheet Accounts Debits Credits Asset accounts……. Increase (+) Decrease (-) Liability accounts.… Decrease (-) Increase (+) Owner’s equity (capital) accounts… Decrease (-) Increase (+) 31

  30. Liability Accounts Balance Sheet Accounts Asset Accounts Debit for decreases (–) Credit for increases (+) Debit for increases (+) Credit for decreases (–) Owner’s Equity Accounts Debit for decreases (–) Credit for increases (+) 0 2-1 32

  31. 0 2-1 Income Statement Accounts (d) On November 18, NetSolutions received fees of $7,500 from customers for services provided.

  32. 0 2-1 30 Cash 7 500 00 Fees Earned 7 500 00 Received fees from customers. 35

  33. 0 2-1 (e) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

  34. 0 2-1 30 Wages Expense 2 125 00 Rent Expense 800 00 Utilities Expense 450 00 Miscellaneous Expense 275 00 Cash 3 650 00 Paid expenses. 37

  35. 0 2-1 (g) On November 30, a count revealed that $800 of the supplies inventory had been used during the month.

  36. 0 2-1 30 Supplies Expense 800 00 Supplies 800 00 Supplies used during November. 39

  37. 0 2-1 Income Statement Accounts Debits Credits Revenue accounts… Decrease (-) Increase (+) Expense accounts… Increase (+) Decrease (-) 40

  38. Expense Accounts Revenue Accounts Less Debit for increases (+) Credit for decreases (–) Debit for decreases (–) Credit for increases (+) 0 2-1 Income Statement Accounts 41 Continued

  39. 0 2-1 Equals Net Income (credit > debits) increases owners’ equity (capital) Net Loss (debits > credits) decreases owners’ equity (capital) 42

  40. 0 2-1 Drawing Account The owner of a proprietorship may withdraw cash from the business for personal use. Such withdrawals have the effect of decreasing owner’s equity.

  41. 0 2-1 (h) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.

  42. 2007 Nov 30 Chris Clark, Drawing 2 000 00 0 2-1 Cash 2 000 00 Chris Clark withdrew cash for personal use. 46

  43. 0 2-1 Increase (Normal Bal.) Decreases Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owner’s Equity: Capital Credit Debit Drawing Debit Credit Income statement accounts: Revenue Credit Debit Expense Debit Credit 48

  44. 0 2-1 The equality of debits and credits for each transaction is built into the accounting equation: Assets = Liabilities + Owner’s Equity. Because of this double equality, this system is called the double-entry accounting system.

  45. 0 2-1 Transaction Analysis 1. Determine whether an asset, liability, owner’s equity, revenue, expense, or drawing account is affected by the transaction. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit. Continued

  46. 0 2-1 4. Record the transaction using a journal entry. • Periodically post journal entries to the accounts in the ledger. • Prepare an unadjusted trial balance at the end of the period.

  47. 0 2-2 The process of transferring the debits and credits from the journal entries to the accounts is called posting.

  48. 0 2-2 Dec. 1 NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering liability, theft and fire. The policy covers a one-year period.

  49. 0 2-2 57

  50. 0 2-2 Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.