Transaction Analysis

Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

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Transaction AnalysisChapter 2


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Explain what a transaction is


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Transactions

•Events that have a financial impact on the business

•Can be reliably measured•Have two sides:

▫Giving▫Receiving

•Accounting records both sides of transactions


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Examples of Transactions

A company sells a product to a customer and receives cash

A company sells a product to a customer and receives cash

GivingReceivin

g

A company pays cash for advertisingA company pays cash for advertising

Giving Receiving


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Define “account” and list and differentiate between different types of accounts


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The Account

•Account is a record of each asset, liability, and stockholders’ equity element▫Basic summary device of accounting

Assets Assets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity


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Assets

Economic resources that provide future benefit


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Assets


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Liabilities


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Owners’ claim to assets


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Stockholders’ Equity Accounts

Common stock Owners’ investment in the company

Retained earnings Cumulative net income (loss) less dividends

Dividends Distributions to owners

Revenues Increase in equity from providing goods and services

Expenses Costs of operating a business


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Show the impact of business transactions on the accounting equation


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Exercise 2-16A

Assets Liabilities


Cash LandSupplie

sAccounts Payable

Common Stock

Retained

Earnings

Aug. 6

+39,000 +39,000


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Exercise 2-16A

Assets Liabilities


Cash LandSupplie

sAccounts Payable

Common Stock

Retained

Earnings

Aug. 6

+39,000 +39,000

Aug. 9

−29,000 +29,000

Bal. 10,000 29,000 39,000


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Exercise 2-16A

Assets Liabilities


Cash LandSupplie

sAccounts Payable

Common Stock

Retained

Earnings

Aug. 6 +39,000 +39,000

Aug. 9 −29,000 +29,000

Bal. 10,000 29,000 39,000

Aug. 12

+1,700 +1,700

Bal. 10,000 29,000 1,700 1,700 39,000


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Exercise 2-16A

Assets Liabilities


Cash LandSupplie

sAccounts Payable

Common Stock

Retained

Earnings

Aug. 6 +39,000 +39,000

Aug. 9 −29,000 +29,000

Bal. 10,000 29,000 39,000

Aug. 12

+1,700 +1,700

Bal. 10,000 29,000 1,700 1,700 39,000

Aug. 15

No entry


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Exercise 2-16A

Assets Liabilities


Cash LandAccts . Rec.

Supplies

Accounts Payable

Cmn. Stock

Ret. Earn.

Bal. 10,000 29,000 39,000

Aug. 12

+1,700 +1,700

Bal. 10,000 29,000 1,700 1,700 39,000

Aug. 15

No entry

Aug. 15-31

+3,800 +3,800 +7,600

Bal. 13,800 29,000 3,800 1,700 1,700 39,000 7,600

revenue


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Exercise 2-16A

Assets Liabilities Stockholders’ Equity

Cash LandAccts. Rec. Supplies

Accounts Payable

Cmn. Stock

Ret. Earn.

Bal. 10,000 29,000 1,700 1,700 39,000

Aug. 15

No entry

Aug. 15-31

+3,800 +3,800 +7,600

Bal. 13,800 29,000 3,800 1,700 1,700 39,000 7,600

Aug. 15-31

−1,300 −1,300

−700 −700

−500 −500

Bal. 11,300 29,000 3,800 1,700 1,700 39,000 5,100

Expenses


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Exercise 2-16A

Assets Liabilities


Cash LandAccts. Rec.

Supplies

Accounts Payable

Cmn. Stock

Ret. Earn.

Bal. 13,800 29,000 3,800 1,700 1,700 39,000 7,600

Aug. 15-31

−1,300 −1,300

−700 −700

−500 −500

Bal. 11,300 29,000 3,800 1,700 1,700 39,000 5,100

Aug 31

+700 −700

Bal. 12,000 29,000 3,800 1,000 1,700 39,000 5,100


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Exercise 2-16A



Supp.

Accts. Pay.

Notes Pay.

Cmn. Stock

Ret. Earn.

Bal. 11,300 29,000

3,800 1,700

1,700 39,000 5,100

Aug 31

+700 −700

Bal. 12,000 29,000

3,800 1,000

1,700 39,000 5,100

Aug 31

+12,000

+12,000

Bal. 24,000 29,000

3,800 1,000

1,700 12,000 39,000 5,100


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Exercise 2-16A



Supp.

Accts. Pay.

Notes Pay

Cmn. Stock

Ret. Earn.

Bal. 11,300

29,000

3,800 1,700

1,700 39,000 5,100

Aug 31

+700 −700

Bal. 12,000

29,000

3,800 1,000

1,700 39,000 5,100

Aug 31

12,000

12,000

Bal. 24,000

29,000

3,800 1,000

1,700 12,000 39,000 5,100

Aug 31

−800 −800

Bal. 23,200

29,000

3,800 1,000

900 12,000 39,000 5,100


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Exercise 2-16AAssets Liabilities Stockholders’

Equity

Cash LandAccts. Rec. Supp.

Accts. Pay.

Notes. Pay.

Cmn. Stock

Ret. Earn.

Bal. 11,300 29,000 3,800 1,700 1,700 39,000 5,100

Aug 31

+700 −700

Bal. 12,000 29,000 3,800 1,000 1,700 39,000 5,100

Aug 31

12,000 12,000

Bal. 24,000 29,000 3,800 1,000 1,700 12,000 39,000 5,100

Aug 31

−800 −800

Bal. 23,200 29,000 3,800 1,000 900 12,000 39,000 5,100$57,000$57,000 $57,000$57,000


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Exercise 2-16A

How much are total assets? $57,000$57,000

How much does the business expect to collect

from its patients?$3,800$3,800

How much does the business owe in total?

$900$900 $12,000$12,000

How much of the assets does Morin really own?

$12,900$12,900

$57,000$57,000 $12,900$12,900$44,100$44,100


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Exercise 2-16A

How much net income did the business

experience during its first month of operations?

How much net income did the business

experience during its first month of operations?

Revenue:$7,600

Revenue:$7,600

Expenses: $1,300 + $700 + $500

Expenses: $1,300 + $700 + $500

Net income $5,100

Net income $5,100

Expenses: $2,500

Expenses: $2,500


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Analyze the impact of business transactions on accounts


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Double-Entry Accounting

•Business transactions include two parts▫Giving▫Receiving

•Accounting based on a double-entry system▫Each transaction affects at least two

accounts


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T-Account

Account Title

(Left side) (Right side)

Debit Credit


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Accounting Equation and Rules of Debit and Credit

Assets LiabilitiesStockholders’

Equity

Debit Debit DebitCredit Credit Credit


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Debit Credit Example

Cash Common Stock

39,000 39,000


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Debit Credit Example

Cash Common Stock

39,000

Land 29,000

29,000

Bal. 10,000

Bal. 29,000

Bal. 39,000


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Additional Stockholders’ Equity Accounts: Revenues and Expenses

Assets

Liabilities



Common Stock

Retained Earnings

Dividends

Revenues

Expenses

+

+


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Rules of Debit and Credit

Assets LiabilitiesStockholders’ Equity

Debit Credit CreditDebit

Common Stock Retained Earnings

Revenue

ExpensesDividends

-

- --

-

-

Credit

Credit

Credit Credit

Credit

Debit

DebitDebit

Debit Debit

-


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Record (journalize and post) transactions in the books


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The Journal

•Chronological record of transactions•Three steps

▫Specify each account affected by the transaction and classify by type

▫Determine if each account is increased or decreased Use debit credit rules

▫Record in journal


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Journal Entry

JOURNAL

Date Accounts and explanation Debit Credit

Apr. 2

Cash 50,000

Common Stock 50,000

Issued common stock


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The Ledger

Individual asset

accounts

Individual liability

accounts

Individual

equity account

s


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Copying Information (Posting) from the Journal to the Ledger

JOURNAL

Date Accounts and explanation Debit Credit

Apr. 2 Cash 50,000

Common Stock 50,000

Issued common stock

Cash Common stock

50,000 50,000


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Flow of Accounting Data


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Construct and use a trial balance


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Trial Balance

•Lists all accounts with their balances•Assets listed first, then liabilities and

stockholders’ equity•Shows that debits equal credits•Usually prepared at the end of the period•Facilitates preparation of the financial

statements


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Analyzing Accounts

Cash

Beginning balance

Ending balance

Cash receipts ?Cash payments


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Analyzing Accounts

Accounts Receivable

Beginning balance

Ending balance

Sales on account ?Collections on account


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Analyzing Accounts

Accounts Payable

Beginning balance

Ending balance

Payments on account? Purchases on account


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Correcting Accounting Errors


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Chart of Accounts

Balance Sheet Accounts


101 Cash 201 Accts. Payable 301 Common Stock

111 Accts. Receivable 231 Notes Payable 311 Dividends

141 Office Supplies 312 Retained Earnings

151 Office Furniture

191 Land

Income Statement Accounts(Part of Stockholders’ Equity)

Revenues Expenses

401 Service Revenue 501 Rent Expense

502 Salary Expense

503 Utilities Expense


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Normal Balances of Accounts

Assets Debit

Liabilities Credit

Stockholders’ Equity—overall

Credit

Common stock Credit

Retained earnings Credit

Dividends Debit

Revenues Credit

Expenses Debit


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Account Formats

•Tw0-column T-account•Four-column format

Account: Cash Account No. 101

Balance

Date

Item Debit Credit Debit Credit


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Analyzing Transactions Using Only T-Accounts•Decisions often are made without a

complete accounting system•T-Accounts allow managers to analyze

transactions quickly


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Short Exercise 2-13Cash

Accounts Payable Common Stock

Computer Equipment

100,000

100,000

60,000

60,000

Debits = $160,000Debits = $160,000

Credits = $160,000Credits = $160,000


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