PP for Chapter 2 - Analyzing Transactions

8/13/2019 PP for Chapter 2 - Analyzing Transactions

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Accounting: A Malaysian Perspective,

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th

ed(Adapted from Accounting 22

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)Warren, Reeve and

Duchac

ANALYZING

TRANSACTIONS

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1. Describe the characteristics of an account andrecord transactions using a chart of accountsand journal .

2. Describe and illustrate the posting of journalentries to accounts.

3. Prepare an unadjusted trial balance andexplain how it can be used to discover errors.

4. Discover and correct errors in recordingtransactions.


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Describe the character istics of an account andrecord transactions using a char t of accounts

and jour nal

Objective 1

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Definitions

Book of first entryJournal

Separate record showing increases and

decreases for each FS itemAccount

A group of accounts for a business entityLedger

A list of the accounts in aledger

Chart ofaccounts

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T Account

Title

Debit Credit(left side) (right side)

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T Account - example

Cash

Date Capital 25,000 Date Equipment 20,000

Fees 5,000 Rent exp 800Wages exp 150

. Bal c/d 9,05030,000 30,000

Bal b/d 9,050

Balance of theaccount

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Types of accounts

Accounts

Assets

Liabilities

Owners

equity

Drawing

Revenues

Expenses

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Balance Sheet Accounts

Assets

resourcesowned bythe business

Examples: cash,

supplies, AR,officeequipment

Liabilities

debts owedto outsiders(creditors)

Examples:AP, salariespayable

OwnersEquity

owners rightto the assets ofthe business

Drawing

withdrawalsby owner

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Income Statement Accounts

Revenues

increases in ownersequity as a result ofselling services or

products Examples: fees earned,

commission revenue,rent revenue

Expenses

cost of using up assetsor consuming servicesin the process ofgenerating revenues

Examples: wagesexpense, rent expense,miscellaneous expense

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Every transaction wouldaffect at least

2 accounts

IMPORTANT NOTE

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Journal entries

Every transaction would first be recordedin a journal

The process of recording a transaction inthe journal is called journalizing

Journal Pg

Date Description PR Debit Credit

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Journalizing steps

1. Record the date .

2. Record the title of the account debited in theDescription column.

3. Enter the amount in the Debit column.

4. Record the title of the account credited in theDescription column.

5. Enter the amount in the Credit column.

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Journal entries Balance Sheet

Accounts(a) On November 1, Idris Ismail opens a new

business and deposits RM25,000 in a bankaccount in the name of NetSolutions.

Journal PgDate Description PR Debit Credit

Nov 1 Cash 25,000Idris Ismail, Capital 25,000

Invested cash in NetSolutions.

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Effect of the entry on the accounts

Cash

Nov 1 25000

Idris Ismail, Capital

Nov 1 25000

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Journal entries Balance SheetAccounts

(b) On November 5, NetSolutions bought land forRM20,000, paying cash.


Nov 5 Land 20,000

Cash 20,000

Purchased land for cash.

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Journal entries Balance SheetAccounts

(c) On November 10, NetSolutions purchasedsupplies on account for RM1,350.


Nov 10 Supplies 1,350

Accounts Payable 1,350

Purchased supplies onaccount.

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Journal entries Balance Sheet

Accounts(f) On November 30, NetSolutions paid creditors

on account , RM950.

Journal Pg


Nov 30 Accounts Payable 950

Cash 950Paid creditors on account.

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BS accounts debit & credit rule

Debit CreditAsset accounts Increase (+) Decrease (-)

Liability accounts Decrease (-) Increase (+)

Owners equity (capital)accounts

Decrease (-) Increase (+)

Owners equity (drawing)accounts

Increase (+) Decrease (-)

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BS accounts debit & credit rule

Assets

Debit for Credit for

increases (+) decreases (- )

Liabilities & OE (Capital)

Debit for Credit fordecreases (+) increases (-)

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Example exercise 2-1

Prepare a journal entry for the purchase of atruck on June 3 for RM42,500, paying RM8,500cash and the remainder on account.

Journal PG

June 3 Truck 42,500

Cash 8,500


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Journal entries income statementaccounts

(d) On November 18, NetSolutions received feesof RM7,500 from customers for services

provided during the month.


Nov 18 Cash 7,500Fees Earned 7,500

Received fees fromcustomers.

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(e) Throughout the month, NetSolutions incurred thefollowing expenses: wages RM2,125; rent RM800;utilities RM450; and miscellaneous RM275.


Nov 30 Wages expense 2,125

Rent expense 800

Utilities expense 450

Miscellaneous expense 275

Cash 3,650

Paid expenses for the month.

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(g) On November 30, a count revealedthat RM800 of the supplies inventory had

been used during the month.Journal Pg


Nov 30 Supplies expense 800

Supplies 800Supplies used during themonth.

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IS accounts debit & credit rule

Debit Credit

Revenue accounts Decrease (-) Increase (+)

Expenses accounts Increase (+) Decrease (-)

Revenues


decreases (+) increases (-)

Expenses


increases (+) decreases (-)

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Net income / net loss

Revenues > Expenses = Net incomeincreases Owners equity (capital)

Revenues < Expenses = Net lossdecreases Owners equity (capital)

Revenues Expenses = Net income or Net loss

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Prepare a journal entry on August 7 forthe fees earned on account, RM115,000.

Journal Pg

Aug 7 Accounts Receivable 115,000

Fees earned 115,000

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Drawing account

When owner of a proprietorship withdraws cashfrom the business for personal use

Decreases owners equity (capital)

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Drawing account - example

On November 30, Idris Ismail withdrewRM2,000 in cash from NetSolutions for

personal use.

Journal Nov 30 Idris Ismail, Drawing 2,000

Cash 2,000

Owner withdrew cash for personal use.

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Prepare a journal entry on December 29for the payment of RM12,000 to theowner of Smart Consulting Services,Danny Wong, for personal use.

Dec 29 Danny Wong, Drawing 12,000

Cash 12,000Owner withdrew cash for

personal use.

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Debit & credit rule and normal

balance

Increase DecreaseNormalbalance

BS accounts:

Asset Debit Credit DebitLiability Credit Debit Credit

Owners equity

Capital Credit Debit Credit

Drawing Debit Credit DebitIS accounts:

Revenue Credit Debit Credit

Expense Debit Credit Debit

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State for each account whether it is likely to have (a) debitentries only, (b) credit entries only, or (c) both debit andcredit entries. Also, indicate its normal balance.

1. Amber, Drawing2. Accounts Payable3. Cash4. Fees Earned

5. Supplies6. Utilities Expense

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Dr entries only Normal Dr balanceAmber, Drawing

Dr and Cr balances Normal Cr balanceAccounts payable

Dr and Cr balances Normal Dr balanceCash

Cr entries only Normal Cr balanceFees Earned

Dr and Cr entries Normal Dr balanceSupplies

Dr entries only Normal Dr balanceUtilities Expense

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Accounting equation

The accounting system is known as the double entryaccounting system

Each transaction would affect at least 2 accounts

Total debits would always equal total credits

ASSETS = LIABILITIES + OWNERS EQUITY

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Transaction analysis

Determine which account is affected by the transaction.

Determine whether the account increases or decreases.

Determine whether the account should be debited or credited.

Record the transaction using journal entry.

Post the journal entries to the accounts in the ledger.

Prepare an unadjusted trial balance at the end of the period.

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Descr ibe and il lustrate the posting of journalentr ies to the accounts

Objective 2

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Posting

The process of transferring the debits and creditsfrom the journal entries to the accounts

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example

Dec.1 NetSolutions paid a premium of RM2,400 for acomprehensive insurance policy covering a one-year

period.

The entry would then be posted to the accounts (usingthe 3-column account) refer Exhibit 5

Refer to the text book for the full example

Dec 1 Prepaid Insurance 2,400

Cash 2,400

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On March 1, the cash account balance was RM22,350.During March, cash receipts totaled RM241,880 and theMarch 31 balance was RM19,125. Determine the cash

payments made during March.

Refer to the text book to solve using T-account Alternatively:

Opening balance + Cash receipts Cash payments= Closing balance

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Prepare an unadjusted tr ial balance and explainhow i t can be used to discover er rors

Objective 3

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Trial balance

A list of all the accounts maintained bythe business entity, along with theirrespective balances

Refer Exhibit 7 for an example of a TrialBalance

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Indicate whether the errors would cause the TB totals to beunequal. If so, indicate whether the Dr or Cr total ishigher and by how much.

a. Cash withdrawal of RM5,600 was journalized and

posted as a debit of RM6,500 to Salary Expense and acredit of RM6,500 to Cash.

The totals are equal since both the debit and creditentries were journalized and posted for RM6,500.

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b. A fee of RM2,850 earned from a clientwas debited to Accounts Receivable forRM2,580 and credited to Fees Earned for

RM2,850.

The totals are unequal. The credit total is higher by RM270(RM2,850 RM2,580).

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Discover and correct er rors in r ecordingtransactions

Objective 4

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Types of errors

Refer Exhibit 8 Transposition - occurs when the order of

the digits is changed mistakenly, such as

writing RM542 as RM452 or RM524. Slide - the entire number is mistakenly

moved one or more spaces to the right or

the left, such as writing RM542.00 asRM54.20.

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Prepare correcting entries for the following errors:a. A withdrawal of RM6,000 by Cheri Ramey,

owner of the business, was recorded as a debitto Office Salaries Expense and a credit to Cash.

b. Utilities Expense of RM4,500 paid for thecurrent month was recorded as a debit toMiscellaneous Expense and a credit to Accounts

Payable.

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(a) A withdrawal was debited to Office SalariesExpense and credited to Cash.

The wrong entry:

The correct entry:

The correcting entry:

Office Salaries Expense 6,000

Cash 6,000

Cherie Ramey, Drawing 6,000

Cash 6,000

Cheri Ramey, Drawing 6,000

Office Salaries Expense 6,000

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(b) Utilities Expense for the current month was debited to MiscellaneousExpense and credited to Accounts payable.

The wrong entry:

The correct entry:

Miscellaneous Expense 4,500


Utilities Expense 4,500Cash 4,500

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Documents

PP for Chapter 2 - Analyzing Transactions