02 Analyzing Transactions

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Courtesy of H. Andre Hernowo, SE,M.Si,Ak

Courtesy of H. Andre Hernowo, SE,M.Si,Ak

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  • 1. Chapter 2 Power Notes Analyzing Transactions Learning Objectives 1. Usefulness of an Account 2. Characteristics of an Account 3. Analyzing and Summarizing Transactions 4. Illustration of Analyzing and Summarizing 5. Trial Balance 6. Discovery and Correction of Errors 7. Financial Analysis and Interpretation C2 C2 - 1
  • 2. Chapter 2 Power Notes Analyzing Transactions Slide # Power Note Topics 3 • Double-Entry Accounting 11 • Analyzing and Recording Transactions 36 • Chart of Accounts, Trial Balance 40 • Journal, Ledger, and Trial Balance 43 • Recording and Posting an Entry 50 • Correcting Errors 57 • Horizontal Analysis Note: To select a topic, type the slide # and press Enter. C2 - 2
  • 3. Double-Entry Accounting ― Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.‖ Scale or Balance T account Left Side Right Side Receive GiveLuca Pacioli DEBIT CREDITDeveloper ofDouble-Entry Receive Give Accounting DEBIT CREDIT C2 - 3
  • 4. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given C2 - 4
  • 5. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Assets C2 - 5
  • 6. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Assets Expenses C2 - 6
  • 7. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Liabilities Assets Expenses C2 - 7
  • 8. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Liabilities Assets Owner’s Equity Expenses C2 - 8
  • 9. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Liabilities Assets Owner’s Equity Revenues Expenses C2 - 9
  • 10. Expanded Accounting Equation ― The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.‖ DEBITS CREDITS received = given Liabilities Assets Owner’s Equity Net Income Revenues Expenses C2 - 10
  • 11. NetSolutions A Sole Proprietorship ― On November 1, 2002, I started a sole proprietorship called NetSolutions. I plan to use my knowledge of microcomputers and offer computer consulting services for a fee. The following double-entry transactions show how amounts received (debits) always equal amounts given (credits).‖Chris Clark, Owner C2 - 11
  • 12. Business TransactionsEntry A. Chris Clark (investor) Chris Clark deposits $25,000 in a bank account for NetSolutions. receive NetSolutions give give Debit (investee) Credit Credit General Journal Date Description Debit Credit 11/1 C2 - 12
  • 13. Business TransactionsEntry A. Chris Clark (investor) Chris Clark deposits $25,000 Cash in a bank account for NetSolutions. receive NetSolutions give give Debit (investee) Credit Credit General Journal Date Description Debit Credit 11/1 Cash 25,000 C2 - 13
  • 14. Business TransactionsEntry A. Chris Clark (investor) Chris Clark deposits $25,000 Cash A promise in a bank account to the owner for NetSolutions. receive NetSolutions give give Debit (investee) Credit Credit General Journal Date Description Debit Credit 11/1 Cash 25,000 Chris Clark, Capital 25,000 C2 - 14
  • 15. Business TransactionsEntry B. Land Owner (seller) NetSolutions buys land for $20,000. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/5 C2 - 15
  • 16. Business TransactionsEntry B. Land Owner (seller) NetSolutions buys land for $20,000. Land receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/5 Land 20,000 C2 - 16
  • 17. Business TransactionsEntry B. Land Owner (seller) NetSolutions buys land for $20,000. Land Cash receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/5 Land 20,000 Cash 20,000 C2 - 17
  • 18. Business TransactionsEntry C. Supplier (seller) NetSolutions buys supplies for $1,350, agreeing to pay in the near future. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/10 C2 - 18
  • 19. Business TransactionsEntry C. Supplier (seller) NetSolutions buys supplies for Supplies $1,350, agreeing to pay in the near future. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/10 Supplies 1,350 C2 - 19
  • 20. Business TransactionsEntry C. Supplier (seller) NetSolutions buys supplies for Supplies A promise $1,350, agreeing to to pay later pay in the near future. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/10 Supplies 1,350 Accounts Payable 1,350 C2 - 20
  • 21. Business TransactionsEntry D. Customer (buyer) NetSolutions earns fees of $7,500, receiving cash. receive NetSolutions give give Debit (seller) Credit Credit General Journal Date Description Debit Credit 11/18 C2 - 21
  • 22. Business TransactionsEntry D. Customer (buyer) NetSolutions earns fees of Cash $7,500, receiving cash. receive NetSolutions give give Debit (seller) Credit Credit General Journal Date Description Debit Credit 11/18 Cash 7,500 C2 - 22
  • 23. Business TransactionsEntry D. Customer (buyer) NetSolutions earns fees of Cash Services $7,500, receiving cash. receive NetSolutions give give Debit (seller) Credit Credit General Journal Date Description Debit Credit 11/18 Cash 7,500 Fees Earned 7,500 C2 - 23
  • 24. Business TransactionsEntry E. Various suppliers NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit C2 - 24
  • 25. Business TransactionsEntry E. Various suppliers NetSolutions paid: Services, wages, $2,125; rent, benefits $800; utilities, $450; and miscellaneous, $275. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/18 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 C2 - 25
  • 26. Business TransactionsEntry E. Various suppliers NetSolutions paid: Services, wages, $2,125; rent, Cash benefits $800; utilities, $450; and miscellaneous, $275. receive NetSolutions give give Debit (buyer) Credit Credit General Journal Date Description Debit Credit 11/18 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 Cash 3,650 C2 - 26
  • 27. Business TransactionsEntry F. Supplier (payee) NetSolutions pays $950 to creditors on account. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 27
  • 28. Business TransactionsEntry F. Supplier (payee) NetSolutions pays Reduction in $950 to creditors obligation on account. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 Accounts Payable 950 C2 - 28
  • 29. Business TransactionsEntry F. Supplier (payee) NetSolutions pays Reduction in $950 to creditors Cash obligation on account. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 Accounts Payable 950 Cash 950 C2 - 29
  • 30. Business TransactionsEntry G. Internal Transaction (no external entity) At the end of the month, the cost of supplies on hand is $550. receive NetSolutions give give Debit (user) Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 30
  • 31. Business TransactionsEntry G. Internal Transaction (no external entity) At the end of the month, the cost of Use of supplies on hand supplies is $550. receive NetSolutions give give Debit (user) Credit Credit General Journal Date Description Debit Credit 11/30 Supplies Expense 800 Balance of Supplies account $1,350 less $550 on hand = $800 used C2 - 31
  • 32. Business TransactionsEntry G. Internal Transaction (no external entity) At the end of the month, the cost of Use of supplies Supplies supplies on hand is $550. receive NetSolutions give give Debit (user) Credit Credit General Journal Date Description Debit Credit 11/30 Supplies Expense 800 Supplies 800 Balance of Supplies account $1,350 less $550 on hand = $800 used C2 - 32
  • 33. Business TransactionsEntry H. Chris Clark (payee) Chris Clark withdraws $2,000 in cash. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 C2 - 33
  • 34. Business TransactionsEntry H. Chris Clark (payee) Chris Clark Reduction in withdraws $2,000 obligation in cash. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 Chris Clark, Drawing 2,000 C2 - 34
  • 35. Business TransactionsEntry H. Chris Clark (payee) Chris Clark Reduction in withdraws $2,000 Cash obligation in cash. receive NetSolutions give give Debit (payor) Credit Credit General Journal Date Description Debit Credit 11/30 Chris Clark, Drawing 2,000 Cash 2,000 C2 - 35
  • 36. NetSolutions Chart of Accounts Balance Sheet Income Statement1. Assets 4. Revenue11 Cash 41 Fees Earned12 Accounts Receivable14 Supplies 5. Expenses 51 Wages Expense15 Prepaid Insurance17 Land 52 Rent Expense18 Office Equipment 54 Utilities Expense 55 Supplies Expense2. Liabilities 59 Miscellaneous21 Accounts Payable Expense23 Unearned Rent3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing C2 - 36
  • 37. NetSolutions Trial Balance November 30, 200211 Cash 5,90014 Supplies 55017 Land 20,00021 Accounts Payable 40031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 2,00041 Fees Earned 7,50051 Wages Expense 2,12552 Rent Expense 80054 Utilities Expense 45055 Supplies Expense 80059 Miscellaneous Expense 275 32,900 32,900 C2 - 37
  • 38. NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550Balance 17 Land 20,000 Sheet 21 Accounts Payable 400 31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 52 Rent Expense 800 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900 C2 - 38
  • 39. NetSolutions Trial Balance November 30, 2002 11 Cash 5,900 14 Supplies 550 17 Land 20,000 21 Accounts Payable 400 31 Chris Clark, Capital 25,000 32 Chris Clark, Drawing 2,000 41 Fees Earned 7,500 51 Wages Expense 2,125 Income 52 Rent Expense 800Statement 54 Utilities Expense 450 55 Supplies Expense 800 59 Miscellaneous Expense 275 32,900 32,900 C2 - 39
  • 40. Journal, Ledger, Trial Balance1. Transactions are analyzed and recorded in journal. Documents Journal C2 - 40
  • 41. Journal, Ledger, Trial Balance1. Transactions are analyzed and recorded in journal. Documents Journal2. Transactions are posted from journal to ledger. Journal Ledger C2 - 41
  • 42. Journal, Ledger, Trial Balance1. Transactions are analyzed and recorded in journal. Documents Journal2. Transactions are posted from journal to ledger. Journal Ledger3. Trial balance is prepared. Trial Balance C2 - 42
  • 43. Recording and Posting an EntryGeneral Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400 1. Analyze and record the transaction as shown. 2. Post the debit side of the transaction. 3. Post the credit side of the transaction. C2 - 43
  • 44. Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,4001 General Ledger Account: Prepaid Insurance Account No. 15 Post. Balance Date Item Ref. Debit Credit Debit Credit 12/1 1 Enter the transaction date in the ledger account. C2 - 44
  • 45. Recording and Posting an EntryGeneral Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400General Ledger 2Account: Prepaid Insurance Account No. 15 Post. BalanceDate Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2 Enter the debit amount in the ledger debit column. C2 - 45
  • 46. Recording and Posting an EntryGeneral Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400General LedgerAccount: Prepaid Insurance Account No. 15 Post. BalanceDate Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 3 3 Update the ledger account balance. C2 - 46
  • 47. Recording and Posting an EntryGeneral Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 2,400 Cash 2,400General Ledger 4Account: Prepaid Insurance Account No. 15 Post. BalanceDate Item Ref. Debit Credit Debit Credit 12/1 1 4 Enter the journal page in the ledger account. C2 - 47
  • 48. Recording and Posting an EntryGeneral Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400 Cash 2,400 5General LedgerAccount: Prepaid Insurance Account No. 15 Post. BalanceDate Item Ref. Debit Credit Debit Credit 12/1 1 2,400 2,400 5 Enter the ledger account number in the journal. C2 - 48
  • 49. Recording and Posting an Entry General Journal Page 1 Post. Date Description Ref. Debit Credit 12/1 Prepaid Insurance 15 2,400 Cash 11 2,4001 4 5 2 General Ledger Account: Cash Account No. 11 Post. Balance Date Item Ref. Debit Credit Debit Credit 11/30 Balance 5,900 12/1 1 2,400 3,500 3 All five parts of the credit posting are shown. C2 - 49
  • 50. Correcting Errors Three Types of ErrorsJournal Entry Ledger Posting Correction Procedure1. incorrect not posted correct Journal C2 - 50
  • 51. Correcting Errors Three Types of ErrorsJournal Entry Ledger Posting Correction Procedure1. incorrect not posted correct Journal2. correct incorrectly posted correct Ledger C2 - 51
  • 52. Correcting Errors Three Types of ErrorsJournal Entry Ledger Posting Correction Procedure1. incorrect not posted correct Journal2. correct incorrectly posted correct Ledger3. incorrect already posted record and post a correcting entry Error 3 requires a correcting journal entry. C2 - 52
  • 53. Correcting Errors – An ExampleOn May 5 a purchase of office equipment on accountwas incorrectly journalized and posted as shown.General Journal – As recorded and posted Date Description Debit Credit 5/5 Supplies 12,500 Accounts Payable 12,500 What part of this entry is incorrect? What correcting entry would you make? C2 - 53
  • 54. Correcting Errors – An ExampleOn May 5 a purchase of office equipment on accountwas incorrectly journalized and posted as shown.General Journal – As recorded and posted Date Description Debit Credit 5/5 Supplies 12,500 Accounts Payable 12,500General Journal – A correcting entry Date Description Debit Credit 5/5 C2 - 54
  • 55. Correcting Errors – An ExampleOn May 5 a purchase of office equipment on accountwas incorrectly journalized and posted as shown.General Journal – As recorded and posted Date Description Debit Credit 5/5 Supplies 12,500 Accounts Payable 12,500General Journal – A correcting entry Date Description Debit Credit 5/5 Office Equipment 12,500 C2 - 55
  • 56. Correcting Errors – An ExampleOn May 5 a purchase of office equipment on accountwas incorrectly journalized and posted as shown.General Journal – As recorded and posted Date Description Debit Credit 5/5 Supplies 12,500 Accounts Payable 12,500General Journal – A correcting entry Date Description Debit Credit 5/5 Office Equipment 12,500 Supplies 12,500 C2 - 56
  • 57. Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent AssetsCurrent assets $ 550,000 $ 533,000Long-term investments 95,000 177,500Plant assets (net) 444,500 470,000Intangible assets 50,000 50,000 $1,139,500 $1,230,500 C2 - 57
  • 58. Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods. Comparative Balance Sheet December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount Percent AssetsCurrent assets $ 550,000 $ 533,000 Horizontal Analysis: $ 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Plant assets (net) Current year (2003) $550,000 444,500 470,000 (25,500) (5.4%) = 103.2%Intangible assets Base 50,000 year (2002) 50,000 $533,000 — $1,139,500 $1,230,500 $ (91,000) (7.4%) Increase amount $17,000 = 3.2% Base year (2002) $533,000 C2 - 58
  • 59. Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods.Comparative Income Statement December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount PercentSales $1,530,500 $1,234,000Sales returns 32,500 34,000Net sales $1,498,000 $1,200,000Cost of goods sold 1,043,000 820,000Gross profit $ 455,000 $ 380,000 C2 - 59
  • 60. Financial Analysis and Interpretation Objective: Use horizontal analysis to compare financial statements from different periods.Comparative Income Statement December 31, 2003 and 2002 Increase (Decrease) 2003 2002 Amount PercentSales $1,530,500 $1,234,000 $296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales $1,498,000 $1,200,000 $298,000) 24.8% Horizontal Analysis:Cost of goods sold 1,043,000 820,000 223,000 27.2%Gross profit $ 455,000 $ 380,000 $ 75,000 19.7% Current year (2003) $1,498,000 = 124.8% Base year (2002) $1,200,000 Increase amount $298,000 = 24.8% Base year (2002) $1,200,000 C2 - 60
  • 61. Chapter 2 Power Notes Analyzing Transactions This is the last slide in Chapter 2. Note: To see the topic slide, type 2 and press Enter. C2 - 61