Chapter 2

1. Chapter 2: Analyzing Transactions
into Debit and Credit Parts
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2. Using T Accounts
A T-account is an accounting device used to analyze
transactions.
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3. The balance of an account increases on the same side as
the normal balance side.
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4. 4

5. August 1. Received cash from owner as an investment, $5,000.00.
2 1 1 2
4 4
3 3
1. Which accounts are affected?
Each transaction
2. How is each account classified? changes the balances in
3. How is each classification changed? at least two accounts.
4. How is each amount entered in the accounts?
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6. August 3. Paid cash for supplies, $275.00.
2 1 1
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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7. August 4. Paid cash for insurance, $1,200.00.
2 1 1
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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8. August 7. Bought supplies on account from Supply Depot, $500.00.
2 1 1 2
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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9. August 11. Paid cash on account to Supply Depot, $300.00.
2 1 1 2
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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10. August 12. Received cash from sales, $295.00.
2 1 1 2
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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11. August 12. Sold services on account to Oakdale School, $350.00.
2 1 1 2
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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12. August 12. Paid cash for rent, $300.00.
2 1 2
3 4 3
1
4
3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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13. August 18. Received cash on account from Oakdale School, $200.00.
2
1 1
4 4
3 3
1. Which accounts are affected?
2. How is each account classified?
3. How is each classification changed?
4. How is each amount entered in the accounts?
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14. August 12. Paid cash to owner for personal use, $125.00.
2
1
4
3 3
1
2
4
1. Which accounts are affected? 3
Withdrawals are
2. How is each account classified?
recorded in the
3. How is each classification changed?
4. How is each amount entered in the accounts?
owner’s drawing
account. 14

15. • Planning phase
 Setting goals and objectives for business
activities
• Performing phase
 Completing the planned business activities
and recording the results of those activities
• Evaluating phase
 Providing information to interested users to
assess the success of the business activities
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16. • Business organization and strategy process
 Determines the plan of action for the company
• Operating processes
 Profit-making activities of the company
• Capital resources processes
 Financing and investing activities of the
company
• Performance measurement and
management process
 Balanced scorecard (see next slide)
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17. • Approach to planning and measuring
performance; “How did we do as a
company?”
• 4 perspectives
 Financial; determine the return on the investment &
accounts payable (see next slide)
 Internal; time it takes to process an order
 Customer; inventory turnover time; customer
satisfaction & loyalty
 Learning and growth; company research & growth,
employee training, new technology
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18. • Accounts receivable turnover
 Days in the collection cycle are compared to the credit
terms your company offers it’s customers; 2/10; n/30
• Inventory turnover
 Days in the selling cycle are compared to the shelf life
of the item; how long did the item sit on the shelf?
• Accounts payable turnover
 Days in the payment cycle are compared to the credit
terms offered by the supplier; how long does your
company have to pay its bill.
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19.  Return on Sales (ROS) indicates a company's operating profit (or
loss) for a particular period—usually one year. Essentially the
formula is profit divided by sale revenue, expressed as a
percentage.
 ROS is a useful measure of a company's operational efficiency as
well as its profitability. It reflects how resourcefully each dollar of
sales revenue is used, how well the company manages costs, and
how it responds to difficulties like a sales downturn, increasing
costs, or a fall in prices. A higher ROS indicates that a company is
likely to cope well with such circumstances, and may be able to
hold out against cutting its prices or entering into a price war.
 ROS can be helpful in analyzing companies with seasonal or
irregular income patterns, or those with a large volume of
depreciating assets—perhaps as a result of substantial capital
investment.

LESSON 2-1
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20. The formula for ROS is simply:
operating profit / total sales × 100 =
percentage return on sales
For example, if a business makes $150 on
a sale worth $950, ROS is:
150 / 950 = 0.158 × 100 = 15.8%
LESSON 2-1
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21. Internal control is the process designed to ensure reliable financial
reporting, effective and efficient operations, and compliance with
applicable laws and regulations. Safeguarding assets against theft and
unauthorized use, acquisition, or disposal is also part of internal
control.
Control activities are the specific policies and procedures
management uses to achieve its objectives. The most important
control activities involve segregation of duties, proper authorization
of transactions and activities, adequate documents and records,
physical control over assets and records, and independent checks on
performance.
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22.  Return on equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested. ROE is the amount of net income returned as a
percentage of shareholders equity.
 Shareholder equity is equal to total assets minus total liabilities. It's what the shareholders "own".
Shareholder equity is a creation of accounting that represents the assets created by the retained
earnings of the business and the paid-in capital of the owners.
 Return on Equity (ROE) is one of the financial ratio used by stock investors in analyzing stocks. It
indicates how effective the management team is in converting the reinvested money into profits. The
higher the ROE, the more money a company able to generate for the same dollar amount spent.
 ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
 So if $50,000 was invested into a company by it’s stockholders and at the end of the year the company
had a net income (revenue - expenses) of $10,000, what is the return on equity?
 Answer: $10,000/$50,000 = 20%
LESSON 2-1
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23.  Segregation of duties requires that different individuals be assigned
responsibility for different elements of related activities, particularly those
involving authorization and recordkeeping. For example, the same person
who is responsible for an asset's recordkeeping should not be responsible
for physical control of that asset. Having different individuals perform these
functions creates a system of checks and balances.
 Proper authorization of transactions and activities helps ensure that all
company activities adhere to established guidelines. For example, a fixed
price list may serve as an official authorization of price for a sales staff.
 Adequate documents and records provide evidence that financial
statements are accurate. Controls designed to ensure adequate
recordkeeping include the creation of invoices and other documents that are
easy to use and sufficiently informative; the use of prenumbered, consecutive
documents; and the timely preparation of documents.
LESSON 2-1
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24.  Physical control over assets and records helps protect the company's
assets. These control activities may include electronic or mechanical
controls (such as a safe, employee ID cards, fences, cash registers,
fireproof files, and locks) or computer-related controls dealing with
access privileges or established backup and recovery procedures.
 Independent checks on performance, which are carried out by
employees who did not do the work being checked, help ensure the
reliability of accounting information and the efficiency of operations. For
example, a supervisor verifies the accuracy of a retail clerk's cash drawer
at the end of the day. Internal auditors may also verity that the supervisor
performed the check of the cash drawer.
LESSON 2-1
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25. • Prevention
 Reducing the opportunity for error to occur
• Employee training, product and process design
• Continuous inspection, testing
• Appraisal
 Finding errors as early in the process as possible
• Internal failure
 Correcting errors before the customer knows the error occurred;
example: reworking a product until it runs properly.
• External failure
 Correcting errors after the customer knows the error occurred
 Includes customer ill will
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26. • Proper authorization; don’t purchase supplies without following proper
procedures; get a signed purchase order.
• Separating duties; one employee writes checks while another employee
signs the checks; they create a check and balance system.
• Maintaining adequate documentation; keep copies of receipts,
purchase orders, and all documents related to any transaction.
• Physically controlling assets and documents; depositing checks
received from sales every night at the bank and record it in the
computer/general journal as a backup.
• Providing independent checks on performance; use internal controls to
check cash flow: check cash receipts, cash disbursements, bank
statements, & company charge card statements. Assigned these job
tasks to different employees (separation of duties).
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