Chapter 2 of the accounting textbook discusses the fundamental concepts of analyzing transactions, including account classifications like assets, liabilities, and owner’s equity, as well as the double-entry accounting system. It covers the structure of financial statements, journal entries, and the T-account method for managing transactions. Additionally, the chapter includes examples of various transactions and emphasizes the importance of maintaining balanced debits and credits in accounting.

1. Chapter 2
Analyzing Transactions
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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2. Each financial statement
item, called an account, is
included in the ledger.

3. A group of
accounts for a
business entity is
called a ledger.

4. A list of the
accounts in a ledger
is called a chart of
accounts.

5. Major Account Classifications
Assets are
resources owned
by the business.
Liabilities are debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable

6. Major Account Classifications
Liabilities are debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable
Assets are
resources owned
by the business.
Liabilities are often identified
on the balance sheet by titles
that include payable.

7. Owner’s
equity is the
owner’s right to
the assets of the
business.
Revenues are
increases in
owner’s equity as
a result of selling
services or
products.
Chris Clark,
Capital
Chris Clark,
Drawing
Fees Earned
Fares Earned
Commission
Revenue
Expenses are the
using up of assets
or consuming of
services to
generate revenue.
Rent Expense
Salary Expense
Utilities
Expense
Major Account Classifications

8. To assist you in learning,
an account can be drawn
to resemble the letter T.

9. The T-Account
The T-account has a title.
Cash

10. The T-Account
The left side of the account is the debit side.
Cash
Left side
debit

11. The T-Account
The right side of the account is the credit side.
Cash
Left side
debit
Right side
credit

12. The T-Account
Cash
3,750
4,300
2,900
850
1,400
700
2,900
Typical entries

13. Balancing a T-Account

14. Cash
3,750
4,300
2,900
850
1,400
700
2,900
10,950
First, foot
the debit
side.

15. 850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Next, foot the
credit side.

16. 850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Subtract total credits
from total debits to
obtain the account
balance.
5,100

17. Transactions and Balance
Sheet Accounts

18. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 1
1
2
3
4
Nov. 1
2005
Cash 25 000 00
Chris Clark, Capital 25 000 00
Invested cash in NetSolutions.
(A) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.

19. (A) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.
Effects of this entry in the Ledger
Cash
Nov. 1 25,000 Nov. 1 25,000
Chris Clark, Capital

20. 4
5
6
7
8
9
10
5 Land 20 000 00
Cash 20 000 00
Purchased land for building
site.
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.

21. Effects of this entry in the Ledger
Cash
Nov. 1 25,000 Nov. 5 20,000
Land
Nov. 5 20,000
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.

22. 10
11
12
13
14
15
16
10 Supplies 1 350 00
Accounts Payable 1 350 00
Purchased supplies on account.
(C) On November 10, NetSolutions
purchased supplies on account
for $1,350.

23. (C) On November 10, NetSolutions
purchased supplies on account
for $1,350.
Effects of this entry in the Ledger
Supplies
Nov. 10 1,350
Accounts Payable
Nov. 10 1,350

24. 30 Accounts Payable 950 00
Cash 950 00
Paid creditors on account.
30
31
32
33
34
35
36
(F) On November 30, NetSolutions
paid creditors on account, $950.

25. Cash
Nov. 1 25,000 Nov. 525,000
18 7,500 30 3,650
Effects of this entry in the Ledger
Accounts Payable
Nov. 10 1,350
Nov. 30 950
30 950
(F) On November 30, NetSolutions
paid creditors on account, $950.

26. Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)
Rules of Debit / Credit Balance
Sheet Accounts

27. Credit for
increases
(+)
Credit for
increases
(+)
Credit for
decreases
(-)
Debit for
increases
(+)
Debit for
decreases
(-)
Debit for
decreases
(-)
ASSETS
Asset Accounts
LIABILITIES
Liability Accounts
Owner’s Equity Accounts
OWNER’S EQUITY
Balance Sheet Accounts

28. (D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .
18 Cash 7 500 00
Fees Earned 7 500 00
Received fees from customers.
14
15
16
17
18
19
20

29. Effects of this entry in the Ledger
Cash
Nov. 1 25,000 Nov. 5 25,000
Fees Earned
Nov. 18 7,500
18 7,500
(D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .

30. (E) Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
30 Wages Expense 2 125 00
Rent Expense 800 00
Utilities Expense 450 00
Miscellaneous Expense 275 00
Cash 3 650 00
Paid expenses.
18
19
20
21
22
23
24

31. Effects of this entry in the Ledger
Cash
Nov. 1 25,000 Nov. 525,000
Wages Expense
Nov. 30 2,125
18 7,500
Rent Expense
Nov. 30 800
Utilities Expense
Nov. 30 450
Miscellaneous Expense
Nov. 30 275
30 3,650
(E) Throughout the month, NetSolutions
incurred the following expenses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .

32. In every entry the sum of
the debits always equal
the sum of the credits.

33. (G) On November 30, a count revealed
that $800 of the supplies inventory
had been used.
30 Supplies Expense 800 00
Supplies 800 00
Supplies used during
November.
25
26
27
28
29
30
31

34. Effects of this entry in the Ledger
Supplies
Nov. 10 1,350
Supplies Expense
Nov. 30 800
Nov. 30 800
(G) On November 30, a count revealed
that $800 of the supplies inventory
had been used.

35. 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.”
Luca Pacioli
Developer of
Double-Entry
Accounting
Scale or Balance
Receive
DEBIT
Give
CREDIT
T account
Left Side
Receive
DEBIT
Right Side
Give
CREDIT

36. Credit for
increases
(+)
Credit for
decreases
(-)
Debit for
increases
(+)
Debit for
decreases
(-)
Expense Accounts Revenue Accounts
Rules of Debit / Credit Income
Statement Accounts

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

38. Withdrawals
by the
Owner

39. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Nov. 30
2005
Chris Clark, Drawing 2 000 00
Cash 2 000 00
Chris Clark withdrew cash for
personal use.
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

40. 30 950
30 2,000
Cash
Nov. 1 25,000 Nov. 525,000
18 7,500 30 3,650
Effects of this entry in the Ledger
Chris Clark, Drawing
Nov. 10 1,350
Nov. 30 2,000
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

41. Increase
(Normal Balances) 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
Normal Balances of Accounts

42. Flow of Business Transactions
1 Transaction
authorized 2 Transaction
takes place 3 Document
prepared
4
Entry recorded
in journal 5
Entry posted to
ledger

43. 1. Determine whether an asset, a liability,
owner’s equity, revenue, or expense 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.
System to Analyze Transactions

44. Journalizing
and Posting

45. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec. 31
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
Dec. 1 NetSolutions paid a premium of
$2,400 for a comprehensive insurance
policy covering two years.

46. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec. 1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
ACCOUNT Prepaid Insurance ACCOUNT NO. 15
Balance
Debit Credit
Date Debit Credit
Item
Post.
Ref.
2 400 00 2 400 00
Dec. 1
2005
Paid premium on two-year
policy.

47. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec. 1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
ACCOUNT Prepaid Insurance ACCOUNT NO. 15
Balance
Debit Credit
Date Debit Credit
Item
Post.
Ref.
2 400 00 2 400 00
Dec. 1
2005
2
15
Paid premium on two-year
policy.

48. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec. 1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
15
ACCOUNT Cash ACCOUNT NO. 11
Balance
Debit Credit
Date Debit Credit
Item
Post.
Ref.
2 000 00 5 900 00
Nov. 30
2005
2
Dec. 1 2 400 00 3 500 00

49. Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 2
1
2
3
4
Dec. 1
2005
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
15
ACCOUNT Cash ACCOUNT NO. 11
Balance
Debit Credit
Date Debit Credit
Item
Post.
Ref.
2 000 00 5 900 00
Nov. 30
2005
2
2 400 00 3 500 00
Dec. 1
11
2

50. Trial Balance

51. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00

52. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
Balance
Sheet
Items

53. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
Statement
of Owner’s
Equity
Item

54. NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
Income
Statement
Items

56. 1. Failure to record a transaction or to post a
transaction.
2. Recording the same erroneous amount
for both the debit and the credit parts of a
transaction.
3. Recording the same transaction more
than once.
4. Posting a part of a transaction correctly
as a debit or credit but to the wrong
account.
Errors that will not cause the
trial balance to be unequal:

57. Error Correction Procedure
1. Journal entry is incorrect Draw a line through the error
but not posted. and insert correct title or
amount.
Error Correction Procedure
Correction
of Errors

58. Error Correction Procedure
1. Journal entry is incorrect Draw a line through the error
but not posted. and insert correct title or
amount.
Error Correction Procedure
2. Journal entry is correct Draw a line through the
but posted incorrectly. posted error and post
correctly.
Correction
of Errors

59. Error Correction Procedure
Error Correction Procedure
3. Journal entry is incorrect Journalize and post a
and posted correcting entry.
Correction
of Errors

60. What would be the necessary
correcting entry?
Journal – As recorded and posted
Correcting Errors – An Example
On May 5, a purchase of office equipment on
account was incorrectly journalized and posted
as shown.
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500

61. Journal – As recorded and posted
Correcting Errors – An Example
On May 5, a purchase of office equipment on
account was incorrectly journalized and posted
as shown.
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500
Date Description Debit Credit
May 5 Office Equipment 12,500

62. Date Description Debit Credit
May 5 Office Equipment 12,500
Supplies 12,500
Journal – As recorded and posted
Correcting Errors – An Example
On May 5, a purchase of office equipment on
account was incorrectly journalized and posted
as shown.
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500

63. Financial Analysis and
Interpretation
Comparing an item in a current
statement with the same item in
prior statements is called
horizontal analysis.

64. J Holmes, Attorney-at-Law
Income Statement
For the Year Ended December 31, 2005 and 2006
Increase (Decrease)
2006 2005 Amount Percent
Fees earned $187,500 $150,000 $37,500 25.0%
Operating expenses:
Wages expense $ 60,000 $ 45,000 $15,000 33.3%
Rent expense 15,000 12,000 3,000 25.0%
Utilities expense 12,500 9,000 3,500 38.9%
Supplies expense 2,700 3,000 (300) (10.0)%
Misc. expense 2,300 1,800 500 27.8%
Total operating
expenses $ 92,500 $ 70,800 $21,700 30.6%
Net income $ 95,000 $ 79,200 $15,800 19.9%

65. The End
Chapter 2