1) The document discusses the accounting process and how to analyze and record business transactions. It explains the key steps which include examining source documents, analyzing transactions using debits and credits, recording transactions in a journal, posting to ledgers, and preparing a trial balance. 2) An example transaction is provided to demonstrate how to apply the accounting equation to identify impacts on asset, liability and equity accounts and how to record the journal entry and post to ledger accounts. 3) The revenue recognition principle is explained as recognizing revenue when it is earned rather than when payment is received. An example transaction illustrates revenue being recognized with a receivable recorded before cash is received.

1. Analyzing and Recording
Transaction
Lecture
Financial Accounting for Business
Learning Accounting
If you want to learn accounting,
you learn it one concept at a
time, one principle at a time.
Learning Objective
Identify, explain, and apply
accounting principles.
Conceptual
Source
documents
Recording &
posting
Trial balance
Reporting
Transaction
or event
Analysis
The Accounting Process
Exh.
2.2

2. External Transactions
occur between the
organization and an
outside party.
Internal Transactions
occur within the
organization.
Transactions and Events
Exchanges of economic consideration
between two parties.
Source Documents
Invoices
Other
Check
Stubs
Journal
Bank Statement
Detailed record of increases
and decreases in specific
assets, liabilities, equities,
revenues, or expenses.
=======================
Separate accounts are maintained for
each item of importance.
The Account

3. BASIC FORM OF ACCOUNT
BASIC FORM OF ACCOUNT
Left or debit side
Title of Account
Right or credit side
Debit balance Credit balance
 In its simplest form, an account consists of
1. the title of the account,
2. a left or debit side, and
3. a right or credit side.
 The alignment of these parts resembles the
letter T, and therefore the account form is
called a T account.

4. Account Title
Left Side Right Side
Debits and Credits
The debit/credit convention or
coding system is very simple.
Do not make it difficult because you
cannot accept its simplicity.
Debits
Debit comes from Latin and merely
means “left,” or the “left-hand” side
of an account. Abbreviated “DR.”

5. Account Title
Left Side
Debit
Side
We need to
stop here
and change
our way of
thinking!
Credits
Credit also comes from the Latin,
and means “right,” or the “right-
hand” side of an account.
Abbreviated “CR.”
Account Title
Right Side
Credit
Side
Let’s stop
here and
modify our
thinking – at
least for this
class!
So, how can
we use this?
That’s a
good
question!

6. Accounts
actually
provide two
equalities or
balances . . .
Let’s . . .
At the first equality
Assets
Liabilities
Owners’
Equity
The algebraic
relationship in the
fundamental
accounting model.
Account Title
Debit Credit

7. DR CR
Assets
Liabilities
DR CR
DR CR
Owners’
Equity
Debits Credits
The Second Equality . . .
The algebraic
relationship between
account increases
and decreases.
Expenses
Revenue
Owners’ Equity
Liabilities
Assets
Debit-Credit Rules . . .
Debit Credit
Credit Debit
Credit Debit
Credit Debit
Debit Credit
Account Inc. Dec.
Debit-Credit Rules . . .
Debits Credits
Assets
Expenses
Liabilities
Equity
Revenue
Increase
Decrease
Liabilities
Equity
Revenue
Assets
Expenses

8. TABULAR SUMMARY
COMPARED TO ACCOUNT FORM
TABULAR SUMMARY
COMPARED TO ACCOUNT FORM
Tabular
Summary
Cash
$15,000
- 7,000
1,200
1,500
- 600
- 900
- 200
- 250
Cash
Debit Credit
15,000
1,200
1,500
600
7,000
600
200
900
Balance
Account Form
8,050
$8,050
600
- 1,300
250
1,300
Example: The owner makes an initial
investment of $15,000 to start the
business. Cash is debited and the
owner’s Capital account is credited.
DEBITING AN ACCOUNT
DEBITING AN ACCOUNT
15,000
Cash
.
Example: Monthly rent of $7,000 is paid.
Cash is credited and Rent Expense
is debited.
CREDITING AN ACCOUNT
CREDITING AN ACCOUNT
7,000
Cash
DEBITING AND CREDITING
AN ACCOUNT
DEBITING AND CREDITING
AN ACCOUNT
f $ , .
Example: Cash is debited for $15,000 and
credited for $7,000, leaving a debit
balance of $8,000.
15,000 7,000
8,000
Cash

9. Basic Facts About
Accounts
For every transaction
there must be at least
one debit and one credit;
Debits must always equal
credits for each
transaction, and;
Debits are always
entered on the left side
of an account and credits
on the right side.

10. ebits
ncrease
ssets
xpenses
iabilities
evenues
redits
ncrease
quity After Eating
Dinner
Let’s Read the
Comics
Accounts increased
with a debit:
Assets
Expenses
Dividends
Accounts increased
with a credit:
Liabilities
Revenues
Capital

11. NORMAL BALANCES — ASSETS AND LIABILITIES
NORMAL BALANCES — ASSETS AND LIABILITIES
Assets
Increase Decrease
Debit Credit
Decrease Increase
Debit Credit
Liabilities
Normal
Balance
Normal
Balance
NORMAL BALANCES —
REVENUES AND EXPENSES
NORMAL BALANCES —
REVENUES AND EXPENSES
Increase Decrease
Debit Credit
Expenses
Revenues
Decrease Increase
Debit Credit
Normal
Balance
Normal
Balance
EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS
EXPANDED BASIC EQUATION AND
DEBIT/CREDIT RULES AND EFFECTS
Liabilities
Assets Owner’s Equity
= +
+
=
+ -
Assets
Dr. Cr.
+ -
Liabilities
Dr. Cr.
- +
Dr. Cr.
Revenues
- +
Dr. Cr.
Expenses
+ -
Dr. Cr.
Owner’s
Capital
- +
Learning Objective
Analyze business
transactions using the
accounting equation.
Analytical

12. Analyzing Transactions
1. Analyze the transaction and its
source.
2. Identify the impact of the
transaction on account balances.
3. Identify the financial
statements that are impacted
by the transaction.
Learning Objective
Record transactions in a
journal and post entries to
a ledger.
Procedural
Step 1: Examine
source documents.
Steps in Processing Transactions
Equipment
(3) 30,000
Liabilities Equity
Assets = +
Step 2: Analyze
transactions.
We saw these steps earlier. Now,
let’s look at some additional ones.
ACCOUNTNAME: ACCOUNTNo.
Date Description PR Debit Credit Balance
Step 4: Record the
journal information in
a ledger.
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record
transactions in
a journal.
Step 5: Prepare
a trial balance.
Steps in Processing Transactions
Step 1: Examine
source
documents.
Equipment
(3) 30,000
Liabilities Equity
Assets = +
Step 2: Analyze
transactions.

13. General Journal Page 1
Date Description PR Debit Credit
Jan 6 Art Supplies 1,800
Office Supplies 800
Accounts Payable 2,600
Purchase of art and office supplies on
credit
Journals . . .
A journal contains a chronological
record of the transactions of a
business.
Advantages
Sets forth transactions of each day.
Records transactions in chronological
order.
Shows the analysis of each
transaction in terms of debit and
credit effects.
Supplies an explanation of each
transaction
Advantages
Serves as a source for future
reference to accounting transactions.
Removes lengthy explanations from
the ledger accounts.
Makes posting the ledger at
convenient times possible.

14. Advantages
Assists in keeping the ledger in balance.
Aids in tracing errors.
Promotes the division of labor.
Accts Rec.
The General Ledger
General
Ledger
Inventory
Cash
Notes Pay.
Mortgage
Accts Pay.
Revenue
Expenses
Retained
Earnings
Transaction Analysis – Example
Step 1 Identify the transaction and any
source documents.
Step 2 Analyze the transaction using
the accounting equation.
Step 3 Record the transaction in
journal entry form applying double-entry
accounting.
Step 4 Post the entry (for simplicity,
we use T-accounts to represent ledger
accounts).
Transaction Analysis – Example
On December 1, Chuck Taylor forms
an athletic shoe consulting business.
He sets it up as a corporation. Taylor
owns and manages the business. The
marketing plan for the business is to
focus primarily on consulting with
sports clubs, amateur athletes and
others who place orders for athletic
shoes with manufacturers.

15. Taylor personally invests $30,000
cash in the new company in exchange
for common stock, and deposits the
cash in a bank account opened under
the name of FastForward, Inc.
Transaction Analysis – Example
To illustrate how revenue recognition
works, let’s return to FastForward’s
transactions.
Transaction Analysis – Example
Chuck Taylor invests $30,000 in the
company in exchange for common stock.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
30,000
$ -
$ -
$ -
$ -
$ 30,000
$
30,000
$ = 30,000
$
1
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Transaction
Date
Titles of Affected
Accounts
Dollar amount of
debits and credits
Transaction
explanation
Chuck Taylor invests $30,000 in the
company in exchange for common stock.
1

16. GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
1
Identify the account.
Posting Journal Entries - Example
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1
2 Enter the date.
Posting Journal Entries - Example
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock 30,000
3
Enter the amount.
Posting Journal Entries - Example
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000
4
Enter the journal reference.
Posting Journal Entries - Example

17. CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000 30,000
5
Compute the balance.
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock
Posting Journal Entries - Example
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
2011
Dec. 1 Cash 101 30,000
Common Stock 301 30,000
Issuance of stock
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000 30,000
Enter the ledger reference. 6
Posting Journal Entries - Example
FastForward purchases $2,500 of
supplies for cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
27,500
$ 2,500
$ -
$ -
$ -
$ 30,000
$
30,000
$ = 30,000
$
2
FastForward spends $26,000 to acquire
equipment for testing athletic shoes.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
1,500
$ 2,500
$ 26,000
$ -
$ -
$ 30,000
$
30,000
$ = 30,000
$
3

18. FastForward purchased $7,100 of
supplies on credit.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
1,500
$ 9,600
$ 26,000
$ 7,100
$ -
$ 30,000
$
37,100
$ = 37,100
$
4 FastForward provides consulting
services to an athletic club and
collects $4,200 in cash.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
5,700
$ 9,600
$ 26,000
$ 7,100
$ -
$ 34,200
$
41,300
$ = 41,300
$
5
FastForward pays $1,000 rent to the
landlord of the building where its
store is located.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
4,700
$ 9,600
$ 26,000
$ 7,100
$ -
$ 33,200
$
40,300
$ = 40,300
$
6
FastForward pays the biweekly
$700 salary of the company’s only
employee.
Assets = Liabilities + Equity
Cash Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
(7) (700) (700)
4,000
$ 9,600
$ 26,000
$ 7,100
$ -
$ 32,500
$
39,600
$ = 39,600
$
7

19. Revenue Recognition Principle
1. Revenue is recognized when earned.
2. Assets received from selling
products and services need not be in
cash.
3. Revenue recognized is measured by
the cash received plus the cash
equivalent (market) value of any
other assets received.
FastForward provides consulting
services of $1,600 and rents its test
facilities for $300.
Assets = Liabilities + Equity
Cash
Accounts
Rec Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,600
300
4,000
$ 1,900
$ 9,600
$ 26,000
$ 7,100
$ -
$ 34,400
$
$ $
8
The client in transaction 8 pays $1,900
to FastForward 10 days after it is billed
for consulting services.
Assets = Liabilities + Equity
Cash
Accounts
Rec Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
5,900
$ $0 9,600
$ 26,000
$ 7,100
$ -
$ 34,400
$
41,500
$ = 41,500
$
9
FastForward pays $900 to CalTech
Supply as partial payment for its
earlier $7,100 purchase of supplies.
Assets = Liabilities + Equity
Cash
Accounts
Rec Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)
5,000
$ $0 9,600
$ 26,000
$ 6,200
$ -
$ 34,400
$
40,600
$ = 40,600
$
10

20. FastForward declares and pays a
$200 cash dividend to its owner.
Assets = Liabilities + Equity
Cash
Accounts
Rec Supplies Equipment
Accounts
Payable
Notes
Payable Equity
(1) 30,000
$ 30,000
$
(2) (2,500) 2,500
(3) (26,000) 26,000
(4) 7,100 7,100
(5) 4,200 4,200
(6) (1,000) (1,000)
(7) (700) (700)
(8) 1,900 1,900
(9) 1,900 (1,900)
(10) (900) (900)
(11) (200) (200)
4,800
$ $0 9,600
$ 26,000
$ 6,200
$ -
$ 34,200
$
40,400
$ = 40,400
$
11 Cash
(1) 30,000
(5) 4,200
(9) 1,900
36,100
-31,300
4,800
(2) 2,500
(3) 26,000
(6) 1,000
(7) 700
(10) 900
(11) 200
31,300
Increases
Decreases
Balance Decreases
Cash Account No. 101
Date Item PR Debit Credit
Balance
Debit Credit
(1) 30,000 30,000
(2) 2,500 27,500
(3) 26,000 1,500
(5) 4,200 5,700
(6) 1,000 4,700
(7) 700 4,000
(9) 1,900 5,900
(10) 900 5,000
(11) 200 4,800
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
T-accounts are useful illustrations,
but balance column ledger
accounts are used in practice.
Balance Column Ledger

21. CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
Balance Column Ledger
Note the the t-account tool is derived from the
debit and credit columns of the ledger.
The last line in the balance column shows
the current balance in the account.
Exh.
2.16
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance
2011
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
Balance Column Ledger
FastForward transactions
12.FastForward receives $3,000 cash in advance
of providing consulting services to a
customer.
13.FastForward pays $2,400 cash (insurance
premium) for a 24-month insurance policy.
Coverage begins on December 1.
14.FastForward pays $120 cash for supplies.
15.FastForward pays $230 cash for December
utilities expense.
16.FastForward pays $700 cash in employee
salary for work performed in the latter part
of December. 83
THE TRIAL BALANCE
THE TRIAL BALANCE
 A trial balance is a list of accounts and their
balances at a given time.
 The primary purpose of a trial balance is to prove
the mathematical equality of debits and credits
after posting.
 A trial balance also uncovers errors in journalizing
and posting.
 The procedures for preparing a trial balance
consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.
84

22. 85
FastForward trial balance
86
LIMITATIONS OF A TRIAL BALANCE
LIMITATIONS OF A TRIAL BALANCE
 A trial balance does not prove that all
transactions have been recorded or that the
ledger is correct.
 Numerous errors may exist even though the trial
balance columns agree.
 The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or
posting,
5. offsetting errors are made in recording the
amount of the transaction.
87
DETECTING ERRORS THROUGH A TRIAL BALANCE
DETECTING ERRORS THROUGH A TRIAL BALANCE
 A trial balance will not balance if double-entry
accounting has not been completed properly.
 The trial balance may not balance when
1. debit or credit omitted,
2. duplication of debit or credit,
3. transposing errors
88

23. Six Steps for Searching for
and Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.
Verify that the trial balance
columns are correctly added.
Verify that account balances
are correctly entered from the
ledger.
See whether a debit (or
credit) balance is mistakenly
listed as a credit (or debit).
Recompute each account
balance in the ledger.
Verify that each journal
entry is properly posted.
Verify that each original
journal entry has equal
debits and credits.
2-89
89
o Describes the relationship between the
amounts of the company’s liabilities and
assets.
o Helps to assess the risk that a company
will fail to pay its debts.
Debt Ratio =
Total Liabilities
Total Assets
Debt Ratio =
Total Liabilities
Total Assets
Debt Ratio
A2
2-90
We Have Learned . . .
The first five
steps in the
accounting
cycle.
Examine Source Documents
Analyze Transactions
Record Transactions
Post Transactions
Prepare
Trial Balance
91
Analyze Transactions
Preparing Financial Statements
Examine Source Documents
Record Transactions
Post Transactions
Financial
Statements Prepare
Trial Balance
92

24. Tutorial 2.1
a. On August 1, Worthy invested $3,000 cash and
$15,000 of equipment in Expressions.
b. On August 2, Expressions paid $600 cash for
furniture for the shop.
c. On August 3, Expressions paid $500 cash to rent
space in a strip mall for August.
d. On August 4, it purchased $1,200 of equipment on
credit for the shop (using a long-term note payable).
e. On August 5, Expressions opened for business. Cash
received from haircutting services in the first week and
a half of business (ended August 15) was $825.
Tutorial 2.1
f. On August 15, it provided $100 of haircutting
services on account.
g. On August 17, it received a $100 check for services
previously rendered on account.
h. On August 17, it paid $125 to an assistant for hours
worked during the grand opening.
i. Cash received from services provided during the
second half of August was $930.
j. On August 31, it paid a $400 installment toward
principal on the note payable entered into on August 4.
k. On August 31, Worthy withdrew $900 cash for
personal use.
Tutorial 2.1
1. Open the following ledger accounts in
balance column format: Cash; Accounts
Receivable; Furniture; Store Equipment;
Note Payable; J. Worthy, Capital ; J.
Worthy, Withdrawals; Haircutting
Services Revenue; Wages Expense; and
Rent Expense. Prepare general journal
entries for the transactions.
2. Post the journal entries from (1) to the
ledger accounts.