Chapter Two Page 47
Analyzing and Recording Transactions
Objective: To have students demonstrate their knowledge in processing transactions and the use of debits and credits by recording transactions into a Journal. They will then take the journal and post it to a General Ledger followed by the preparation of a Trial Balance and Financial Statements.
Topics to be covered:
Analyzing and Recording Transactions
- Analyzing and Recording Process
o Steps in processing transactions
o Use of source documents
o What is an account?
o Types of accounts
- Analyzing and Processing Transactions
o Journal Entry
o Double entry system with debits and credits
- Trial Balance
o Debits = Credits
o List all accounts
o Use it to prepare Financial Statements
Analyzing and Recording
-Four step process
- Analyze each transaction (events) from source documents
- Record relevant transactions (events) in a Journal entry format. (At least one debit and one credit and debits = credits.)
- Post the journal entry into the General Ledger using the Chart of Accounts.
- Prepare and analyze the Trial Balance using the final account balances from the general ledger.
Source Documentation – Anything that identifies and describes transactions (events).
Account – A record of increases and decreases in a specific asset, liability, equity, revenue, or expense category.
General Ledger – A record containing all accounts used by a company. This contains all accounts with a balance or activity over a period of time. The accounts come from the Chart of Accounts. The G/L is what is audited.
Asset – Resources owned or controlled by a company. What is owed to the company. Account examples: cash, A/R, N/R, Prepaids, Equipment, Supplies, ect.
Account number will always start with the number 1.
Liability – Claims by creditors against the company’s assets. What the company owes others. Creditors have the right to receive payment first. Account examples: A/P, N/P, Unearned Revenue, Accruals, ect.
Account number will always begin with the number 2.
Equity – The owner’s claim on a company’s assets after the liabilities have been satisfied. The value of a company in dollars. Revenue and Expenses are also recorded here.
Account examples: Owners Capital (increase) and Owners Withdrawal (decrease), Revenues – Sales, Fees (increase), and Expenses – Salary, Rent, Advertising, Utilities, ect. (decrease).
Equity Account Number will always begin with the number 3
Revenue Account Numbers will always begin with the number 4
Cost of Goods Sold Account Numbers will always begin with the number 5
Expense Accounts Numbers will always begin with the numbers 6, 7, or 9
Double Entry System
- Must have at least one debit and one credit
- Total debits must equal total credits
- Accounting equation must always be in balance
Debit and Credit Rules
Assets - Debit increases, Credit decreases, Debit side is natural balance, Permanent acct
Liability – Credit increases, Debit Decreases, Credit side is natural balance, Permanent acct
Capital - Credit increases, Debit Decreases, Credit side is natural balance, Permanent acct
Withdrawal - Debit increases, Credit decreases, Debit side is natural balance, Temporary acct
Revenue - Credit increases, Debit Decreases, Credit side is natural balance, Temporary acct
COGS - Debit increases, Credit decreases, Debit side is natural balance, Temporary acct
Expenses - Debit increases, Credit decreases, Debit side is natural balance, Temporary acct
Journalizing and Posting
There are four steps to processing transactions:
- Analyze source documents
- Apply double journal entry system to transaction
- Record or Journalize
Journal – A complete record of each transaction in a one page double entry system recorded in chronological order. (G/J)
Journalizing – The four step process of recording transactions in a journal.
1. Record the date
2. Determine the debit and credit accounts to be affected and record them. The debits are recorded first and to the left, the credits are indented under the debits.
3. Record the dollar amounts for each debit and credit account
4. Record an explaination describing the transaction
Posting -The five step process of transferring the journal entries to the ledger from the journal to the ledger debit and credit columns.
1. Enter date from the G/J
2. In the post reference column put the page number from the G/J
3. Enter the debit or credit depending on the account
4. Compute the new balance in the account
5. Put the G/L account number in the post reference column on the G/J
Use T-Accounts and the Accounting equation to show and analyze transactions
T accounts: All look like a T: top is the account title, left side is debit, right side is credit
You then apply the debit and credit rules to each account
Trial Balance (T/B)
-A report that lists all the accounts and their balances in chronological order
-The report is at a point in time
- It is used to list accounts, compare balances, and prove the G/L that the debits equal the credits.
Steps: 1. A list of the accounts, their numbers, and their respective balances
2. Compute total debits and then total credits
3. Prove debits=credits
4. Investigate if it does not prove
Errors: 1. Transposition error, difference is divisable by 9
2. Correcting J/E
3. Reclass J/E
Financial Statements are then prepared from the trial balance.
Companies finance their asset with either liabilities or equity. Companies that use liabilities have a high degree of financial leverage and a greater risk. They must pay back debt with interest: Total Liability
Compare the results to the industry ratio. A higher number means risk is rising.
Demonstration Problem page 67-71.
Also use Exercise 2-8 & 2-9 page 76 for transactions
Quick Study, Exercises, and Problems
1. Do QS: 2-1 – Identifying source documents pg 74
2-2 – Identifying F/S pg 74
Ex. 2-6 – Record transactions into T-accts pg 76
Ex. 2-7 – Use 2-6 to prepare a Trial Balance pg 76
2. Do QS: 2-3 – Normal balances of accts pg 74
2-4 – Normal balances of accts pg 74
Ex. 2- 4 – Journal entries pg 75
Ex. 2- 5 – Use 2-4 to record T-accts pg 75
Ex. 2-15 – Description of T-Acct activity pg 77
Ex. 2-16 – Use 2-15 to write up journal entries pg 77
Ex. 2-17 – Identifying errors and effect on T/B pg 77 & 78
3. Do QS: 2-8 – Classifying accts. pg 75
2-5 – Dr. & Cr. rules pg 74
Ex. 2-10 – I/S pg 76
Ex. 2-11 – SCOE pg 76
Ex. 2-12 – B/S pg 76
4. Do Ex. 2-1 - Types of acct and balances pg 75
Problem 2-1 – J/E, Posting, & T/B pg 79
5. Do problem 2-3 – J/E, posting, & T/B pg 80
6. Do problem 2-6 – J/E, posting, & T/B pg 81 & 82
Backup: exercise 2-17 pg 77 & 78 Posting errors
Exercise 2-14 pg 77 changes in equity