College Accounting Notes - Chapter 2

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

o   Posting


-   Trial Balance

o   Debits = Credits

o   List all accounts

o   Use it to prepare Financial Statements


Analyzing and Recording


-Four step process


  1. Analyze each transaction (events) from source documents
  2. Record relevant transactions (events) in a Journal entry format. (At least one debit and one credit and debits = credits.)
  3. Post the journal entry into the General Ledger using the Chart of Accounts.
  4. 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:

  1. Analyze source documents
  2. Apply double journal entry system to transaction
  3. Record or Journalize
  4. Post


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.



Debt Ratio


                  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

                                    Total Assets


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