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Analyzing Transactions
Accounting, 21st Edition
Warren Reeve Fess
Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
Objectives
1. Explain why accounts are used to record After studying this and summarize the effects of transactions chapter, you should on financial statements. be able to: 2. Describe the characteristics of an account. 3. List the rules of debit and credit and the normal balances of accounts. 4. Analyze and summarize the financial statement effects of transactions.
Objectives
5. Prepare a trial balance and explain how it can be used to discover errors. 6. Discover errors in recording transactions and correct them. 7. Use horizontal analysis to compare financial statements from different periods.
The T-Account
Cash
Typical entries
Balancing a T-Account
Cash
3,750 4,300 2,900 10,950 850 1,400 700 2,900
Cash
3,750 4,300 Next, foot the 2,900 side. credit 10,950 850 1,400 700 2,900 5,850
5,100
Subtract total credits Cash from total debits to obtain the account 3,750 850 balance.
(A) On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
JOURNAL
Date Description Post. Ref. Debit
2005
Page 1
Credit
25 000 00 25 000 00
3
4
(A) On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
Cash
Purchased land for building site.
20 000 00
10
Land
20,000
Accounts Payable
Purchased supplies on account.
1 350 00
Accounts Payable
Nov. 10 1,350
Cash
Paid creditors on account.
950 00
36
Accounts Payable
950 Nov. 10 1,350
LIABILITIES
Liability Accounts
Debit for decreases (-) Credit for increases (+)
OWNERS EQUITY
Owners Equity Accounts
Debit for decreases (-) Credit for increases (+)
(D) On November 18, NetSolutions received fees of $7,500 from customers for services provided .
14 15 16 17 18 19 18 Cash 7 500 00
Fees Earned
Received fees from customers.
7 500 00
20
(D) On November 18, NetSolutions received fees of $7,500 from customers for services provided .
Fees Earned
Nov. 18 7,500
(E) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 .
18 19 20 21 22 23 30 Wages Expense Rent Expense Utilities Expense Miscellaneous Expense 2 125 00 800 00 450 00 275 00
Cash
Paid expenses.
3 650 00
24
(E) Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275 .
Wages Expense
2,125
Rent Expense
Nov. 30 800 Nov. 30
Utilities Expense
450
Miscellaneous Expense
Nov. 30 275
In every entry the sum of the debits always equal the sum of the credits.
(G) On November 30, a count revealed that $800 of the supplies inventory had been used.
25 26 27 28 29 30 30 Supplies Expense 800 00
Supplies
Supplies used during November.
800 00
31
(G) On November 30, a count revealed that $800 of the supplies inventory had been used.
Supplies Expense
800
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. Scale or Balance T account Left Side Receive DEBIT Receive DEBIT Give CREDIT Right Side Give CREDIT
Revenue Accounts
Debit for decreases (-) Credit for increases (+)
(H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
2 000 00 2 000 00
3
4
(H) On November 30, Chris Clark withdrew $2,000 in cash from NetSolutions for personal use.
Credit Debit
Debit Credit
Document prepared
Dec. 1 NetSolutions paid a premium of $2,400 for a comprehensive insurance policy covering two years.
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
2 400 00 2 400 00
3
4
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
2 400 00 2 400 00
ACCOUNT NO. 15
Balance Debit Credit Debit Credit
Date
2005
Item
Post. Ref.
Dec. 1
2 400 00
2 400 00
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
15
2 400 00 2 400 00
ACCOUNT NO. 15
Balance Debit Credit Debit Credit
Date
2005
Item
Post. Ref.
Dec. 1
2 400 00
2 400 00
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
15
2 400 00 2 400 00
ACCOUNT Cash
ACCOUNT NO. 11
Post. Ref.
Balance Debit Credit Debit Credit
Date
2005
Item
Nov. 30 Dec. 1
2 000 00 2 400 00
5 900 00 3 500 00
JOURNAL
Date
2005
Page 2
Post. Ref. Debit Credit
Description
15 11
2 400 00 2 400 00
ACCOUNT Cash
ACCOUNT NO. 11
Post. Ref.
Balance Debit Credit Debit Credit
Date
2005
Item
Nov. 30 Dec. 1
2 2
2 000 00 2 400 00
5 900 00 3 500 00
14
15 16 17
52 11
800 00 800 00
Dec. 1 NetSolutions receives $360 for three months rent beginning December 1.
14
15 16 17
1 Cash Unearned Rent Received advanced payment For three months rent of land.
14 23
360 00 360 00
Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.
18
19 20 21
18 21
1 800 00 1 800 00
21
22 23 24
59 11
180 00 180 00
24
25 26 27
21 11
400 00 400 00
Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks wages.
JOURNAL
Date
2005
Page 3
Post. Ref. Debit Credit
Description
51 11
950 00 950 00
3
4
Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.
5
6 7 8
11 41
3 100 00 3 100 00
Dec. 16 Fees earned on account totaled $1,750 for the first half of December.
9
10 11 12
12 41
1 750 00 1 750 00
Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.
13
14 15 16
20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co.
21 11
900 00 900 00
11 12
650 00 650 00
22
23 24 25
14 11
1 450 00 1 450 00
Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks wages.
27
28 29 30
51 11
1 200 00 1 200 00
Dec. 31 NetSolutions paid its $310 telephone bill for the month.
31
32 33 34
54 11
310 00 310 00
Dec. 31 NetSolutions paid its $225 electric bill for the month.
Page 4
Post. Ref. Debit Credit
JOURNAL
Date
2005
Description
54 11
225 00 225 00
3
4
Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.
5
6 7 8
11 41
2 870 00 2 870 00
Dec. 31 NetSolutions earned $1,120 on account for the second half of December.
9
10 11 12
12 41
1 120 00 1 120 00
14
15 16 17
31 Chris Clark, Drawing Cash Chris Clark withdrew cash for personal use.
32 11
2 000 00 2 000 00
Trial Balance
NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 4 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00
NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 4 000 00 16 340 00 4 275 00 1 600 00 985 00 800 00 455 00 42 600 00 42 600 00
NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 4 000 00
NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 2 2 20 1 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 4 000 00 16 340 00
Correction of Errors
Error 1. Journal entry is incorrect but not posted. Correction Procedure Draw a line through the error and insert correct title or amount.
Correction of Errors
Error 1. Journal entry is incorrect 2. correct but not posted. posted incorrectly. Correction Procedure Draw a line through the error and insert correctpost or posted error and title amount. correctly.
Correction of Errors
Error Correction Procedure 3. Journal entry is incorrect Journalize and post a and posted correcting entry.
12,500 12,500
12,500 12,500
Date
Description
Debit
Credit
12,500
12,500 12,500
Date
Description
Debit
Credit
12,500 12,500
J Holmes, Attorney-at-Law Income Statement For the Year Ended December 31, 2005 and 2006
2006 Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Misc. expense Total operating expenses Net income
2005
$187,500 $150,000 $37,500 25.0% $ 60,000 $ 45,000 $15,000 33.3% 15,000 12,000 3,000 25.0% 12,500 9,000 3,500 38.9% 2,700 3,000 (300) (10.0)% 2,300 1,800 500 27.8%
Chapter 2
The End