Financial and Managerial

Accounting

Wild, Shaw, and Chiappetta

Fifth Edition
McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All

Chapter 2
Analyzing and Recording
Transactions

Conceptual Learning Objectives

C1: Explain the steps in processing

transactions and the role of source

documents.
C2: Describe an account and its use in
recording transactions.
C3: Describe a ledger and a chart of
accounts.
C4: Define debits and credits and explain
double-entry accounting.
2-3

Analytical Learning Objectives

A1: Analyze the impact of transactions

on accounts and financial

statements.
A2: Compute the debt ratio and describe
its use in analyzing financial
condition.

2-4

Procedural Learning Objectives

P1: Record transactions in a journal and

post entries to a ledger.

P2: Prepare and explain the use of a trial
balance.
P3: Prepare financial statements from
business transactions.

2-5

C1

Analyzing and Recording

Process
Exchanges of economic consideration
between two parties.

External Transactions
occur between the
organization and an
outside party.

Internal Transactions
occur within the
organization.
2-6

C1

Analyzing and Recording

Process

Analyze each transaction and

event from source documents

Prepare and analyze

the trial balance

Record relevant transactions

and events in a journal

Post journal
information
to ledger
accounts
2-7

C1

Source Documents
Checks

Employee
Earnings
Records

Bills from
Suppliers

Purchase
Orders

Bank
Statements
Sales
Tickets
2-8

C2

The Account and Its Analysis

An
An account
account is
is aa
record
record of
of
increases
increases and
and
decreases
decreases in
in aa
specific
specific asset,
asset,
liability,
liability, equity,
equity,
revenue,
revenue, or
or
expense
expense item.
item.

The
The general
general
ledger
ledger is
is aa record
record
containing
containing all
all
accounts
accounts used
used by
by
the
the company.
company.

2-9

C2

The Account and Its Analysis

Assets
Assets
Asset
Accounts
Accounts
Accounts

Liability
Liability
Liability
Accounts
Accounts
Accounts

Equity
Equity
Equity
Accounts
Accounts
Accounts

2-10

C2

Asset Accounts
Cash
Land

Buildings

Asset
Asset
Accounts
Accounts

Equipment
Supplies

Accounts
Receivable

Notes
Receivable
Prepaid
Accounts

2-11

C2

Liability Accounts
Accounts
Accounts
Payable
Payable

Notes
Notes
Payable
Payable

Liability
Liability
Accounts
Accounts
Accrued
Accrued
Liabilities
Liabilities

Unearned
Unearned
Revenue
Revenue
2-12

C2

Equity Accounts

Common
Common
Stock
Stock

Retained
Retained
Earnings
Earnings
Dividends
Dividends

Equity
Equity
Accounts
Accounts
Revenues
Revenues

Expenses
Expenses

2-13

C2

The Account and Its Analysis

Assets

+
Common
Common
Stock
Stock

Liabilities
Liabilities

Dividends
Dividends

+
+

Revenues
Revenues

Equity
Equity

Expenses
Expenses

2-14

C3

Ledger and Chart of Accounts

The ledger is a collection of all accounts for
an information system. A companys size and
diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all accounts and
includes an identifying number for each account.

2-15

C4

Debits and Credits

A T-account represents a ledger account and is a tool
used to understand the effects of one or more
transactions.

2-16

C4

Double-Entry Accounting
Assets
Assets
ASSETS

Debit

Credit

Liabilities
Liabilities
LIABILITIES

Debit

Credit

Equity
Equity
EQUITY

Debit

Credit

2-17

Double-Entry Accounting

C4

Equity
Common
Common
Stock
Stock

Dividends
Dividends

Revenues
Revenues

Expenses
Expenses

Stock

Dividends

Revenues

Expenses

Debit Credit

Debit Credit

Debit Credit

Debit Credit

2-18

C4

Double-Entry Accounting
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account

2-19

Journalizing and
Posting Transactions

P1

Assets
Assets

Step 1: Analyze
transactions and source
documents.

ACCOUNT NAME:
Date

Liabilities
Liabilities

Equity
Equity

Step 2: Apply doubleentry accounting

ACCOUNT No.
Description

PR

Debit

Credit

Balance

Step 4: Post entry to ledger

Step 3: Record journal entry

2-20

P1

Journalizing Transactions

Transaction
Transaction
Date
Date

Transaction
Transaction
Explanation
Explanation

Titles
Titles of
of Affected
Affected
Accounts
Accounts

Dollar
Dollar Amount
Amount of
of Debits
Debits
and
and Credits
Credits
2-21

P1

Balance Column Account

T-accounts are useful illustrations, but balance
column accounts are used in practice.

2-22

P1

Posting Journal Entries

Identify the debit account in ledger.

2-23

Posting Journal Entries

P1

Enter the date in the ledger.

2-24

P1

Posting Journal Entries

Enter the amount and description.

2-25

P1

Posting Journal Entries

Enter the journal reference.

2-26

P1

Posting Journal Entries

Compute the balance.

2-27

P1

Posting Journal Entries

Enter the ledger reference into the general journal.

2-28

A1

Transaction:

Analyzing Transactions
Shareholder invested $30,000 in FastForward on Dec. 1

Analysis:

Double entry:

Posting:
101

Common Stock
(1)

307

30,000
2-29

A1

Analyzing Transactions
Transaction:

FastForward purchases supplies by paying

$2,500 in cash

Analysis:

Double entry:
Posting:
126

101

2-30

A1

Transaction:

Analyzing Transactions
FastForward purchases equipment by paying $26,000
cash.

Analysis:

Double entry:
Posting:
167

101

2-31

A1

Analyzing Transactions
Analysis:

Double entry:

Posting:
126

201

2-32

Analyzing Transactions

A1

Analysis:

Double entry:

Posting:
(1)
(5)

Cash
30,000
4,200

(2)
(3)

403

2,500
26,000

Consulting Revenue 101

(3)
4,200

2-33

P2

Trial Balance
FASTFORWARD
Trial Balance
December 31, 2013
Debits
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accounts payable
Unearned consulting revenue
Common stock
Dividends
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Totals

Credits

4,350
9,720
2,400
26,000
$

6,200
3,000
30,000

200
5,800
300
1,400
1,000
230
$ 45,300 $ 45,300

After processing its

remaining transactions
for December,
FastForwards trial
balance is prepared.

The trial balance lists

all account balances
in the general ledger.
If the books are in
balance, the total
debits will equal the
total credits.

2-34

P2

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.

Recompute each account

balance in the ledger.

Verify that account balances

are correctly entered from the
ledger.

Verify that each journal

entry is properly posted.

See whether a debit (or

credit) balance is mistakenly
listed as a credit (or debit).

Verify that each original

journal entry has equal
debits and credits.
2-35

P3

Using a Trial Balance to

Prepare Financial Statements
Point in
Time

Period of Time

Point in
Time

Income Statement
Statement of Retained Earnings

Beginning
Balance
Sheet

Statement of Cash
Flows

Ending
Balance
Sheet

2-36

P3

Income Statement

2-37

P3

Statement of Retained Earnings

2-38

P3

Balance Sheet

2-39

A2

Debt Ratio
o

Describes the relationship between the

amounts of the companys liabilities
and assets.

Helps to assess the risk that a

company will fail to pay its debts.
2-40

End of Chapter 2

2-41