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Accounting, 21st Edition


Warren Reeve Fess

© Copyright 2004 South-Western, a division


PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University m 
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ë  
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ë  
a  

    
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Ôach financial statement
item, called an is
included in the ledger.
Ê group of
accounts for a
business entity is
called a  
Ê list of the
accounts in a ledger
is called a  

^ajor Êccount Classifications

Assets are Liabilities are debts


resources owned owed to outsiders
by the business. (creditors).
Cash Êccounts
Supplies payable
Building Notes payable
Êccounts Wages payable
receivable
^ajor Êccount Classifications
Liabilities are often identified
Assets are on the balance sheetare
Liabilities by debts
titles
owed 

resources owned that include J
to outsiders
by the business. (creditors).
Cash Êccounts
Supplies payable
Building Notes payable
Êccounts Wages payable
receivable
^ajor Êccount Classifications
ë ner¶s Revenues are Expenses are the
equity is the increases in using up of assets
owner¶s right to owner¶s equity as or consuming of
the assets of the a result of selling services to
business. services or generate revenue.
Chris Clark, products. Rent Ô pense
Capital Fees Ôarned Salary Ô pense
Chris Clark, Fares Ôarned Utilities
Drawing Commission Ô pense
Revenue
mo assist you in learning,
an account can be drawn
to resemble the letter m.
m e m
mAccount
Cash

m-account has a title.


mhe m-
m e m
mAccount
Cash
Left side
 

mhe left side of the account is the   side.


m e m
mAccount
Cash
Left side Right side
   

mhe right side of the account is the  side.


 side.
m e m
mAccount
Cash
3,750 850
4,300 1,400
2,900 700
2,900

mypical entries
Balancing a m-
m-Êccount
Cash
First, foot
the debit 3,750 850
side. 4,300 1,400
2,900 700
10,950 2,900
Cash
3,750 850
4,300
Ne t, foot the 1,400
2,900
credit side. 700
10,950 2,900
5,850
Subtract total credits
Cash from total debits to
obtain the account
3,750 850
balance.
4,300 1,400
2,900 700
a 10,950 2,900
5,850
mransactions and Balance
Sheet Êccounts
(Ê) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.

- URNAL Page 1
Post.
Date Description Ref. Debit Credit
2005
1 ½ov. 1 Cas 25 000 00
2 C ris Clark, Capital 25 000 00
3 Invested cas in ½etSolutions.
4
(Ê) On November 1, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions.

Ôffects of this entry in the Ledger

Cash Chris Clark, Capital


½ov. 1 25,000 ½ov. 1 25,000
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.

4
5 5 Land 20 000 00
6 Cas 20 000 00
7 Purc ased land for building
8 site.
9
10
(B) On November 5,
NetSolutions bought land
for $20,000, paying cash.

Ôffects of this entry in the Ledger


Cash Land
Nov. 1 25,000 ½ov. 5 20,000 ½ov. 5 20,000
(C) On November 10, NetSolutions
purchased supplies on account
for $1,350.

10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purc ased supplies on account.
14
15
16
(C) On November 10, NetSolutions
purchased supplies on account
for $1,350.

Ôffects of this entry in the Ledger


Supplies Êccounts Payable
½ov. 10 1,350 ½ov. 10 1,350
(F) On November 30, NetSolutions
paid creditors on account, $950.

30
31 30 Accounts Payable 950 00
32 Cas 950 00
33 Paid creditors on account.
34
35
36
(F) On November 30, NetSolutions
paid creditors on account, $950.

Ôffects of this entry in the Ledger


Cash Êccounts Payable
Nov. 1 25,000 Nov. 525,000 ½ov. 30 950 Nov. 10 1,350
18 7,500 30 3,650
30 950
Rules of debit / Credit Balance
S eet Accounts
debits Credits
Êsset accounts«««. Increase (+) Decrease (-)
Liability accounts«« Decrease (-) Increase (+)
Owner¶s equity
(capital) accounts«. Decrease (-) Increase (+)
Balance S eet Accounts
ÊSSÔmS LIÊBILImIÔS
Êsset Êccounts Liability Êccounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)

OWNÔR¶S ÔUImY
Owner¶s Ôquity Êccounts
Debit for Credit for
decreases increases
(-) (+)
(D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .

14
15 18 Cas  500 00
16 Fees Earned  500 00
17 Received fees from customers.
18
19
20
(D) On November 18, NetSolutions
received fees of $7,500 from
customers for services provided .

Ôffects of this entry in the Ledger


Cash Fees Ôarned
Nov. 1 25,000 Nov. 5 25,000 ½ov. 18 ,500
18 ,500
(Ô) mhroughout the month, NetSolutions
incurred the following e penses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 25 00
23 Cas 3 650 00
24 Paid expenses.
(Ô) mhroughout the month, NetSolutions
incurred the following e penses:
wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275 .
Ôffects of this entry in the Ledger
Cash Wages Ô pense
Nov. 1 25,000 Nov. 525,000 ½ov. 30 2,125
18 7,500 30 3,650

Rent Ô pense Utilities Ô pense


½ov. 30 800 ½ov. 30 450

^iscellaneous Ô pense
½ov. 30 25
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 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 ½ovember.
30
31
(G) On November 30, a count revealed
that $800 of the supplies inventory
had been used.

Ôffects of this entry in the Ledger


Supplies Supplies Ô pense
Nov. 10 1,350 ½ov. 30 800 ½ov. 30 800
Double--Entry Accounting
Double
Î 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.µ

Scale or Balance T account

$ %!
$
Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
Rules of debit / Credit Income
Statement Accounts
Ô pense Êccounts Revenue Êccounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)
Income Statement Accounts
debits Credits
Revenue accounts«« Decrease (-) Increase (+)
Ô pense accounts«« Increase (+) Decrease (-)
Wit dra als
by t e
ë ner
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 ½ov. 30 C ris Clark, dra ing 2 000 00
2 Cas 2 000 00
3 C ris Clark it dre cas for
4 personal use.
(H) On November 30, Chris Clark
withdrew $2,000 in cash from
NetSolutions for personal use.

Ôffects of this entry in the Ledger


Cash Chris Clark, Drawing
Nov. 1 25,000 Nov. 525,000 ½ov. 30 2,000 Nov. 10 1,350
18 7,500 30 3,650
30 950
30 2,000
½ormal Balances of Accounts
Increase
(½ormal Balances) decreases

º
  

Êsset Debit Credit
Liability Credit Debit
Owner¶s Ôquity:
Capital Credit Debit
Drawing Debit Credit


 

Revenue Credit Debit
Ô pense Debit Credit
Flow of Business mransactions
mransaction mransaction Document
1 authorized 2 takes place 3 prepared

Ôntry recorded Ôntry posted to


4 in journal 5 ledger
System to Ênalyze mransactions
1. Determine whether an asset, a liability,
owner¶s equity, revenue, or e pense account
is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit.
-  
 
Dec. 1 NetSolutions paid a premium of
$2,400 for a comprehensive insurance
policy covering two years.

- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 dec. 31 Prepaid Insurance 2 400 00
2 Cas 2 400 00
3 Paid premium on t oyear
4 policy.
- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 dec. 1 Prepaid Insurance 2 400 00
2 Cas 2 400 00
3 Paid premium on t oyear
4 policy.

ACCOUNT  
  ACCOUNT NO.
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
dec. 1 2 400 00 2 400 00
- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 dec. 1 Prepaid Insurance 15 2 400 00
2 Cas 2 400 00
3 Paid premium on t oyear
4 policy.

ACCOUNT  
  ACCOUNT NO.
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
dec. 1 2 2 400 00 2 400 00
- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 dec. 1 Prepaid Insurance 15 2 400 00
2 Cas 2 400 00
3 Paid premium on t oyear
4 policy.

ACCOUNT m  ACCOUNT NO.


Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
½ov. 30 2 2 000 00 5 900 00
dec. 1 2 400 00 3 500 00
- URNAL Page 2
Post.
Date Description Ref. Debit Credit
2005
1 dec. 1 Prepaid Insurance 15 2 400 00
2 Cas 11 2 400 00
3 Paid premium on t oyear
4 policy.

ACCOUNT m  ACCOUNT NO.


Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
½ov. 30 2 2 000 00 5 900 00
dec. 1 2 2 400 00 3 500 00
Dec. 1 NetSolutions paid rent for December,
$800.

14 1 Rent Expense 52 800 00


15 Cas 11 800 00
16 Paid rent for december.
17
Dec. 1 NetSolutions receives $360 for three
month¶s rent beginning December 1.

14 1 Cas 14 360 00
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For t ree mont s¶ rent of land.
Dec. 4 NetSolutions purchased office
equipment on account from Ô ecutive
Supply Co. for $1,800.

18 4 ëffice Equipment 18 1 800 00


19 Accounts Payable 21 1 800 00
20 Purc ased office equipment on
21 account.
Dec. 6 NetSolutions paid $180 for a
newspaper advertisement.

21 6 Miscellaneous Expense 59 180 00


22 Cas 11 180 00
23 Paid for ne spaper ad.
24
Dec. 11 NetSolutions paid creditors $400.

24 11 Accounts Payable 21 400 00


25 Cas 11 400 00
26 Paid creditors on account.
27
Dec. 13 NetSolutions paid a receptionist and
part--time assistant $950 for two
part
weeks¶ wages.

- URNAL Page 3
Post.
Date Description Ref. Debit Credit
2005
1 dec. 13 Wages Expense 51 950 00
2 Cas 11 950 00
3 Paid t o eek¶s ages.
4
Dec. 16 NetSolutions received $3,100 from
fees earned for the first half of
December.

5 16 Cas 11 3 100 00
6 Fees Earned 41 3 100 00
7 Received fees from customers.
8
Dec. 16 Fees earned on account totaled
$1,750 for the first half of
December.

9 16 Accounts Receivable 12 1 50 00


10 Fees Earned 41 1 50 00
11 Received fees from customers.
12
Dec. 20 NetSolutions paid $900 to Ô ecutive
Supply Co. on the $1,800 debt owed
from the December 4 transaction.

13 20 Accounts Payable 21 900 00


14 Cas 11 900 00
15 Paid part of amount o ed to
16 Executive Supply Co.
Dec. 21 NetSolutions received $650 from
customers in payment of their
accounts.

18 21 Cas 11 650 00
19 Accounts Receivable 12 650 00
20 Received cas from customer
21 on account.
Dec. 23 NetSolutions paid $1,450 for
supplies.

22 23 Supplies 14 1 450 00
23 Cas 11 1 450 00
24 Purc ased supplies.
25
Dec. 27 NetSolutions paid the receptionist
and part-
part-time assistant $1,200 for
two weeks¶ wages.

27 2 Wages Expense 51 1 200 00


28 Cas 11 1 200 00
29 Paid t o eeks¶ ages.
30
Dec. 31 NetSolutions paid its $310 telephone
bill for the month.

31 31 Utilities Expense 54 310 00


32 Cas 11 310 00
33 Paid telep one bill.
34
Dec. 31 NetSolutions paid its $225 electric
bill for the month.

- URNAL Page 4
Post.
Date Description Ref. Debit Credit
2005
1 dec. 31 Utilities Expense 54 225 00
2 Cas 11 225 00
3 Paid utility bill.
4
Dec. 31 NetSolutions received $2,870 from
fees earned for the second half of
December.

5 31 Cas 11 2 80 00
6 Fees Earned 41 2 80 00
7 Received fees from customers.
8
Dec. 31 NetSolutions earned $1,120 on
account for the second half of
December.

9 31 Accounts Receivable 12 1 120 00


10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.
Dec. 31 Chris Clark withdrew $2,000 for
personal use.

14 31 C ris Clark, dra ing 32 2 000 00


15 Cas 11 2 000 00
16 C ris Clark it dre cas
17 for personal use.
mrial Balance
½etSolutions
mrial Balance
december 31, 2005
Cas 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
ëffice Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
C ris Clark, Capital 25 000 00
C ris Clark, dra ing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 25 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
½etSolutions
mrial Balance
december 31, 2005
Cas 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance Balance 2 400 00
Land S eet 20 000 00
ëffice Equipment 1 800 00
Accounts Payable Items 900 00
Unearned Rent 360 00
C ris Clark, Capital 25 000 00
C ris Clark, dra ing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 25 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
½etSolutions
mrial Balance
december 31, 2005
Cas 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
ëffice Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
C ris Clark, Capital 25 000 00
C ris Clark, dra ing 4 000 00
Fees Earned Statement 16 340 00
Wages Expense 4 25 00
Rent Expense
of ë ner¶s 1 600 00
Utilities Expense Equity 985 00
Supplies Expense Item 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
½etSolutions
mrial Balance
december 31, 2005
Cas 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
ëffice Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
C ris Clark, Capital 25 000 00
C ris Clark, dra ing 4 000 00
Fees Earned 16 340 00
Wages Expense Income 4 25 00
Rent Expense 1 600 00
Utilities Expense
Statement 985 00
Supplies Expense Items 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
Errors t at ill  cause t e
trial balance to be unequal:
 &       
  
 % !
   
  


  
  
 % !
   

  
  !      
   
  !
 
Correction of
Errors

Ôrror Correction Procedure


1. Journal entry is incorrect Draw a line through the error
but not posted. and insert correct title or
amount.
Correction of
Errors

Ôrror Correction Procedure


1. Journal entry is correct
2. incorrect Draw a line through the error
not posted.
but posted incorrectly. and insert
posted correct
error title or
and post
amount.
correctly.
Correction of
Errors

Ôrror Correction Procedure


3. Journal entry is incorrect Journalize and post a
and posted correcting entry.
Correcting Errors ² An Example

On May 5, a purchase of office equipment on


account was incorrectly journalized and posted
as shown.

   

  

 
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500

u 





 

Correcting Errors ² An Example

On May 5, a purchase of office equipment on


account was incorrectly journalized and posted
as shown.

   

  

 
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500

Date Description Debit Credit


May 5 Office Equipment 12,500
Correcting Errors ² An Example

On May 5, a purchase of office equipment on


account was incorrectly journalized and posted
as shown.

   

  

 
Date Description Debit Credit
May 5 Supplies 12,500
Accounts Payable 12,500

Date Description Debit Credit


May 5 Office Equipment 12,500
Supplies 12,500
Financial Analysis and
Interpretation
Comparing an item in a current
statement with the same item in
prior statements is called
  
 .
- Holmes, AttorneyatLa
Income Statement
For t e Year Ended december 31, 2005 and 2006
Increase (Decrease)
2006 2005 Êmount Percent
Fees earned $187,500 $150,000 $37,500 25.0%
Operating e penses:
Wages e pense $ 60,000 $ 45,000 $15,000 33.3%
Rent e pense 15,000 12,000 3,000 25.0%
Utilities e pense 12,500 9,000 3,500 38.9%
Supplies e pense 2,700 3,000 (300) (10.0)%
^isc. e pense 2,300 1,800 500 27.8%
motal operating
e penses $ 92,500 $ 70,800 $21,700 30.6%
Net income $ 95,000 $ 79,200 $15,800 19.9%
m 

mhe Ônd