Chapter Two Transaction Analysis

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Chapter TwoTransaction Analysis
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Transactions

• Business Transactions are events that have a
  financial impact on the business (assign a
  amount) and can be measured reliably.
• Transactions will impact the Assets, Liabilities,
  and Owners Equity of a firm
• To analyze, determine how this impacts the
  accounting equation (Assets Liabilities
  Owners Equity) of a firm

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Accounts

• Accounts are a summary device that record the
  changes that have occurred during a period.
• Organizational system for businesses that allow
  them to analyze the cumulative effects of
  transactions.
• Each account shows the effect of all of the
  increases and decreases during a period.
• Accounts are organized via the basic accounting
  equation (Assets Liabilities Owners Equity.)

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Accounts

• Use a separate account for each particular
• Asset
• Liability
• Stockholders Equity (Owners Equity)
• that is involved in a transaction.
• Each transaction will affect at least two
  accounts. This is reflective of the double-entry
  system used in accounting, which keeps the
  accounting equation in balance.
• Know the different types of accounts on pages
  55-57. You should also review the lecture
  material for Chapter 1.

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Transaction Analysis

• Remember, the accounting equation helps to
  analyze the impact of transactions on financial
  position
• Assets Liabilities Owners Equity
• There are many examples of the analysis of
  business transactions on pages 57-63 in the text.
  Make sure to study and understand these examples.
  

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In-Class Exercise!

• Form groups of 2-3 with people around you.
• I will distribute an in-class exercise, in which
  you will analyze the effect of a series of
  events.
• Nominate someone in your group to serve as a team
  spokesperson.
• We will then discuss as a larger group.
• Be sure to keep this handout, since we will build
  upon this later in the chapter.

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Debits and Credits

• Recall that each transaction affects at least two
  accounts.
• In accounting, accounts can be represented by the
  letter T and referred to as T-accounts.
• Accountants designate
• Left side of account Debits
• Right side of account Credits
• Total Debits always equal total credits

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Debits and Credits
Visualization of the T-Account
Adapted from Harrison (2006)
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Debits and Credits

• Rules for Assets on the left-hand side of the
  accounting equation
• Assets have a normal debit balance.
• Increases in assets are recorded on the left
  (debit) side.
• Decreases in assets are recorded on the right
  (credit) side.
• The balance in the account is calculated as
  the beginning balance (what was in the account
  at the beginning of the period) increases -
  decreases

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Debits and Credits

• Rules for Liabilities and Owners Equity on the
  right-hand side of the accounting equation
• Liabilities and Owners Equity (LOE) have a
  normal credit balance.
• Increases in LOE are recorded on the right
  (credit) side.
• Decreases in LOE are recorded on the left (debit)
  side.
• The balance in the account is calculated as
  the beginning balance (what was in the account
  at the beginning of the period) increases -
  decreases

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Debits and Credits
Adapted from Harrison (2006)
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Debits and Credits

• Rules of debit and credit for Stockholders
  Equity are slightly different, since
  stockholders equity is affected by different
  types of accounts.
• Common Stock Retained Earnings
  Dividends
• -
  -
  -
• Debit Credit Debit
  Credit Debit Credit
• Expenses Revenues
  
• - -
  
• Debit Credit Debit Credit

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Debits and Credits

• The following types of accounts (1) have a
  normal balance as a debit or credit and (2)
  increase with a debit or credit.
• Normal Balance
• Assets
  Liabilities
• Expenses
  Revenues
• Dividends
  Retained Earnings
• 
  Common Stock
• (DEBIT)
  (CREDIT)
• Remember Debit Expenses Assets Dividends (DEAD)
• All other accounts
  Credit
• Refer to Exhibit 2-7 on page 65 and Exhibit 2-14
  on page 73 for charts summarizing these rules.

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Journal Entries

• In addition to T-accounts, companies record
  transactions in a journal.
• The journal gives a chronological record of all
  of a companys transactions.
• Steps
• Specify accounts involved in the transaction,
• Determine whether each account increased or
  decreased and apply the rules of debits and
  credits, and
• Enter the transaction into the journal.

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Journal Entries
The example below demonstrates proper journal
entry form for the purchase of 500 of supplies
for cash.
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In-Class Exercise!

• Form groups of 2-3 with people around you.
• I will distribute an in-class exercise. This
  builds off of the prior exercise, and asks you to
  prepare journal entries.
• We will then discuss as a larger group.
• Be sure to keep this handout.

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Posting Journal Entries

• The General Ledger is a group of all T-accounts,
  with their balances.
• The Posting process transfers information from
  the journal to the ledger.
• (1) Record items via the journal, via journal
  entries.
• (2) Post items to the ledger, by recording the
  journal entries in the T-accounts.

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Posting Journal Entries
Adapted from Harrison (2006)
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In-Class Exercise!

• We will perform another in-class exercise. This
  builds off of the prior exercise. Using
  T-accounts, you will post the journal entries
  that you just prepared.
• Use the previous in-class activity (Chapter 2,
  Parts 1) for the transactions.

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Trial Balance

• A trial balance lists all accounts with their
  balances in the following order
• Assets
• Liabilities
• Stockholders Equity
• Goal to ensure that total debits total
  credits. Examine for recording or posting errors.
  
• Provides that the ledger is in balance, but is
  not one of the financial statements.

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Chart of Accounts

• A chart of accounts is a listing of all of a
  companys accounts and their account numbers.
• Referenced when posting journal entries or
  deciding how to code transactions.
• Additional accounts may be added as a company
  participates in additional transactions.

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Questions?

• Any questions or concerns?