Chapter 2 Transaction Analysis

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Chapter 2Transaction Analysis
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Learning Objectives

• Analyze business transactions
• Understand how accounting works
• Record business transactions
• Use a trial balance
• Analyze transactions for quick decisions

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Transactions

• A transaction is any event that
• has a financial impact on the business and
• can be measured reliably.
• Transactions involve give-get exchanges
• give merchandise
• get cash
• Transactions must be stated in monetary terms to
  be entered in the books.

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Accounts

• An account is a record of events affecting an
  element of the accounting equation
• Types of accounts
• Assets
• Liabilities
• Stockholders Equity
• Revenues
• Expenses

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Assets

• Economic resources that provide a future benefit
  for the business.
• Cash
• Accounts Receivable
• Notes Receivable
• Inventory
• Prepaid Expenses
• Land
• Buildings
• Equipment, Furniture, and Fixtures

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Liabilities

• Debts of the business
• Accounts Payable
• Notes Payable
• Accrued liabilities

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Stockholders Equity

• Owners claims to the assets of a company
• Common Stock
• Retained Earnings
• Dividends
• Revenues
• Expenses

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Analyzing Transactions
The Lyons invest 50,000 to begin the business,
and Air Sea Travel issue common stock to Gary
and Monica Lyon
Common Stock
Cash
50,000
50,000
50,000
50,000
Balance
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Analyzing Transactions
Air Sea Travel purchases land for an office
location and pays cash of 40,000.
50,000
50,000
Balance
40,000
Land
The land account increased, cash decreased, and
total assets stayed the same.
-40,000
Cash
50,000
50,000
Balance
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Analyzing Transactions
The business buys office supplies on account.
50,000
50,000
Balance
Both Total Assets and Total Liabilities increased
by 500.
Office Supplies
500
500
Accounts Payable
50,500
50,500
Balance
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Analyzing Transactions
Air Sea Travel earns 5,500 of service revenue
by providing services for clients and receives
cash in payment.
50,500
50,500
Balance
Both Assets and Stockholders Equity increased by
5,500.
5,500
Cash
5,500
Service Revenue
56,000
56,000
Balance
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Analyzing Transactions
Air Sea Travel earns 3,000 of service revenue
by providing services for clients who agree to
pay in 30 days.
56,000
56,000
Balance
Both Assets and Stockholders Equity increased by
3,000.
3,000
Accounts Receivable
3,000
Service Revenue
59,000
59,000
Balance
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Analyzing Transactions
Air Sea Travel pays 2,700 for the following
office rent, 1,100 employee salary, 1,200
utilities, 400.
59,000
59,000
Balance
Both Assets and Stockholders Equity decreased by
2,700.
-2,700
Cash
-2,700
Expense Accounts
56,300
56,300
Balance
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Analyzing Transactions
Air Sea Travel pays 400 on account to the
store from which it purchased office supplies in
transaction 3.
56,300
56,300
Balance
Both Assets and Stockholders Equity decreased by
400.
-400
Cash
-400
Accounts Payable
55,900
55,900
Balance
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Analyzing Transactions
Air Sea Travel collects 1,000 cash for
services previously performed and billed.
55,900
55,900
Balance
Cash increased, Accounts Receivable decreased,
and Total Assets remained unchanged.
1,000
Cash
-1,000
Accounts Receivable
55,900
55,900
Balance
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Analyzing Transactions
Air Sea Travel sells land for 22,000 which is
the same amount it paid for the land.
55,900
55,900
Balance
Cash increased, Land decreased, and Total Assets
remained unchanged.
22,000
Cash
-22,000
Land
55,900
55,900
Balance
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Analyzing Transactions
Air Sea Travel declares a dividend and pays
Gary and Monica Lyon 2,100 cash.
55,900
55,900
Balance
-2,100
Cash decreased and Stockholders Equity decreased.
Cash
-2,100
Land
53,800
53,800
Balance
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Financial Statements
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Financial Statements
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Financial Statements
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Double Entry Accounting

• Each accounting transaction affects at least two
  accounts.
• T-accounts can be used to represent accounts and
  their increases and decreases.
• Every business transactions involves both a debit
  and a credit

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Using T-Accounts
Assets Liabilities Stockholders Equity
Stockholders Equity
Assets
Liabilities

Debit
Credit -
Debit -
Credit
Debit -
Credit
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Using T-Accounts
The balance in an account is the difference
between the sum of the debits and the sum of the
credits.
Credit for decrease, 40,000
Bal. 10,000
Debit for Increase, 40,000
Bal. 40,000
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Additional Stockholders Equity Accounts

• Revenues are
• increases in stockholders equity
• resulting from delivering goods or services to
  customers.
• Expenses are
• decreases in stockholders equity
• due to the cost of operating the business.

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Stockholders Equity Accounts

• Expanded Accounting Equation

Assets
Liabilities

Stockholders Equity
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Stockholders Equity Accounts
Expanded Accounting Equation
Statement of Retained Earnings
Common Stock
Retained Earnings
- Dividends
Revenues
Income Statement
- Expenses
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Using T-Accounts Expanded
Accounts that are increased with debits and have
normal debit balances
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Using T-Accounts Expanded
Accounts that are increased with credits and have
normal credit balances
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Recording Transactions

• Accounting transactions are entered in
  chronological order in the journal

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Recording Transactions

• Journalizing process
• Specify each account affected by the transaction
• Classify each account as either asset, liability,
  stockholders equity, revenue, or expense
• Determine whether each account is increased or
  decreased (use rules of debit and credit)
• Record the transaction in a journal with a brief
  explanation. Debits are at the left margin and
  credits are indented

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Posting to Accounts
DATE
ACCOUNTS AND EXPLANATION
DEBIT
CREDIT
Apr 2 Cash . 50,000
Common Stock ....... 50,000
Issued common stock
Common Stock
Cash
50,000
50,000
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Flow of Accounting Data

• Transaction occurs
• Transaction analyzed
• Transaction entered in journal
• Amounts posted to the ledger accounts

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Trial Balance

• A trial balance lists all accounts with their
  balances
• Accounts are listed with assets first, then
  liabilities, then stockholders equity
• The trial balance
• summarizes account balances
• shows whether total debits equal total credits

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Finding Errors

• Find the difference between total debits and
  total credits.
• Search for a missing account with that balance.
• Divide the difference by 2 and search for a debit
  recorded as a credit or vice-versa.
• Divide the difference by 9. If you get an even
  amount, you may have either a slide or a
  transposition.

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Chart of Accounts

• The chart of accounts lists all accounts and
  their account numbers.
• Accounts can be grouped under the financial
  statement headings
• Balance Sheet Assets, Liabilities, and
  Stockholders Equity
• Income Statement Revenues and Expenses

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End of Chapter 2