TRANSACTION ANALYSIS

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TRANSACTION ANALYSIS

• Economic events are the basis for recording
  transactions in the
• accounting system. For every transaction, it is
  essential to analyze its
• effect on the accounting equation.
• REMEMBER!!!
• A L SHE

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• Owner invests 1,000 cash
• Obtains loan from bank for 5,000.
• Purchased supplies for 2,000, paid cash.
• Received 3,000 cash from customer for 3 jobs to
  be performed in future. (Fee for each job is
  1,000)

3

• Owner withdrew 500 for personal use.
• Performed a job for a fee of 700. Customer paid
  in cash.
• Performed job for customer for a fee of 900.
  Customer will pay next month.
• Paid employees wages of 1,500

4

• Completed one job for customer in 4 above.
• Supplies on hand at the end of the month are
  800.

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Exercise

• Given the following information, answer the
  questions below

What are the total assets on December 31, 2006?
What is net income for the year?
What is total expenses for 2006?
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• Below is a balance sheet for Rich Exterminator
  Co. at October 31, 2006.

The unearned fees are the result of receiving in
advance a 100 fee for each of three jobs to be
performed in the future. During the month of
November, the following transactions occurred
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THE RECORDING PROCESS

• Double-Entry System
• The Accounting Equation A L SHE
• b. The Format
• c. The Rules
• Debits on the left, Credits on the right
• For each individual transaction, debits credits
  

T Account
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The T Account
Account Name
Debits are entered on left
Credits are entered on right
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The T Account
Account Name
900 cr.
400 dr.
Debits and credits are netted to obtain balance
in account
500 cr.
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Asset
- credit.
debit.
Dr.
Normal balance
Example Purchase computer of 5,000 by paying
cash
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Debits/Credits and the Accounting Equation
Opposite sides of the accounting equation are
increased/decreased in an opposite way
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Liability
credit.
- debit.
Normal balance
Cr.
Example Purchase computer of 5,000 on account
(pay later)
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SHE
credit.
- debit.
Normal balance
Cr.
Example Owners put in 10,000 of cash
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Link Between Revenues and Retained Earnings
Both accounts are increased with credits


Revenues increase retained earnings (part of
owners equity)


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Revenue
credit.
- debit.
Normal balance
Cr.
Example Firm sells goods worth 10,000 for
cash
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Link Between Expenses and Dividends and
Retained Earnings
RETAINED EARNINGS
Retained earnings is decreased with debits
DR.
CR.


Expenses and dividends decrease retained earnings
Use debits to record(increase) expenses and
dividends
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Dividend
debit.
- credit.
Normal balance
Dr.
Example Firm pays a cash dividend of 10,000
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Expense
- credit.
debit.
Dr.
Normal balance
Example Firm pays 5,000 for utility expense in
cash
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Supplies
Supplies Expense


Normal balance
Normal balance
Example Supplies balance Start of the year
2,000 End of the year 500
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Normal Account Balances
Debit
Credit

• Assets
• Expenses
• Dividends

• Liabilities
• SHE
• Revenues

DEAD Debits increase Assets, Expenses, Dividends
all increased with debits
all increased with credits
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• Listed below are selected accounts from the
  financial statements of Pasquarella Company. In
  the blank space provided for each account,
  indicate what type of account it is, its normal
  balance, and the debit/credit rules for
  increasing and decreasing it. Use the following
  abbreviations for your answers.

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THE ACCOUNTING CYCLE
STEP 1 RECORDING GENERAL JOURNAL
ENTRIES General Journal a chronological
listing of transactions
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Step 2 Post to T-Accounts
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Step 2 Post to T-Accounts
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STEP 3 TRIAL BALANCE BEFORE ADJUSTMENT

• Trial Balance - a list of all accounts in the
  Ledger their balance
• Purpose - 1. Prove that debits credits
• 2. Catch some obvious errors
• (the trial balance will NOT catch all errors)

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Trial Balance