Financial Accounting

Fundamentals

John J. Wild
2009 Edition
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2

Accounting For Transactions

 Conceptual Learning Objectives

C1: Explain the steps in processing

transactions.
C2: Describe source documents and their
purpose.
C3: Describe an account and its use in
recording transactions.
C4: Describe a ledger and a chart of accounts.
C5: 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 Internal Transactions

occur between the occur within the
organization and an organization.
outside party.
2-6
C1 Analyzing and Recording
Process

Record relevant transactions

Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
to ledger
Prepare and analyze accounts
the trial balance
2-7
C2
Source Documents
Bills from
Checks Suppliers Purchase
Orders
Employee
Earnings
Records Bank
Statements

Sales
Tickets

2-8
C3

The Account and its Analysis

An
An account
account is is aa
record
record of of
increases The
The general
general
increases and and ledger
decreases
decreases in in aa ledger isis aa record
record
specific containing
containing all
all
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts usedused byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.
item.

2-9
C3
The Account and its Analysis

Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts

2-10
C3
Asset Accounts

Cash
Accounts
Land
Receivable

Notes
Buildings
Asset
Asset Receivabl
Accounts
Accounts e

Prepaid
Equipment
Accounts
Supplies

2-11
C3
Liability Accounts

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accounts

Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenue
Revenue

2-12
C3
Equity Accounts

Retained
Retained
Earnings
Earnings
Common
Common
Stock
Stock Dividends
Dividends

Equity
Accounts
Accounts
Revenues
Revenues Expenses
Expenses

2-13
C3
The Account and its Analysis

Assets = Liabilities
Liabilities + Equity
Equity

+ – + –
Common
Common Dividends
Dividends Revenues
Revenues Expenses
Expenses
Stock
Stock

2-14
C4
Ledger and Chart of Accounts

The ledger is a collection of all accounts for an

information system. A company’s 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.
101 Cash 319 Dividends
106 Accounts receivable 403 Consulting Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
307 Common stock 690 Utilities expense
318 Retained Earnings
2-15
C5
Debits and Credits
A T-account represents a ledger account and is a
tool used to understand the effects of one or more
transactions.

T- Account
(Left side) (Right side)
Debit Credit

2-16
C5
Double-Entry Accounting

Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

2-17
C5
Double-Entry Accounting

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
C5
Double-Entry Accounting
An account balance is the difference between the increases
and decreases in an account.
Notice the T-Account

2-19
P1 Journalizing &
Posting Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

2-20
P1
Journalizing Transactions

Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts

 
Dollar
Dollar amount
amount of
of debits
debits
Transaction
Transaction
explanation and
and credits
credits
explanation
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

1 Identify the debit account in ledger.

2-23
P1
Posting Journal Entries

2 Enter the date.

2-24
P1
Posting Journal Entries

3 Enter the amount and description.

2-25
P1
Posting Journal Entries

4 Enter the journal reference.

2-26
P1
Posting Journal Entries

5 Compute the balance.

2-27
P1
Posting Journal Entries

6 Enter the ledger reference.

2-28
A1
Analyzing Transactions

Analysis:

Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000

2-29
A1
Analyzing Transactions

Analysis:

Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500

2-30
A1
Analyzing Transactions

Analysis:

Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000

2-31
A1
Analyzing Transactions

Analysis:

Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100

Posting:
Supplies 126 Accounts Payable 201
(2) 26,000 (4) 7,100
(4) 7,100

2-32
A1
Analyzing Transactions

Analysis:

Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200

Posting:
Consulting Revenue 403 Cash 101
(5) 4,200 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000

2-33
A1 After processing its remaining transactions for December,
FastForward’s Trial Balance is prepared.

FastForward
Trial Balance
December 31, 2009 The trial balance lists
Debits Credits all account balances
Cash
Accounts receivable
$ 4,350
-
in the general ledger.
Supplies 9,720 If the books are in
Prepaid Insurance 2,400
Equipment 26,000
balance, the total
Accounts payable $ 6,200 debits will equal the
Unearned consulting revenue 3,000
Common stock 30,000 total credits.
Dividends 200
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
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.
Make sure the trial balance Recompute each account
columns are correctly added. balance in the ledger.

Make sure account

balances are correctly Verify that each journal
entered from the ledger. entry is posted correctly.

See if debit or credit Verify that each original

accounts are mistakenly journal entry has equal
placed on the trial balance. debits and credits.
2-35
P3 Using a Trial Balance to Prepare Financial
Statements
Point in Point in
Time Period of Time Time

Income Statement
Statement of Retained Earnings
Statement of Cash
Flows
Beginning Ending
Balance Balance
Sheet Sheet

2-36
P3
Income Statement
FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Salaries expense 1,400
Rent Expense 1,000
Utilities Expense 230
Total expenses 2,630
Net income $ 3,470

2-37
P3
Statement of Retained Earnings
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2009
Balance, 12/1/09 $ -
Net income for December 3,470
3,470
Less: Dividends (200)
Balance, 12/31/09 $ 3,270

FASTFORWARD
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470

2-38
P3
Balance Sheet
FASTFORWARD
FASTFORWARD Balance Sheet
Statement of Retained Earnings December 31, 2009
For the Month Ended December 31, 2009
Assets
Balance, 12/1/09 $ -
Net income for December 3,470 Cash $ 4,350
3,470 Supplies 9,720
Less: Dividends 200 Prepaid insurance 2,400
Balance, 12/31/09 $ 3,270 Equipment 26,000
Total assets $ 42,470
Liabilities
Accounts payable $ 6,200
Unearned revenue 3,000
Total liabilities 9,200
Equity
Common stock 30,000
Retained earnings 3,270
Total equity 33,270
Total liabilities and equity $ 42,470

2-39
A2
Debt Ratio

o Describes the relationship between the

amounts of the company’s liabilities
and assets.

o Helps to assess the risk that a

company will fail to pay its debts.

2-40
End of Chapter 2

2-41