Usefulness of an Account 2. Characteristics of an Account

C2 - 1 Learning Objectives

1. Usefulness of an Account 2. Characteristics of an Account

3. Analyzing and Summarizing Transactions 4. Illustration of Analyzing and Summarizing 5. Trial Balance 6. Discovery and Correction of Errors 7. Financial Analysis and Interpretation Analyzing Transactions Analyzing Transactions Chapter 2 C2 C2 - 2 • Double-Entry Accounting • Analyzing and Recording Transactions • Chart of Accounts, Trial Balance • Journal, Ledger, and Trial Balance • Recording and Posting an Entry • Correcting Errors • Horizontal Analysis Slide Power Note Topics 3 11 36 40 43 50 57 Power Notes Analyzing Transactions Analyzing Transactions Chapter 2 Note: To select a topic, type the slide and press Enter. C2 - 3 Double-Entry Accounting Double-Entry Accounting “ 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.” Luca Pacioli Developer of Double-Entry Accounting Scale or Balance Receive DEBIT Give CREDIT T account Left Side Receive DEBIT Right Side Give CREDIT C2 - 4 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded diperluas to include mencakup all five financial categories indicating what has been received and given.” DEBITS received CREDITS given = C2 - 5 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” DEBITS received CREDITS given = Assets C2 - 6 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Assets DEBITS received CREDITS given = Expenses C2 - 7 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Assets DEBITS received CREDITS given = Liabilities C2 - 8 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Assets DEBITS received CREDITS given = Owner’s Equity C2 - 9 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Owner’s Equity Assets DEBITS received CREDITS given = Revenues C2 - 10 Expanded Accounting Equation Expanded Accounting Equation “ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.” Expenses Liabilities Owner’s Equity Assets DEBITS received CREDITS given = Revenues Net Income C2 - 11 NetSolutions NetSolutions A Sole Proprietorship A Sole Proprietorship A Sole Proprietorship A Sole Proprietorship “ On November 1, 2002, I started a sole proprietorship called NetSolutions. I plan to use my knowledge of microcomputers and offer computer consulting services for a fee. The following double-entry transactions show how amounts received debits always equal amounts given credits.” Chris Clark, Owner C2 - 12 Chris Clark deposits 25,000 in a bank account for NetSolutions. General Journal receive Debit give Credit NetSolutions investee Chris Clark investor give Credit Entry A. Date Description Debit Credit 111 C2 - 13 Chris Clark deposits 25,000 in a bank account for NetSolutions. General Journal receive Debit give Credit NetSolutions investee Cash Chris Clark investor give Credit Entry A. Date Description Debit Credit 111 Cash 25,000 C2 - 14 Chris Clark deposits 25,000 in a bank account for NetSolutions. General Journal Date Description Debit Credit 111 Cash 25,000 Chris Clark, Capital 25,000 receive Debit give Credit NetSolutions investee Cash A promise to the owner Chris Clark investor give Credit Entry A. C2 - 15 NetSolutions buys land for 20,000. receive Debit give Credit NetSolutions buyer Land Owner seller give Credit Entry B. General Journal Date Description Debit Credit 115 C2 - 16 NetSolutions buys land for 20,000. receive Debit give Credit NetSolutions buyer Land Land Owner seller give Credit Entry B. General Journal Date Description Debit Credit 115 Land 20,000 C2 - 17 NetSolutions buys land for 20,000. receive Debit give Credit NetSolutions buyer Land Cash Land Owner seller give Credit Entry B. General Journal Date Description Debit Credit 115 Land 20,000 Cash 20,000 C2 - 18 NetSolutions buys supplies for 1,350, agreeing to pay in the near future. receive Debit give Credit NetSolutions buyer Supplier seller give Credit Entry C. General Journal Date Description Debit Credit 1110 C2 - 19 NetSolutions buys supplies for 1,350, agreeing to pay in the near future. receive Debit give Credit NetSolutions buyer Supplies Supplier seller give Credit Entry C. General Journal Date Description Debit Credit 1110 Supplies 1,350 C2 - 20 NetSolutions buys supplies for 1,350, agreeing to pay in the near future. receive Debit give Credit NetSolutions buyer Supplies Supplier seller give Credit Entry C. A promise to pay later General Journal Date Description Debit Credit 1110 Supplies 1,350 Accounts Payable 1,350 C2 - 21 NetSolutions earns fees of 7,500, receiving cash. receive Debit give Credit NetSolutions seller Customer buyer give Credit Entry D. General Journal Date Description Debit Credit 1118 C2 - 22 NetSolutions earns fees of 7,500, receiving cash. Business Transactions Business Transactions receive Debit give Credit NetSolutions seller Cash Customer buyer give Credit Entry D. General Journal Date Description Debit Credit 1118 Cash 7,500 C2 - 23 NetSolutions earns fees of 7,500, receiving cash. Business Transactions Business Transactions receive Debit give Credit NetSolutions seller Cash Customer buyer give Credit Entry D. Services General Journal Date Description Debit Credit 1118 Cash 7,500 Fees Earned 7,500 C2 - 24 Date Description Debit Credit NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Business Transactions Business Transactions General Journal receive Debit give Credit NetSolutions buyer Various suppliers give Credit Entry E. C2 - 25 Date Description Debit Credit 1118 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Business Transactions Business Transactions General Journal receive Debit give Credit NetSolutions buyer Services, benefits Various suppliers give Credit Entry E. C2 - 26 Date Description Debit Credit 1118 Wages Expense 2,125 Rent Expense 800 Utilities Expense 450 Misc. Expense 275 Cash 3,650 NetSolutions paid: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Business Transactions Business Transactions General Journal receive Debit give Credit NetSolutions buyer Services, benefits Various suppliers give Credit Entry E. Cash C2 - 27 NetSolutions pays 950 to creditors on account. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Supplier payee give Credit Entry F. General Journal Date Description Debit Credit 1130 C2 - 28 NetSolutions pays 950 to creditors on account. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Reduction in obligation Supplier payee give Credit Entry F. General Journal Date Description Debit Credit 1130 Accounts Payable 950 C2 - 29 NetSolutions pays 950 to creditors on account. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Reduction in obligation Supplier payee give Credit Entry F. Cash General Journal Date Description Debit Credit 1130 Accounts Payable 950 Cash 950 C2 - 30 At the end of the month, the cost of supplies on hand is 550. Business Transactions Business Transactions receive Debit give Credit NetSolutions user Internal Transaction no external entity give Credit Entry G. General Journal Date Description Debit Credit 1130 C2 - 31 At the end of the month, the cost of supplies on hand is 550. Business Transactions Business Transactions receive Debit give Credit NetSolutions user Use of supplies Internal Transaction no external entity give Credit Entry G. General Journal Balance of Supplies account 1,350 less 550 on hand = 800 used Date Description Debit Credit 1130 Supplies Expense 800 C2 - 32 At the end of the month, the cost of supplies on hand is 550. Business Transactions Business Transactions receive Debit give Credit NetSolutions user Use of supplies Internal Transaction no external entity give Credit Entry G. Supplies General Journal Date Description Debit Credit 1130 Supplies Expense 800 Supplies 800 Balance of Supplies account 1,350 less 550 on hand = 800 used C2 - 33 Chris Clark withdraws 2,000 in cash. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Chris Clark payee give Credit Entry H. General Journal Date Description Debit Credit 1130 C2 - 34 Chris Clark withdraws 2,000 in cash. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Reduction in obligation Chris Clark payee give Credit Entry H. General Journal Date Description Debit Credit 1130 Chris Clark, Drawing 2,000 C2 - 35 Chris Clark withdraws 2,000 in cash. Business Transactions Business Transactions receive Debit give Credit NetSolutions payor Reduction in obligation Chris Clark payee give Credit Entry H. Cash General Journal Date Description Debit Credit 1130 Chris Clark, Drawing 2,000 Cash 2,000 C2 - 36 NetSolutions Chart of Accounts Balance Sheet Income Statement

1. Assets