CHAPTER
4
The Bookkeeping Process and
Transaction Analysis
CHAPTER OUTLINE:
I. The Bookkeeping/Accounting Process
II. The Balance Sheet Equation: A = L + SE
A. Stockholders’ Equity expanded:
1. SE = Paid-in Capital + Retained Earnings
3. Net income = Revenues – Expenses
4. SE = Paid-in Capital + Retained Earnings (beginning) + Revenues – Expenses
B. The Balance Sheet Equation expanded:
A = L + PIC + Retained Earnings (beginning) + Revenues – Expenses
III. Bookkeeping Jargon and Procedures
A. Transactions recorded in a journal, then posted to an account in the ledger.
B. Accounts use a “T” format
1. Left side of “T” is debit
1. Debit: Assets and expenses
2. Credit: Liabilities, stockholders’ equity, and revenues
D. Journal entries
IV. Effect of Transactions on the Financial Statements (Horizontal Model)
Chapter 4 The Bookkeeping Process and Transaction Analysis
VI. Transaction Analysis Methodology
A. Five questions:
1. What’s going on?
2. What accounts are affected?
3. How are they affected?
4. Does the balance sheet balance? (Do the debits equal the credits?)
5. Does my analysis make sense?
TEACHING/LEARNING OBJECTIVES:
Principal:
1. To have the student understand how transactions affect the financial statements.
3. To have the student learn to use the financial statement horizontal model to reason through
the impact of transactions on the financial statements.
Supporting:
4. To have the student learn to use the T-account model and understand the effect of a journal
entry.
5. To have the student understand why adjusting entries are necessary, and to see that they
result in more meaningful financial statements.
TEACHING OBSERVATIONS:
1. Develop the expanded balance sheet equation by relating net income to stockholders’ equity
(retained earnings) and explaining that income statement preparation is made easier if
3. Review the articulation of the income statement and balance sheet in Exhibit 4-2.
4. The normal balance and debit/credit behavior of T-accounts can be developed from the
expanded equation:
a. Assets = Liabilities + Stockholders’ Equity + Revenues – Expenses
d. Accounts to the left (or debit side) of the equal sign and vertical line have a normal balance
that is a debit. If a debit balance is normal, increases will be debits, and decreases will be
credits; it’s just the opposite for accounts on the right side.
6. Explain that the horizontal model directly illustrates the effects of transactions on the balance
7. Explain that in the horizontal model an increase in an expense is a negative amount because
an expense reduces net income, which reduces retained earnings and stockholders’ equity.
8. Introduce adjusting entries as changes in account balances needed to improve the accuracy of
Problem 4-28 can be used as an in-class demonstration of the 5 question analytical process.
Chapter 4 The Bookkeeping Process and Transaction Analysis
10. Students are easily confused by alternative methods of recording certain transactions (e.g.,
the purchase of supplies can be debited either to supplies expense or the supplies asset).
11. It is recommended that the horizontal model and the T-account model be used to help
students get a picture of the activity in an account, and/or to solve for the amount of an
12. “Matrix” assignments (see M4-1, M4-2, and E4-7 through E4-12) can be used to emphasize
student understanding of the effect of transactions on the financial statements. The same
format can be used on quizzes and exams. After subsequent chapters have been covered,
Instructor’s Manual / Solutions Manual
ASSIGNMENT OVERVIEW:
NO.
LEARNING
OBJECTIVES
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
M4.1.
2, 6, 7
Easy, 5-8 min.
Basic transaction analysis without numbers.
M4.2.
2, 6, 7
Easy, 5-8 min.
Continuation of M4.1. to show second month.
M4.3.
6, 7
Easy, 5-8 min.
Use to emphasize T-account analysis.
M4.4.
6, 7
Easy, 5-8 min.
See E4.19 and E4.20. for similar homework assignments.
E4.5.
2, 6, 7
Easy, 5-8 min.
Basic transaction analysis.
E4.6.
2, 6, 7
Easy, 5-8 min.
See E4.5.
E4.7.
6
Easy, 5-8 min.
Alternative format to E4.5.
E4.8.
6
Easy, 5-8 min.
Alternative format to E4.6.
E4.9.
2, 6, 7
Med., 5-8 min.
Emphasize the effects of transactions on financial statements.
E4.10.
2, 6, 7
Med., 5-8 min.
See E4.9. Good homework assignment.
E4.11.
2, 6, 7
Med., 5-8 min.
Parts d, e, and f can be demonstrated using a time-line approach.
E4.12.
2, 6, 7
Med., 5-8 min.
Excel exercise. Good in-class demonstration exercise.
E4.13.
3
Easy, 3-5 min.
Emphasize the difference between income and cash flows.
E4.14.
6,7
Easy, 3-5 min.
See E4.13.
E4.15.
6, 7
Med., 10-12 min.
Easy way to introduce adjusting entries.
E4.16.
6, 7
Med., 10–12 min.
See E4.15. Good homework assignment.
E4.17.
6, 7
Med., 5-8 min.
Shows the effects of omitted adjusting entries.
E4.18.
6, 7
Med., 5-8 min.
Shows the effects of omitted adjusting entries.
E4.19.
6, 7
Easy, 3-5 min.
See E4.20.
E4.20.
6, 7
Med., 10–15
Use to emphasize T-account analysis.
P4.21.
2, 6, 7
Med., 7-10 min.
Basic transaction analysis.
P4.22.
1
Med., 10-12 min.
Group learning problem. Assign with P4.21. Emphasize the
need for liquidity and profitability planning. Ask “What went
wrong with this company?”
P4.23.
6, 7
Med., 10-15 min.
Emphasizes the form of income statement presentation.
CAN USE LATER as a Chapter 9 assignment.
P4.25.
6, 7
Med., 10-15 min.
See P4.23.
P4.26.
6, 7
Med., 10-15 min.
See P4.25. Good in-class demonstration problem.
P4.27.
6, 7
Med.-Hard, 10-20
Group learning problem. Excellent way to stress the impact of
P4.28.
6, 7
Hard, 20-30 min.
Excel problem. Worksheet should be used to show students that
C4.29.
6, 7
Hard, 25-35 min.
Group learning case. Makes students think!
C4.30.
6, 7
Hard, 25-35 min.
Group learning case. Makes students think!
Chapter 4 The Bookkeeping Process and Transaction Analysis
SOLUTIONS:
M4.1.
a.
Transaction/Adjustment A = L + SE Net Income
Issued common stock to the initial + Cash + Common
stockholders in exchange for their Stock
cash investment……………………..
M4.2.
a.
b.
Transaction/Adjustment A = L + SE Net Income
Paid wages that had been accrued – Cash – Wages
at the end of the prior month………… Payable
Collected accounts receivable from + Cash
sales recorded in the prior month…… – Acc. Rec.
M4.3.
a.
Accounts Payable
Beginning balance 9,000
Payments to suppliers ? . Purchases on account 18,300
Ending balance 10,200
Solution: $9,000 + $18,300 – ? = $10,200
Payments to suppliers during the month = $17,100
b.
Accounts Receivable
Beginning balance 10,700 Collections from
Credit sales ? customers 38,000
Ending balance 9,900
M4.4.
a.
Supplies
Beginning balance 4,800
Supplies purchased 15,600 Supplies used ?
Ending balance 6,400
Solution: $4,800 + $15,600 – ? = $6,400
Supplies used during the month = $14,000
b.
Wages Payable
Net income for the month: Revenues $40,000 – Expenses $32,700 = Net income $7,300
Net income (this exercise ignores income taxes)…………………..
E4.5.
Assets = Liabilities + Stockholders’ Equity
b.
d.
-2,800 -2,800
-18,000 +30,000 +12,000
-2,400 +8,400 +6,000
+7,800 +19,200 –18,000 +27,000 – 18,000
+6,320 -6,320
k.
l.
-9,440 -9,440
______ ______ ______ _____ ______ ______ ______ _____ ______ ______
16,980 + 12,880 + 12,400 + 3,500 = 10,000 + 12,460 + 16,000 + + 40,000 – 32,700
Month-end totals: Assets $45,760 = Liabilities $22,460 + Stockholders’ equity $23,300
E4.5.
(continued)
BLUE CO. STORES, INC.
Balance Sheet
Assets:
Cash…………………………………………………………………
$16,980
Merchandise inventory……………………………………………..
12,400
Liabilities:
Notes payable………………………………………………………
$10,000
$22,460
Retained earnings *…………………………………………………
7,300
Total liabilities and stockholders’ equity…………………………..
$45,760
E4.6.
Assets = Liabilities + Stockholders Equity
Trans- Accounts Notes Accounts Paid-in Retained
action Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital + Earnings + Rev – Exp