Financial and Managerial Accounting, 8th Edition
2-1
CHAPTER 2
ACCOUNTING FOR BUSINESS TRANSACTIONS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA
and
BTN
Conceptual objectives:
C2. Describe an account and its
use in recording
2-2
2-2
2-5
BTN 2-2, BTN 2-4
C3. Describe a ledger and a
chart of accounts.
2-3
2-3, 2-16
2-1, 2-2, 2-3,
2-4, 2-6, GL: 2-4,
2-5, 2-6, 2-7
C4. Define debits and credits
and explain double-entry
7
2-4, 2-5,
2-10
2-4
2-1, 2-2, 2-3,
GL: 2-4, 2-5, 2-6
BTN 2-4
C1. Explain the steps in
processing transactions and
the role of source
3, 6, 9
2-1
2-1
2-6
BTN 2-1, BTN 2-2,
BTN 2-4, BTN 2-7
Analytical objectives:
A1. Analyze the impact of
transactions on accounts and
financial statements.
.
2-7
2-5, 2-6,
2-9, 2-13,
2-15, 2-20
2-1, 2-2, 2-3,
2-4, 2-5, 2-6, SP,
GL: 2-2, 2-4,
2-5, 2-6, 2-7, 2-8
AA 2-1, AA 2-2,
BTN 2-2, BTN 2-3,
BTN 2-4, BTN 2-5,
BTN 2-6
describe its use in analyzing
AA 2-3, BTN: 2-5,
Procedural objectives:
P1. Record transactions in a
journal and post entries to a
ledger.
4, 5
2-6, 2-11
2-7, 2-11,
2-12, 2-14,
2-19, 2-21,
2-23
2-1, 2-2, 2-3,
2-4, SP, GL: 2-1,
2-3, 2-4, 2-5,
2-6, 2-7, 2-8
P2. Prepare and explain the use
of a trial balance.
8
2-8
2-8, 2-10,
2-20, 2-21
2-1, 2-2, 2-3,
2-4, 2-6, SP,
GL: 2-4, 2-5,
2-6, 2-7, 2-8
P3. Prepare financial statements
10, 11, 12,
17, 18
2-9, 2-12, 2-
2-16, 2-17,
2-7, ES-1, ES–2
BTN 2-2, BTN 2-5,
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
C2
Describe an account and its use in recording transactions.
Types of Accounts
0:52
Asset Accounts
3:48
Liability Accounts
2:35
Equity Accounts
Decision Insights
0:14
C3
Describe a ledger and a chart of accounts.
Chart of Accounts
1:45
Ledger
0:25
C4
Define debits and credits and explain double-entry accounting.
T-accounts
Financial and Managerial Accounting, 8th Edition
2-2
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available
in Connect.
Connect
Available on the instructor’s course-specific website, Connect:
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1, C2, C3
2-1
Classifying Accounts
1:34
2-3
Recording Transactions
1:54
2-4
Preparing Trial Balance
2:01
Concept Overview Videos
Each video is paired with a Knowledge Check question.
LO
Title
Time
C1
Explain the steps in processing transactions and the role of source documents.
Source Documents
0:58
Financial and Managerial Accounting, 8th Edition
2-3
Double-Entry Accounting
0:47
Normal Balance Rules
1:33
Normal Balance – Equity
0:43
A1
Analyze the impact of transactions on accounts and financial statements.
Receive Investment by Owner
1:00
Purchase Equipment for Cash
0:46
0:32
0:32
Payment of Expense on Credit
0:34
Payment of Accounts Payable
0:43
A2
Compute the debt ratio and describe its use in analyzing financial condition.
Financial Statement Data
1:25
Debt Ratio
1:13
P1
Record transactions in a journal and post entries to a ledger.
Accounting Process
0:20
Journalizing Transactions
1:30
Posting Journal Entries to Ledger Accounts: General Procedures
1:37
Post Entries to Ledger Accounts: Four step Process
0:48
P2
Prepare and explain the use of a trial balance.
Trial Balance
1:33
Trial Balance – Searching for Errors
1:04
P3
Prepare financial statements from business transactions.
How Financial Statements Link
1:10
Synopsis of Chapter Revisions
NEW opener—Fitbit and entrepreneurial assignment.
New visual for process to get from transactions to financial statements.
Financial and Managerial Accounting, 8th Edition
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Chapter Outline
I. Basis of Financial Statements—process to go from transactions and events to financial statements
includes the following:
1. Identify each transaction and event from source documents, which identify and describe
transactions and events entering the accounting process.
A. Source Documents—identify and describe transactions and events entering the accounting system.
II. The “Account” Underlying Financial Statements
An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or
expense. Account categories include:
1. Assets—resources owned or controlled by a company that have future economic benefit. Examples
include Cash, Accounts Receivable, Note Receivable, Prepaid Expenses, Prepaid Insurance,
2. Liabilities—claims (by creditors) against assets, which means they are obligations to transfer
assets or provide products or services to others. Examples include Accounts Payable, Note
Payable, Unearned Revenues, and Accrued Liabilities.
3. Equity—an owner’s claim on a company’s assets is called equity or owner’s equity. Examples
include Common stock, Dividends (decreases equity), Revenues from providing goods or
services; i.e., Sales, Fees Earned, (increases equity), and Expenses from assets or services used
in operation; i.e., Supplies Expense, (decreases equity).
III. Ledger and Chart of Accounts
1. The general ledger or ledger (referred to as the books) is a collection of all accounts and their
IV. Double-Entry Accounting
Double-entry accounting demands the accounting equation remain in balance. This means that for each
transaction (1) at least two accounts are involved with at least one debit and one credit and (2) total
amount debited must equal the total amount credited.
A. Debits and Credit
1. A T-account represents a ledger account and is used to understand the effects of one or more
transactions. It is shaped like the letter T with the account title on top.
Financial and Managerial Accounting, 8th Edition
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2. The left side of an account is called the debit side. A debit is an entry on the left side of an
account.
B. Double-Entry System—requires that each transaction affect, and be recorded in, at least two
accounts. The total debits must equal the total credits for each transaction.
1. The assignment of balance sides (debit or credit) follows the accounting equation.
a. Assets are on the left side of the equation; therefore, the left, or debit, side is the normal
balance for assets.
V. Analyzing and Processing Transactions
A. Journalizing and Posting Transactions
Four steps in processing transactions are as follows:
1. Identify transactions and source documents.
determine account to be debited and credited.
3. Record journal entry—recorded chronologically. (A journal gives us a complete record of each
transaction in one place.)
4. Post entry to ledger—process of transferring entries from the journal to the ledger.
a. Debits are posted as debit, and credits as credits to the accounts identified in the journal
entry.
Financial and Managerial Accounting, 8th Edition
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VI. Trial Balance
B. The trial balance tests for the equality of the debit and credit account balances as required by
double-entry accounting.
C. Preparing a Trial Balance: three steps to prepare a trial balance are as follows:
1. List each account and its amount (from the ledger).
D. Searching for Errors: when a trial balance does not balance, an error has occurred and must be
corrected. Follow these steps:
1. Verify that the trial balance columns are correctly added.
Note: Any errors must be located and corrected before preparing the financial statements.
Financial statements prepared from the trial balance are actually unadjusted
statements. The purpose, content and format for each statement was presented in
Chapter 1. The next chapter will address adjustments.
D. Presentation Issues
1. Dollar signs are not used in journals and ledgers, but do appear in financial statements and
other reports such as trial balances.
VI. Decision Analysis—Debt Ratio
A. Companies finance their assets with either liabilities or equity.
Financial and Managerial Accounting, 8th Edition
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Chapter 2 Alternate Demonstration Problem
Record the following transactions of Speedy Computer Service, owned by Bill
Smith, for the month of March 2019.
Mar 1. Bill Smith invested $3,000 cash in exchange for common stock to start
the business.
15. Bill provided services and received cash amounting to $5,400 from
customers.
Required:
1. Record the above transactions in general journal form.
2. Prepare a trial balance after posting the entries to T-accounts (you can
make your own T-accounts).
Financial and Managerial Accounting, 8th Edition
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Chapter 2 Solution: Alternate Demonstration Problem
GENERAL JOURNAL
DATE
ACCOUNT TITLES AND
EXPLANATION
PR
DEBIT
CREDIT
March 1
Cash
3
0
0
0
00
Common Stock
3
0 0 0
00
15
Cash
5
4
0
0
00
Service Fees Earned
5
4 0 0
00
16
Supplies
1
0
0
00
Accounts Payable
1 0 0
00
17
Gas and Oil Expense
8
0
0
00
Cash
8 0 0
00
18
Salaries Expense
5
0
0
0
00
Cash
5
0 0 0
00
21
Accounts Receivable
6
0
0
00
Service Fees Earned
6 0 0
00
Cash
6
0
0
0
00
Service Fees Earned
6
0 0 0
00
Cash
2
5 0 0
00
30
Dividends
2
0
0
0
00
Cash
2
0 0 0
00
Financial and Managerial Accounting, 8th Edition
Speedy Computer Service
Trial Balance
March 31, 2019
Cash
4
1
0
0
00
Accounts Receivable
6
0
0
00
Supplies
1
0
0
00
Accounts Payable
1
0
0
00
Common Stock
0
0
0
00
Dividends
2
0
0
0
00
Gas & Oil Expense
8
0
0
00
Equipment Rental Expense
2
5
0
0
00
Salaries Expense
5
0
0
0
00
Totals
1
5
1
0
0
00
1
5
1
0
0
00
3.
Speedy Computer Service
Income Statement
For the month ended March 31, 2019
Fees Earned ………………………………………………………
$12,000
Expenses:
Equipment Rental Expense …………………………..
$2,500
Salary Expense …………………………………………….
Total expenses …………………………………………….
Financial and Managerial Accounting, 8th Edition
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4.
Speedy Computer Service
Statement of Retained Earnings
For the month ended March 31, 2019
Total
Beginning Owner’s Equity
$0
5.
Speedy Computer Service
Balance Sheet
March 31, 2019
Assets
Liabilities and Owner’s Equity
Cash …………………………….
$4,100
Accounts payable ………..
$ 100
Accts Receivable ………….
Common Stock..…………..
6. First, note that Common stock ($3,000) and Dividends ($2,000) affect the
cash balance but do not affect the amount of net income earned during the