Financial and Managerial Accounting, 8th Edition
CHAPTER 2
ACCOUNTING FOR BUSINESS TRANSACTIONS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA
and
BTN
Conceptual objectives:
C1. Explain the steps in
processing transactions and
the role of source
documents.
3, 6, 9
2-1
2-1
2-6
BTN 2-1, BTN 2-2,
BTN 2-4, BTN 2-7
C2. Describe an account and its
use in recording
transactions.
1, 2, 14
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
accounting.
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
Analytical objectives:
A1. Analyze the impact of
transactions on accounts and
financial statements.
.
2-5, 2-6, 2-7, 2-8
BTN 2-6
describe its use in analyzing
AA 2-3, BTN: 2-5,
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,
AA 2-1, AA 2-2,
BTN 2-2, BTN 2-3,
BTN 2-4, BTN 2-5,
Procedural objectives:
P1. Record transactions in a
journal and post entries to a
ledger.
2-23
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,
4, 5
2-6, 2-11
2-7, 2-11,
2-12, 2-14,
2-19, 2-21,
2-1, 2-2, 2-3,
2-4, SP, GL: 2-1,
2-3, 2-4, 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
Financial and Managerial Accounting, 8th Edition
BTN refers to Beyond the Numbers
GL refers to General Ledger Problems
Questions with Guided Example videos
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
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated
PowerPoints without the video and audio functions for the Guided Examples are also available in the Connect
Instructor Library and Exercise Presentations. These are indicated in the Related Assignment Materials grid
on page 1 in blue bold font.
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1, C2, C3
2-1
Classifying Accounts
1:34
C4
2-2
Normal Account Balance
2:54
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
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
1:29
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
0:54
Financial and Managerial Accounting, 8th Edition
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.
Preparing Financial Statements
2:01
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.
New layout on four types of accounts that determine equity.
Improved presentation of “Double–Entry System” section.
Updated Apple data for NTK 2-4.
Updated debt ratio analysis using Costco and Walmart.
New Cheat Sheet reinforces chapter content.
Added four new Quick Studies.
Added three new Exercises.
Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.
Financial and Managerial Accounting, 8th Edition
2-4
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.
2. Analyze each transaction and event using the accounting equation.
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,
Supplies, Store Supplies, Equipment, Buildings, and Land.
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.
a. Accounts Payable—promises to pay later, usually arising from purchase of inventory or other
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
balances for an accounting system.
2. The chart of accounts is a list of all accounts in the ledger with their identification numbers.
IV. Double-Entry Accounting
Financial and Managerial Accounting, 8th Edition
2-5
2. The left side of an account is called the debit side. A debit is an entry on the left side of an
account.
3. The right side of an account is called the credit side. A credit is an entry on the right side of an
4. Accounts are assigned balance sides based on their classification or type.
5. To increase an account, an amount is placed on the balance side, and to decrease an account,
the amount is placed on the side opposite its assigned balance side.
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.
2. Analyze transactions using the accounting equation. Apply double-entry accounting to
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.
b. Actual accounting systems use balance column accounts rather than T-accounts in the
ledger.
Financial and Managerial Accounting, 8th Edition
2-6
VI. Trial Balance
A. A trial balance is a list of all ledger accounts and their balances (either debit or credit) at a point
in time. Account balances are reported in their appropriate debit or credit columns of the trial
balance.
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).
2. Compute the total of debit balances and the total of credit balances.
3. Verify (prove) total debit balances equal total credit balances.
D. Searching for Errors: when a trial balance does not balance, an error has occurred and must be
corrected. Follow these steps:
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.
2. Usual practice on statements is to put dollar signs before only the first and last numbers in
each column.
VI. Decision Analysis—Debt Ratio
A. Companies finance their assets with either liabilities or equity.
B. A company that finances a relatively large portion of its assets with liabilities has a high degree
of financial leverage (greater risk).
Financial and Managerial Accounting, 8th Edition
2-7
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.
21. Provided service on credit, $600.
28. Bill provided services and received cash amounting to $6,000.
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).
4. Prepare a statement of retained earnings from the trial balance and
income statement.
Financial and Managerial Accounting, 8th Edition
2-8
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
Cash
5
0 0 0
00
21
Accounts Receivable
6
0
0
00
Service Fees Earned
6 0 0
00
28
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
3
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
Gas & Oil Expense ……………………………………….
800
Salary Expense …………………………………………….
Total expenses …………………………………………….
2-10
4.
Speedy Computer Service
Statement of Retained Earnings
For the month ended March 31, 2019
Total
3,700
Beginning Owner’s Equity
$0
Add: Net Income
3,700
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