Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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CHAPTER 2
ANALYZING AND RECORDING TRANSACTIONS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Explain the steps in processing
3, 6, 9
2-1
2-1
2-6
2-3, 2-4,
C2. Describe an account and its use
in recording transactions.
1 ,2, 14
2-2
2-2
2-5
2-4, 2-6
2-3
2-3, 2-16
2-1, 2-2, 2-3, 2-4,
GL 2-5, GL 2-6,
GL 2-7
2-10
GL 2-4, GL 2-5,
GL 2-6
C4. Define debits and credits and
7
2-4, 2-5,
2-4
2-1, 2-2, 2-3,
2-6
transactions on accounts and
2-9, 2-13,
2-15, 2-20
2-5, 2-6, SP 2
GL 2-2, GL 2-4,
2-4, 2-5,
2-6, 2-7,
A1. Analyze the impact of
.
2-7
2-5, 2-6,
2-1, 2-2, 2-3, 2-4,
GL 2-5, GL 2-6,
GL 2-7, GL 2-8
2-1, 2-2,
2-8
A2. Compute the debt ratio and
2-22
2-5
2-1, 2-2,
2-19, 2-21
GL 2-4, GL 2-5,
P1. Record transactions in a journal
and post entries to a ledger.
4, 5
2-6
2-7, 2-11,
2-12, 2-14
GL 2-8
2-1, 2-2, 2-3, 2-4,
SP 2, GL2-3,
GL 2-6, GL 2-7,
P2. Prepare and explain the use of a
trial balance.
8
2-8
2-8, 2-10,
2-20, 2-21
GL 2-4, GL 2-5,
GL 2-8
2-1, 2-2, 2-3, 2-4,
2-5, SP 2,
GL 2-6, GL 2-7,
17
P3. Prepare financial statements
10, 11, 12,
2-9
2-16, 2-17,
2-5, ES-1, ES-2
2-4, 2-7,
source documents.
2-6, 2-9
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
GL refers to the General Ledger Problems
ES refers to Excel Simulations
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
Connect Insight
The first and only analytics tool of its kind, Connect Insight is a series of visual data displays that are each framed
by an intuitive question and provide at-a-glance information regarding how an instructor’s class is performing.
Connect Insight is available through Connect titles.
General Ledger
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
NEW opener—Soko and entrepreneurial assignment.
Simplified discussion on analyzing and recording process.
Streamlined discussion of classified vs. unclassified balance sheet.
Enhanced explanation of computing equity.
Enhanced Exhibit 2.4 to identify account categories.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
I. System of Accounts
A. Identify transaction from source document which identifies and
describes transactions and events entering the accounting process.
B. Analyze transaction using the accounting equation.
II. The Account and its Analysis
A. An account is a record of increases and decreases in a specific asset,
liability, equity, revenue, or expense.
B. Account categories include:
Payable, Unearned Revenues, and Accrued Liabilities.
1. Assets—resources owned or controlled by a company that have
future economic benefit. Examples include Cash, Accounts
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
3. Equity—owner’s claim on company’s assets is called equity or
owner’s equity. Examples include Owner’s Capital, Owner’s
Withdrawals (decreases in equity). Revenues (results from
providing goods or services; i.e. Sales, Fees Earned) increases
equity. Expenses (results from assets or services used in
operation; i.e. Supplies Expense) decreases equity.
III. Double-Entry Accounting
B. The chart of accounts is a list of all accounts in the ledger with their
A. The general ledger or ledger (referred to as the books) is a collection
Chapter Outline
Notes
C. A T-account represents a ledger account and is used to understand the
effects of one or more transactions. Has shape like the letter T with
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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account title on top.
IV. Debits and Credits
A. The left side of an account is called the debit side. A debit is an entry
on the left side of an account.
B. The right side of an account is called the credit side. A credit is an
entry on the right side of an account.
V. Double-Entry System—requires that each transaction affect, and be
recorded in, at least two accounts. The total debits must equal total credits
for each transaction.
A. The assignment of balance sides (debit or credit) follows the
accounting equation.
balances.
1. Assets are on the left side of the equation; therefore, the left, or
debit, side is the normal balance for assets.
3. Withdrawals, revenues, and expenses really are changes in equity,
but it is necessary to set up temporary accounts for each of these
items to accumulate data for statements. Withdrawals and
B. Three important rules for recording transactions in a double-entry
accounting system are:
1. Increases to assets are debits to the asset accounts. Decreases to
assets are credits to the asset accounts.
3. Increases to equity are credits to the equity accounts. Decreases
to equity are debits to the equity accounts.
total debits the account has a credit balance. When two sides are
equal the account has a zero balance.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
VI. Journalizing and Posting Transactions
A. Four steps in processing transactions are as follows:
Journalizing—The process of recording each transaction in a journal.
2. Analyze 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. Posting Journal Entries to Ledger—transfer (or post) each
entry from journal to ledger.
a. Debits are posted as debit, and credits as credits to the
accounts identified in the journal entry.
Note: To see an illustration of analyzing, journalizing and posting of 16
basic transactions refer to the textbook.
VII. Trial Balance
A. A trial balance is a list of 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.
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:
2. Compute the total debit balances and the total 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:
the trial balance as a credit (or debit).
2. Verify that account balances are accurately entered from
ledger.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
4. Re-compute each account balance in the ledger.
6. Verify that the original journal entry has equal debits and
credits.
(Note: Any errors must be located and corrected before preparing
The next chapter will address adjustments).
E. Presentation Issues
1. Dollar signs are not used in journals and ledgers but do appear
2. Usual practice on statements is to put dollar signs before the
first and last number in each column.
4. Companies commonly round in reports to the nearest dollar, or
even higher levels.
5. Double rule the final total(s) on the financial statements.
VIII. 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
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #2-1
THREE PARTS OF AN ACCOUNT
(1) ACCOUNT TITLE
(2) DEBIT
(3) CREDIT
Rules for using accounts
Accounts are assigned balance sides (Debit or Credit).
To increase any account, use the balance side.
To decrease any account, use the side opposite the balance.
Finding account balances
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #2-2
REAL ACCOUNTS
ALL ACCOUNTS ARE ASSIGNED BALANCE SIDES
BALANCE SIDES FOR ASSETS, LIABILITIES, AND
EQUITY ACCOUNTS ARE ASSIGNED BASED ON
SIDE OF EQUATION THEY ARE ON.
ASSETS
=
LIABILITIES + EQUITY
ASSIGNED LEFT SIDE
BALANCE
ASSIGNED RIGHT SIDE
BALANCE
DEBIT BALANCE
CREDIT BALANCE
All Asset Accts
All Liability Accts
All Equity Accts
Normal
Normal
Normal
Debit
Credit
Debit
Credit
Debit
Credit
+ side
– side
– side
+ side
– side
+ side
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #2-3
TEMPORARY ACCOUNTS
Temporary accounts are established to facilitate efficient accumulation of
data for statements. Temporary accounts are established for withdrawals,
each revenue, and each expense. Temporary accounts are assigned
balances based on how they affect equity.
(Equity Account)
Owner’s Name, Capital
Debit
Credit Balance
– side
+ side
Temporary Accounts Effect on equity? E or E
Owner, Withdrawals* E = Dr
Revenues E = Cr
Expenses E = Dr
All Withdrawal Accts
All Revenue Accts
All Expense Accts
Normal
Normal
Normal
Note:
Transactions during the period always increase the balances of these
temporary accounts since the transaction represent additional withdrawals,
revenues, and expenses. We will later learn how to move these amounts
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #2-4
USING ACCOUNTS – SUMMARY
Real Accounts
All Asset Accts
All Liability Accts
All Equity Accts
RULE REVIEW
Temporary Accounts
Transaction analysis rules
• Each transaction affects at least 2
accounts.
• Each transaction must have equal
debits and credits.
All Withdrawal
Accounts
Balance
General account use rules
opposite the balance
Balance
Balance
Balance
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd 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 2017.
March 1. Bill Smith invested $3,000 cash in his business.
15. Bill provided services and received cash amounting to $5,400
from customers.
17. Paid for gas and oil, $800.
21. Provided service on credit, $600.
29. Paid for truck and equipment rental, $2,500.
Required:
1. Record the above transactions in general journal form.
3. prepare an income statement from trial balance
5. Prepare a balance sheet using the trial balance totals and the
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter 2 Solution: Alternate Demonstration Problem
GENERAL JOURNAL
DATE
ACCOUNT TITLES AND
EXPLANATION
P.R.
DEBIT
CREDIT
March 1
Cash
3
0
0
0
00
Bill Smith, Capital
3
0 0 0
00
15
Cash
5
4
0
0
00
Service Fees Earned
5
4 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
28
Cash
6
0
0
0
00
29
Equipment Rental Expense
2
5
0
0
00
Cash
2
5 0 0
00
30
2
0
0
0
00
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Speedy Computer Service
Trial Balance
March 31, 2017
Cash
4
1
0
0
00
Accounts Receivable
6
0
0
00
Supplies
1
0
0
00
3.
Speedy Computer Service
Income Statement
For the month ended March 31, 2017
Fees Earned ………………………………………………………
$12,000
Expenses:
Equipment Rental Expense …………………………..
Salary Expense …………………………………………….
Total expenses …………………………………………….
Accounts Payable
1
0
0
00
0
0
0
00
2
0
0
0
00
Service Fees Earned
1
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
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
4.
Speedy Computer Service
Statement of Owner’s Equity
For the month ended March 31, 2017
Add: Investments
Total
Beginning Capital
$0
5.
Speedy Computer Service
Balance Sheet
March 31, 2017
Assets
Liabilities and Owner’s Equity
Accounts payable ………..
Accts Receivable ………….
Supplies ………………………
Total Assets …………………
6. First, note that the cash investment ($2,000) and cash withdrawal
($2,000) affect the cash balance but do not affect the amount of net