chapter 2 financial accounting
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Analyzing Analyzing
TransactionsTransactions
Chapter 2Chapter 2Chapter 2Chapter 2
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning ObjectivesLearning Objectives
1.1. Describe the characteristics of an account and a Describe the characteristics of an account and a chart of accounts.chart of accounts.
2.2. Describe and illustrate journalizing transactions Describe and illustrate journalizing transactions using the double-entry accounting system.using the double-entry accounting system.
3.3. Describe and illustrate the journalizing and Describe and illustrate the journalizing and posting of transactions to accounts.posting of transactions to accounts.
4.4. Prepare an unadjusted trial balance and explain Prepare an unadjusted trial balance and explain how it can be used to discover errors.how it can be used to discover errors.
5.5. Describe and illustrate the use of horizontal Describe and illustrate the use of horizontal analysis in evaluating a company’s performance analysis in evaluating a company’s performance and financial condition.and financial condition.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Learning Objective
ObjectiveDescribe the characteristics of
Describe the characteristics of
an account and a chart of
an account and a chart of accounts.accounts.
11
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Using Accounts to Record TransactionsUsing Accounts to Record Transactions
o Accounting systems are designed to show Accounting systems are designed to show the increases and decreases in each the increases and decreases in each accounting equation element as a accounting equation element as a separate record. This record is called an separate record. This record is called an accountaccount..
USING USING ACCOUNTS TO ACCOUNTS TO
RECORD RECORD TRANSACTIONSTRANSACTIONS
THE T THE T ACCOUNTACCOUNT
The T account has a title
Title
THE T THE T ACCOUNTACCOUNT
The left side of the account is called the debitdebit
side.
Title
Title
Debit
The right side of the account is
called the creditcredit side.
Credit
THE T THE T ACCOUNTACCOUNT
THE T THE T ACCOUNTACCOUNT
Cash(a) 25,000 (b) 20,000(d) 7,500 (e) 3,650
(f) 950(h) 2,000
Balance 5,900
Debit Side of Account
Credit Side of Account
Balance of the account
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Chart of AccountsChart of Accounts
o A group of accounts for a business entity A group of accounts for a business entity is called ais called a ledger ledger..
o A list of the accounts in the ledger is A list of the accounts in the ledger is called a called a chart of accountschart of accounts..
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Chart of AccountsChart of Accounts
o AssetsAssets are resources owned by the are resources owned by the business. Some examples of assets follow:business. Some examples of assets follow: CashCash
SuppliesSupplies
Accounts receivableAccounts receivable
BuildingsBuildings
CopyrightsCopyrights
TrademarksTrademarksIntangible assetsIntangible assets
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Chart of AccountsChart of Accounts
o LiabilitiesLiabilities are debts owed to outsiders are debts owed to outsiders (creditors). Some examples of liabilities (creditors). Some examples of liabilities follow:follow: Accounts payableAccounts payable
Notes payableNotes payable
Wages payableWages payable
Interest payableInterest payable
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Chart of AccountsChart of Accounts
o Stockholders’ equityStockholders’ equity is the stockholders’ is the stockholders’ right to the assets of the business after all right to the assets of the business after all liabilities have been paid. Stockholders’ liabilities have been paid. Stockholders’ equity is represented by the balance of equity is represented by the balance of the capital stock and retained earnings the capital stock and retained earnings accounts.accounts.
o A A dividendsdividends account represents account represents distributions of earnings to stockholders.distributions of earnings to stockholders.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Chart of AccountsChart of Accounts
o RevenuesRevenues are increases in stockholders’ are increases in stockholders’ equity as a result of selling services or equity as a result of selling services or products to customers. Some examples of products to customers. Some examples of revenue accounts are:revenue accounts are: Fees earnedFees earned
Commission revenueCommission revenue
Rent revenueRent revenue
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Chart of AccountsChart of Accounts
o The using up of assets or consuming The using up of assets or consuming services in the process of generating services in the process of generating revenues results in revenues results in expensesexpenses. Some . Some examples of expenses follow:examples of expenses follow: Wages expenseWages expense
Rent expenseRent expense
Miscellaneous expenseMiscellaneous expense
CHART OF CHART OF ACCOUNTSACCOUNTS
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Learning Learning Objective
ObjectiveDescribe and illustrate
Describe and illustrate
journalizing transactions using
journalizing transactions using
the double-entry accounting
the double-entry accounting system.system.
22
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Double-Entry Accounting SystemDouble-Entry Accounting System
o All businesses use what is called the All businesses use what is called the double-entry accounting systemdouble-entry accounting system. This . This system is based on the accounting system is based on the accounting equation and requires:equation and requires: Every business transaction to be recorded in at Every business transaction to be recorded in at
least two accounts.least two accounts.
The total debits recorded for each transaction The total debits recorded for each transaction to be equal to the total credits recorded.to be equal to the total credits recorded.
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Balance Sheet AccountsBalance Sheet Accounts
o The debit and credit rules for balance The debit and credit rules for balance sheet accounts are:sheet accounts are:
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Income Statement AccountsIncome Statement Accounts
o The debit and credit rules for income The debit and credit rules for income statement accounts are based on their statement accounts are based on their relationship with stockholders’ equity.relationship with stockholders’ equity.
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DividendsDividends
o The debit and credit rules for recording The debit and credit rules for recording dividends are based on the effect of dividends are based on the effect of dividends on stockholders’ equity dividends on stockholders’ equity (retained earnings).(retained earnings).
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Normal BalancesNormal Balances
o The sum of the increases in an account is The sum of the increases in an account is usually equal to or greater than the sum usually equal to or greater than the sum of the decreases in the account. Thus, the of the decreases in the account. Thus, the normal balance ofnormal balance of an accountan account is either a is either a debit or a credit depending on whether debit or a credit depending on whether increases in the account are recorded as increases in the account are recorded as debits or credits.debits or credits.
RULES OF DEBIT RULES OF DEBIT AND CREDIT – AND CREDIT –
NORMAL NORMAL BALANCES OF BALANCES OF
ACCOUNTSACCOUNTS
Normal BalancesNormal Balances
Increases (Normal Bal.) Decreases
Balance sheet accounts:AssetDebit CreditLiability Credit DebitStockholders’ Equity:
Capital Stock Credit DebitRetained Earnings Credit Debit
Income statement accounts:Revenue Credit DebitExpense DebitCredit
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Transaction ATransaction A
o On November 1, Chris Clark deposited $25,000 in On November 1, Chris Clark deposited $25,000 in a bank account in the name of NetSolutions in a bank account in the name of NetSolutions in exchange for capital stock.exchange for capital stock.
TRANSACTION TRANSACTION AA
Assets = Liabilities + Stockholders’ Equity (investment)Assets = Liabilities + Stockholders’ Equity (investment)
ACCOUNTING EQUATION ACCOUNTING EQUATION IMPACTIMPACT
increase increase
Step 1
Step 2
Step 2
Step 3
Step 3 Step 5Step 4
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(continued)
JournalizingJournalizing
Journalizing requires the following steps:Journalizing requires the following steps:Step 1.Step 1. The date of the transaction is entered The date of the transaction is entered in the Date column.in the Date column.
Step 2.Step 2. The title of the account to be debited The title of the account to be debited is recorded at the left-hand margin under the is recorded at the left-hand margin under the Description column, and the amount to be Description column, and the amount to be debited is entered in the Debit column.debited is entered in the Debit column.
Step 3.Step 3. The title of the account to be credited The title of the account to be credited is listed below and to the right of the debited is listed below and to the right of the debited account title, and the amount to be credited is account title, and the amount to be credited is entered in the Credit column.entered in the Credit column.
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(continued)
JournalizingJournalizing
Step 4.Step 4. A brief description may be entered A brief description may be entered below the credited account.below the credited account.
Step 5.Step 5. The Post. Ref. (Posting Reference) The Post. Ref. (Posting Reference) column is left blank when the journal entry is column is left blank when the journal entry is initially recorded. This column is used later when initially recorded. This column is used later when the journal entry amounts are transferred to the the journal entry amounts are transferred to the accounts in the ledger.accounts in the ledger.
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JournalizingJournalizing
o A transaction is initially entered in a record A transaction is initially entered in a record called a called a journaljournal..
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JournalizingJournalizing
o A transaction is initially entered in a record A transaction is initially entered in a record called a journal.called a journal.
o The process of recording a transaction in The process of recording a transaction in the journal is called the journal is called journalizingjournalizing..
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
JournalizingJournalizing
o A transaction is initially entered in a record A transaction is initially entered in a record called a journal.called a journal.
o The process of recording a transaction in The process of recording a transaction in the journal is called journalizing.the journal is called journalizing.
o The entry in the journal is called a The entry in the journal is called a journal journal entryentry..
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Transaction BTransaction B
o On November 5, NetSolutions paid On November 5, NetSolutions paid $20,000 for the purchase of land as a $20,000 for the purchase of land as a future building site.future building site.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase
decrease
TRANSACTION TRANSACTION BB
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Transaction CTransaction C
o On November 10, NetSolutions purchased On November 10, NetSolutions purchased supplies on account for $1,350.supplies on account for $1,350.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase increase
TRANSACTION TRANSACTION CC
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Transaction DTransaction D
o On November 18, NetSolutions received On November 18, NetSolutions received cash of $7,500 from customers for cash of $7,500 from customers for services provided.services provided.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Revenue)Assets = Liabilities + Stockholders’ Equity (Revenue)
increase increase
TRANSACTION TRANSACTION DD
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Transaction ETransaction E
o On November 30, NetSolutions incurred On November 30, NetSolutions incurred the following expenses: wages, $2,125; the following expenses: wages, $2,125; rent, $800; utilities, $450; and rent, $800; utilities, $450; and miscellaneous, $275. miscellaneous, $275.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
decrease
All four expense accounts increase
TRANSACTION TRANSACTION EE
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Transaction FTransaction F
o On November 30, NetSolutions paid On November 30, NetSolutions paid creditors on account, $950. creditors on account, $950.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
decreasedecrease
TRANSACTION TRANSACTION FF
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Transaction GTransaction G
o NetSolutions purchased $1,350 of supplies NetSolutions purchased $1,350 of supplies on November 10. Chris Clark determined on November 10. Chris Clark determined that the cost of supplies on hand on that the cost of supplies on hand on November 30 was $550 or, stated another November 30 was $550 or, stated another way, $800 in supplies had been used. way, $800 in supplies had been used.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
decrease increase
TRANSACTION TRANSACTION GG
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Transaction HTransaction H
o On November 30, NetSolutions paid On November 30, NetSolutions paid $2,000 to stockholders (Chris Clark) as $2,000 to stockholders (Chris Clark) as dividends. dividends.
decrease increase
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Dividends)Assets = Liabilities + Stockholders’ Equity (Dividends)
TRANSACTION TRANSACTION HH
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Learning Learning Objective
ObjectiveDescribe and illustrate
Describe and illustrate
journalizing and posting of
journalizing and posting of
transactions to accounts.
transactions to accounts.
33
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Posting Journal Entries to AccountsPosting Journal Entries to Accounts
o The process of transferring the debits and The process of transferring the debits and credits from the journal entries to the credits from the journal entries to the accounts is called accounts is called postingposting..
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Posting Journal Entries to AccountsPosting Journal Entries to Accounts
o On December 1, NetSolutions paid a On December 1, NetSolutions paid a premium of $2,400 for an insurance policy premium of $2,400 for an insurance policy for liability, theft, and fire. The policy for liability, theft, and fire. The policy covers a one-year period.covers a one-year period.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase
decrease
POSTING POSTING JOURNAL JOURNAL
ENTRIES TO ENTRIES TO ACCOUNTSACCOUNTS
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Steps in PostingSteps in Posting
o Step 1.Step 1. The The date of the date of the transaction is transaction is entered in the entered in the Date column Date column of Prepaid of Prepaid Insurance.Insurance.
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Steps in PostingSteps in Posting
o Step 2.Step 2. The The amount amount ($2,400) is ($2,400) is entered in the entered in the Debit column Debit column of Prepaid of Prepaid Insurance.Insurance.
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Steps in PostingSteps in Posting
o Step 3.Step 3. The The journal page journal page number (2) is number (2) is entered in the entered in the account’s account’s Post. Ref. Post. Ref. column.column.
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Steps in PostingSteps in Posting
o Step 4.Step 4. The The ledger ledger account account number (15) is number (15) is entered in the entered in the journal’s Post. journal’s Post. Ref. column.Ref. column.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 1, NetSolutions paid rent for On December 1, NetSolutions paid rent for December, $800. The company from December, $800. The company from which NetSolutions is renting its store which NetSolutions is renting its store space now requires the payment of rent space now requires the payment of rent on the first of each month, rather than at on the first of each month, rather than at the end of the month. the end of the month.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
decrease increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
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December TransactionsDecember Transactions
o On December 1, NetSolutions received an On December 1, NetSolutions received an offer from a local retailer to rent the land offer from a local retailer to rent the land purchased on November 5. purchased on November 5.
o The retailer plans to use the land as a The retailer plans to use the land as a parking lot for its employees and parking lot for its employees and customers. NetSolutions agreed to rent customers. NetSolutions agreed to rent the land to the retailer for three months, the land to the retailer for three months, with the rent payable in advance. with the rent payable in advance.
o NetSolutions received $360 for three NetSolutions received $360 for three months’ rent beginning December 1. months’ rent beginning December 1.
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December TransactionsDecember Transactions
o The liability created by receiving the cash The liability created by receiving the cash in advance of providing the service is in advance of providing the service is called called unearned revenueunearned revenue. .
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increaseincrease
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
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December TransactionsDecember Transactions
o On December 4, NetSolutions purchased On December 4, NetSolutions purchased office equipment on account from office equipment on account from Executive Supply Co. for $1,800.Executive Supply Co. for $1,800.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
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December TransactionsDecember Transactions
o On December 6, NetSolutions paid $180 On December 6, NetSolutions paid $180 for a newspaper advertisement.for a newspaper advertisement.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
decrease increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 11, NetSolutions paid On December 11, NetSolutions paid creditors $400.creditors $400.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
decrease decrease
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 13, NetSolutions paid a On December 13, NetSolutions paid a receptionist and a part-time assistant receptionist and a part-time assistant $950 for two weeks’ wages.$950 for two weeks’ wages.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
decrease increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 16, NetSolutions received On December 16, NetSolutions received $3,100 from fees earned for the first half $3,100 from fees earned for the first half of December.of December.
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Revenue)Assets = Liabilities + Stockholders’ Equity (Revenue)
increase increase
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o Fees earned on account totaled $1,750 for Fees earned on account totaled $1,750 for the first half of December.the first half of December.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Revenue)Assets = Liabilities + Stockholders’ Equity (Revenue)
increase increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 20, NetSolutions paid $900 On December 20, NetSolutions paid $900 to Executive Supply Co. on the $1,800 to Executive Supply Co. on the $1,800 debt owed from the December 4 debt owed from the December 4 transaction.transaction.
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
decreasedecrease
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December TransactionsDecember Transactions
o On December 21, NetSolutions received On December 21, NetSolutions received $650 from customers in payment of their $650 from customers in payment of their accounts.accounts.
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
LO 3LO 3
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase
decrease
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 23, NetSolutions paid On December 23, NetSolutions paid $1,450 for supplies.$1,450 for supplies.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ EquityAssets = Liabilities + Stockholders’ Equity
increase
decrease
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 27, NetSolutions paid the On December 27, NetSolutions paid the receptionist and the part-time assistant receptionist and the part-time assistant $1,200 for two weeks’ wages.$1,200 for two weeks’ wages.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
increasedecrease
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
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December TransactionsDecember Transactions
o On December 31, NetSolutions paid its On December 31, NetSolutions paid its $310 telephone bill for the month.$310 telephone bill for the month.
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
increasedecrease
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 31, NetSolutions paid its On December 31, NetSolutions paid its $225 electric bill for the month.$225 electric bill for the month.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Expense)Assets = Liabilities + Stockholders’ Equity (Expense)
increasedecrease
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
December TransactionsDecember Transactions
o On December 31, NetSolutions received On December 31, NetSolutions received $2,870 from fees earned for the second $2,870 from fees earned for the second half of December.half of December.
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Revenue)Assets = Liabilities + Stockholders’ Equity (Revenue)
increase increase
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
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December TransactionsDecember Transactions
o On December 31, fees earned on account On December 31, fees earned on account totaled $1,120 for the second half of totaled $1,120 for the second half of December.December.
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Revenue)Assets = Liabilities + Stockholders’ Equity (Revenue)
increase increase
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December TransactionsDecember Transactions
o On December 31, paid dividends of On December 31, paid dividends of $2,000.$2,000.
increasedecrease
ACCOUNTING EQUATION IMPACTACCOUNTING EQUATION IMPACT
Assets = Liabilities + Stockholders’ Equity (Dividends)Assets = Liabilities + Stockholders’ Equity (Dividends)
DECEMBER DECEMBER TRANSACTIONSTRANSACTIONS
LEDGER LEDGER NETSOLUTIONSNETSOLUTIONS
LEDGER LEDGER NETSOLUTIONSNETSOLUTIONS
LEDGER LEDGER NETSOLUTIONSNETSOLUTIONS
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Learning Learning Objective
ObjectivePrepare an unadjusted trial
Prepare an unadjusted trial
balance and explain how it can
balance and explain how it can
be used to discover errors.
be used to discover errors.
44
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Trial BalanceTrial Balance
o The equality of debits and credits in the The equality of debits and credits in the ledger should be proved at the end of ledger should be proved at the end of each accounting period by preparing a each accounting period by preparing a trial balancetrial balance..
UNADJUSTED UNADJUSTED TRIAL BALANCETRIAL BALANCE
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Trial Balance Errors - TranspositionTrial Balance Errors - Transposition
o A A transpositiontransposition occurs when the order of occurs when the order of the digits is changed by mistake, such as the digits is changed by mistake, such as writing $542 as $452 or $524.writing $542 as $452 or $524.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Trial Balance Errors - SlideTrial Balance Errors - Slide
o In a In a slideslide, the entire number is moved one , the entire number is moved one or more spaces to the right or the left by or more spaces to the right or the left by mistake, such as writing $542.00 as mistake, such as writing $542.00 as $54.20 or $97.50 as $975.00.$54.20 or $97.50 as $975.00.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Errors Not Affecting the Trial BalanceErrors Not Affecting the Trial Balance
o If an error has already been journalized If an error has already been journalized and posted to the ledger, a and posted to the ledger, a correcting correcting journaljournal entryentry is normally prepared. is normally prepared.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Errors Not Affecting the Trial BalanceErrors Not Affecting the Trial Balance
o Another type of error is a posting error.Another type of error is a posting error.
o Assume that on May 5 a $12,500 purchase Assume that on May 5 a $12,500 purchase of office equipment on account was of office equipment on account was incorrectly journalized and posted as a incorrectly journalized and posted as a debit to supplies and a credit to accounts debit to supplies and a credit to accounts payable for $12,500.payable for $12,500.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Errors Not Affecting the Trial BalanceErrors Not Affecting the Trial Balance
o The entry to correct the error is:The entry to correct the error is:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Learning Objective
ObjectiveDescribe and illustrate the use of
Describe and illustrate the use of
horizontal analysis in evaluating
horizontal analysis in evaluating
a company’s performance and
a company’s performance and financial condition.
financial condition.
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c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Horizontal AnalysisHorizontal Analysis
o In horizontal analysis, the amount of each In horizontal analysis, the amount of each item on a current financial statement is item on a current financial statement is compared with the same item on an compared with the same item on an earlier statement.earlier statement.
o When two statements are being When two statements are being compared, the earlier statement is used as compared, the earlier statement is used as the base for computing the amount and the base for computing the amount and the percent of change.the percent of change.
$3,000
$12,000= 25.0%
HORIZONTAL HORIZONTAL ANALYSISANALYSIS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Analyzing Analyzing
TransactionsTransactions
The EndThe EndThe EndThe End
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