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Analyzing and Recording
Transactions
C H A P T E R 2
The Beginning
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Learning Objectives
1. Explain the accounting cycle. (LO1)
2. Describe an account, its use, and its relationship to the ledger. (LO2)
3. Define debits and credits and explain their role in double-entry accounting. (LO3)
4. Describe a chart of accounts and its relationship to the ledger. (LO4)
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5. Analyze the impact of transactions on accounts. (LO5)
6. Record transactions in a journal and post entries to a ledger. (LO6)
7. Prepare and explain the use of a trial balance. (LO7)
Learning Objectives
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A detailed record ofincreases and decreases in a specific
asset, liability, or equity item.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Examples:Cash Accounts Payable V.Climb, Capital
Accounts Receivable Notes Payable V.Climb, Withdrawals
Supplies Wages Owing Service Revenue
Furniture Salaries Expense
The Account
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• Transactions are recorded using debits and credits.
• Every transaction affects at least two accounts.
• Equal debits and credits will keep the accounting equation in balance.
Double-Entry Accounting
Debits = CreditsAlways !
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Debit balance Credit balance
Account Title(Left side)/Debit (Right side)/Credit
• Represents an account in the ledger.• Used as a learning tool.• The difference between the debit side
and credit side is the balance.
The T Account
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Cash sale 500 325 Paid salary
Ow ner's investment 1000 450 Paid rent
Total debits 1500 775 Total credits
Balance 725
Cash
Steps:
1. Add the amounts on the debit side.
2. Add the amounts on the credit side.
3. Calculate the difference between the debits and credits.
Steps:
1. Add the amounts on the debit side.
2. Add the amounts on the credit side.
3. Calculate the difference between the debits and credits.
Example:
1
Calculating the Account Balance
3 2
3-7LO 2
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3-8
Focussed Workout
QS 2-2
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Double-Entry Accounting
LiabilitiesLiabilitiesAssetsAssets EquityEquityLiabilitiesLiabilities
EquityAssets Liabilities
+ - - + - +
Debit for increases
Credit for decreases
Debit for decreases
Credit for increases
Debit for decreases
Credit for increases
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Capital
- +
Equity AccountsEquity Accounts
Withdrawals
+ -
Expenses
+ -
Revenues
- +
Double-Entry Accounting
Debit for decreases
Debit for decreases
Credit for increases
Credit for increases
Debit for increases
Debit for increases
Credit for decreases
Credit for decreases
3-10LO 3
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LiabilitiesLiabilities EquityEquityAssetsAssets == ++Assets
Debit for Credit forincrease decreaseNormal balance
Owner's CapitalDebit for Credit fordecrease increase
Normal Balance
LiabilitiesDebit for Credit fordecrease increase
Normal balance
An account’s normal balance is the side (debit or credit) where
increases are recorded.
Normal Balances
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Account Type
Assets
Liabilities
Capital
Revenue
Expenses
Withdrawals
Step 1
Write down the account types using ALCREW.
Remembering Debits and CreditsALCREW
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Account Type
Normal Balance
Assets
Liabilities
Capital
Revenue
Expenses
Withdrawals
Step 2
Write down the normal balance (debit) of A,E,W.
Remembering Debits and CreditsALCREW
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Account Type
Normal Balance
Assets Dr
Liabilities
Capital
Revenue
Expenses Dr
Withdrawals Dr
Step 2
Write down the normal balance (debit) of A,E,W.
Remembering Debits and CreditsALCREW
3-15LO 3
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Account Type
Normal Balance
Assets Dr
Liabilities Cr
Capital Cr
Revenue Cr
Expenses Dr
Withdrawals Dr
Step 2
Write down the normal balance (debit) of A,E,W.
The others are credits.
Remembering Debits and CreditsALCREW
3-16LO 3
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Account Type
Normal Balance
To ↑Balance
To ↓Balance
Assets Dr Dr
Liabilities Cr Cr
Capital Cr Cr
Revenue Cr Cr
Expenses Dr
Withdrawals Dr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
Remembering Debits and CreditsALCREW
3-17LO 3
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Account Type
Normal Balance
To ↑Balance
To ↓Balance
Assets Dr Dr Cr
Liabilities Cr Cr Dr
Capital Cr Cr Dr
Revenue Cr Cr Dr
Expenses Dr
Withdrawals Dr
Step 3
Remember, increases are the same as the normal balances, decreases are the opposite.
Remembering Debits and CreditsALCREW
3-18LO 3
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Account Type
Normal Balance
To ↑Balance
To ↓Balance
Assets Dr Dr Cr
Liabilities Cr Cr Dr
Capital Cr Cr Dr
Revenue Cr Cr Dr
Expenses Dr Dr Cr
Withdrawals Dr Dr Cr
Remembering Debits and CreditsALCREW
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Mini-QuizIndicate whether a debit or credit is needed to:
• Increase Rent Expense• Decrease Accounts Payable• Decrease Accounts Receivable• Decrease Cash• Increase Withdrawals
3-20
Debit
Debit
CreditCredit
Debit
LO 3
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3-21
Focussed Workout
QS 2-1, 2-3, and 2-4
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• A list of all accounts used in the ledger by a company.
• Unique for each company. • Accounts are usually numbered.
Chart of Accounts
3-22LO 4
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23
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Steps: Determine which accounts are
being affected. Determine if account balances
are increasing or decreasing. Apply rules of debits and
credits.
Analyzing Transactions
3-24LO 5
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Example #1:
The owner, V. Klimb, invests $10,000 in the business.
Accounts affected
Increase/ Decrease
Debit/Credit
1
Analyzing Transactions
2 3
3-25LO 5
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Example #1:
The owner, V. Klimb, invests $10,000 in the business.
Accounts affected
Increase/ Decrease
Debit/Credit
Cash
V.Klimb, capital
1 2 3
Analyzing Transactions
3-26LO 5
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Example #1:
The owner, V. Klimb, invests $10,000 in the business.
Accounts affected
Increase/ Decrease
Debit/Credit
Cash Increase
V.Klimb, capital
Increase
1 2 3
Analyzing Transactions
3-27LO 5
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Example #1:
The owner, V. Klimb, invests $10,000 in the business.
Accounts affected
Increase/ Decrease
Debit/Credit
Cash Increase Debit
V.Klimb, capital Increase Credit
Analyzing Transactions
1 2 3
3-28LO 5
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Example #1:
The owner invests $10,000 in the business. Debit Cash for $10,000 Credit V.Klimb, Capital for $10,000
Cash10,000
V.Klimb, Capital10,000
Analyzing Transactions
3-29LO 5
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A credit entry:A) Increases asset and expense accounts, or
decreases liability, equity, and revenue accounts.
B) Is recorded on the left side of a T-account.C) Decreases asset and expense accounts, or
increases liability, equity, and revenue accounts.
D) Decreases asset, expense and revenue accounts.
E) Increases the withdrawals account.30
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Example #2:
The company purchases supplies by paying $2,500 cash.
Accounts affected
Increase/ Decrease
Debit/Credit
Analyzing Transactions
1 2 3
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Example #2:
The company purchases supplies by paying $2,500 cash.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies
Cash
Analyzing Transactions
1 2 3
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Example #2:
The company purchases supplies by paying $2,500 cash.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies Increase
Cash Decrease
Analyzing Transactions
1 2 3
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Example #2:
The company purchases supplies by paying $2,500 cash.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies Increase Debit
Cash Decrease Credit
Analyzing Transactions
1 2 3
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Analyzing Transactions
Example #2:
The company purchases supplies by paying $2,500 cash.
Debit supplies for $2,500 Credit cash for $2,500
Supplies2,500
Cash2,500
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Example #3:
The company purchases supplies for $1,100 on credit.
Accounts affected
Increase/ Decrease
Debit/Credit
Analyzing Transactions
1 2 3
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Example #3:
The company purchases supplies for $1,100 on credit.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies
Accounts Payable
Analyzing Transactions
1 2 3
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Example #3:
The company purchases supplies for $1,100 on credit.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies Increase
Accounts Payable
Increase
Analyzing Transactions
1 2 3
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Example #3:
The company purchases supplies for $1,100 on credit.
Accounts affected
Increase/ Decrease
Debit/Credit
Supplies Increase Debit
Accounts Payable Increase Credit
Analyzing Transactions
1 2 3
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Analyzing Transactions
Example #3:
The company purchases supplies for $1,100 on credit.
Debit supplies for $1,100 Credit accounts payable for $1,100
Supplies
1,100
Accounts Payable1,100
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Focussed Workout
QS 2-7, 2-8
EX 2-1, 2-2
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Total Workout
PR 2-1A
42