Accounting 1 MGT 130 Lecture 04 Chapter 02

Accounting 1 MGT 130

Lecture 04 Chapter 02 Analyzing Transactions

Lecture 03 overview

Lecture 03 overview • Each financial statement item, called an account, is included in the ledger. • A group of accounts for a business entity is called a ledger. • A list of the accounts in a ledger is called a chart of accounts.

The T-Account Cash Left side debit Right side credit The right side of the account is the credit side.

Subtract total Cash credits from total debits to obtain the 3, 750 850 account balance. 5, 100 4, 300 2, 900 10, 950 1, 400 700 2, 900 5, 850

Transactions and Balance Sheet Accounts

Rules of Debit / Credit Balance Sheet Accounts Debits Asset accounts………. Increase (+) Liability accounts…… Decrease (-) Owner’s equity accounts…. Decrease (-) Credits Decrease (-) Increase (+) (capital) Increase (+)

Income Statement Accounts Debits Revenue accounts…… Decrease (-) Expense accounts…… Increase (+) Credits Increase (+) Decrease (-)

Double-Entry Accounting “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance. ” Scale or Balance T account Left Side Receive DEBIT Right Side Give CREDIT

Normal Balances of Accounts Increase (Normal Balances) Balance sheet accounts: Asset Liability Owner’s Equity: Capital Drawing Income statement accounts: Revenue Expense Decreases Debit Credit Debit Credit

System to Analyze Transactions 1. Determine whether an asset, a liability, owner’s equity, revenue, or expense account is affected by the transaction. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit.

Journalizing and Posting

Dec. 1 Opportunities Inc. paid a premium of Rs. 2, 400 for a comprehensive insurance policy covering two years. JOURNAL Date Description 2010 Dec. 31 Prepaid Insurance Cash Paid premium on two-year policy. Post. Ref. Debit Credit 2 400

Dec. 1 Opportunities Inc. paid a premium of Rs. 2, 400 for a comprehensive insurance policy covering two years. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Prepaid Insurance Dec 1. Cash 2400

Dec. 1 Opportunities Inc. paid rent for December, Rs. 800. 1 Rent Expense Cash Paid rent for December. 800

Dec. 1 Opportunities Inc. paid rent for December, Rs. 800. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Rent Expense Dec 1. Cash 800

Dec. 1 Opportunities Inc. receives Rs. 360 for three month’s rent beginning December 1. 1 Cash 360 Unearned Rent Received advanced payment For three months’ rent of land. 360

Dec. 1 Opportunities Inc. receives Rs. 360 for three month’s rent beginning December 1. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 360 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Rent Dec 1. Cash 800

Dec. 4 Opportunities Inc. purchased office equipment on account from Executive Supply Co. for Rs. 1, 800. 4 Office Equipment Accounts Payable Purchased office equipment on account. 1 800

Dec. 4 Opportunities Inc. purchased office equipment on account from Executive Supply Co. for Rs. 1, 800. Effects of this entry in the Ledger Furniture Dec 4. A/P 1800 Accounts Payable Nov. Cash 950 Nov 10. Supplies Dec 4. Furniture 1350 1800

Dec. 6 Opportunities Inc. paid Rs. 180 for a newspaper advertisement. 6 Miscellaneous Expense Cash Paid for newspaper ad. 180

Dec. 6 Opportunities Inc. paid Rs. 180 for a newspaper advertisement. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 360 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Misc Nov. Cash Dec 6. Cash 275 180

Dec. 11 Opportunities Inc. paid creditors Rs. 400. 11 Accounts Payable Cash Paid creditors on account. 21 11 400

Dec. 11 Opportunities Inc. paid creditors Rs. 400. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 360 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Accounts Payable Nov. 30 Cash Dec. 11 Cash 950 Nov 10. Supplies 1350 400 Dec 4. Furniture 1800

Dec. 13 Opportunities Inc. paid a receptionist and part-time assistant Rs. 950 for two weeks’ wages. JOURNAL Date Description 2010 Dec. 13 Wages Expense Cash Paid two week’s wages. Post. Ref. Debit Credit 950

Dec. 13 Opportunities Inc. paid a receptionist and part-time assistant Rs. 950 for two weeks’ wages. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent 25000 Nov 5 Land 20000 7500 Nov. Exp 3650 360 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Wages Expense Nov. 30 Cash Dec. 13 Cash 2125 950

Dec. 16 Opportunities Inc. received Rs. 3, 100 from fees earned for the first half of December. 16 Cash 3 100 Fees Earned Received fees from customers. 3 100

Dec. 16 Opportunities Inc. received Rs. 3, 100 from fees earned for the first half of December. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees 25000 7500 360 3100 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Fees Earned Nov 18. Cash Dec 16. Cash 7500 3100

Dec. 16 Fees earned on account totaled Rs. 1, 750 for the first half of December. 16 Accounts Receivable Fees Earned Received fees from customers. 1 750

Dec. 16 Fees earned on account totaled Rs. 1, 750 for the first half of December. Effects of this entry in the Ledger Account Receivable Dec 16. Fees 1750 Fees Earned Nov 18. Cash Dec 16. A/R 7500 1750

Dec. 20 Opportunities Inc. paid Rs. 900 to Executive Supply Co. on the Rs. 1, 800 debt owed from the December 4 transaction. 20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 900

Dec. 20 Opportunities Inc. paid Rs. 900 to Executive Supply Co. on the Rs. 1, 800 debt owed from the December 4 transaction. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees 25000 7500 360 3100 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Accounts Payable Nov. 30 Cash 950 Nov 10. Supplies 1350 Dec. 11 Cash 400 Dec 4. Furniture 1800 Dec. 20. Cash 900

Dec. 21 Opportunities Inc. received Rs. 650 from customers in payment of their accounts. 21 Cash 650 Accounts Receivable Received cash from customer on account. 650

Dec. 21 Opportunities Inc. received Rs. 650 from customers in payment of their accounts. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees Dec 21. A/R 25000 7500 360 3100 650 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Account Receivable Dec 16. Fees 1750 Dec 21. Cash 650

Dec. 23 Opportunities Inc. paid Rs. 1, 450 for supplies. 23 Supplies Cash Purchased supplies. 1 450

Dec. 23 Opportunities Inc. paid Rs. 1, 450 for supplies. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees Dec 21. A/R 25000 7500 360 3100 650 Nov 5 Land Nov. Exp Nov. 30 A/P Dec. 1 Pre Ins Dec. 1 Rent Dec. 6 Misc Dec. 11 A/P Dec. 13 wages Dec 20. A/P Dec 23. A/P 20000 3650 950 2400 800 180 400 950 900 1450 Supplies Nov 10. A/P Dec 23. Cash 1350 1450 Nov 30. S. EXP 800

Dec. 27 Opportunities Inc. paid the receptionist and part-time assistant Rs. 1, 200 for two weeks’ wages. 27 Wages Expense Cash Paid two weeks’ wages. 1 200

Dec. 27 Opportunities Inc. paid the receptionist and part -time assistant Rs. 1, 200 for two weeks’ wages. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees Dec 21. A/R 25000 7500 360 3100 650 Nov 5 Land Nov. Exp Nov. 30 A/P Dec. 1 Pre Ins Dec. 1 Rent Dec. 6 Misc Dec. 11 A/P Dec. 13 wages Dec 20. A/P Dec 23. A/P Dec 27. wages 20000 3650 950 2400 800 180 400 950 900 1450 1200 Wages Expense Nov. 30 Cash Dec. 13 Cash Dec 27. wages 2125 950 1200

Dec. 31 Opportunities Inc. paid its Rs. 310 telephone bill for the month. 31 Utilities Expense Cash Paid telephone bill. 310

Dec. 31 Opportunities Inc. paid its Rs. 310 telephone bill for the month. Effects of this entry in the Ledger Cash Nov. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees Dec 21. A/R 25000 7500 360 3100 650 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Dec 23. A/P 1450 Dec 27. wages 1200 Dec 31. utilities 310 Utilities Nov 30. Cash Dec 31. Cash 450 310

Dec. 31 Opportunities Inc. paid its Rs. 225 electric bill for the month. JOURNAL Date Description 2005 Dec. 31 Utilities Expense Cash Paid utility bill. Post. Ref. Debit Credit 225

Dec. 31 Opportunities Inc. paid its Rs. 225 electric bill for the month. Effects of this entry in the Ledger Cash Nov 01. Capital 25000 Nov 18 Fees 7500 Dec 1. Rent 360 Dec 16. Fees 3100 Dec 21. A/R 650 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Dec 23. A/P 1450 Dec 27. wages 1200 Dec 31. utilities 310 Dec 31. utilities 225 Utilities Nov 30. Cash Dec 31. Cash 450 310 225

Dec. 31 Opportunities Inc. received Rs. 2, 870 from fees earned for the second half of December. 31 Cash 2 870 Fees Earned Received fees from customers. 2 870

Dec. 31 Opportunities Inc. received Rs. 2, 870 from fees earned for the second half of December. Effects of this entry in the Ledger Cash Nov 01. Capital 25000 Nov 18 Fees 7500 Dec 1. Rent 360 Dec 16. Fees 3100 Dec 21. A/R 650 Dec 31. Fees 2870 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Dec 23. A/P 1450 Dec 27. wages 1200 Dec 31. utilities 310 Dec 31. utilities 225 Fees Earned Nov 18. Cash Dec 16. A/R Dec 31. Cash 7500 1750 2870

Dec. 31 Opportunities Inc. earned Rs. 1, 120 on account for the second half of December. 31 Accounts Receivable Fees Earned Recorded fees earned on account. 1 120

Dec. 31 Opportunities Inc. earned Rs. 1, 120 on account for the second half of December Effects of this entry in the Ledger Account Receivable Dec 16. Fees Dec 31. Fees 1750 Dec 21. Cash 1120 Fees Earned 650 Nov 18. Cash Dec 16. A/R Dec 31. Cash Dec 31. A/R 7500 1750 2870 1120

Dec. 31 Javid Iqbal withdrew Rs. 2, 000 for personal use. 31 Javid Iqbal, Drawing Cash Javid Iqbal withdrew cash for personal use. 2 000

Dec. 31 Javid Iqbal withdrew Rs. 2, 000 for personal use. Effects of this entry in the Ledger Cash Nov 01. Capital 25000 Nov 18 Fees 7500 Dec 1. Rent 360 Dec 16. Fees 3100 Dec 21. A/R 650 Dec 31. Fees 2870 Nov 5 Land 20000 Nov. Exp 3650 Nov. 30 A/P 950 Dec. 1 Pre Ins 2400 Dec. 1 Rent 800 Dec. 6 Misc 180 Dec. 11 A/P 400 Dec. 13 wages 950 Dec 20. A/P 900 Dec 23. A/P 1450 Dec 27. wages 1200 Dec 31. utilities 310 Dec 31. utilities 225 Dec 31. Drawings 2000 Javid Iqbal Drawings Nov 30. Cash 2000 Dec 31. Cash 2000

Balancing the Accounts Javid Iqbal Drawings Cash Nov 01. Capital Nov 18 Fees Dec 1. Rent Dec 16. Fees Dec 21. A/R Dec 31. Fees 25000 7500 360 3100 650 2870 Nov 5 Land Nov. Exp Nov. 30 A/P Dec. 1 Pre Ins Dec. 1 Rent Dec. 6 Misc Dec. 11 A/P Dec. 13 wages Dec 20. A/P Dec 23. A/P Dec 27. wages Dec 31. utilities Dec 31. Drawings Balance total 39480 Total 20000 3650 950 2400 800 180 400 950 900 1450 1200 310 225 2000 2065 39480 Nov 30. Cash 2000 Dec 31. Cash 2000 Total 4000 Balance 4000 Total 4000 Fees Earned Balance 16340 Total Nov 18. Cash Dec 16. A/R Dec 31. Cash Dec 31. A/R 16340 Total 7500 1750 2870 1120 16340 Account Receivable Dec 16. Fees Dec 31. Fees Total 1750 1120 Dec 21. Cash Balance 2870 total 650 2220 2870

Supplies Accounts Payable Nov. 30 Cash 950 Nov 10. Supplies 1350 Dec. 11 Cash 400 Dec 4. Furniture 1800 Dec. 20. Cash 900 Balance 900 Total 3150 Total Nov 10. A/P Dec 23. Cash 1350 1450 Nov 30. S. EXP 800 Balance 2000 Total 2800 3150 Utilities Wages Expense Nov. 30 Cash Dec. 13 Cash Dec 27. wages 2125 950 1200 Balance 4275 Total 4275 Nov 30. Cash Dec 31. Cash 450 310 225 Balance 985 Total 985 Furniture Misc Nov. Cash Dec 6. Cash Total 275 180 Dec 4. A/P 1800 Balance Total 1800

Rent Expense Unearned Rent Balance 800 Total 800 Dec 1. Cash 800 Total 2400 Balance 2400 Total 20000 Nov 5 Cash 20000 Total 800 Nov 30. Supplies 800 Balance 800 Total Capital Land Balance 800 Supplies Expenses Prepaid Insurance Dec 1. Cash Balance 20000 Balance 25000 20000 Total 25000 Total Nov 1 Cash 25000

Lecture Review Transactions Rules of Dr and Cr Journalizing Posting into Ledgers Balancing the Ledger Accounts

End of Lecture 04

Trial Balance

Opportunities Inc. Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Javid Iqbal, Capital Javid Iqbal, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 900 360 25 000 4 000 16 340 4 275 1 600 985 800 455 42 600

Opportunities Inc. Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Javid Iqbal, Capital Javid Iqbal, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Balance Sheet Items 2 2 20 1 065 220 000 400 000 800 900 360 25 000 4 000 16 340 4 275 1 600 985 800 455 42 600

Opportunities Inc. Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Javid Iqbal, Capital Javid Iqbal, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 900 360 25 000 Statement of Owner’s Equity Item 4 000 16 340 4 275 1 600 985 800 455 42 600

Opportunities Inc. Trial Balance December 31, 2010 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Javid Iqbal, Capital Javid Iqbal, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 1 065 220 000 400 000 800 900 360 25 000 4 000 Income Statement Items 16 340 4 275 1 600 985 800 455 42 600

Errors that will not cause the trial balance to be unequal: 1. Failure to record a transaction or to post a transaction. 2. Recording the same erroneous amount for both the debit and the credit parts of a transaction. 3. Recording the same transaction more than once. 4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.

Correction of Errors Error 1. Journal entry is incorrect but not posted. Correction Procedure Draw a line through the error and insert correct title or amount.

Correction of Errors Error 1. Journal entry is correct incorrect 2. not posted. but posted incorrectly. Correction Procedure Draw a line through the error and insert correct title or posted error and post amount. correctly.

Correction of Errors Error Correction Procedure 3. Journal entry is incorrect Journalize and post a and posted correcting entry.

Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. Journal – As recorded and posted Date Description May 5 Supplies Accounts Payable 12, 500 Debit Credit 12, 500 What would be the necessary correcting entry?

Correcting Errors – An Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown. Journal – As recorded and posted Date Description May 5 Supplies Accounts Payable 12, 500 Date Description May 5 Office Equipment Supplies 12, 500 Debit Credit 12, 500 Debit 12, 500 Credit

Financial Analysis and Interpretation Comparing an item in a current statement with the same item in prior statements is called horizontal analysis.

J Holmes, Attorney-at-Law Income Statement For the Year Ended December 31, 2010 and 2011 2010 Increase (Decrease) Amount Percent Fees earned Rs. 187, 500 Rs. 150, 000 Rs. 37, 500 25. 0% Operating expenses: Wages expense 60, 000 45, 000 15, 00033. 3% Rent expense 15, 000 12, 000 3, 00025. 0% Utilities expense 12, 500 9, 000 3, 50038. 9% Supplies expense 2, 700 3, 000 (300) (10. 0)% Misc. expense 2, 300 1, 800 500 27. 8% Total operating expenses 92, 500 70, 800 21, 70030. 6% Net income 95, 000 79, 200 15, 80019. 9%

Chapter 2 The End