Chapter Analyzing Transactions Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Explain why accounts are used to record After studying this After studying this and summarize the effects of transactions chapter, you should chapter, you should on financial statements be be able able to: to: Describe the characteristics of an account List the rules of debit and credit and the normal balances of accounts Analyze and summarize the financial statement effects of transactions Objectives Objectives Prepare a trial balance and explain how it can be used to discover errors Discover errors in recording transactions and correct them Use horizontal analysis to compare financial statements from different periods Each Each financial financial statement statement item, item, called called an an account, account, isis included included in in the the ledger ledger A A group group of of accounts accounts for for aa business business entity entity isis called called aa ledger ledger A A list list of of the the accounts accounts in in aa ledger ledger isis called called aa chart chart of of accounts accounts Major Account Classifications Assets Assets are are resources resources owned owned by by the the business business Liabilities Liabilities are are debts debts owed owed to to outsiders outsiders (creditors) (creditors) Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable Major Account Classifications Liabilities Liabilities are are often often identified identified on the balance sheet by titles on the balance sheet by titles Assets are Liabilities are debts Assets are Liabilities are debts that include payable that include payable resources owned owed to outsiders resources owned owed to outsiders by (creditors) by the the business business (creditors) Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable Major Account Classifications Owner’s Owner’s equity equity isisthe the owner’s owner’s right right to to the the assets assetsof of the the business business Chris Clark, Capital Chris Clark, Drawing Revenues Revenues are are increases increasesin in owner’s owner’s equity equity as as aa result result of of selling selling services servicesor or products products Fees Earned Fares Earned Commission Revenue Expenses Expenses are are the the using using up up of of assets assets or or consuming consuming of of services services to to generate generate revenue revenue Rent Expense Salary Expense Utilities Expense NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 000 00 16 340 00 275 00 600 00 985 00 800 00 455 00 42 600 00 42 600 00 NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Balance Sheet Items 2 2 20 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 000 00 16 340 00 275 00 600 00 985 00 800 00 455 00 42 600 00 42 600 00 NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 Statement of Owner’s Equity Item 000 00 16 340 00 275 00 600 00 985 00 800 00 455 00 42 600 00 42 600 00 NetSolutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 2 2 20 065 220 000 400 000 800 00 00 00 00 00 00 900 00 360 00 25 000 00 000 00 Income Statement Items 16 340 00 275 00 600 00 985 00 800 00 455 00 42 600 00 42 600 00 Errors that will not cause the trial balance to be unequal: Failure to record a transaction or to post a transaction Recording the same erroneous amount for both the debit and the credit parts of a transaction Recording the same transaction more than once Posting a part of a transaction correctly as a debit or credit but to the wrong account Correction of Errors Error 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 Journal entry is correct incorrect 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 Journal entry is incorrect Journalize and post a and posted correcting entry Correcting Correcting Errors Errors –– An An Example 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 Debit Credit May Supplies 12,500 Accounts Payable 12,500 What What would would be be the the necessary necessary correcting correcting entry? entry? Correcting Correcting Errors Errors –– An An Example Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown Journal – As recorded and posted Date Debit Credit May Supplies 12,500 Accounts Payable 12,500 Date Description Description May Office Equipment Debit 12,500 Credit Correcting Correcting Errors Errors –– An An Example Example On May 5, a purchase of office equipment on account was incorrectly journalized and posted as shown Journal – As recorded and posted Date Debit Credit May Supplies 12,500 Accounts Payable 12,500 Date Description Description May Office Equipment Supplies Debit Credit 12,500 12,500 Financial Financial Analysis Analysis and and Interpretation Interpretation Comparing Comparing an an item item in in aa current current statement statement with with the the same same item item in in prior prior statements statements isis called called horizontal horizontal analysis analysis J Holmes, Attorney-at-Law Income Statement For the Year Ended December 31, 2005 and 2006 2006 Fees earned Operating expenses: Wages expense Rent expense Utilities expense Supplies expense Misc expense Total operating expenses Net income 2005 Increase (Decrease) Amount Percent $187,500 $150,000 $37,500 25.0% $ 60,000 $ 45,000 $15,000 33.3% 15,000 12,000 3,000 25.0% 12,500 9,000 3,500 38.9% 2,700 3,000 (300) (10.0)% 2,300 1,800 500 27.8% $ 92,500 $ 70,800 $21,700 30.6% $ 95,000 $ 79,200 $15,800 19.9% Chapter The The End End ... record After studying this After studying this and summarize the effects of transactions chapter, you should chapter, you should on financial statements be be able able to: to: Describe the characteristics