LECTURE 2 :

ANALYZING TRANSACTION

Introduction to the accounting cycle

Debits and credits
General journal and general ledger
Illustration of transaction analysis
Trial balance

Introduction to the
accounting cycle
Accounting cycle
O Step and procedures accountants
follow when recording accounting
information

No Step in the accounting cycle

.

Documentatio
n

1.

Analyze transaction

Source
documents

2.

Journalize transaction

General journal

3.

Post transaction from the journal to the

ledger

General ledger

4.

Prepare a trial balance

Trial balance

5.

Prepare the financial statement

Financial
statement

Account
O A record that documents increase
and decrease in
O Asset
O Liabilities
O Equity
O Revenues
O Expenses

Prepaid Expenses:
O Cash payment made for expenses
that will be incurred in the future

Asset
(From asset to
cash)

Individual
(Using the money
)

Expense
(Paybills etc.)

Prepaid Expenses:
O Assest!
Unearned Revenue:
O Cash received from customers for goods or
services to be provided to them in the future.
O Liability!

DEBIT & CREDIT

O Debit = Left
O Credit = Right
O T-Account

Account Title
Debit

Credit

DR

CR

Left side

Right side

Account
Debit
100
Balance. 20
Debit Balance

Credit
80

Normal balance:
O Where an increase in the account in recorded
Debit :
O Assets, expenses, withdrawals
Credit :
O Liabilities, Equity, Revenues

General Journal and

General ledger
O Actually, general journal and general

ledger is same information but

different formats.
O General journal like a diary and

general ledger like a filing cabinet.

Asset
s
Liabilities

Revenues

Equity

Expenses

Cas
h

Resit,
invoice,
etc

Illustration of transaction
analysis
O Transaction 1: The owner deposits

$5000 in the checking account to

begin operations
O Assets = Liabilities + Owners Equity
O +$5000
$0
+ $5000
O The asset Cash is increased by
$5000 and the Owners Equity is
increased $5000. The business owes
the owner $5000.

O Transaction 2: The business purchases a

computer, on credit, for $2500.

O Assets = Liabilities + Owners Equity
O +$2500
+$2500
$
O The asset Computers is increased by $2500
and the liability is also increased $2500
because the business now owns the store
$2500.

O Transaction 3: The business purchases office

supplies using $550 cash.

O Assets = Liabilities + Owners Equity
O +$550
O -$550
O The asset Office Supplies is increased $550
and the asset Cash is decreased $550.

O Transaction 4: A business purchases a building

for $100,000 with a $25,000 cash down-payment

and a loan for the $75,000 outstanding.
O Assets = Liabilities + Owners Equity
O +$100,000 +75,000
O -$25,000
O More than two accounts are affected by this
transaction. The asset Building increases by
$100,000, the asset Cash decreases by
$25,000, and the liability Bank Loan increases
by $75,000. The net result is that both sides of
the equation increase by $75K.
O As you can see, regardless of the transaction, the
accounting equation must stay balanced.

O The Expanded Accounting Equation breaks out the

Owners Equity section into two components:

Revenues and Expenses.
O Revenues = what the business earns for providing
goods or services
O Expenses = the cost of assets the business uses to
generate revenues (payroll, depreciation, rent,
utilities, taxes)
O The business Profit or Loss equals the Revenues
Expenses. If Revenues are more than Expenses,
there is Profit. If Expenses are more than Revenues,
there is Loss. The owner of the company also has
the option to withdraw equity from the company in
the form of drawings (proprietorships and
partnerships) or dividends (corporations).

O When you look at these relationships to

Owners Equity in terms of the accounting

equation you see that
1. Revenues increase Owners Equity
2. Expenses decrease Owners Equity
3. Drawings or Dividends decrease Owners
Equity:
O.The expanded Accounting Equation looks like
this:
O.Assets = Liabilities + Owners Equity +
Revenues Expenses Drawing

O Lets analyze some transactions involving

these types of accounts:

O Transaction 5: The business sells goods for

$1,200 cash.
O Assets = Liabilities + Owners Equity
O +$1200
+$1200 (Revenue)
O The asset Cash is increased $1200 and the
revenue increases Owners Equity $1200.

O Transaction 6: The business pays its rent

monthly rent of $950 using a company

check.
O Assets = Liabilities + Owners Equity
O -$950
-$950
(Expense)
O The asset Cash is decreased $950 and
the expense decreases Owners Equity
$950.

O Transaction 7: The business owner

withdraws $2,000 for his personal use.

O Assets = Liabilities + Owners Equity
O -$1200
-$1200 (Revenue)
O The asset Cash is decreased $2000 and
the drawing decreases Owners Equity
$2000.

O The accounting cycle is the sequence of

procedures used to keep track of what has

happened in the business and to report the
financial effect of those things.
O The financial reports will only make sense if

the accounts have been analyzed correctly

and the accounting equation remains
balanced.
O This is the fundamental building block of

accounting and you must learn and apply

transaction analysis before continuing
further.

Trial Balance :
O List of all general ledger accounts

and their balances at a specific point

in time
O Purpose is to verify that total debits
equals total credits

Running latte
Trial Balance
December 31, 2014
No.

Account

Debit ($)

Credit ($)

100

Cash

9,890

110

Account Receivable

5,150

130

Supplies

700

142

Prepaid Insurance

360

160

Equipment

210

Accounts Payable

230

Unearned

250

Loan Payable

4,500

300

Capital

2,000

350

Withdrawals

400

revenues

541

Advertising Expense

2,400
1,800
900

250
9,700
150

Thank You For Your Corporation