PP For Chapter 2 - Analyzing Transactions - Final

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Accounting: A Malaysian Perspective, 4
th
ed
(Adapted from Accounting 22
nd
ed)
Warren, Reeve and Duchac
ANALYZING
TRANSACTIONS
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1. Describe the characteristics of an account and
record transactions using a chart of accounts
and journal.
2. Describe and illustrate the posting of journal
entries to accounts.
3. Prepare an unadjusted trial balance and
explain how it can be used to discover errors.
4. Discover and correct errors in recording
transactions.

3
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Describe the characteristics of an account and
record transactions using a chart of accounts
and journal

Objective 1
2-1
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Definitions

Book of first entry
Journal
Separate record showing increases and
decreases for each FS item

Account
A group of accounts for a
business entity
Ledger
A list of the accounts in a
ledger
Chart of
accounts
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T Account
Title

Debit Credit
(left side) (right side)
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T Account - example
Cash

Date Capital 25,000 Date Equipment 20,000
Fees 5,000 Rent exp 800
Wages exp 150
. Bal c/d 9,050
30,000 30,000
Bal b/d 9,050

Balance of the
account
2-1
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Types of accounts
Accounts
Assets
Liabilities
Owners
equity
Drawing
Revenues
Expenses
2-1
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Balance Sheet Accounts
Assets
resources
owned by
the business
Examples:
cash,
supplies, AR,
office
equipment
Liabilities
debts owed
to outsiders
(creditors)
Examples:
AP, salaries
payable
Owners
Equity
owners right
to the assets of
the business

Drawing
withdrawals
by owner
2-1
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Income Statement Accounts
Revenues
increases in owners
equity as a result of
selling services or
products
Examples: fees earned,
commission revenue,
rent revenue
Expenses
cost of using up assets
or consuming services
in the process of
generating revenues
Examples: wages
expense, rent expense,
miscellaneous expense
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Every transaction would
affect at least
2 accounts
IMPORTANT NOTE

2-1
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Journal entries
Every transaction would first be recorded
in a journal
The process of recording a transaction in
the journal is called journalizing

J ournal Pg

Date Description PR Debit Credit
1
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3
2-1
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Journalizing steps
1. Record the date.
2. Record the title of the account debited in the
Description column.
3. Enter the amount in the Debit column.
4. Record the title of the account credited in the
Description column.
5. Enter the amount in the Credit column.
2-1
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Journal entries Balance Sheet
Accounts
(a) On November 1, Idris Ismail opens a new
business and deposits RM25,000 in a bank
account in the name of NetSolutions.

Journal Pg

Nov 1 Cash 25,000
Idris Ismail, Capital 25,000
Invested cash in NetSolutions.
2-1
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Effect of the entry on the accounts
Cash

Nov 1 25000

Idris Ismail, Capital

Nov 1 25000

2-1
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Accounts
(b) On November 5, NetSolutions bought land for
RM20,000, paying cash.

Journal Pg

Nov 5 Land 20,000
Cash 20,000
Purchased land for cash.
2-1
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Accounts
(c) On November 10, NetSolutions purchased
supplies on account for RM1,350.

Journal Pg

Nov 10 Supplies 1,350
Accounts Payable 1,350
Purchased supplies on
account.
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Accounts
(f) On November 30, NetSolutions paid creditors
on account , RM950.

Journal Pg

Nov 30 Accounts Payable 950
Cash 950
Paid creditors on account.
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BS accounts debit & credit rule
Debit Credit
Asset accounts Increase (+) Decrease (-)
Liability accounts Decrease (-) Increase (+)
Owners equity (capital)
accounts
Decrease (-)

Increase (+)

Owners equity (drawing)
accounts
Increase (+) Decrease (-)
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BS accounts debit & credit rule
Assets

Debit for Credit for
increases (+) decreases (-)

Liabilities & OE (Capital)

decreases (+) increases (-)

2-1
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Example exercise 2-1
Prepare a journal entry for the purchase of a
truck on June 3 for RM42,500, paying RM8,500
cash and the remainder on account.

Journal PG
June 3 Truck 42,500
Cash 8,500
2-1
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Journal entries income statement
accounts
(d) On November 18, NetSolutions received fees
of RM7,500 from customers for services
provided during the month.

Journal Pg

Nov 18 Cash 7,500
Fees Earned 7,500
Received fees from
customers.
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accounts
(e) Throughout the month, NetSolutions incurred the
following expenses: wages RM2,125; rent RM800;
utilities RM450; and miscellaneous RM275.
Journal Pg

Nov 30 Wages expense 2,125
Rent expense 800
Utilities expense 450
Miscellaneous expense 275
Cash 3,650
Paid expenses for the month.
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accounts
(g) On November 30, a count revealed
that RM800 of the supplies inventory had
been used during the month.
Journal Pg

Nov 30 Supplies expense 800
Supplies 800
Supplies used during the
month.
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IS accounts debit & credit rule
Debit Credit
Revenue accounts Decrease (-) Increase (+)
Expenses accounts Increase (+) Decrease (-)
Revenues

decreases (+) increases (-)
Expenses

increases (+) decreases (-)
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Net income / net loss

Revenues > Expenses = Net income
increases Owners equity (capital)

Revenues < Expenses = Net loss
decreases Owners equity (capital)
Revenues Expenses = Net income or Net loss
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Prepare a journal entry on August 7 for
the fees earned on account, RM115,000.

Journal Pg

Aug 7 Accounts Receivable 115,000
Fees earned 115,000
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Drawing account
When owner of a proprietorship withdraws cash
from the business for personal use

Decreases owners equity (capital)

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Drawing account - example
On November 30, Idris Ismail withdrew
RM2,000 in cash from NetSolutions for
personal use.

Journal
Nov 30 Idris Ismail, Drawing 2,000
Cash 2,000
Owner withdrew cash for
personal use.
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Prepare a journal entry on December 29
for the payment of RM12,000 to the
owner of Smart Consulting Services,
Danny Wong, for personal use.

Dec 29 Danny Wong, Drawing 12,000
Cash 12,000
Owner withdrew cash for
personal use.
2-1
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Debit & credit rule and normal
balance

Increase

Decrease
Normal
balance
BS accounts:
Asset Debit Credit Debit
Liability Credit Debit Credit
Owners equity
Capital Credit Debit Credit
Drawing Debit Credit Debit
IS accounts:
Revenue Credit Debit Credit
Expense Debit Credit Debit
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State for each account whether it is likely to have (a) debit
entries only, (b) credit entries only, or (c) both debit and
credit entries. Also, indicate its normal balance.
1. Amber, Drawing
2. Accounts Payable
3. Cash
4. Fees Earned
5. Supplies
6. Utilities Expense

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Dr entries only
Normal Dr balance
Amber, Drawing
Dr and Cr balances
Normal Cr balance
Accounts payable
Dr and Cr balances
Normal Dr balance
Cash
Cr entries only
Normal Cr balance
Fees Earned
Dr and Cr entries
Normal Dr balance
Supplies
Dr entries only
Normal Dr balance
Utilities Expense
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Accounting equation

The accounting system is known as the double entry
accounting system

Each transaction would affect at least 2 accounts

Total debits would always equal total credits
ASSETS = LIABILITIES + OWNERS EQUITY
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Transaction analysis
Determine which account is affected by the transaction.
Determine whether the account increases or decreases.

Determine whether the account should be debited or credited.

Record the transaction using journal entry.
Post the journal entries to the accounts in the ledger.
Prepare an unadjusted trial balance at the end of the period.
2-1
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Describe and illustrate the posting of journal
entries to the accounts

Objective 2
2-2
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Posting
The process of transferring the debits and credits
from the journal entries to the accounts
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example
Dec.1 NetSolutions paid a premium of RM2,400 for a
comprehensive insurance policy covering a one-year
period.

The entry would then be posted to the accounts (using
the 3-column account) refer Exhibit 5
Refer to the text book for the full example

Dec 1 Prepaid Insurance 2,400
Cash 2,400
2-2
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On March 1, the cash account balance was RM22,350.
During March, cash receipts totaled RM241,880 and the
March 31 balance was RM19,125. Determine the cash
payments made during March.
Refer to the text book to solve using T-account
Alternatively:

Opening balance + Cash receipts Cash payments
= Closing balance
2-2
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Prepare an unadjusted trial balance and explain
how it can be used to discover errors

Objective 3
2-3
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Trial balance
A list of all the accounts maintained by
the business entity, along with their
respective balances
Refer Exhibit 7 for an example of a Trial
Balance
2-3
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Indicate whether the errors would cause the TB totals to be
unequal. If so, indicate whether the Dr or Cr total is
higher and by how much.
a. Cash withdrawal of RM5,600 was journalized and
posted as a debit of RM6,500 to Salary Expense and a
credit of RM6,500 to Cash.

The totals are equal since both the debit and credit
entries were journalized and posted for RM6,500.
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b. A fee of RM2,850 earned from a client
was debited to Accounts Receivable for
RM2,580 and credited to Fees Earned for
RM2,850.

The totals are unequal. The credit total is higher by RM270
(RM2,850 RM2,580).

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c. A payment of RM3,500 to a creditor was
posted as a debit of RM3,500 to Accounts
Payable and a debit of RM3,500 to Cash.

The totals are unequal. The debit total is higher by
RM7,000 (RM3,500 + RM3,500).

2-3
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Discover and correct errors in recording
transactions

Objective 4
2-4
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Types of errors
Refer Exhibit 8
Transposition - occurs when the order of
the digits is changed mistakenly, such as
writing RM542 as RM452 or RM524.
Slide - the entire number is mistakenly
moved one or more spaces to the right or
the left, such as writing RM542.00 as
RM54.20.
2-4
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Prepare correcting entries for the following errors:
a. A withdrawal of RM6,000 by Cheri Ramey,
owner of the business, was recorded as a debit
to Office Salaries Expense and a credit to Cash.
b. Utilities Expense of RM4,500 paid for the
current month was recorded as a debit to
Miscellaneous Expense and a credit to Accounts
Payable.

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(a) A withdrawal was debited to Office Salaries
Expense and credited to Cash.
The wrong entry:

The correct entry:

The correcting entry:

Office Salaries Expense 6,000
Cash 6,000
Cherie Ramey, Drawing 6,000
Cash 6,000
Cheri Ramey, Drawing 6,000
Office Salaries Expense 6,000
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(b) Utilities Expense for the current month was debited to Miscellaneous
Expense and credited to Accounts payable.

The wrong entry:

The correct entry:

Miscellaneous Expense 4,500
Utilities Expense 4,500
Cash 4,500
2-4
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The correcting entry:

The first entry reverses the incorrect entry, and the
second entry records the correct entry

Miscellaneous Expense 4,500
Utilities Expense 4,500
Cash 4,500
2-4

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