Chapter Two

Transaction Analysis
Transactions
• Business Transactions are events that
have a financial impact on the business
(assign a $$ amount) and can be
measured reliably.
• Transactions will impact the Assets,
Liabilities, and Owners’ Equity of a firm.
• To analyze, determine how this impacts
the accounting equation (Assets =
Liabilities + Owners’ Equity) of a firm.
Accounts
• Accounts are a summary device that
record the changes that have occurred
during a period.
• Organizational system for businesses that
allow them to analyze the cumulative
effects of transactions.
• Each account shows the effect of all of the
increases and decreases during a period.
• Accounts are organized via the basic
accounting equation (Assets =
Liabilities + Owners’ Equity.)
Accounts
• Use a separate account for each particular:
• Asset
• Liability
• Stockholders’ Equity (Owners’ Equity)
that is involved in a transaction.
• Each transaction will affect at least two
accounts. This is reflective of the double-entry
system used in accounting, which keeps the
accounting equation in balance.

**Know the different types of accounts on pages 50-52. You should

also review the lecture material for Chapter 1.
Transaction Analysis
• Remember, the accounting equation helps
to analyze the impact of transactions on
financial position:

Assets = Liabilities + Owners’ Equity

**There are many examples of the analysis

of business transactions on pages 54-60 in
the text. Make sure to study and
understand these examples.
Debits and Credits
• Recall that each transaction affects at
least two accounts.
• In accounting, accounts can be
represented by the letter “T” and
referred to as T-accounts.
• Accountants designate:
• Left side of account = Debits.
• Right side of account = Credits.

Total Debits always equal total credits.

Debits and Credits

Visualization of the T-Account

Adapted from Harrison (2006)

Debits and Credits
• Rules for Assets – on the left-hand
side of the accounting equation:
• Assets have a normal debit balance.*
• Increases in assets are recorded on the
left (debit) side.
• Decreases in assets are recorded on the
right (credit) side.

*The “balance” in the account is calculated as the beginning balance (what was
in the account at the beginning of the period) + increases - decreases
Debits and Credits
• Rules for Liabilities and Owners’ Equity – on
the right-hand side of the accounting
equation:
• Liabilities and Owners’ Equity (LOE) have a
normal credit balance.*
• Increases in LOE are recorded on the right
(credit) side.
• Decreases in LOE are recorded on the left (debit)
side.
*The “balance” in the account is calculated as the beginning balance (what was in the account
at the beginning of the period) + increases - decreases
 Debits and Credits

Accounting Stockholders’
Equation: Assets = Liabilities + Equity
Rules of
Debit and
Credit: Debit Credit Debit Credit Debit Credit
+ – – + – +

Adapted from Harrison (2006)

Debits and Credits

• Rules of debit and credit for

Stockholders’ Equity are slightly different,
since stockholders’ equity is affected by
different types of accounts.
Common Stock Retained Earnings Dividends
- + - +
+ -
Debit Credit Debit Credit Debit Credit

Expenses Revenues
+ - - +
Debit Credit Debit Credit
Debits and Credits
The following types of accounts: (1) have a normal
balance as a debit or credit and (2) increase with
a debit or credit.
Normal Balance
Assets Liabilities
Expenses Revenues
Dividends Retained Earnings
Common Stock
(DEBIT) (CREDIT)

Remember: Debit Expenses Assets Dividends (DEAD)

All other accounts = Credit

Refer to Exhibit 2-7 on page 65 and Exhibit 2-14 on page 73 for charts summarizing
these rules.
Journal Entries

• In addition to T-accounts, companies

record transactions in a journal.
• The journal gives a chronological record
of all of a company’s transactions.
Steps
1. Specify accounts involved in the transaction,
2. Determine whether each account increased or
decreased and apply the rules of debits and
credits, and
3. Enter the transaction into the journal.
 Journal Entries

The example below

demonstrates proper journal
entry form for the purchase of
$500 of supplies for cash.

General Journal
Date Accounts and Explanations Debit Credit
6/28 Supplies 500
Cash 500
Purchased supplies
Posting Journal Entries

• The General Ledger is a group of all T-

accounts, with their balances.

• The Posting process transfers

information from the journal to the
ledger.
• (1) Record items via the journal, via journal
entries.
• (2) Post items to the ledger, by recording
the journal entries in the T-accounts.
 Posting Journal Entries

General Journal
Date Accounts and Explanations PR Debit Credit
8/1 Cash 50,000
Common Stock 50,000
Issued common stock.

Cash Common Stock

50,000 50,000

Adapted from Harrison (2006)

Trial Balance
• A trial balance lists all accounts with their
balances in the following order:
• Assets
• Liabilities
• Stockholders’ Equity
• Goal: to ensure that total debits = total credits.
Examine for recording or posting errors.
• Provides that the ledger is in balance, but is
not one of the financial statements.
Trial Balance
• Common Errors in the Trial
Balance:
• Missing accounts
• Reversal of debits or credits
• Divide the account by 2 to detect
• Mathematical errors
• Divide the account by 9 to detect
• Slide
• Transposition
Chart of Accounts
• A chart of accounts is a listing of all of a
company’s accounts and their account
numbers.
• Referenced when posting journal
entries or deciding how to code
transactions.
• Additional accounts may be added as a
company participates in additional
transactions.
Questions?
• Any questions or concerns?