Chapter 2

Analyzing Transactions
Some of the action has been automated,
so click the mouse when you see this
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 Objectives
ObObjejec
ctivtiveses
1. Explain whyAfter
accounts
studying
AAfterfter are used
this t o record and
e the
s tu effects
d yin
s tu d you
summariz chapter,
of
g h
ttransac
yin gshould s
i
ht si tions on
financial s atements.
be able to:
c hhapapteet rr,,yyooofuua n account.
t ccharacteristics
2. Describe the
3. List the rules of debit and credit and the
normal balances ssof
hhoaccounts.
oulddulbbee
4. Analyze and summarize
aabblleettthe oo::financial
statement effects of transactions.
 Objectives
ObObjejec
ctivtiveses
5. Prepare a trial balance and explain how
it can be used to discover errors.
6. Discover errors in recording
transactions and correct them.
7. Use horizontal analysis to compare
financial statements from different
periods.
 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.
 Major Account Classifications

AsAssets
Assseetsare
ts areare Liabilities
LiaLiabbiilities arelities
debts
areare
resources
reressoouuowned
rcercess oweddetodeoutsiders
bbtsts
byowthe
o nbusiness.
w nedde byby o(creditors).
owweedd toto
thethe ououtsst iddi eerrss
Cash Accounts
bbSupplies
uussinni esesss.. (c(crereditoditorsrs).).
Building payable
Accounts Notes payable
receiva Wages payable
ble
 Major Account Classifications
Liabilities are often identified
on the baLlaai nbbceilsthei esetabre
AsAssets
Assseetsarets areare yLia
dtietLia
blebtsbiilitieslities areare
resources rcercess that
reressoouuowned dedebbtsts
byowthe inc o l w
o ud e
wde eedd toto
o nnedde byby
w o w
business.the the p a ouyouta
sst ib
ddi leeerrs. s
Cash t toAccounts
o u t si d e rs
bbSupplies
uussinni esesss.. (c(crereditoditorsrs).).
(creditors).
Building payable
Accounts Notes payable
receivable Wages payable
 Major Account Classifications
Owner’s equity RRevenues
Revenueevenue aress Expenses
EExpenseare xpensethe
ss
is the owner’s increases
arraee in using aarup reeof assets
tthe he
right to the owner’s equity as or consuming of
iinncrcreaeasesses iinn ususiingng upup ofof
assets of the a result of services to
business. selling
owowner services
ner’’ss generateaseessattsrevenue.
s oorr
Chris Clark, or products. Rent Expense
eeqquiuittyyasas aa cons consum umiingng
Capital Fees Earned Salary Expense
Chris Clark, rresulesul
Fares tt ofof
Earned ofUtilities
of serservivicecess
Drawing selsellliingng Expense ttoo
Commission
seseRevenue
rrvivicesces oorr gengeneerraattee
To assist you in learning,
an account can be
drawn to resemble the
letter T.
The
TThhT-Account
eeT-AccT-
Ac ouountnt
Cash

The T-account
TheThe T-acaccouhas a title.
countnt hashas
aa
 The
TThhT-Account
eeT-AccT-
Ac ouountnt
Cash
L
e
f
t

The
s
TThleft
hee lside
lefeftof
t sisithe
dedeaccount
oofftthehise acc
theaccdebit
oountside.
unt iiss
tthehe deedbbiitt sisiide.de.
 The
TThhT-Account
eeT-AccT-
Ac ouountnt
Cash
Left side Right side
debit credit

The right
TheThe rriiside
ghghttof
sisithe
ddeeaccount
ofof tthheiseacthe credit
accoun counside.
tt iiss
tthehe ccrreeddiitt sisiddee..
The
TThhT-Account
eeT-AccT-
Ac ouountnt
Cash
3,750 850
4,300 1,400
2,900 700
2,900

Typical entries
Balaanncciinngga T-
Account
 Cash
First, foot
the debit 3,750 850
side. 4,300 1,400
2,900 700
10,950 2,900
 Cash
3,750 850
N4e3, xt0,0foot 1,400
the 700
2c,r9e0di0t 2,900
side. 5,850
10,950
 Subtract total credits
Cash from total
obtain thedebits to
3,750 balance.
4,300 ac c o unt1,400
8 5 0
2,900 700
5,100 10,950 2,900
5,850
Transactions and Balance
Sheet Accounts
 (A) OOn
(A) nOnNovember
NNoovemem1,bbChris
erer 1,1,Clark
CChrishris
Cdeposits
Callarrkk $25,000
dedeppoosin a tsbank
siits $ account
$2in25the
5,00,name
0000inof
in aNetSolutions.
abbaannkk
aaccccoouunntt
iinntthheennaammJOURNAL ee ofof
NNeettSSooluul ttiooi nnss..
Page 1
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 1 Cash 25 000 00
2 Chris Clark, Capital 25 000 00
3 Invested cash in NetSolutions.
4
 (A) OOn
(A) nOnNovember
NNoovemem1,bbChris
erer 1,1,Clark
CChrishris
Cdeposits
Callarrkk $25,000
dedeppoosin a tsbank
siits $ account
$2in25the
5,00,name
0000inof
in aNetSolutions.
abbaannkk
aaccccoouunntt
iiEffects
nntthheenof naathis
mmeentry
e ofof in the Ledger
NNeettSSooluul ttiooi nnss..
Cash Chris
Clark, Capital 25,000
Nov. 1 25,000 Nov. 1
 (B)
(B) (B)OnOnNovember
On NoNovemem 5, bberer
5,NetSolutions
5, NeNetStSoolbought
luutiontionland
ss
bofor
bouu$20,000,
gghhtt lanpaying
landd
ffororcash.
$$2200,00, 000,0,ppaayyinni gg
4 caacsshh..
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10
 (B)
(B) (B)On OnNovember
On NoNovemem 5, bberer
5,NetSolutions
5, NeNetStSoolbought
luutiontionland
ss
bofor
bouu$20,000,
gghhtt lanpaying
landd
ffororcash.
$$2200,00, 000,0,ppaayyinni gg
Effectscaof acssthis
hh.. entry in the Ledger

Cash

Land
Nov. 1 25,000 Nov. 5 20,000 Nov. 5 20,000
 (C) OOn
(C) nOnNovember
NoNovvemem 10,
bbNetSolutions
erer 10,,
Npurchased
NSteetSooiutlutionsnsupplies
s pupurcrchonhasaseedd
saccount
suupppliepfor liesso$1,350.
onn aaccccouounntt

10 ffoorr $$13, ,35500..

11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16
 (C) OOn
(C) nOnNovember
NoNovvemem 10,
bbNetSolutions
erer 10,,
Npurchased
NSteetSooiutlutionsnssupplies
pupurcrchonhasaaccount
seedd
ssfor
uup$1,350.
ppliepliessoonn aaccccouounntt

ffoorr $$13, ,35500..

Effects of this entry in the Ledger
Supplies
Accounts Payable 1,350
Nov. 10 1,350 Nov. 10
 (F(F)
(F))OnONovember
Onn NNoov30, ememNetSolutions
bbeerr 3300,,
Npaid
eNeStocreditors
tSoul luoint tionsson
ppaccount,
aaiddi $950.
ccrereditoditorrss oonn
aaccccoouunntt,, $$995050..
30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36
 (F(F)
(F))OnONovember
Onn NNoov30, ememNetSolutions
bbeerr 3300,,
Nepaid
NeStotScreditors
oul luoint tionsson
ppaaccount,
aiddi
c$950.
crereditoditorrss oonn
aaccccoouunntt,, $$995050..
Effects of this entry in the Ledger
Cash
Nov. 1 Accounts
25,000 Nov. 5 Payable
25,000 Nov. 30 950 Nov. 10 1,350
18 30 3,650
7,500 30 950
 Rules of Debit / Credit Balance
Sheet Accounts
Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase
Owner’s equity (+)
(capital) accounts…. Decrease (-) Increase (+)
 Balance Sheet Accounts
ASSETS LIABILITIES
Asset Accounts Liability
Debit for Credit for Debit Accounts
for Credit for
decreases increases
increases (-) decreases (+)
(+) (-)
OWNER’S EQUITY
Owner’s Equity Accounts
Debit for Credit for
increases
decreases (+)
(-)
 (D) OOn
(D) nOnNovember
NoNoveemm 18,
bberNetSolutions
er 1818,,
Nreceived
NSteetSooiutlutiofees
nnssofrere$7,500 from
ceceivived ed
fcustomers
feeeessooff$for $7,7services
,550000 ffprovided
roor mm .
ccusustoot mmeerrssffoorrsseervrviicceess
14 pproor viddvieedd ..
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20
(D) OOn
(D) nOnNovember
NoNoveemm 18,
bbeNetSolutions
rer 1818,,
Nreceived
NSteetSooiutlutiofees
nnssofrere$7,500
ceceivivedfrom
ed
fcustomers
feeeessooff$for $7,7services
,550000 ffprovided
roor mm .
ccusustoot mmeerrssffoorrsseervrviicceess
pproor vof
Effects iddviethis
edd entry
.. in the Ledger
Cash
Fees Earned 7,500
Nov. 1 25,000 Nov. 5 25,000 Nov. 18
18 7,500
 (E)
(E (E))TThroughout
Thhroor uughghthe ooumonth,
uttththeeNetSolutions
mmoincurred
onntthh,N NetSfollowing
, the Setoolluuttiooiexpenses:
nnss
wages, $2,125; rent, $800; utilities,
iinncucurredrred tthheeffoollloowwinging
$450; and miscellaneous, $275 .
18
eexpxpeennsseess:: wawaggeess,,$
19 30 Wages Expense 2 125 00
$22,,121255;;rerent,nt, $$880000;;
20 Rent Expense 800 00
21 utiliutili
Utilities tietiess,,
Expense 450 00
22 $4$45050;Expense
Miscellaneous ;aanndd 275 00
23 mCash
misiscecellalanneoeouuss,,$$227755 .. 3 650 00
24 Paid expenses.
 (E)
(E (E))TThroughout
Thhroor uughghthe ooumonth,
uttththeeNetSolutions
mmoincurred
onntthh,N NetSfollowing
, the Setoolluuttiooiexpenses:
nnss
wages, $2,125; rent, $800; utilities,
iinncucurredrred tthheeffoollloowwinging
$450; and miscellaneous, $275 .
eexpxpeennsseess:: wawaggeess,,$
Effects of this entry in the Ledger
$22,,Cash
121255;;rerent,nt, $$880000;; Wages
Nov. 1 Expense
25,000 Nov. 5 25,000 Nov. 30
18 7,500 30
utiliutilitietiess,, 2,125
3,650
$4$Rent
45050Expense
;;aanndd Utilities Expense
mmisis800
Nov. 30
cecellalanneoeouuss,Nov.
,$$2 2775450
30
5 ..
Miscellaneous Expense
Nov. 30 275
In every entry the sum of
the debits always equal
the sum of the credits.
 (G) OOn
(G) nOnNovember
NoNoveemm 30,
bbearercount
3030,, arevealed
a
cthat
coou$800
unntt of
rreethe
vvesupplies
eaalleeddinventory
ththatat $
$8had
800been
00oofused.
fththeessupuppplieslies
iinnvveentontoryry
25 hhadadbebeeenn uusseed.d.
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31
 (G) OOn
(G) nOnNovember
NoNoveemm 30,
bbearercount
3030,, arevealed
a
ccothat
ouunnt$800
t rreevveofeaalltheeedd th supplies
thatat $
$inventory
880000ooffhadththeebeen
ssupupused.
pplieslies
iinnvveentontoryry
hEffects
hadadbebeof
eenthis
n uusentry
seed.d. in the Ledger

Supplies
Supplies Expense
Nov. 10 1,350 Nov. 30 800 Nov. 30 800
 Double-Entry
DDooubublle-e-EAccounting
Ennttryry
AAccocoununttiinngg
“ 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 Right Side
Give
Luca Pacioli Receive CREDIT
Developer of DEBIT
Double- Receive Give
Entry DEBIT CREDIT
Accounting
Rules of Debit / Credit Income
Statement Accounts
Expense Accounts Revenue Accounts
Debit for Credit for Debit for Credit for
decreases increases
increases (-) decreases (+)
(+) (-)
 Income Statement Accounts
Debits Credits
Revenue accounts…… Decrease (-) Increase (+)
Expense accounts…… Increase (+) Decrease
(-)
Withdrawals
by the
Owner
 (H)(H)
OnOnNovember
On NNoovem 30,emChris
bberer 3Clark
030,,
withdrew C$2,000hChrisris CinCllacash
arkrk
from
withwithdredreNetSolutions
ww $$22,00, 0000for inin
personal use. ccaasshh ffroor mm
NeNetStSolu JOURNAL
olutiontionss ffoorr
ppeePage
rsrsoo2 nnaall uusse.e.
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 30 Chris Clark, Drawing 2 000 00
2 Cash 2 000 00
3 Chris Clark withdrew cash for
4 personal use.
 (H)(H)
OnOnNovember
On NNoovem 30,
emChris
bberer 3Clark
030,,
withdrew C$2,000hChrisris Cin
Cllacash
arkrk
from
withwithdredreNetSolutions
ww $$22,00, 0000for inin
personal use. ccaasshh ffroor mm
EffectsNeof this entry in
Ne tS olu tion s f orr
tS olu tion s the
f o Ledger
Cashppeersrsoonnaall uusse.e. Chris
Nov. 1 Clark,
25,000 Nov.Drawing
5 25,000 Nov. 30 2,000 Nov. 10
18 7,500 30 3,650 1,350
30 950
30 2,000
 Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Debit Credit
Expense
 Flow of Business Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger
 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.
DeDecc1..NetSolutions
1 NeNetStSoluolu paid a spremium
tiontion s papaidid aof
a
pperremmu$2,400
iiumm ooforff a comprehensive
insurance
$2 $2,,404000fpolicy
foorraacovering two years.
ccoommppreherheennssiivvee
iinnssuurraanJOURNAL
nccee popoliclicyy
ccooveverinringPage
gtwo 2 two yyeeaarsrs..
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.
 JOURNAL

Page 2

Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.
ACCOUNT Prepaid Insurance ACCOUNT NO. 15
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 400 00 2 400 00
 JOURNAL Page 2
Post.
Dat Description Debit Credit
e
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400
2 00
Cash 2 400
3 00
Paid premium on two-year
4 policy.

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balanc
Post. e
Dat Item Ref. Debit Credit Debit Credit
e
Dec.
2005 2 2 400 2 400
1 00 00
 JOURNAL

Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.
ACCOUNT Cash
ACCOUNT NO. 11
Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 400 00 3 500 00
 JOURNAL Page 2
Post.
Dat Description Debit Credit
e
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400
2 00
Cash 11 2 400
3 00
Paid premium on two-year
4 policy.

ACCOUNT Cash
ACCOUNT NO. 11
Balanc
Post. e
Dat Item Ref. Debit Credit Debit Credit
e 2005
Nov. 30 2 2 000 5 900
Dec. 2 00
2 400 00 00
3 500
1 00
 Dec.
De Decc1..NetSolutions
11NeNetStSoluolpaid
utiontiorent
nss pafor
paidDecember,
id rerenntt
ffoorrDD$800.
eeceecmmbbee,,rr
$8$80000..
14 1 Rent Expense 52 800 00
15 Cash 11 800 00
16 Paid rent for December.
17
 Dec. 1 NetSolutions
DeDecc.receives
.11NeNetS$360
tSoluolfor
utionthree
tionss
rreemonth’s
cceeiivverent
ess $beginning
$336600 ffoDecember
orr tthhreree1. e

mmoonntthh’s rerenntt bbegegni innniinngg

14 1 Cash DDeecceme14
mbbe360
err 0011..
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For three months’ rent of land.
 Dec.
DeDecc4..NetSolutions
44NeNetStSoluolupurchased
tiontionss office
pequipment
upurcrchahasseon
edaccount
d ooffciicefrom
e
eExecutive
eququippi mmSupply
eentntononCo.aaccfor
ccoo$1,800.
uuntnt
ffroor mm EExxeecucutivvit ee
SSupuppplyyl CCoo..ffoorr $$11,88, 0000..
18 4 Office Equipment 18 1 800 00
19 Accounts Payable 21 1 800 00
20 Purchased office equipment on
21 account.
 Dec.
De Dec6c..NetSolutions
66NeNetStSoluolpaid
utionti$180
onss pafor
paidia
d
$$118800 advertisement.
newspaper ffoorr aa
nenewwssppapapeerr
aaddvevertisrtiseemmeennt.t.
21 6 Miscellaneous Expense 59 180 00
22 Cash 11 180 00
23 Paid for newspaper ad.
24
 Dec.
DeDecc11 .. 11NetSolutions
NeNetStSoollupaid
utiotiocreditors
nns ppaidaid$400.
ccreredoti ditorsrs $$404000..

24 11 Accounts Payable 21 400 00

25 Cash 11 400 00
26 Paid creditors on account.
27
 Dec.
DeDecc13
.. 1NetSolutions
33 NeNetStSoollpaid
uutiotioanreceptionist
ns ppaidaid aa and
er rpart-time
ecceeppttoi assistant
ionnsiisttaan$950
nddpfor two
part-ti art-
tiweeks’
mmee aawages.
ssssisistatantnt$9$95500fforor
ttwwoo
JOURNAL
weweeekkss’ wwagageess..
Page 3

Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 13 Wages Expense 51 950 00
2 Cash 11 950 00
3 Paid two week’s wages.
4
 Dec.
DeDecc16
.. 1NetSolutions
66 NeNetStSoollreceived
uutiotionns $3,100 from
rfees
reeccearned
eevieivedfor
d $3$the
31, ,10first
000fhalf of
fromrom
fDecember.
feeeesseeaarnrneded ffoorrththeeffiirsrstt
hhaallff ofof
DeDecceemmbbeerr..
5 16 Cash 11 3 100 00
6 Fees Earned 41 3 100 00
7 Received fees from customers.
8
 DDec.
eDecc16
.. 1Fees
66 FFearned
eeeses eeon aanr account
rneedd oototaled
nn
acacccoouu$1,750 tdeleldfor the first half of
nnttaottoa
$December.
$11,77, 5500ffoorrththee
ffirirsstthhaalflfoffo
DeDecceemmbbeerr..
9 16 Accounts Receivable 12 1 750 00
10 Fees Earned 41 1 750 00
11 Received fees from customers.
12
 Dec.
De Decc20
..2NetSolutions
200NeNetStSoollpaiduutiotio$900
nnsspto Executive
paid aid $
$990000totoSupply
EExeexccuCo.
uttv
ivieon
e the $1,800 debt
Sowed
Supupppyl lyfrom
CCoo..othe onnthDecember
thee $ 4
transaction.
$1 8, ,80000 ddeebtbt w
o oweedd ffrroomm
thethe DDeecceemmbberer44
13 20 Accounts Payable 21 900 00
ttrarannssacactiotionn..
14 Cash 11 900 00
15 Paid part of amount owed to
16 Executive Supply Co.
 Dec.
DeDecc21
.. 2NetSolutions
21 NeNetStSoollreceived
uutiotionnss$650 from
rcustomers
reecceevieivein
ddpayment
$6$65500 foffromtheir
rom
caccounts.
cusustoot mmeersrsinin ppaayymmeentnt
ooff ththeeiirr
aacccocouunnttss..
18 21 Cash 11 650
19 00
Accounts Receivable 12 650
20 00
Received cash from customer
21 on account.
 Dec.
DeDecc23
.. 2NetSolutions
233NeNetStSoopaid $1,450
lluutiotio nns for
psupplies.
paidaid $$114,4, 5500 fforor
ssuupppplieslies..

22 23 Supplies 14 1 450 00
23 Cash 11 1 450 00
24 Purchased supplies.
25
 Dec.
DeDecc27
.. 2NetSolutions
277NeNetStSoopaid lluutiotiothennsreceptionist
ppaidaid
ththand
ee erreepart-time
cceppoittiosninistt aassistant $1,200
andndpapart-t rt-
tfor
imimtwo
ee aaweeks’
ssssisistanwages.tantt$$11,22, 0000
fforor
27 27two
two ww
Wages eeeeksks’ wawaggeess..
Expense 51 1 200
28 00
Cash 11 1 200
29 00
Paid two weeks’ wages.
30
 Dec.
DeDecc31
.. 3NetSolutions
31 NeNetStSoollpaiduutiotioits
nns$310 telephone
ppaidaid itsits $
$bill
3310for
tteeethe
lel ppmonth.
hhnoonee bbililllffoorrththee
mmoonnth.ht.

31 31 Utilities Expense 54 310 00

32 Cash 11 310 00
33 Paid telephone bill.
34
 Dec.
DeDecc31
.. 3NetSolutions
31 NeNetStSoollpaid
uutiotioits
nns$225 electric
ppaidaid itsits
$bill
$22for
2525ethe
ellemonth.
ecctritricc bbililllffoorr
ththeemmoonnth.ht.

JOURNAL

Page 4

Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Utilities Expense 54 225 00
2 Cash 11 225 00
3 Paid utility bill.
4
 Dec.
DeDecc31
.. 3NetSolutions
31 NeNetStSoollreceived
uutiotionns $2,870 from
rfees
reeccearned
eevieivedfor
d $2$the
28, ,87second
700ffromhalf
rom of
fDecember.
feeeesseeaarnrneded ffoorrththee
ssececoonnddhhaalflf ooff
DeDecceemmbbeerr..
5 31 Cash 11 2 870 00
6 Fees Earned 41 2 870 00
7 Received fees from customers.
8
 Dec.
DeDecc31
.. 3NetSolutions
31 NeNetStSoollearned $1,120 on
uutiotionns
eaaccount
earnrneedfor
d $$the second
,11,11 2200 oo half
nn of
aDecember.
acccocouunnttfforor ththee
sseeccononddhhaalflf ooff
DeDecceemmbbeerr..
9 31 Accounts Receivable 12 1 120 00
10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.
 Dec.
DeDecc31
.. 3Chris
31 CChri Clark
shris Cwithdrew
Clarklark $2,000 for
wpersonal
withdithdrereuse.
ww $$,22,00000 ffoorr
ppersersoonnalal uussee..

14 31 Chris Clark, Drawing 32 2 000 00

15 Cash 11 2 000 00
16 Chris Clark withdrew cash
17 for personal use.
Trial Balance
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
 NetSolutions
Trial Balance
December 31,
Cash 2005 2 065
Accounts Receivable 00 220
2
Supplies 00 000
2
Prepaid Insurance Balance 00 400
2
Land Sheet 20
00 000
Office Equipment 00
1 800
Accounts Payable Items 00 900
Unearned Rent 00
360
Chris Clark, Capital 25 00
000
Chris Clark, Drawing 4 000 00
Fees Earned 00 16 340
Wages Expense 4 275 00
Rent Expense 00 600
1
Utilities Expense 00985
Supplies Expense 00
800
Miscellaneous Expense 00
455
42 00
600 00 42 600
00
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned Statement 16 340 00
Wages Expense of Owner’s 4 275 00
Rent Expense 1 600 00
Utilities Expense Equity 985 00
Supplies Expense Item 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
 NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Chris Clark, Capital 25 000 00
Chris Clark, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense Income 4 275 00
Rent Expense Statement 1 600 00
Utilities Expense 985 00
Supplies Expense Items 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00
 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 Correction Procedure

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

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

Error Correction Procedure

3. Journal entry is incorrect Journalize and post a
and posted correcting entry.
 Correcting
CoCorrrreeccErrors
ttiinng–
gEAn
rErrExample
roorrss–
AAnn ExExaam pmpele
l
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 5 Supplies
Accounts Payable 12,500 12,500

What
WWhwould bewou
ahattwou the
ldldnecessary
bbeetthehe
correcting
ecceessssentry?
nen aarryy
ccororrereccttinging eentntrryy??
 Correcting
CoCorrrreeccErrors
ttiinng–
gEAn
rErrExample
roorrss–
AAnn ExExaam pmpele
l
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 5 Supplies
Accounts Payable 12,500 12,500

Date Description Debit Credit

May 5 Office Equipment 12,500
 Correcting
CoCorrrreeccErrors
ttiinng–
gEAn
rErrExample
roorrss–
AAnn ExExaam pmpele
l
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 5 Supplies
Accounts Payable 12,500 12,500

Date Description Debit Credit

May 5 Office Equipment 12,500
Supplies 12,500
Financial
FFiinaAnalysis
nanncciaai land
l
Ana Analylyssisisaandnd
Interpretation
IIntnteerrpprretaetattiiono
Comparing an item in a
n
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, 2005 and 2006
Increase (Decrease)
2006 2005 Amount Percent
Fees earned $187,500 $150,000 $37,500 25.0%
Operating expenses:
Wages expense $ 60,000 $ 45,000 $15,000 33.3%
Rent expense 15,000 12,000 3,000 25.0%
Utilities expense 12,500 9,000 3,500 38.9%
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 $21,700 30.6%
Net income $ 95,000 $ 79,200 $15,800 19.9%
Chapter 2

The

End