Chapter 2: Overview

Analyzing and Recording Business Transactions

The chapter introduces the account and briefly describes specific asset, liability, and stockholders’ equity accounts. The concept of double-entry accounting and the rules of debit and credit for assets, liabilities, and stockholders’ equity are described. The “T-account” is illustrated. The accounting equation is tied to the rules of debit and credit. Normal balance of accounts is discussed.

The journal is introduced and the process of recording (journalizing) transactions is illustrated. Details of journals, ledgers, and the posting process are presented, including an illustration of a 4-column account with a running balance.The five-step transactional analysis process is described and demonstrated..A series of transactions are analyzed, journalized, and posted to T-accounts in the ledger. Balancing the accounts is explained.

The trial balance is defined and illustrated. Some errors that would not be revealed by a trial balance are described. The preparation of the financial statements from the trial balance is illustrated.

ADemo Doc problem reviews opening accounts, journalizing, posting, and balancing T-accounts. The chapter concludes with Decision Guidelines that assist the student in understanding the decisions required as transactions are recorded and summarized.

Learning Objectives

After studying Chapter 2, your students should be able to:

  1. Define accounts and describe how they are used in accounting.
  2. Explain debits, credits, and the double entry system of accounting.
  3. Demonstrate the use of the general journal and the general ledger to record business transactions.
  4. Use a trial balance to prepare financial statements.

Teaching Outline

1)Define accounts and discuss their uses in accounting.

a) Numbering of accounts

b) Chart of accounts

2) Explain debits, credits, and the double-entry system of accounting.

a) The T-account

b) Increases and decreases in the accounts

c) Identify the normal balance for each type of account

d) Exhibit 2-1 The Accounting Equation and the Rules of Debit and Credit

3) Demonstrate the use of the general journal and general ledger to record business transactions.

a) Exhibit 2-2 Making a Journal Entry and Posting to the Ledger

b) Four-column ledger account

4) Discuss the five steps in analyzing business transactions.

a) Identify the accounts involved

b) Determine the type of account for each account involved

c) Determine whether the account increases or decreases

d) Debit or Credit the account

e) Journalize the transaction and post to the ledger

f) Balance the T-Accounts

5) Depict the use of a trial balance to prepare financial statements.

a) Exhibit 2-3 Trial Balance

b) Correcting errors

c) Exhibit 2-4 Financial Statements

d) Review accounting cycle

Key Topics

An understanding of Chapter 2 is essential for student success in the remaining financial accounting chapters. Spend adequate time in the beginning with accounting terminology. Accounting is a “foreign” language to many students, and, as true with any real foreign language, you must start with the basics. Students seem to more easily understand assets and liabilities than equity. An asset can be touched, a liability can be confirmed by looking at an invoice, but equity is conceptual. Equity is the stockholders’ claims to the business assets—what’s left over after liabilities are subtracted from assets. It may be helpful to ask students to attempt to calculate their personal equity. Students may own a car or home that has an outstanding loan or mortgage.

Keep it simple when discussing T accounts and the rules of debit and credit. Debit means left and credit means right, period. A debit does not mean increase, and a credit does not mean decrease. Increases and decreases depend on the account type. Emphasize that everyentry must balance (debits equal credits) and be correct for the accounting system to generate correct and useful information. An incorrect journal entry that is posted to the right accounts will still produce incorrect information.

An account can only have one balance. Debits and credits within the same account are subtracted to determine the account balance, just like positives and negatives from a mathematical standpoint. The normal balance of an account is the side used to record increases in the account.

When discussing the posting process, inform students to be very careful when transferring amounts to the ledger. It is common for students at this point to reverse a posting, recording a debit as a credit, or vice versa. A debit is placed on the left side and a credit is placed on the right side. If the trial balance doesn’t balance, it is common for students to have reversed a posting.

Lastly, it may be helpful for students to view the accounting system from both ends. The natural process is to journalize, post, and prepare a trial balance. However, once the chapter content is discussed, you can also begin with the trial balance and have students trace back to the ledger and journal to find a specific transaction. They can also get experience doing this when correcting a trial balance that doesn’t balance.

Chapter 2: Student Summary Handout

  1. Chart of Accounts: listing of all accounts of a business with account numbers assigned to each
  2. Assets
  3. Liabilities
  4. Stockholders’ equity (other than a revenue or expense account)
  5. Revenues
  6. Expenses
  7. Double-entry accounting
  8. Every transaction affects at least two accounts
  9. Each transaction is recorded with equal amounts of debits and credits
  10. Asset, dividends, and expense (ADE) accounts increase on the debit side
  11. Liability, common stock, revenue, and retained earnings (LCR) accounts increase on the credit side
  12. The normal balance of an account is on the increase side of the account
  13. Journalizing and posting transactions
  14. Record (i.e., journalize) the transactions in the General Journal
  15. Record the date of the transaction
  16. List the title of account debited with the amount in the debit column
  17. List the title of account credited on the next line (indented) with amount in the credit column
  18. Write a brief explanation describing the entry
  19. Post the transaction from the journal to the ledger
  20. Balance the accounts by calculating each account’s balance (i.e., difference between the account’s total debits and its total credits)
  21. Prepare a trial balance
  22. Heading
  23. List accounts in account number order with the respective balance in the appropriate debit or credit column
  24. Total each column verifying total debits = total credits
  25. Use the trial balance to prepare the financial statements
  26. Income Statement
  27. Statement of Retained Earnings (uses net income or loss from the Income Statement)
  28. Balance Sheet (the balance for retained earnings comes from the Statement of Retained Earnings)
Assignment Grid

EstimatedLevel

LearningTime inof

AssignmentTopic(s)Objective(s)MinutesDifficulty

Short Exercises

S2-1Using accounting terminology15Easy

S2-2The role of accounts15Easy

S2-3Recording and summarizing transactions3, 45Easy

S2-4The role of accounts15Easy

S2-5Using accounting terminology2, 3, 45Easy

S2-6Double-entry accounting25Easy

S2-7Calculating account balances35Easy

S2-8Double-entry accounting25Easy

S2-9Recording and summarizing transactions210Easy

S2-10Recording and summarizing transactions310Easy

S2-11Recording and summarizing transactions310Easy

S2-12Preparing a trial balance410Easy

S2-13Using a trial balance for preparing

financial statements410Easy

S2-14Using accounting terminology1, 2, 3, 410Easy

Exercises (Group A)

E2-15AThe role of accounts;double-entry accounting210Easy

E2-16ARecording and summarizing transaction310-15Easy

E2-17ARecording and summarizing transactions310-15Easy

E2-18ACalculating account balances and preparing

a trial balance3, 410-15Easy

E2-19ARecording and summarizing transactions;

preparing a trial balance3,410-15Medium

E2-20ARecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 410-20Medium

E2-21ARecording and summarizing transactions;

using a trial balance for preparing

financial statements3,415-20Medium

E2-22ARecording and summarizing transactions;

using a trial balance for preparing

financial statements3,410-15Difficult

Exercises (Group B)

E2-23BThe role of accounts;double-entry accounting210Easy

E2-24BRecording and summarizing transactions310-15Easy

E2-25BRecording and summarizing transactions310-15Easy

E2-26BCalculating account balances and preparing

a trial balance3, 410-15Easy

E2-27BRecording and summarizing transactions;

preparing a trial balance3, 410-15Medium

E2-28BRecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 410-20Medium

E2-29BRecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 415-20Medium

E2-30BRecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 410-15Difficult

Exercises (Alternatives 1,2, and 3)

Available at

Problems (Group A)

P2-31ARecording and summarizing transactions315-20Medium

P2-32ARecording and summarizing transactions315-20Medium

P2-33ARecording and summarizing transactions;

preparing a trial balance3, 440-50Medium

P2-34A Recording and summarizing transactions;

preparing a trial balance3, 450-60Medium

P2-35AUsing a trial balance for preparing

financial statements 430-40Medium

P2-36ARecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 430Difficult

Problems (Group B)

P2-37BRecording and summarizing transactions315-20Medium

P2-38BRecording and summarizing transactions315-20Medium

P2-39BRecording and summarizing transactions;

preparing a trial balance3, 440-50Medium

P2-40B Recording and summarizing transactions;

preparing a trial balance3, 450-60Medium

P2-41BUsing a trial balance for preparing

financial statements 430-40Medium

P2-42BRecording and summarizing transactions;

using a trial balance for preparing

financial statements3, 430Difficult

Problems (Alternatives 1,2, and 3))

Available at

Continuing Exercise

Open T-accounts, journalize transactions,

Post and prepare trial balance3, 4 30Medium

Continuing Problem

Recording and summarizing transactions;

preparing a trial balance3, 4 50-60Medium

Financial Statement Analysis

Utilizing Target Corporation’s

financial statements to answer a

series of questions

Ethics in Action (2 scenarios)

Financial Analysis60Medium

Industry Analysis40Medium

Small Business Analysis30Medium

Written Communication

Assignments Available in Varied Accounting Software Formats:

Excel Templates:E 2-17A, E2-23B,E2-24B, P2-32A

QuickBooks: E 2-16A, E2-17A,E2-24B, P2-32A

Peachtree: E2-16A, E2-17A,E2-24B, P2-32A

General Ledger:E2-16A, E2-17A,E2-24B, P2-32A

Answer Key to Chapter 2 Quiz (on following pages)

1. C
2. B
3. D
4. B
5. C / 6. D
  1. A
  2. A
  3. B
10. D

NameDateSection

CHAPTER 2

TEN-MINUTE QUIZ

Circle the letter of the best response.

1.Which of these is (are) an example of a liability account?

A.Service Revenue

B.Rent Expense

C.Accounts Payable

D.All of the above

2.Oliver Company collected $2,250 on account. The effect of this transaction on the accounting equation is to:

A.increase assets and decrease liabilities.

B.nothing. It has no effect on total assets.

C.increase assets and increase stockholders’ equity.

D.decrease assets and decrease liabilities.

3.Which of these statements is TRUE?

A.Decreases in assets and increases in revenues are recorded with a debit.

B.Increases in liabilities and decreases in stockholders’ equity are recorded with a credit.

C.Increases in both assets and dividends are recorded with a credit.

D.Decreases in liabilities and increases in expenses are recorded with a debit.

4.Note Payable has a normal beginning balance of $30,000. During the period, new borrowings total $63,000 and the ending balance in Note Payable is $41,000. Determine the payments on loans during the period.

A.$ 8,000

B.$ 52,000

C.$134,000

D.$ 22,000

5.Which of these statements is NOT correct?

A.The account is a basic summary device used in accounting.

B.A business transaction is recorded first in the journal and then posted to the ledger.

C.The ledger is a chronological listing of all transactions.

D.The debit entry is recorded first in a journal entry; the credit entry then follows.

6.Which of these accounts has a normal credit balance?

A.Rent Expense

B.Common Stock

C.Service Revenue

D.Both B and C

7.The journal entry to record the payment to a supplier of $890 on account is:

A.Accounts Payable890

Cash890

B.Cash890

Accounts Receivable890

C.Cash890

Accounts Payable890

D.Supplies890

Cash890

8.The ending Cash account balance is $57,600. During the period, debit postings equal $124,300. If credit postings during the period total $135,100, then the beginning Cash amount must have been:

A.$ 68,400.

B.$ 46,800.

C.$181,900.

D.$ 10,800.

9.Use the following selected information for the Callie Company to calculate the correct credit column total for a trial balance:

Accounts receivable$7,200

Accounts payable6,900

Building179,400

Cash15,800

Common stock64,000

Salary expense56,100

Salary payable3,600

Service revenue190,500

Dividends6,500

A.$201,000

B.$265,000

C.$321,400

D.$271,500

10.The INCORRECT trial balance debit column total is $58,700. During the period, a $1,000 debit to Accounts Receivable was posted as $100. What is the trial balance debit column total after this error is corrected?

A.$57,600

B.$59,800

C.$57,800

D.$59,600

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