Learning Objective

1. Explain what a transaction is

2-1

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EXPLAIN WHAT A TRANSACTION IS

Transaction

Any event that has a financial impact on the business

Can be measured reliably

Provides information about an exchange

2-2

Something given

Something received

Accounting records both sides of a transaction

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LO 1

EXPLAIN WHAT A TRANSACTION IS

Transaction Examples
Whole Foods Market, Inc.

2-3

Purchase
fresh produce

Sell product

Borrow money

Repay a loan

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LO 1

Learning Objective
2. Define account, and list and differentiate
between different types of accounts

2-4

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DEFINE ACCOUNT, AND LIST AND

DIFFERENTIATE BETWEEN DIFFERENT
TYPES OF ACCOUNTS
Assets

Liabilities

Stockholders
Equity

Account

2-5

Record of all changes in a particular asset, liability, or

stockholders equity during a period

Basic summary device

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LO 2

Assets
Economic resources that provide a future benefit
Cash

Money including bank account balances,

paper currency, coins, certificates of
deposit, and checks

Accounts
Receivable

Promise for future collection of cash from

the sale of goods or providing services

Notes
Receivable

2-6

Promise for future collection of cash

Customer signed note

Interest rate

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LO 2

Assets
Economic resources that provide a future benefit
Inventory

Goods the company sells to customers

Prepaid
Expenses

Expenses paid in advance, such as

insurance and rent

Land

2-7

Cost of land used in operations

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LO 2

Assets
Economic resources that provide a future benefit
Cost of buildings used in operations

Building

Equipment,
Furniture, and
Fixtures

2-8

Cost of furniture, fixture, and equipment

used in operations

Includes heating and air conditioning,

computers, and office furniture

Depreciated

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LO 2

Liabilities
A liability is a debt
Accounts
Payable

Promise to pay a debt

Notes Payable

Accrued
Liabilities

2-9

Signed notes promising to pay a future

amount

Liability for an expense not yet paid

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LO 2

Stockholders (Owners) Equity

Owners claims to the assets of a corporation
Common
Stock

Owners investment in the corporation

through the ownership of stock

Retained
Earnings

Net income (loss) earned over the

companys lifetime, minus dividends

Dividends

2-10

Distribution to stockholders

Declared by board of directors

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LO 2

Stockholders (Owners) Equity

Owners claims to the assets of a corporation

2-11

Revenues

Increase in stockholders equity from

delivering goods or services to customers

Expenses

Decrease in stockholders equity due to

the cost of operating the business

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LO 2

Learning Objective
3. Show the impact of business transactions on the
accounting equation

2-12

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SHOW THE IMPACT OF BUSINESS

TRANSACTIONS ON THE ACCOUNTING
EQUATION
Example: Freddys Auto Service, Inc.
To illustrate the accounting for transactions, lets assume
Freddy Kish opened Freddys Auto Service, Inc., in April 2014.

2-13

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LO 3

Transaction 1. On April 1, Freddy Kish and a few friends invest $50,000 to

open Freddys Auto Service, Inc., in return for common stock.

1. +50,000

2-14

+50,000

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LO 3

Transaction 2. Freddys purchases land for a new location and pays cash
of $40,000.

1. +50,000
2. -40,000

2-15

+50,000
+40,000

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LO 3

Transaction 3. The business buys supplies on account, agreeing to pay

$3,700 within 30 days.

1. +50,000
2. -40,000
3.

2-16

+50,000
+40,000
+3,700

+3,700

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LO 3

Transaction 4. Freddys received $7,000 cash by providing services for

customers.

1. +50,000
2. -40,000
3.

+50,000
+40,000
+3,700

+3,700

4. +7,000

2-17

Service revenue

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+7,000

LO 3

Transaction 5. Freddys repairs a fleet of UPS delivery trucks, and UPS

promises to pay Freddys $3,000 within one month.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

2-18

+7,000
+3,000

Service revenue

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+3,000

LO 3

Transaction 6. Freddys Auto Service, Inc., pays $2,700 for the following
expenses: rent, $1,100; employee salaries, $1,200; and utilities, $400.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.
6.

2-19

+7,000
+3,000

+3,000

-2,700

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Rent expense

- 1,100

Salary expense

- 1,200

Utilities expense

- 400

LO 3

Transaction 7. Freddys pays $1,900 on account, which means to make a

payment toward an account payable.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

+3,000

6.

-2,700

7.

-1,900

2-20

+7,000
+3,000
- 2,700
-1,900

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LO 3

Transaction 8. Freddy Kish, the major stockholder of Freddys Auto

Service, paid $30,000 from his personal bank account to remodel his home.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

+7,000
+3,000

6.

-2,700

7.

-1,900

+3,000
-2,700
-1,900

No Entry

2-21

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LO 3

Transaction 9. In transaction 5, Freddys performed services for UPS on

account. The business now collects $1,000 from UPS.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

+3,000

6.

-2,700

7.

-1,900

9. +1,000

2-22

+7,000
+3,000
-2,700
-1,900
-1,000

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LO 3

Transaction 10. Freddys receives $22,000 from the sale of land, which is
the same amount that Freddys paid for the land.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

+3,000

6.

-2,700

7.

-1,900

9. +1,000
10. +22,000

2-23

+7,000
+3,000
-2,700
-1,900
-1,000
-22,000

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LO 3

Transaction 11. Freddys Auto Service, Inc., declares a dividend and pays
the stockholders $2,100 cash.

1. +50,000

+50,000

2. -40,000
3.

+40,000
+3,700

+3,700

4. +7,000
5.

+7,000
+3,000

6.

-2,700

7.

-1,900

9. +1,000
10. +22,000

+3,000
-2,700
-1,900

-1,000
-22,000

11. -2,100

2-24

Dividends

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-2,100

LO 3

Financial Statements
Exhibit 2-2 | Financial Statements of Freddys Auto Service, Inc.

2-25

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LO 3

Financial Statements
Exhibit 2-2 | Financial Statements of Freddys Auto Service, Inc.

2-26

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LO 3

Financial Statements
Exhibit 2-2 | Financial Statements of Freddys Auto Service, Inc.

2-27

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LO 3

Illustration
Dr. Luke opened a medical practice specializing in physical
therapy. During the first month of operation (February), the
business, titled Dr. Luke, Professional Corporation (P.C.),
experienced several events.

Requirement
Analyze the effects of the following events on the accounting
equation of the medical practice of Dr. Luke, P.C.

2-28

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LO 3

Feb. 1 Dr. Luke invested $100,000 in the business in return for

common stock.

2-29

Advance slide in presentation mode to reveal answer

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LO 3

Feb. 5 The business borrowed $50,000, signing a note payable to

the bank.

2-30
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LO 3

Feb. 8 The business paid cash for land costing $105,000. Luke
plans to build an office building on the land.

2-31

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LO 3

Feb. 11 The business purchased medical supplies for $1,700 on

account.

2-32

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LO 3

Feb. 12 Dr. Luke, P.C., officially opened for business.

No Entry

2-33

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LO 3

Feb. 14 Dr. Luke treated patients and earned service revenue of

$5,600, receiving cash for half the revenue earned.

Service Revenue

2-34

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LO 3

Feb. 16 The business paid employee salaries of $2,300 for the first
half of the month.

Salaries Expense

2-35

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LO 3

Feb. 25 Dr. Luke treated patients and received $1,500 cash at the
time of service.

Service Revenue

2-36

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LO 3

Feb. 28 The business paid office rent of $1,000.

Rent Expense

2-37

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LO 3

Feb. 28 The business paid $500 on account.

$155,500
2-38

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$155,500
LO 3

Illustration
Requirements
Using the data from the transaction analysis of the medical practice
of Dr. Luke, P.C., answer the following questions.
a. How much are total assets?
b. How much does the business expect to collect from patients?
c. How much does the business owe in total?
d. How much of the businesss assets does Luke really own?
e. How much net income or net loss did the business
experience during its first month of operations?

2-39

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LO 3

a. How much are total assets?

$ 155,000

$155,000
2-40

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$155,000
LO 3

b. How much does the business expect to collect from

patients?

$ 2,800

2-41

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LO 3

c. How much does the business owe in total?

$ 51,200

2-42

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LO 3

d. How much of the businesss assets does Luke

really own?

$ 103,800

2-43

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LO 3

e. How much net income or net loss did the business

experience during its first month of operations?

$ 3,800

2-44

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LO 3

Learning Objective
4. Analyze the impact of business transactions on
accounts

2-45

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ANALYZE THE IMPACT OF BUSINESS

TRANSACTIONS ON ACCOUNTS
Accounting

2-46

Double-entry system

Each transaction affects at least two accounts

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LO 4

The T-Account

Record of increases and decreases in

a specific asset, liability, equity,
revenue, or expense element

Debit = Left

Credit = Right

Account

An Account can
be illustrated in a
T-Account form

2-47

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LO 4

Increases and Decreases in the Accounts:

The Rules of Debit and Credit
Exhibit 2-3 | Accounting Equation and the Rules of Debit and Credit

The type of account determines how to record

increases and decreases.

2-48

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LO 4

Increases and Decreases in the Accounts:

The Rules of Debit and Credit
To illustrate, Freddys Auto Service, Inc., received $50,000 and
issued (gave) stock. What is the effect on the accounts?

Cash
Debit for
increase,
50,000

Common Stock
Credit for
increase,
50,000

Exhibit 2-4 | The Accounting

Equation after Freddys Auto
Services First Transaction
2-49
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LO 4

Freddys second transaction is a $40,000 cash purchase of

land. What is the effect on the accounts?

Cash
Bal

50,000

Bal

10,000

Common Stock
Credit for
decrease,
40,000

Land

Bal

50,000

Exhibit 2-5 | The Accounting

Equation after Freddys Auto
Services First Two Transactions

Debit for
increase,
40,000
Bal
2-50

40,000

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LO 4

Additional Stockholders Equity Accounts:

Revenues and Expenses
Two categories of income statement accounts

2-51

Revenues

Increase in stockholders equity from

delivering goods or services to customers

Expenses

Decrease in stockholders equity due to

the cost of operating the business

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LO 4

Additional Stockholders Equity Accounts:

Revenues and Expenses
Exhibit 2-6 | Expansion of the Accounting Equation

+
Common Stock
Assets

Liabilities

Stockholders
Equity

+
Retained Earnings
Dividends
+
Revenues
Expenses

2-52

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LO 4

Final Form of the Rules of Debit and Credit

Exhibit 2-7

2-53

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LO 4

Final Form of the Rules of Debit and Credit

Exhibit 2-7

2-54

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LO 4

Learning Objective
5. Record (journalize and post) transactions in the
books

2-55

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RECORD (JOURNALIZE AND POST)

TRANSACTIONS IN THE BOOKS
Journal

Chronological record of transactions

Three steps
1. Specify each account affected by the transaction and
classify by type
2. Determine if each account is increased or decreased
(debit or credit)
3. Record in the journal

2-56

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LO 5

RECORD (JOURNALIZE AND POST)

TRANSACTIONS IN THE BOOKS
Steps to journalize the first transaction of Freddys Auto Service
Business receives $50,000 cash and issues stock

Step 2

Both Cash and Common Stock increase

Step 3

Journalize the transaction:

Date

Accounts and Explanations

Debit

Credit

Apr 1

3
4
2-57

Step 1

Cash
Common Stock

50,000
50,000

Issued common stock.

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LO 5

Individual
asset
accounts

Individual
liability
accounts

Individual
equity
accounts

2-58

Exhibit 2-8 | The Ledger (Asset, Liability, and

Stockholders Equity Accounts)
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LO 5

Copying Information (Posting) from the

Journal to the Ledger
Exhibit 2-9 | Journal Entry
and Posting to the Accounts

Date

Accounts and Explanations

Debit

Credit

Apr 1

3
4
Posting
to the
Accounts

2-59

Cash

50,000

Common Stock

50,000

Issued common stock.

Cash
50,000

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Common Stock
50,000

LO 5

The Flow of Accounting Data

Transaction Occurs
Transaction Analyzed
Transaction Entered in the Journal
Amounts Posted to the Ledger
Accounts
2-60

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LO 5

Transactions from Freddys Auto Service

(1) Received $50,000 cash and issued stock to the owners
Accounting
Equation

Assets

Liabilities

+ 50,000

1
2

Ledger
Accounts

50,000

Cash
Common Stock

Cash
(1)

Stockholders Equity
+ 50,000

Journal
Entry

2-61

50,000

Common Stock
50,000

Advance slide in presentation mode to reveal answers

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(1)

50,000
LO 5

Transactions from Freddys Auto Service

(2) Paid $40,000 cash for land
Accounting
Equation

Journal
Entry

Assets

2-62

Liabilities

Stockholders Equity

+ 40,000
- 40,000
A

1
2

Ledger
Accounts

B
40,000

Land
Cash

40,000

Cash
(1)

Land
50,000

(2)

40,000

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(2)

40,000
LO 5

Transactions from Freddys Auto Service

(3) Purchased supplies for $3,700 on account
Accounting
Equation

Journal
Entry

Assets

+ 3,700

Supplies

2-63

Stockholders Equity

3,700

Accounts Payable

Supplies
(3)

+ 3,700

Ledger
Accounts

Liabilities

3,700

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3,700

Accounts Payable
(3)

3,700
LO 5

Transactions from Freddys Auto Service

(4) Performed services for clients and received cash of $7,000
Accounting
Equation

Journal
Entry

Assets = Liabilities + Stockholders Equity + Revenues

+ 7,000

1
2

Ledger
Accounts

2-64

+ 7,000

7,000

Cash
Service Revenue

Cash

7,000

Service Revenue

(1)

50,000

(4)

7,000

(2)

40,000

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(4)

7,000
LO 5

Transactions from Freddys Auto Service

(5) Performed services for a customer on account, $3,000
Accounting
Equation

Journal
Entry

Ledger
Accounts

2-65

Assets = Liabilities + Stockholders Equity + Revenues

+ 3,000

+ 3,000

Accounts Receivable

Service Revenue

Accounts Receivable
(5)

3,000

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3,000
3,000

Service Revenue
(4)
(5)

7,000
3,000
LO 5

Transactions from Freddys Auto Service

(6) Paid cash expenses: rent, $1,100; employee salary, $1,200;
utilities, $400
Accounting
Equation

Journal
Entry

Assets = Liabilities + Stockholders Equity - Expenses

- 2,700

Rent Expense

1,100

Salary Expense

1,200

3
4
2-66

- 2,700

Utilities Expense
Cash

Copyright 2015 Pearson Education Inc. All rights reserved.

400
2,700

LO 5

Transactions from Freddys Auto Service

(6) Paid cash expenses: rent, $1,100; employee salary, $1,200;
utilities, $400
A

Journal
Entry

Rent Expense

1,100

Salary Expense

1,200
400

Utilities Expense
Cash

2,700

Rent
Expense

Cash
(1) 50,000

(2) 40,000 (6)

(4)

(6)

2-67

1
3

7,000

2,700

1,100

Salary
Expense

Utilities
Expense

(6)

(6)

1,200

400

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LO 5

Transactions from Freddys Auto Service

(7) Paid $1,900 on the account payable created in transaction 3
Accounting
Equation

Journal
Entry

Assets

2-68

Liabilities

- 1,900

1,900

Accounts Payable
Cash

1,900

Cash
(1)
(4)

Stockholders Equity

- 1,900

2
Ledger
Accounts

Accounts Payable
50,000
7,000

(2)
(6)
(7)

40,000
2,700
1,900

Copyright 2015 Pearson Education Inc. All rights reserved.

(7)

1,900

(3)

3,700

LO 5

Transactions from Freddys Auto Service

(9) Received $1,000 on account
Accounting
Equation

Journal
Entry

Assets

Liabilities

Stockholders Equity

+ 1,000
- 1,000
A

1
2

Ledger
Accounts

B
1,000

Cash
Accounts Receivable

1,000

Cash
(1)
(4)
(9)

Accounts Receivable
50,000
7,000
1,000

(2)
(6)
(7)

40,000
2,700
1,900

2-69
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(5)

3,000

(9)

1,000

LO 5

Transactions from Freddys Auto Service

(10) Sold land for cash at the lands cost of $22,000
Accounting
Equation

Journal
Entry

Assets

2-70

Liabilities

Stockholders Equity

+ 22,000
- 22,000
A

1
2

Ledger
Accounts

B
22,000

Cash
Land

22,000

Cash
(1)
(4)
(9)
(10)

Land
50,000
7,000
1,000
22,000

(2)
(6)
(7)

40,000
2,700
1,900

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(2)

40,000

(10)

22,000

LO 5

Transactions from Freddys Auto Service

(11) Declared and paid a dividend of $2,100 to the stockholders
Accounting
Equation

Journal
Entry

Ledger
Accounts

2-71

Assets = Liabilities + Stockholders Equity - Dividends

- 2,100

- 2,100

Dividends

Cash

B
2,100

2,100

Cash
(1)
(4)
(9)
(10)

Dividends
50,000
7,000
1,000
22,000

(2)
(6)
(7)
(11)

40,000
2,700
1,900
2,100

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(11)

2,100

LO 5

Accounts after Posting to the Ledger

Exhibit 2-11 | Freddys Auto Service, Inc.s Ledger Accounts after Posting

2-72
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LO 5

Accounts
after
Posting to
the Ledger

Exhibit 2-11 | Freddys

Auto Service, Inc.s
Ledger Accounts after
Posting (partial)
2-73
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Accounts
after
Posting to
the Ledger

Exhibit 2-11 | Freddys

Auto Service, Inc.s
Ledger Accounts after
Posting (partial)
2-74
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Learning Objective
6. Construct and use a trial balance

2-75
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CONSTRUCT AND USE A TRIAL BALANCE

Trial Balance

2-76

Lists all accounts with their balances

Assets listed first, then liabilities and stockholders

equity

Shows that debits equal credits

Usually prepared at the end of the period

Facilitates preparation of the financial statements

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LO 6

Analyzing Accounts
Suppose Freddys Auto Service began May with cash of
$1,000. During May, Freddys received cash of $8,000 and
ended the month with a cash balance of $3,000.
You can compute total cash payments by analyzing Freddys
Cash account:
Cash
Beginning balance
Cash receipts
1,000

Cash payments

Ending balance
8,000

6,000

3,000
* 1,000 + 8,000 - 3,000 = 6,000
2-77

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LO 6

Analyzing Accounts
You can compute either sales on account or cash collections
on account by analyzing the Accounts Receivable account
(using assumed amounts):
Accounts Receivable
Beginning balance
Sales on account
6,000

Collections on account

Ending balance
10,000

11,000

5,000
* 6,000 + 10,000 - 5,000 = 11,000

2-78

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LO 6

Analyzing Accounts
You can determine how much you paid on account by
analyzing Accounts Payable (using assumed amounts):

Accounts Payable
Beginning balance
Payments on account
4,000

Ending balance
6,000

* 9,000 + 6,000 - 11,000 = 4,000

2-79

* Purchases on account
9,000

11,000

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LO 6

Correcting Accounting Errors

2-80

Missing account

Trace each account from journal to

ledger

Divide out-ofbalance amount

by 2

Reversing debits and credits doubles

the error

Divide out-ofbalance amount

by 9

If an integer (no decimals), error may be

a slide or transposition

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LO 6

Chart of Accounts
Exhibit 2-13 | Chart of AccountsFreddys Auto Service, Inc.

2-81

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LO 6

The Normal Balance of an Account

Exhibit 2-14 | Normal Balances of the Accounts

2-82

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LO 6

Account Formats
Two Formats:

T-account

Four column
Exhibit 2-15 | Account in Four-Column Format

2-83

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LO 6

Analyzing Transactions Using Only

T-Accounts

2-84

Decisions often are made without a complete

accounting system

T-accounts allow managers to analyze transactions

quickly

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LO 6

Analyzing Transactions Using T-Accounts

For example, the managers of Whole Foods Market, Inc.,
may consider borrowing $100,000 to buy equipment. To see
how the two transactions affect Whole Foods Market, Inc., the
manager can go directly to T-accounts.
(a) Borrow
(b) Buy Equipment

(a)

Equipment

Note Payable

(b)

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Cash

100,000

Copyright 2015 Pearson Education Inc. All rights reserved.

100,000

(b)

100,000

(a)

100,000

LO 6

Copyright
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2-86

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