ACCOUNTING—

INDONESIA ADAPTATION
4 TH EDITION—VOLUME 1
Carl S. Warren
James M. Reeve
Jonathan E.Duchac
Ersa Tri Wahyuni
Amir Abadi Jusuf
 CHAPTER 2

ANALYZING TRANSACTION
Contents

Using
Accounts to
Record
Transactions

Financial Double-
Analysis and
Entry
Interpretatio
n: Horizontal Accounting
Analysis System

Posting
Trial Journal
Balance Entries to
Accounts
Using Accounts to Record Transactions

 In Chapter 1, the November transactions for SolusiNet were

recorded using the accounting equation format.
 Accounting equation is not efficient or practical for
companies that have to record thousands or millions of
transactions daily.
 Accounting systems are designed to show the increases and
decreases in a separate record called an account.
An account
An account, in its simplest form, has three parts.
 A title, which is the name of the accounting equation
element recorded in the account.
 A space for recording increases in the amount of the
element.
 A space for recording decreases in the amount of the
element.
T Account
SolusiNet November Transaction
Rules in Recording Transaction
in Account
Cash Account For SolusiNet
Chart of Accounts (COA)

 A group of accounts for a business entity is called a ledger.

 A list of the accounts in the ledger is called a chart of
accounts.
 The statement of financial position accounts are listed first,
in the order of assets, liabilities, and owner’s equity.
 The income statement accounts are then listed in the order
of revenues and expenses.
 Owner’s
• The owner’s right to the assets of the business after equity
all liabilities have been paid
Liabilities
• Debts owed to outsiders (creditors)
Assets
• Resources owned by the business entity
COA for Statement of Financial Position
 Expense
• Result from using up assets or consuming s
services in the process of generating revenues
Revenue
• Increases in owner’s equity as a result of selling
s
services or products to customers
COA for Income Statement
COA for SolusiNet
Double-Entry Accounting System

This system is based on the accounting equation and requires:

 Every business transaction to be recorded in at least two
accounts.
 The total debits recorded for each transaction to be equal
to the total credits recorded.
Debit and Credit Rule for Statement of
Financial Position Accounts
Debit and Credit Rule for Income
Statement Accounts
Owner Withdrawals
Normal Balances
 The normal balance of an account is either a debit or credit
depending on whether increases in the account are recorded as
debits or credits.

Account Normal Balances

Asset Debit
Liability Credit
Equity Credit
Revenue Credit
Expense Debit
Withdrawal Debit
Rules of Debit and Credit, Normal
Balances of Accounts
Journalizing

• Using the rules of debit and credit, transactions are initially

entered in a record called a journal.
• The November transactions of SolusiNet from Chapter 1 are
used in journalizing illustration.
Transaction A (slide 1 of 2)

Nov. 1, 2015
Cristina deposited Rp25,000,000 in a bank
account in the name of SolusiNet.
Transaction A (slide 2 of 2)
This transaction:
 increases an asset account, and
 increases an owner’s equity account.

It is recorded in the journal as:

 an increase (debit) to Cash and,
 an increase (credit) to Cristina, Capital.
Journal Entry for Transaction A
• The Posting reference column is left blank when recording journal entry. Step 5
• This coulumn is used later during the posting process
• A brief description may be entered below the credited account Step 4
• The tittle of the account to be credited is listed below and to the right of debited
Step 3
account
• Enter the amount to be credited in the Credit column
• The title of the account to be debited is recorded in the left-hand margin under The
Step 2
Description column
• Enter the amount to be debited in the Debit column
• Enter the date of the transaction in the date column Step 1
In Journal
5 Steps in Recording Transaction
Common Transaction Terminology
Transaction B (slide 1 of 2)

Nov. 5
SolusiNet paid Rp20,000,000 for the
purchase of land as a future building site.
Transaction B (slide 2 of 2)
This transaction:
 increases one asset account, and decreases another.
It is recorded in the journal as:
 a Rp20,000,000 increase (debit) to Land and
 a Rp20,000,000 decrease (credit) to Cash.
Transaction C (slide 1 of 2)

Nov. 10
SolusiNet purchased supplies on account for
Rp1,350,000.
Transaction C (slide 2 of 2)
This transaction:
 increases an asset account, and
 increases a liability account.
It is recorded in the journal as:
 a Rp1,350,000 increase (debit) to Supplies, and
 a Rp1,350,000 increase (credit) to Accounts Payable.
Transaction D (slide 1 of 2)

Nov. 18
SolusiNet received cash of Rp7,500,000 from
customers for services provided.
Transaction D (slide 2 of 2)
This transaction:
 increases an asset account, and
 increases a revenue account.
It is recorded in the journal as:
 a Rp7,500,000 increase (debit) to Cash, and
 a Rp7,500,000 increase (credit) to Fees Earned.
Transaction E (slide 1 of 3)

Nov. 30
SolusiNet incurred the following expenses:
wages, Rp2,125,000; rent, Rp800,000;
utilities, Rp450,000;
and miscellaneous, Rp275,000.
Transaction E (slide 2 of 3)
This transaction:
 increases various expense accounts, and
 decreases an asset (Cash) account.

It is recorded in the journal with:

 increases (debits) to the expense accounts (Wages Expense,
Rp2,125,000; Rent Expense, Rp800,000; Utilities Expense,
Rp450,000; and Miscellaneous Expense, Rp275,000), and
 a decrease (credit) to Cash, Rp3,650,000.
Transaction E (slide 3 of 3)
Transaction F (slide 1 of 2)

Nov. 30
SolusiNet paid creditors on account, Rp950,000
Transaction F (slide 2 of 2)
This transaction:
 decreases a liability account, and
 decreases an asset account.
It is recorded in the journal as:
 a Rp950,000 decrease (debit) to Accounts Payable, and
 a Rp950,000 decrease (credit) to Cash.
Transaction G (slide 1 of 2)

Nov. 30
Cristina determined that the cost of supplies
on hand at November 30 was Rp550,000.
Transaction G (slide 2 of 2)
 SolusiNet purchased Rp1,350,000 of supplies on November
10. Thus, Rp800,000 (Rp1,350,000 – Rp550,000) of supplies
must have been used during November.
 This transaction is recorded in the journal as:
• a Rp800,000 increase (debit) to Supplies Expense, and
• a Rp800,000 decrease (credit) to Supplies.
Transaction H (slide 1 of 3)

Nov. 30
Cristina withdrew Rp2,000,000 from
SolusiNet for personal use.
Transaction H (slide 2 of 3)
This transaction:
 decreases assets, and
 owner’s equity.
This transaction is recorded in the journal as:
 a Rp2,000,000 increase (debit) to Cristina, Drawing, and
 a Rp2,000,000 decrease (credit) to Cash.
Transaction H (slide 3 of 3)
Posting Journal Entries to Accounts

 A transaction is first recorded in a journal and periodically, the

journal entries are transferred to the accounts in the ledger.
 The process of transferring the debits and credits from the
journal entries to the accounts is called posting.
 The December transactions of SolusiNet are used to illustrate
posting from the journal to the ledger.
Transaction 1 (slide 1 of 3)

Dec. 1
SolusiNet paid a premium of Rp2,400,000
for an insurance policy for liability, theft, and
fire. The policy covers a one-year period.
Transaction 1 (slide 2 of 3)
 Advance payments of expenses, such as for insurance
premiums, are called prepaid expenses.
 Prepaid expenses are assets.

 This transaction is recorded as:

• a Rp2,400,000 increase (debit) to Prepaid Insurance and
• a Rp2,400,000 decrease (credit) to Cash.
Transaction 1 (slide 3 of 3)
Illustration of Posting
Transaction 2 (slide 1 of 2)

Dec. 1
SolusiNet paid rent for December, Rp800,000.
The company from which SolusiNet is renting its office
space now requires the payment of rent on the first of
each month, rather than at the end of the month.
Transaction 2 (slide 2 of 2)
 The advance payment of rent is an asset, much like the
advance payment of the insurance premium in the preceding
transaction.
 However, unlike the insurance premium, this prepaid rent
will expire in one month.
 When an asset is purchased with the expectation that it will be
used up in a short period of time, such as a month, it is normal
to debit an expense account initially.
Transaction 3 (slide 1 of 2)

Dec. 1
SolusiNet received an offer from a local retailer to rent the
land purchased on November 5. The retailer plans to use the
land as a parking lot for its employees and customers.
SolusiNet agreed to rent the land to the retailer for three
months, with the rent payable in advance. SolusiNet
received Rp360,000 for three months’ rent beginning
December 1.
Transaction 3 (slide 2 of 2)

 The liability created by receiving the cash in advance of

providing the service is called unearned revenue.
 As time passes, the unearned rent liability will decrease and
will become revenue.
 This transaction is recorded as:
• a Rp360,000 increase (debit) to Cash, and
• a Rp360,000 increase (credit) to Unearned Rent.
Transaction 4 (slide 1 of 2)

Dec. 4
SolusiNet purchased office equipment on account
from PT Pratama Jaya forRp1,800,000.
Transaction 4 (slide 2 of 2)
 The asset (Office Equipment) and liability accounts (Accounts
Payable) increase.
 This transaction is recorded as:
• a Rp1,800,000 increase (debit) to Office Equipment, and
• a Rp1,800,000 increase (credit) to Accounts Payable.
Transaction 5 (slide 1 of 2)

Dec. 6
SolusiNet paid Rp180,000 for a newspaper
advertisement.
Transaction 5 (slide 2 of 2)
 An expense increases and an asset (Cash) decreases.
 Expense items that are expected to be minor in amount are
normally included as part of the miscellaneous expense.
 This transaction is recorded as:
• a Rp180,000 increase (debit) to Miscellaneous Expense,
and
• a Rp180,000 decrease (credit) to Cash.
Transaction 6 (slide 1 of 2)

Dec. 11
SolusiNet paid creditors Rp400,000.
Transaction 6 (slide 1 of 2)
 A liability (Accounts Payable) and an asset (Cash) decrease.
 This transaction is recorded as:
• a Rp400,000 decrease (debit) to Accounts Payable, and
• a Rp400,000 decrease (credit) to Cash.
Transaction 7 (slide 1 of 2)

Dec. 13
SolusiNet paid a receptionist and a part-time
assistant Rp950,000 for two weeks’ wages.
Transaction 7 (slide 2 of 2)
 This transaction is similar to the December 6 transaction,
where an expense account is increased and Cash is decreased.
 This transaction is recorded as:
• a Rp950,000 increase (debit) to Wages Expense, and
• a Rp950,000 decrease (credit) to Cash.
Transaction 8 (slide 1 of 2)

Dec. 16
SolusiNet received Rp3,100,000 from fees
earned for the first half of December.
Transaction 8 (slide 2 of 2)
 An asset account (Cash) and a revenue account (Fees Earned)
increase.
 This transaction Is recorded as:
• a Rp3,100,000 increase (debit) to Cash, and
• a Rp3,100,000 increase (credit) to Fees Earned.
Transaction 9 (slide 1 of 3)

Dec. 16
Fees earned on account totaled Rp1,750,000
for the first half of December.
Transaction 9 (slide 2 of 3)
 When a business agrees that a customer may pay for services
provided at a later date, an account receivable is created.
 An account receivable is a claim against the customer. An
account receivable is an asset, and the revenue is earned even
though no cash has been received.
 This transaction is recorded as a Rp1,750,000 increase (debit)
to Accounts Receivable and a Rp1,750,000 increase (credit) to
Fees Earned.
Transaction 9 (slide 3 of 3)
Transaction 10 (slide 1 of 2)

Dec. 20
SolusiNet paid Rp900,000 to PT Pratama
Jaya on the Rp1,800,000 debt owed from the
December 4 transaction.
Transaction 10 (slide 2 of 2)
 This is similar to the transaction of December 11.
 This transaction is recorded as a Rp900,000 decrease (debit)
to Accounts Payable and a Rp900,000 decrease (credit) to
Cash.
Transaction 11 (slide 1 of 2)

Dec. 21
SolusiNet received Rp650,000 from
customers in payment of their accounts.
Transaction 11 (slide 2 of 2)
 When customers pay amounts owed for services they have
previously received, one asset increases and another asset
decreases.
 This transaction is recorded as:
• a Rp650,000 increase (debit) to Cash, and
• a Rp650,000 decrease (credit) to Accounts Receivable.
Transaction 12 (slide 1 of 2)

Dec. 23
SolusiNet paid Rp1,450,000 for supplies.
Transaction 12 (slide 2 of 2)
 One asset account (Supplies) increases, and another asset
account (Cash) decreases.
 This transaction is recorded as:
• a Rp1,450,000 increase (debit) to Supplies, and
• a Rp1,450,000 decrease (credit) to Cash.
Transaction 13 (slide 1 of 2)

Dec. 27
SolusiNet paid the receptionist and the part-time
assistant Rp1,200,000 for two weeks’ wages.
Transaction 13 (slide 2 of 2)
 This transaction is similar to the transaction of December 13.
 This transaction is recorded as:
• a Rp1,200,000 increase (debit) to Wages Expense, and
• a Rp1,200,000 decrease (credit) to Cash.
Transaction 14 (slide 1 of 2)

Dec. 31
SolusiNet paid its Rp310,000 telephone bill
for the month.
Transaction 14 (slide 2 of 2)
 This is similar to the transaction of December 6.
 This transaction is recorded as:
• a Rp310,000 increase (debit) to Utilities Expense, and
• a Rp310,000 decrease (credit)to Cash.
Transaction 15 (slide 1 of 2)

Dec. 31
SolusiNet paid its Rp225,000 electric bill for
the month.
Transaction 15 (slide 2 of 2)
 This is similar to the preceding transaction.
 This transaction is recorded as:
• a Rp225,000 increase (debit) to Utilities Expense, and
• a Rp225,000 decrease (credit) to Cash.
Transaction 16 (slide 1 of 2)

Dec. 31
SolusiNet received Rp2,870,000 from fees
earned for the second half of December.
Transaction 16 (slide 2 of 2)
 This is similar to the transaction of December 16.
 This transaction is recorded as:
• a Rp2,870,000 increase (debit) to Cash, and
• a Rp2,870,000 increase (credit)to Fees Earned.
Transaction 17 (slide 1 of 2)

Dec. 31
Fees earned on account totaled Rp1,120,000
for the second half of December.
Transaction 17 (slide 2 of 2)
 This is similar to the transaction of December 16.
 This transaction is recorded as:
• a Rp1,120,000 increase (debit) to Accounts Receivable
and
• a Rp1,120,000 increase (credit) to Fees Earned.
Transaction 18 (slide 1 of 2)

Dec. 31
Cristina withdrew Rp2,000,000
for personal use.
Transaction 18 (slide 2 of 2)
 This transaction decreases owner’s equity and assets.
 This transaction is recorded as:
• a Rp2,000,000 increase (debit) to Cristina, Drawing
• a Rp2,000,000 decrease (credit) to Cash.
Exhibit 6 – Ledger for SolusiNet
(slide 1 of 4)
Exhibit 6 – Ledger for SolusiNet
(slide 2 of 4)
Exhibit 6 – Ledger for SolusiNet
(slide 3 of 4)
Exhibit 6 – Ledger for SolusiNet
(slide 4 of 4)
Trial Balance

Trial balance can be used to detect errors in

posting debits and credits from the journal to
the ledger.

Double-entry accounting requires that debits

must always equal credits.

The trial balance verifies this equality.

 Steps in Preparing Trial Balance
Step 1 - List the name of the company, the title of the
trial balance, and the date the trial balance is prepared.

Step 2 - List the accounts from the ledger, and enter

their debit or credit balance in the Debit or Credit column
of the trial balance.

Step 3 - Total the Debit and Credit columns of the

trial balance.

Step 4 - Verify that the total of the Debit column

equals the total of the Credit column.
Exhibit 7: Trial Balance
Errors Affecting the Trial Balance
(slide 1 of 3)

 If the difference between the Debit and Credit column totals

is 10, 100, or 1,000, an error in addition may have occurred.
In this case, re-add the trial balance column totals. If the
error still exists, recompute the account balances.
 If the difference between the Debit and Credit column totals
can be evenly divisible by 2, the error may be due to the
entering of a debit balance as a credit balance, or vice versa.
Errors Affecting the Trial Balance
(slide 2 of 3)

 If the difference between the Debit and Credit column totals

is evenly divisible by 9, trace the account balances back to
the ledger to see if an account balance was incorrectly
copied from the ledger.
 Two common types of copying errors are transpositions and
slides. A transposition occurs when the order of the digits is
copied incorrectly, such as writing Rp542,000 as Rp452,000
or Rp524,000.
Errors Affecting the Trial Balance
(slide 3 of 3)

 If the difference between the Debit and Credit column totals is

not evenly divisible by 2 or 9, review the ledger to see if an
account balance in the amount of the error has been omitted
from the trial balance. If the error is not discovered, review the
journal postings to see if a posting of a debit or credit may
have been omitted.
 If an error is not discovered by the preceding steps, the
accounting process must be retraced, beginning with the last
journal entry.
Errors Not Affecting the
Trial Balance

 An error may occur that does not cause the trial balance totals
to be unequal, e.g. supplies account has credit balance.
 Correcting journal entry is normally prepared.
Correcting Journal Entry (slide 1 of 3)

 Assume that on May 5 a Rp12,500,000 purchase of office

equipment on account was incorrectly journalized and posted
as:
• a debit to Supplies and a credit to Accounts Payable for
Rp12,500,000.
 Incorrect:
Correcting Journal Entry (slide 2 of 3)

 Before making a correcting journal entry, determine the

debit(s) and credit(s) that should have been recorded.
 Correct:
Correcting Journal Entry (slide 3 of 3)

 Comparing the two sets of T accounts shows that the incorrect

debit to Supplies may be corrected by debiting Office
Equipment for Rp12,500,000 and crediting Supplies for
Rp12,500,000.
Financial Analysis and Interpretation:
Horizontal Analysis

In horizontal analysis
the amount of each item on a current financial
statement is compared with the same item on
an earlier statement.
Illustration of Horizontal Analysis
Horizontal Analysis – Sitompul and Partners

If fees earned increase: Favorable

If expenses decrease : Favorable
Horizontal Analysis for
Statement of Cash Flows
 Two recent years of PT Mitra Adi Perkasa’s statements of
cash flows is shown below.
Horizontal Analysis – PT Mitra
Adi Perkasa

 Increase in cash flows from operating activities of 381.5%,

which is a favorable trend.
 Increase in the cash used in its investing activities by 49.5%
and increased the cash it received from financing activities by
40.0%.
 Overall, PT Mitra Adi Perkasa had a 604.2% increase in cash
for the year, which increase the end-of-the-year cash balance
by 202.8%.