Chapter 9.5® - How to Analyze Accounting Transactions Part #1

• Part 9.1 - Basic Introductory Accounting Terminologies
• Part 9.2 - Double Entry Accounting - Accounting Debits & Credits
• Part 9.3 - General Ledger & Chart of Accounts - Debits & Credits to Accounts
• Part 9.4 - Important Rules for Double Entry Accounting – Balance Sheet Accounts
• Part 9.5 - How to Analyze Accounting Transactions Part #1
• Part 9.6 - How to Analyze Accounting Transactions Part #2

Let’s analyze transactions of a hypothetical firm called Simpsons Corp. to show how debits, credits & double-entry accounting work. We will analyze these transactions in two steps i) Analyze the source document from where the transaction originates and ii) Apply double-entry accounting rules to identify the effects of the transaction on the Assets side of the accounting equation and the Liabilities + Shareholder’s equity side.

1) Investment by Owner

Transaction: Mr. Simpson invests $120,000 to his business on January 1st, 2010.

Analysis: Assets increase. Owner’s equity Increases.

Double-Entry Accounting: Debit the Cash asset account for $120k. Credit the Simpson, Owner’s Equity account for $120k.

2) Buy Supplies for Cash

Transaction: Simpsons Corp purchases supplies by paying $3,000 cash.

Analysis: Assets (supplies) increase. Assets (cash) decrease. This only affects the left side of the accounting equation (the assets side) but does not change the total amount of assets.

Double-Entry Accounting: Debit the Supplies account for $3000. Credit the cash account for $3,000.

3) Buy Office Furniture for Cash

Transaction: Simpsons Corp buys office furniture for $10,000 cash.

Analysis: Assets (office furniture) increase. Assets (cash) decrease. This only affects the left side of the accounting equation (the assets side) but does not change the total amount of assets.

Double-Entry Accounting: Debit the Office Furniture account for $10,000. Credit the cash account for $10,000.

4) Buy Office Printer & Desks on Credit

Transaction: Simpsons Corp buys office printer for $2,000 on credit and $3,000 of desks for which it signed a promissory note.

Analysis: Assets (office printer) increase. Assets (desks) increase. Accounts payable & Notes payable increases (two liabilities).

Double-Entry Accounting: Debit the Office Printer account for $2,000 and Desks account for $3,000. Credit the Accounts Payable account for $2,000 and Notes payable for $3,000.

5. Provide Consulting Service for Cash.

Transaction: Simpsons Corp does consulting service for a client and earns $15,000 cash paid via a bank transfer.

Analysis: Assets (Cash) increase. Revenues increase (Owner’s equity increases).

Double-Entry Accounting: Debit the Cash account for $15,000 (increase). Credit the Consulting Revenues account for $15,000 (increase).

6. Pay Rent Expense via Cash.

Transaction: Simpsons Corp pays its January 2010 rent totalling $2,800.

Analysis: Rent Expenses increase. Cash decreases.

Double-Entry Accounting: Debit the Rent expense account for $2,800. Credit the Cash account for $2,800.

7. Payment of Employee Salaries for Cash.

Transaction: Simpsons Corp pays its January 2010 employee salaries totalling $5,000.

Analysis: Salaries expense (expense) increases. Cash (asset) decreases.

Double-Entry Accounting: Debit the Salaries expense account for $5,000. Credit the Cash account for $5,000.

8. Rents Office Space on Credit

Transaction: Simpsons Corp rents out its office space for 1 month with rent set at $700.

Analysis: Asset (Accounts Receivable) increases. Rental revenue (Revenue account) increases.

Double-Entry Accounting: Debit the Accounts Receivable account for $700. Credit the Rental revenue account for $700.