Chapter 2: Overview
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.
A Demo 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.
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Analyzing and Recording Business Transactions
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
2-2
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 every entry 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.
2-3
Chapter 2: Student Summary Handout
1. Chart of Accounts: listing of all accounts of a business with account numbers assigned to each
oAssets
oLiabilities
oStockholders’ equity (other than a revenue or expense account)
oRevenues
oExpenses
2. Double-entry accounting
oEvery transaction affects at least two accounts
oEach transaction is recorded with equal amounts of debits and credits
Asset, dividends, and expense (ADE) accounts increase on the debit side
Liability, common stock, revenue, and retained earnings (LCR) accounts increase on
the credit side
oThe normal balance of an account is on the increase side of the account
3. Journalizing and posting transactions
oRecord (i.e., journalize) the transactions in the General Journal
Record the date of the transaction
List the title of account debited with the amount in the debit column
List the title of account credited on the next line (indented) with amount in the credit
column
Write a brief explanation describing the entry
oPost the transaction from the journal to the ledger
2-4
oBalance the accounts by calculating each account’s balance (i.e., difference between the
account’s total debits and its total credits)
4. Prepare a trial balance
oHeading
oList accounts in account number order with the respective balance in the appropriate debit or
credit column
oTotal each column verifying total debits = total credits
5. Use the trial balance to prepare the financial statements
oIncome Statement
oStatement of Retained Earnings (uses net income or loss from the Income Statement)
oBalance Sheet (the balance for retained earnings comes from the Statement of Retained
Earnings)
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Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Short Exercises
S2-1 Using accounting terminology 1 5 Easy
S2-2 The role of accounts 1 5 Easy
S2-3 Recording and summarizing transactions 3, 4 5 Easy
S2-4 The role of accounts 1 5 Easy
S2-5 Using accounting terminology 2, 3, 4 5 Easy
S2-6 Double-entry accounting 2 5 Easy
S2-7 Calculating account balances 3 5 Easy
S2-8 Double-entry accounting 2 5 Easy
S2-9 Recording and summarizing transactions 2 10 Easy
S2-10 Recording and summarizing transactions 3 10 Easy
S2-11 Recording and summarizing transactions 3 10 Easy
S2-12 Preparing a trial balance 4 10 Easy
S2-13 Using a trial balance for preparing
financial statements 4 10 Easy
S2-14 Using accounting terminology 1, 2, 3, 4 10 Easy
Exercises (Group A)
E2-15A The role of accounts; double-entry accounting 2 10 Easy
E2-16A Recording and summarizing transaction 3 10-15 Easy
E2-17A Recording and summarizing transactions 3 10-15 Easy
E2-18A Calculating account balances and preparing
a trial balance 3, 4 10-15 Easy
E2-19A Recording and summarizing transactions;
preparing a trial balance 3, 4 10-15 Medium
E2-20A Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 10-20 Medium
E2-21A Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 15-20 Medium
E2-22A Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 10-15 Difficult
Exercises (Group B)
E2-23B The role of accounts; double-entry accounting 2 10 Easy
E2-24B Recording and summarizing transactions 3 10-15 Easy
E2-25B Recording and summarizing transactions 3 10-15 Easy
E2-26B Calculating account balances and preparing
a trial balance 3, 4 10-15 Easy
E2-27B Recording and summarizing transactions;
preparing a trial balance 3, 4 10-15 Medium
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E2-28B Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 10-20 Medium
E2-29B Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 15-20 Medium
E2-30B Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 10-15 Difficult
Exercises (Alternatives 1,2, and 3)
Available at www.myaccountinglab.com
Problems (Group A)
P2-31A Recording and summarizing transactions 3 15-20 Medium
P2-32A Recording and summarizing transactions 3 15-20 Medium
P2-33A Recording and summarizing transactions;
preparing a trial balance 3, 4 40-50 Medium
P2-34A Recording and summarizing transactions;
preparing a trial balance 3, 4 50-60 Medium
P2-35A Using a trial balance for preparing
financial statements 4 30-40 Medium
P2-36A Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 30 Difficult
Problems (Group B)
P2-37B Recording and summarizing transactions 3 15-20 Medium
P2-38B Recording and summarizing transactions 3 15-20 Medium
P2-39B Recording and summarizing transactions;
preparing a trial balance 3, 4 40-50 Medium
P2-40B Recording and summarizing transactions;
preparing a trial balance 3, 4 50-60 Medium
P2-41B Using a trial balance for preparing
financial statements 4 30-40 Medium
P2-42B Recording and summarizing transactions;
using a trial balance for preparing
financial statements 3, 4 30 Difficult
Problems (Alternatives 1,2, and 3))
Available at www.myaccountinglab.com
Continuing Exercise
Open T-accounts, journalize transactions,
Post and prepare trial balance 3, 4 30 Medium
Continuing Problem
Recording and summarizing transactions;
preparing a trial balance 3, 4 50-60 Medium
2-7
Financial Statement Analysis
Utilizing Target Corporation’s
financial statements to answer a
series of questions
Ethics in Action (2 scenarios)
Financial Analysis 60 Medium
Industry Analysis 40 Medium
Small Business Analysis 30 Medium
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
7. A
8. A
9. B
10. D
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Name Date Section
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
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7. The journal entry to record the payment to a supplier of $890 on account is:
A. Accounts Payable 890
Cash 890
B. Cash 890
Accounts Receivable 890
C. Cash 890
Accounts Payable 890
D. Supplies 890
Cash 890
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 payable 6,900
Building 179,400
Cash 15,800
Common stock 64,000
Salary expense 56,100
Salary payable 3,600
Service revenue 190,500
Dividends 6,500
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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