Accounting Analyzing Transaction (PowerPoint PPT)

Accounting Analyzing Transaction

Lecture Outline :
1. The effects of transactions on financial statements.
2. Describe the characteristics of an account.
3. The rules of debit and credit and the normal balances of accounts.
4. Analyze the financial statement effects of transactions.
5. Prepare a trial balance and how it can be used to discover errors.
6. Discover errors in recording transactions and correct them.
7. Horizontal analysis to compare financial statements.

Did you know that millions of times a day, all over the world, transactions occur? Think about it. Any time that a bill is paid, a loan is made, a purchase is made, or a sale is made, a transaction has occurred. A transaction is any event that involves goods, services, or money changing hands. For the average person, a completed transaction simply means that something on their to-do list has been completed. To the accounting professional, a completed transaction is just the beginning of something even bigger.

It's the beginning of the accounting cycle. The accounting cycle is the series of events that begin with a transaction and end with the closing of the books for an accounting period. In this lesson, we're going to talk about the first step in the accounting cycle: transaction analysis. What is transaction analysis, you wonder? Transaction analysis is the act of examining a transaction to decide how it affects the accounting equation.

Now, in order to analyze a transaction, you must know what it is you're looking for. Accountants are equipped with a very special tool that they use when analyzing transactions – that tool is the accounting equation. The accounting equation states that assets = liabilities + owner's equity. An asset is something that a business owns. A liability is something that a business owes. Owner's equity is the amount of money that a business owner personally invests in the business. Every account that a business has falls into one of these three categories.

Another important thing to know before you can analyze a transaction is that accounting professionals use a double-entry accounting system. A double-entry accounting system is one that is based on the premise that for every one transaction at least two accounts will be affected.

So, what does this mean? It means that at least one account will be debited and one account will be credited. A debit is an entry on the left side of an account that signifies an increase in the balance of an asset account and a decrease in the balance of a liability or owner's equity account. A credit is an entry on the right side of an account that decreases the balance of an asset account and increases the balance of a liability or owner's equity account.

The last thing that you really need to know before you can begin transaction analysis goes back to the accounting equation. If you recall, the accounting equation states that assets are equal to the sum of the total of liabilities and owner's equity. The key to this is in the word 'equals'. The same premise applies to transaction analysis as it does to the accounting equation. The bottom line is that everything must balance.

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