TRANSACTION ANALYSIS II

In the previous part, I itemized and discussed the processes of analyzing transactions.

Today, I would continue from Trial balance.

• Transactions
• Journal Voucher
• Ledger Accounts/ T accounts
• Trial Balance
• Financial Statement

Trial Balance

This lists all accounts with their balances—assets, liabilities and stockholders’ equity. It summarizes all the account balances for the financial statements and shows whether total debits equal total credits.

A trial balance can be reported at any time, but the commonest time is at the end of the period.

Analyzing An Account

This is a powerful tool for a manager who knows accounting. For example, if you know the beginning and ending balance of Cash, and if you know total cash receipts, you can compute your total cash payments during the period.

Suppose Kquinxtarbells Supermarket began May with cash of N1,000. During May, Kquinxtarbells received cash of N8,000 and ended the month with a cash balance of $3,000. You can compute total cash payments by analyzing kquinxtarbells’s Cash account.

Or, if you know Cash’s beginning and ending balances and total payments, you can compute cash receipts during the period.

Correcting Accounting Errors

Accounting errors can occur even in computerized systems. Input data may be wrong, or they may be entered twice or not at all. A debit may be entered as a credit, and vice versa. You can detect the reason or reasons behind many out-of-balance conditions by computing the difference between total debits and total credits. Then perform one or more of the following actions:

1. Search the records for a missing account. Trace each account back and forth from the journal to the ledger. A N200 transaction may have been recorded incorrectly in the journal or posted incorrectly to the ledger. Search the journal for a N200 transaction.

2. Divide the out-of-balance amount by 2. A debit treated as a credit, or vice versa, doubles the amount of error. Suppose Kquinxtarbell Supermarket added $300 to Cash instead of subtracting $300. The out-of-balance amount is N600 and dividing by 2 identifies N300 as the amount of the transaction. Search the journal for the N300 transaction and trace to the account affected.

Chart of Account

Ledger contains the accounts grouped under these headings:

1. Balance sheet accounts: Assets, Liabilities, and Stockholders’ Equity

2. Income statement accounts: Revenues and Expenses

Chart of accounts are used to list organization’s accounts and account numbers. Account numbers usually have 2 or more digits. Asset account numbers may begin with 1, liabilities with 2, stockholders’ equity with 3, revenues with 4, and expenses with 5.

The second, third, and higher digits in an account number indicate the position of the individual account within the category. For example, Cash may be account number 101, which is the first asset account. Accounts Payable may be number 201, the first liability. All accounts are numbered by using this system.

Normal Balance of Account

An account’s normal balance falls on the side of the account; debit or credit where increases are recorded. The normal balance of assets is on the debit side, so assets are debit-balance accounts. Conversely, liabilities and stockholders’ equity usually have a credit balance, so these are credit-balance accounts.

Till next time.

#MMBA3