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Chapter 2

Chapter 2. Analyzing and Recording Transactions Last Revised: 3/1/2011. Conceptual Learning Objectives. SELF-STUDY: C1: Explain the steps in processing transactions. C2: Describe source documents and their purpose.

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Chapter 2

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  1. Chapter 2 Analyzing and Recording Transactions Last Revised: 3/1/2011

  2. Conceptual Learning Objectives SELF-STUDY: C1: Explain the steps in processing transactions. C2: Describe source documents and their purpose. C3: Describe an account and its use in recording transactions. C4: Describe a ledger and a chart of accounts. C5: Define debitsand creditsand explain double-entry accounting. 2-2

  3. Analytical Learning Objectives A1: Analyze the impact of transactions on accounts and financial statements. A2:Compute the debt ratio and describe its use in analyzing financial condition =>Self-study 2-3

  4. Procedural Learning Objectives P1:Record transactions in a journal and postentries to a ledger (T account). P2:Prepare and explain the use of a trial balance. P3:Prepare financial statements from business transactions. 2-4

  5. Analyzing and Recording Process C 1 Exchanges of economic consideration between two parties. External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. 2-5

  6. Analyzing and Recording Process • Accounting process: • -Identifiesbusiness transactions and events, • -Analyzes and records their effects, and • -Summarizes and presents information in reports and financial statements. • Steps in accounts process that focus on analyzing and recordingtransactions and events are: • Record relevant transactions and events in a journal, • (2) Post journal information to ledger accounts, and • (3) Prepare a trial balance. • Accounting records are informally referred as the • accounting books, or simply the books.

  7. Record relevant transactions and events in a journal Analyze each transaction and event from source documents Post journal information to ledger (T) accounts Prepare and analyze the trial balance Analyzing and Recording Process C 1 2-7

  8. Source Documents C 2 Bills from Suppliers Checks Purchase Orders Employee EarningsRecords Bank Statements Sales Tickets 2-8

  9. The Account and its Analysis C 3 An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company. 2-9

  10. AssetsAccounts AssetsAccounts + AssetAccounts LiabilityAccounts LiabilityAccounts LiabilityAccounts EquityAccounts EquityAccounts EquityAccounts The Account and its Analysis C 3 = 2-10

  11. Asset Accounts C 3 Cash Accounts Receivable Land AssetAccounts Notes Receivable Buildings Prepaid Accounts Equipment Supplies 2-11

  12. Liability Accounts C 3 Accounts Payable Notes Payable LiabilityAccounts Dividends Payable Accrued Liabilities Unearned Revenue 2-12

  13. Equity Accounts C 3 Retained Earnings CommonStock Dividends Declared EquityAccounts Revenues Expenses 2-13

  14. – – + + CommonStock Dividends Revenues Expenses The Account and its Analysis C 3 = + Assets Liabilities Equity 2-14

  15. Ledger and Chart of Accounts C 4 The ledger is a collection of all accounts for aninformation system. A company’s size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts andincludes an identifying number for each account. 2-15

  16. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C 5 2-16

  17. Double-Entry AccountingNORMAL Balance ASSETS = LIABILITIES + EQUITY DR = CR CR Assets are on the left side of the equation; therefore, the left, or debit side is the normal balance side for assets. Liabilities and equities are on the right side; therefore, the right, or credit side is the normal balance side for liabilities and equity.

  18. Double-Entry Accounting ASSETS = LIABILITIES + EQUITY|| ASSETS = LIABILITIES + Common Stock – DIV + REV - EXP Total amount that is debited to accounts must equal the total amount credited to accounts for each transaction. Sum of debit account balances in the ledger must equal the sum of credit account balances.

  19. = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- - + - + Double-Entry AccountingNORMAL Balance C 5 Whether a debit or a credit is an increase or decrease depends on the NORMAL Balance of the account. 2-19

  20. Double-Entry AccountingNORMAL Balance _ _ CommonStock Dividends + Revenues Expenses Stock Dividends Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit - + +- - + +- C 5 Equity 2-20

  21. Double-Entry AccountingNORMAL Balance C 5 An account balance is the difference between the increases and decreasesin an account. Notice the T-Account 2-21

  22. = + Assets Liabilities Equity Step 1: Analyze transactions and source documents. Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry Journalizing & Posting Transactions P1 2-22

  23. Titles of Affected Accounts • Transaction Date • Transaction explanation Journalizing Transactions P1 • Dollar amount of debits and credits 2-23

  24. T-accounts are useful illustrations, but balance column accounts are used in practice. Balance Column Account P1 2-24

  25. Posting Journal Entries P1 1 Identify the debit account in ledger. 2-25

  26. Posting Journal Entries P1 2 Enter the date. 2-26

  27. Posting Journal Entries P1 3 Enter the amount and description. 2-27

  28. Posting Journal Entries P1 Enter the journal reference. 4 2-28

  29. Posting Journal Entries P1 Compute the balance. 5 2-29

  30. Posting Journal Entries P1 6 Enter the ledger reference. 2-30

  31. Analysis: Double entry: 101 Posting: 301 Analyzing Transactions A1 2-31

  32. Analysis: Double entry: Posting: 101 126 Analyzing Transactions A1 2-32

  33. Double entry: Posting: 101 167 Analyzing Transactions A1 Analysis: 2-33

  34. Double entry: Posting: 201 126 Analyzing Transactions A1 Analysis: 2-34

  35. Analysis: Double entry: Posting: 101 403 Analyzing Transactions A1 2-35

  36. Analysis: Double entry: Posting: 101 Analyzing Transactions A1 2-36

  37. Analyzing Transactions Transactions 7: Payment of Salaries expenses in cash Analysis: - Assets (Cash) = – Equity (Expenses) Double entry: Debit Salaries Expenses and credit Cash Transaction 8: Provide services and rents test facilities for credit Analysis: + Assets (Accts Receivable) = + Equity (Revenues) Double entry: Debit Accounts Receivable and Credit Consulting Revenue and Credit Rental Revenue Transaction 9: Receipt of cash from accounts receivable Analysis: + Assets (Cash) = – Assets (Accounts Receivable) Double entry: Debit Cash and credit Accounts Receivable

  38. Analyzing Transactions Transaction 10: Payment of accounts payable Analysis: – Assets (Cash) = – Liability (Accounts Payable) Double entry: Debit Accounts Payable and credit Cash Transaction 11: Payment of cash dividend Analysis: – Assets (Cash) = – Equity (Dividends) Double entry: Debit Dividends and credit Cash Transaction 12: Receipts of cash from a customer for future consulting services Analysis: + Assets (Cash) = + Liabilities (Unearned Revenue) Double entry: Debit Cash and credit Unearned Consulting Revenue

  39. Analyzing Transactions Transaction 13: Pay cash for future insurance coverage Analysis: – Assets (Cash) = + Assets (Prepaid Insurance) Double entry: Debit Prepaid Insurance and credit Cash Transaction 14: Purchase supplies for cash Analysis: - Assets (Cash) = + Assets (Supplies) Double entry: Debit Supplies and credit Cash Transactions 15: Payment of utilities expenses in cash Analysis: – Assets (Cash) = – Equity (Expenses) Double entry: Debit Utilities Expense and credit Cash Transactions 16: Payment of salaries expenses in cash Analysis: – Assets (Cash) = – Equity (Expenses) Double entry: Debit Salaries Expense and credit Cash

  40. FastForward Trial Balance December 31, 2009 Debits Credits Cash $ 4,350 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable $ 6,200 Unearned consulting revenue 3,000 Common stock 30,000 Dividends 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300 A1 After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. 2-40

  41. Exercises 16 and 17

  42. Six Steps for Searching for and Correcting Errors P2 If the trial balance does not balance, the error(s) must be found and corrected. Make sure the trial balance columns are correctly added. Recompute each account balance in the ledger. Make sure account balances are correctly entered from the ledger. Verify that each journal entry is posted correctly. See if debit or credit accounts are mistakenly placed on the trial balance. Verify that each original journal entry has equal debits and credits. 2-42

  43. Exercises 20 and 21

  44. Using a Trial Balance to Prepare Financial Statements P3 Point inTime Point inTime Period of Time Income Statement Statement of Retained Earnings Statement of Cash Flows Beginning Balance Sheet Ending Balance Sheet 2-44

  45. Income Statement P3 2-45

  46. Statement of Retained Earnings P3 2-46

  47. Balance Sheet P3 2-47

  48. Describes the relationship between the amounts of the company’s liabilities and assets. Helps to assess the risk that a company will fail to pay its debts. Debt Ratio A2 2-48

  49. Exercise 23

  50. End of Chapter 2 2-50

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