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CHAPTER 4

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CHAPTER 4

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  1. CHAPTER 4 The Bookkeeping Process and Transaction Analysis

  2. Borrow cash from the bank The Bookkeeping/Accounting Process Transactions are economic interchanges between entities that are accounted for and reflected in financial statements.

  3. The Balance Sheet Equation—A Mechanical Key A = L + OE The basic accounting equation can be expanded to include revenues and expenses. A = L + PIC + REBEG+ R - E

  4. Let’s see how some transactions effect the operation of this equation.

  5. Transactions • The owners invested $2,000. • The company borrowed $6,000 from a bank. • Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000. • Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days. • The company provided services for $8,000 and received cash. • Wages of $2,000 were paid in cash.

  6. Equipment Cash Notes Payable Inventory Bookkeeping Jargon Transactions are initially recorded in a journal. Transactions are then recorded—posted to—individual accounts in the ledger.

  7. A T-account is a tool used to represent an account. T-Account Account Name Left Right

  8. T-Account The leftside of the T-account is always the debit side. The rightside of the T-account is always the credit side. Account Name Left Right Debit Credit

  9. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Debits and Credits Debits and credits affect the accounting equation as follows: A = L + OE

  10. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Debits and Credits A = L + OE Remember that Owners’ Equity includes Paid-in Capital and Retained Earnings. Paid-in Capital Retained Earnings

  11. Revenue and Expenses Increases in owners’ equity. Increases with a credit. Increases with a debit. Decreases in owners’ equity.

  12. Debits and Credits A = L + OE

  13. Journal Entry Format A typical journal entry might look like this.

  14. Debits are written first. Provide a reference date for each transaction. Total debits must equal total credits. Credits are indented and written after debits. Journal Entry Format

  15. Transactions Recorded in the Journal Source Documents Account Name Posted to the Ledger Debit Credit The Bookkeeping Process

  16. Transaction Analysis Illustrated Let’s prepare some journal entries for and post them to the ledger. • Transactions • The owners invested $2,000. • The company borrowed $6,000 from a bank. • Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000. • Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days. • The company provided services for $8,000 and received cash. • Wages of $2,000 were paid in cash.

  17. The owners invested $2,000.

  18. The company borrowed $6,000 from a bank.

  19. Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000. Let’s see how to post this entry . . .

  20. Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000.

  21. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days.

  22. The company provided services for $8,000 and received cash.

  23. Wages of $2,000 were paid in cash.

  24. At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements.

  25. Adjustments/Adjusting Entries Adjusting entries are Every adjusting needed whenever revenue or expenses affect more than one entry involves a change in either a revenue or expense and an asset or liability. accounting period.

  26. Accruals Reclassifications Transactions for which cash has NOT yet been received or paid, but the effect of which must be recorded in the accounts in order to accomplish a matching of revenues and expenses. The initial recording of a transaction does not result in assigning revenues to the period in which they were earned or expenses to the period in which they were incurred.. Types of Adjusting Entries

  27. Accruing Expenses Hey, when do we get paid? Examples Include: Interest Wages and Salaries Property Taxes

  28. Accruing Expenses $3,000 Wages Expense Monday, May 29 Wednesday, May 31 Friday, June 2 On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2.

  29. Accruing Expenses Initially, an expense and a liability are recorded.

  30. Accruing Unpaid Expenses Balance Sheet Liability to be paid in a future period. Income Statement Cost incurred this period to generate revenue.

  31. Accruing Expenses $5,000 Weekly Wages $3,000 Wages Expense $2,000 Wages Expense Monday, May 29 Wednesday, May 31 Friday, June 2 Let’s look at the entry for June 2.

  32. Accruing Expenses The liability is extinguished when the debt is paid.

  33. Accruing Revenues Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer

  34. Accruing Revenues $170 Interest Revenue Saturday, Jan. 15 Monday, Jan. 31 Tuesday, Feb. 15 On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th day of each month.

  35. Accruing Revenues Initially, the revenue is recognized and a receivable is created.

  36. Accruing Revenues Balance Sheet Receivable to be collected in a future period. Income Statement Revenue earned this period.

  37. Accruing Revenues $320 Monthly Interest $170 Interest Revenue $150 Interest Revenue Saturday, Jan. 15 Monday, Jan. 31 Tuesday, Feb. 15 Let’s look at the entry for February 15.

  38. Accruing Revenues The receivable is collected in a future period.

  39. Reclassifying Assets to Expenses Examples Include: Supplies Expiring Insurance Policies

  40. Reclassifying Assets to Expenses $2,400 Insurance Policy Coverage for 12 Months $200 Monthly Insurance Expense Jan. 1 Dec. 31 On January 1, Webb Co. purchased a one-year insurance policy for $2,400.

  41. Reclassifying Assets to Expenses Initially, costs that benefit more than one accounting period are recorded as assets.

  42. Reclassifying Assets to Expenses The costs are expensed as they are used to generate revenue.

  43. Reclassifying Assets to Expenses Balance Sheet Cost of assets that benefit future periods. Income Statement Cost of assets used this period to generate revenue.

  44. Reclassifying Liabilities to Revenues Examples Include: Airline Ticket Sales Sports Teams’ Sales of Season Tickets

  45. Reclassifying Liabilities to Revenues $6,000 Rental Contract Coverage for 12 Months $500 Monthly Rental Revenue Jan. 1 Dec. 31 On January 1, Webb Co. received $6,000 in advance for a one-year rental contract.

  46. Reclassifying Liabilities to Revenues Initially, revenues that benefit more than one accounting period are recorded as liabilities.

  47. Reclassifying Liabilities to Revenues Over time, the revenue is recognized as it is earned.

  48. Reclassifying Liabilities to Revenues Balance Sheet Liability for future periods. Income Statement Revenue earned this period.

  49. Closing the Books The closing process simply transfers the year-end balances of all income statement accounts (e.g., revenues, expenses, gains and losses) to the retained earnings account. In addition, the dividends account is also closed to retained earnings.