analyzing and recording transactions - mgmt-026 · nalyzing and recording transactions. ... 2 - 2 ....

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

Chapter 02

ANALYZING AND RECORDING TRANSACTIONS

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2 - 2

Analyze each transaction and event from source documents

ANALYZING AND RECORDING PROCESS

Record relevant transactions and events in a journal

Post journal information to ledger accounts

Prepare and analyze the trial balance

C 1

2 - 3

Sales Tickets

Bank Statements

Purchase Orders

Checks

SOURCE DOCUMENTS Bills from Suppliers

Employee Earnings Records

C 1

2 - 4

An account is a record of

increases and decreases in a specific asset, liability, equity,

revenue, or expense item.

THE ACCOUNT AND ITS ANALYSIS

The general ledger is a record

containing all accounts used by

the company.

C 2

2 - 5


Owner, Capital Owner, Withdrawals

C 2

2 - 6

Land

Equipment

Buildings

Cash

Notes Receivable

Supplies

Prepaid Accounts

Accounts Receivable

Asset Accounts

ASSET ACCOUNTS C 2

Prepaid expenses turn into expenses as they are used up

2 - 7

Accrued Liabilities

Unearned Revenue

Notes Payable

Accounts Payable

Liability Accounts

LIABILITY ACCOUNTS C 2

Cash received but product service not delivered

2 - 8

Equity Accounts

Revenues

Owner’s Capital

Owner’s Withdrawals

Expenses

EQUITY ACCOUNTS C 2

Owners claim on companys assets

2 - 9

Liabilities Equity Assets = +


Owner’s Capital

Owner's Withdrawals Revenues Expenses

+ + – –

C 2

2 - 10

LEDGER AND CHART OF ACCOUNTS

The ledger is a collection of all accounts for an information 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 and includes an identifying number for each account.

Account Number Account Name Account Number Account Name101 Cash 302 C. Taylor, Withdrawals106 Accounts receivable 403 Revenues126 Supplies 406 Rental revenue128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense201 Accounts payable 640 Rent expense236 Unearned revenue 652 Supplies expense301 C. Taylor, Capital 690 Utilities expense

C 3

2 - 11

DEBITS AND CREDITS A T-account represents a ledger account and

is a tool used to understand the effects of one or more transactions.

(Left side) (Right side)Debit Credit

Account Title

C 4

When the sum of debits exceeds the credit side you have a debit balance

2 - 12


DOUBLE-ENTRY ACCOUNTING

Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

C 4

Normal Normal Normal

For each transaction at least 2 accounts are involved one debit one credit

2 - 13

Revenues Expenses Owner’s Capital

Owner's Withdrawals

_ + _

Debit Credit

Owner’s Capital

- + Debit Credit

Owner's Withdrawals

+ - Debit Credit

Expenses

+ - Debit Credit

Revenues

- +

DOUBLE-ENTRY ACCOUNTING

Equity

C 4

2 - 14

DOUBLE-ENTRY ACCOUNTING An account balance is the difference between the increases

and decreases in an account. Notice the T-Account.

C 4

2 - 15 JOURNALIZING &

POSTING TRANSACTIONS

Step 1: Analyze transactions and source

documents.


Step 2: Apply double-entry accounting

(Left side) (Right side)Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger

GENERAL JOURNAL Page 123

Date DescriptionPost. Ref. Debit Credit

Step 3: Record journal entry

P 1

2 - 16

Date Description Debit Credit2011Dec. 1 Cash 30,000

C. Taylor, Capital 30,000 Investment by owner

Dec. 2 Supplies 2,500 Cash 2,500

Purchased supplies for cash

Dollar amount of debits and credits

JOURNALIZING TRANSACTIONS Transaction

Date

Transaction explanation

Titles of Affected Accounts

P 1

2 - 17

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance2011

Dec. 1 Initial investment G1 30,000 30,000 Dec. 2 Purchased supplies G1 2,500 27,500 Dec. 3 Purchased equipment G1 26,000 1,500 Dec. 10 Collection from customer G1 4,200 5,700

BALANCE COLUMN ACCOUNT T-accounts are useful illustrations, but balance

column ledger accounts are used in practice.

P 1

2 - 18

2011Dec. 1 Cash 30,000




1 Identify the debit account in ledger.

POSTING JOURNAL ENTRIES P 1

2 - 19

2011Dec. 1 Cash 30,000




Dec. 1

2 Enter the date.


2 - 20

2011Dec. 1 Cash 30,000




Dec. 1 Investment by owner 30,000

3 Enter the amount and description.


2 - 21



Dec. 1 Investment by owner G1 30,000

4 Enter the journal reference.


2011Dec. 1 Cash 30,000


2 - 22



Dec. 1 Investment by owner G1 30,000 30,000

5 Compute the balance.


2011Dec. 1 Cash 30,000


2 - 23

2011Dec. 1 Cash 101 30,000




Dec. 1 Investment by owner G1 30,000 30,000

Enter the ledger reference. 6


2 - 24

Transaction: Owner invested $30,000 in FastForward on Dec. 1.

ANALYZING TRANSACTIONS

Assets = + EquityCash Capital

30,000 30,000

Liabilities

Analysis:

(1) Cash 101 30,000 C. Taylor, Capital 301 30,000

Double entry:

(1) 30,000Cash 101 301

(1) 30,000C. Taylor, Capital 301

Posting:

A 1

2 - 25

ANALYZING TRANSACTIONS Transaction: FastForward purchases supplies by paying $2,500

cash.

Assets = + EquityCash Supplies Capital

(2,500) 2,500

Liabilities

Analysis:

(2) Supplies 126 2,500 Cash 101 2,500

Double entry:

(2) 2,500Supplies 126

(1) 30,000 (2) 2,500Cash 101

Posting:

A 1

2 - 26

Transaction: FastForward purchases equipment by paying $26,000 cash.


Assets = + EquityCash Equipment Capital

(26,000) 26,000

Liabilities

Analysis:

(3) Equipment 167 26,000 Cash 101 26,000

Double entry:

(1) 30,000 (2) 2,500(3) 26,000

Cash(3) 26,000

Equipment 167 101

Posting:

A 1

2 - 27

Transaction: FastForward purchases $7,100 of supplies on credit.


Assets = + EquitySupplies Accounts Payable Capital

7,100 7,100

Liabilities

Analysis:

(4) Supplies 126 7,100 Accounts payable 201 7,100

Double entry:

(2) 2,500 (4) 7,100

Supplies 126 (4) 7,100

Accounts Payable 201

Posting:

A 1

2 - 28

ANALYZING TRANSACTIONS Transaction: FastForward provides consulting services and

immediately collects $4,200 cash.

Assets = + EquityCash Revenue

4,200 4,200

Liabilities

Analysis:

(5) Cash 101 4,200 Consulting Revenue 403 4,200

Double entry:

403 101 (1) 30,000 (2) 2,500(5) 4,200 (3) 26,000

Cash 101(5) 4,200

Consulting Revenue 403Posting:

A 1

2 - 29

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.

Debits Credits Cash 4,350

$

Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200 $ Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 Owner's Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300 $ 45,300

$

FastForward Trial Balance

December 31, 2011 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.

P 2

2 - 30

PREPARING A TRIAL BALANCE

Preparing a trail balance involves three steps: 1.List each account title and its amount (from

ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely).

2.Compute the total of debit balances and the total of credit balances.

3.Verify (prove) total debit balances equal total credit balances.

P 2

2 - 31

SEARCHING FOR AND CORRECTING ERRORS

If the trial balance does not balance, the error(s) must be found and corrected.

Make sure the trial balance columns are correctly added.

Make sure account balances are correctly entered from the ledger.

See if debit or credit accounts are mistakenly placed on the trial balance.

Re-compute each account balance in the ledger.

Verify that each journal entry is posted correctly.

Verify that each original journal entry has equal debits and credits.

P 2

2 - 32

USING A TRIAL BALANCE TO PREPARE FINANCIAL STATEMENTS

P 3

2 - 33

INCOME STATEMENT

Revenues: Consulting revenue 5,800$ Rental revenue 300 Total revenues 6,100$ Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income 3,470$

FASTFORWARDIncome Statement

For the Month Ended December 31, 2011

P 3

2 - 34

STATEMENT OF OWNER'S EQUITY

C. Taylor, Capital 12/1/11 - $ Net income for December 3,470 Plus: Investments by Owner 30,000

33,470 Less: Owner Withdrawals 200

C. Taylor, Capital, 12/31/11 33,270 $

Statement of Owner's Equity For the Month Ended December 31, 2011

FASTFORWARD

Revenues: Consulting revenue 5,800$ Rental revenue 300 Total revenues 6,100$ Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income 3,470$

FASTFORWARDIncome Statement

For the Month Ended December 31, 2011

Connections

P 3

2 - 35

BALANCE SHEET

AssetsCash 4,350$ Supplies 9,720 Prepaid insurance 2,400 Equipment 26,000 Total assets 42,470$

LiabilitiesAccounts payable 6,200$ Unearned revenue 3,000 Total liabilities 9,200

Equity

C. Taylor, Capital 33,270$ Total equity 33,270 Total liabilities and equity 42,470$

FASTFORWARDBalance Sheet

December 31, 2011

Connections

P 3

C. Taylor, Capital 12/1/11 - $ Net income for December 3,470 Plus: Investments by Owner 30,000

33,470 Less: Owner Withdrawals 200

C. Taylor, Capital, 12/31/11 33,270 $

Statement of Owner's Equity For the Month Ended December 31, 2011

FASTFORWARD

2 - 36

PRESENTATION ISSUES

1. Dollar signs are not used in journals and ledgers. 2. Dollar signs appear in financial statements and other

reports such as trial balances. The usual practice is to put dollar signs beside only the first and last numbers in a column.

3. When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth.

4. Commas are always used in financial statements. 5. Companies commonly round amounts in reports to the

nearest dollar, or even to a higher level.

P 3

2 - 37

GLOBAL VIEW Both U.S. GAAP and IFRS prepare the same four basic financial statements. A few differences are found within each statement, but over time these differences are likely to be eliminated. Here is a typical IFRS balance sheet presentation:

2 - 38

ACCOUNTING CONTROLS AND ASSURANCE Accounting systems depend on control procedures that assure the proper principles were applied in processing accounting information. The passage of SOX legislation strengthened U.S. control procedures in recent years.

The percentage of employees in information technology that report observing specific types of misconduct in 2009.

2 - 39

Debt Ratio

Evaluates the level of debt risk.

A higher ratio indicates that there is a greater probability that a company will

not be able to pay it’s debt in the future.

A 2

Total Liabilities Total Assets

Debt Ratio =

2 - 40

END OF CHAPTER 02

analyzing and recording transactions - mgmt-026 · nalyzing and recording transactions. ... 2 - 2 ....

Documents