engg 401 x2 fundamentals of engineering management spring 2008 chapter 2: supplement journal entries...

ENGG 401 X2ENGG 401 X2Fundamentals of Engineering ManagementFundamentals of Engineering Management

Spring 2008Spring 2008

Chapter 2:Chapter 2:

SupplementSupplement

Journal Entries and T-accountsJournal Entries and T-accounts

Dave LudwickDave Ludwick

Dept. of Mechanical EngineeringDept. of Mechanical Engineering

University of AlbertaUniversity of Albertahttp://members.shaw.ca/dave_ludwick/

Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements

Summer 20082

ENGG 401 X2 – Fundamentals of Engineering Management

Financial StatementsFinancial Statements

• Financial statements: “Show me the money!”“Show me the money!”

• Financial statements apply to all sizes of business, from a single proprietor corner store to a multinational company.

• Many financial statements are public information and available through the web

• Types of financial statements:– Income statements– Balance sheets– Cash flow statements (aka, Statement of Changes in Financial

Position)– Statement of Retained Earnings– Statement of Owner’s Equity


Summer 20083


AccountsAccounts

• An account is a detailed record of increases and decreases in a specific asset, liability, equity, revenue or expense item

• Separate accounts are kept for each type of asset, liability, equity, revenue or expense item.

• Balance Sheet accounts (like cash, AR, AP, etc) are “As at” accounts, showing the status of these items at the end of a period

• Income Statement accounts are “flow through” accounts, measuring the amount of revenue and expense occurring through a period

• A Chart of Accounts or Ledger is a list of all the accounts used by a company, often showing an account number


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AssetsAssets

• Assets are resources available and controlled by the organization for current or future benefit

• Assets– Cash, the most liquid of all assets– Accounts Receivable: amounts owed to the company for goods or

services provided through operations– Prepaid Expenses, advanced payments made for expenses.

Prepaid expenses are assets until the asset is consumed (insurance, rent)

– Equipment, are assets not sold in the course of operations, but used to deliver products or services (computers, desks, machinery) over the course of several accounting periods

– Buildings and Land are assets because they provide a location in which to operate the business


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LiabilitiesLiabilities

• Liabilities are obligations to transfer assets or provide services to other entities.

• Liabilities– Accounts Payable: Money owed to suppliers for products or

services bought on credit– Unearned Revenue, when customers pay in advance for products or

services.– Wages, amounts owed to employees for services provided, but for

which they have not yet been paid– Taxes payable, amounts owed to governments for sales tax or

income taxes accumulated but not yet paid.– Mortgages or loans, money owed to lending institutions or

individuals for money they have loaned to the organization


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Equity AccountsEquity Accounts

• There are 4 types of accounts affecting Owner’s Equity:– Owner Capital: records owner investment– Owner Withdrawals: records their withdrawals from investment– Revenues and Expenses

• Incurred over a defined period of time

• The difference between revenue and expenses defines net income which is either paid out as dividends (after taxes are applied) or rolled back into the organization (often called Retained Earnings)


Summer 20087


A sample Income StatementA sample Income Statement

Income Statement

Sales Revenue

Cost of Goods Sold

Gross Profit

Expenses

Interest Expense

Depreciation Expense

Utilities Expense

Wages Expense

Total Expenses

Net Income

20000

14000

6000

500

600

100

1200

2400

3600


Summer 20088


A sample Statement of Owner’s EquityA sample Statement of Owner’s Equity

Statement of Owner’s Equity

Opening Balance (from previous period)

Add: Net Profit

Less: Withdrawals

Closing Balance

44400

3600

0

48000


Summer 20089


A sample Balance SheetA sample Balance Sheet

Balance Sheet

Current Assets

Cash 10000

Current Liabilities

Accounts Payable 5000

Accounts Receivable 20000 Wages Payable 25000

Notes Receivable 15000 Utilities Payable 2000

Marketable Securities 25000 Long-Term Debt

Inventory 120000 Notes Payable 20000

Capital Assets Bonds Payable 600000

Equipment 250000 Owner’s Equity

Buildings 500000 Common Stock 300000

Goodwill 60000 Retained Earnings 48000

Total Assets 1000000

Total Liabilities + OE 1000000


Summer 200810


T-AccountT-Account

• We have been using these in our sample problems so far• It is a helpful tool to help illustrate how the various business

transactions affect the various accounts and how they relate to each other

• The left side is always labeled debit and the right, credit• Depending on which side of the balance sheet the account

in question is on, entries on either the right or left could be increases or decreases for that account.

Account Title

Debit side Credit Side


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Double Entry AccountingDouble Entry Accounting

• The most common way to keep accounting records• Means that for every business transaction, there is an affect and a

record written into at least 2 accounts to always ensure that the accounting equation is in balance

• Rules to remember:– Increases to assets are debited (entered on left side) of asset accounts.

Decreases are credited (entered on right side)

– Increases in liabilities are credited (entered on right side) to liability accounts. Decreases are debited (entered on left)

– Increases in owner’s equity are credited (right side) and decreases are debited left side)

– Revenues (or increases in revenues) are credited to revenue accounts, expenses (or increases) are debited to expense accounts

• Illustrate: A sale is made for cash, hydro expense paid, cash is used to buy inventory


Summer 200812


Organizing AccountsOrganizing Accounts

• A ledger is a collection of all accounts on the books• A Chart of Accounts is a numeric list of accounts• Some accounting systems and accountants are familiar with

an account numbering system• In general the first digit provides a clue to the type of

account with subsequent digits providing further detail


Summer 200813


Analyzing TransactionsAnalyzing Transactions

• Analyzing Transactions is Step 1 in the Accounting Cycle


Summer 200814


Journal EntriesJournal Entries

• We have already been doing these, this is Step 2 in the Accounting Cycle

• Consists the following info:– Date of transaction– Titles of the affected accounts– Dollar amount of each debit or credit– Transaction explanation for future reference

• Double entry accounting requires that every transaction will affect at least 2 accounts.– Those that affect 3 or more accounts are called Compound

Journal Entries

• Note that the accounts involved do not need to be on opposite sides of the balance sheet– Ex: A cash purchase of furniture vs. purchase of furniture on

credit


Summer 200815



Date Account Titles and explanation PR Debit Credit

Jan 1

Cash 101 10000

D. Ludwick, Capital 600 10000

Jan 3

Furniture 150 1200

Cash 101 1200

Jan 7

Accounts Receivable 125 2000

Cash 101 1000

Revenue 500 3000


Summer 200816



• Date column: the transaction date• Account title and explanation: the names of the accounts

affected by the transaction. Some journal entries place a short, plain-english, description of the transaction so the record keeper remembers the event

• PR: Posting Reference column: a place to enter the account number if accounting number is being applied to the books

• Debit and Credit columns: Places to enter the amounts affecting the specific account for the transaction


Summer 200817


Posting Journal EntriesPosting Journal Entries

• Step 3 in the Accounting Cycle• The process of posting or transferring entries from the

journal to the ledger


Summer 200818


An example – Jim the LawyerAn example – Jim the Lawyer

Sept 1 Began his public legal practice by investing $4200 in cash and $3000 in office equipment

1 Prepaid 3 months’ rent in advance on suitable office space, $3000

2 Purchased office equipment for $420 on credit, and purchased $50 worth of office supplies on credit

4 Completed legal work for a client and immediately received payment of $400 cash

8 Completed legal work on credit for Forty Third and a Half Bank, $1000

10 Paid for the items purchased on credit on Sept 2

14 Paid the annual $1200 premium on an insurance policy

15 Paid $300 to attend an all-day seminar on Sept 20 regarding ethical legal practices

18 Received payment in full from Forty Third and a Half Bank for services provided on Sept 8

20 Attended the seminar paid for on Sept 15

24 Completed legal work on credit for Great West Realty, $500

28 Jim withdrew $150 cash from the practice to pay for personal expenses

29 Purchased additional office supplies on credit for $45

30 Paid the September utility bill of $175

engg 401 x2 fundamentals of engineering management spring 2008 chapter 2: supplement journal entries...

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