2 - 2 analyze each transaction and event from source documents. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. A company's size and diversity of operations affect the number of accounts needed.
2 - 2 analyze each transaction and event from source documents. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. A company's size and diversity of operations affect the number of accounts needed.
2 - 2 analyze each transaction and event from source documents. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. A company's size and diversity of operations affect the number of accounts needed.
Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA Chapter 2 Analyzing and Recording Transactions McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. 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 THE ACCOUNT AND ITS ANALYSIS 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 2 - 7 Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts LIABILITY ACCOUNTS C 2 2 - 8 Equity Accounts Revenues Owners Capital Owners Withdrawals Expenses EQUITY ACCOUNTS C 2 2 - 9 Liabilities Equity Assets = + THE ACCOUNT AND ITS ANALYSIS Owners 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 companys 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 Name 101 Cash 302 C. Taylor, Withdrawals 106 Accounts receivable 403 Revenues 126 Supplies 406 Rental revenue 128 Prepaid insurance 622 Salaries expense 167 Equipment 637 Insurance expense 201 Accounts payable 640 Rent expense 236 Unearned revenue 652 Supplies expense 301 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 2 - 12 Liabilities Equity Assets = + DOUBLE-ENTRY ACCOUNTING Debit Credit Debit Credit Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + C 4 Normal Normal Normal 2 - 13 Revenues Expenses Owners Capital Owner's Withdrawals _ + _ Debit Credit Owners 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. Liabilities Equity Assets = + 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 Description Post. Ref. Debit Credit Step 3: Record journal entry P 1 2 - 16 Date Description Debit Credit 2011 Dec. 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 Balance 2011 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 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 3 Purchased equipment G1 20,000.00 (20,000.00) Dec. 10 Collection from customer G1 2,200.00 (17,800.00) 1 Identify the debit account in ledger.
POSTING JOURNAL ENTRIES P 1 2 - 19 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 1 Dec. 3 Purchased equipment G1 20,000.00 (20,000.00) Dec. 10 Collection from customer G1 2,200.00 (17,800.00) 2 Enter the date. POSTING JOURNAL ENTRIES P 1 2 - 20 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 1 Investment by owner 30,000 Dec. 3 Purchased equipment G1 20,000 (20,000) Dec. 10 Collection from customer G1 2,200 (17,800) 3 Enter the amount and description. POSTING JOURNAL ENTRIES P 1 2 - 21 CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 1 Investment by owner G1 30,000 Dec. 3 Purchased equipment G1 20,000 (20,000) Dec. 10 Collection from customer G1 2,200 (17,800) 4 Enter the journal reference. POSTING JOURNAL ENTRIES P 1 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 2 - 22 CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 1 Investment by owner G1 30,000 30,000 Dec. 3 Purchased equipment G1 20,000 (20,000) Dec. 10 Collection from customer G1 2,200 (17,800) 5 Compute the balance. POSTING JOURNAL ENTRIES P 1 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 2 - 23 2011 Dec. 1 Cash 101 30,000 C. Taylor, Capital 30,000 Investment by owner CASH ACCOUNT No. 101 Date Description PR Debit Credit Balance 2011 Dec. 1 Investment by owner G1 30,000 30,000 Dec. 3 Purchased equipment G1 20,000 (20,000) Dec. 10 Collection from customer G1 2,200 (17,800) Enter the ledger reference. 6 POSTING JOURNAL ENTRIES P 1 2 - 24 Transaction: Owner invested $30,000 in FastForward on Dec. 1. ANALYZING TRANSACTIONS Assets = + Equity Cash Capital 30,000 30,000 Liabilities Analysis: (1) 30,000 Cash 101 301 (1) 30,000 C. Taylor, Capital 301 Posting: A 1 2 - 25 ANALYZING TRANSACTIONS Transaction: FastForward purchases supplies by paying $2,500 cash. Assets = + Equity Cash Supplies Capital (2,500) 2,500 Liabilities Analysis: (2) Supplies 126 2,500 Cash 101 2,500 Double entry: (2) 2,500 Supplies 126 (1) 30,000 (2) 2,500 Cash 101 Posting: A 1 2 - 26 Transaction: FastForward purchases equipment by paying $26,000 cash. ANALYZING TRANSACTIONS Assets = + Equity Cash 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. ANALYZING TRANSACTIONS Assets = + Equity Supplies 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 = + Equity Cash 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 403 Posting: A 1 2 - 29 After processing its remaining transactions for December, FastForwards Trial Balance is prepared. Debits Credits Cash 4,350
$ 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 $ FASTFORWARD Income Statement For the Month Ended December 31, 2011 P 3 2 - 34 STATEMENT OF CHANGES IN 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 Changes in 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 $ FASTFORWARD Income Statement For the Month Ended December 31, 2011 Connections P 3 2 - 35 BALANCE SHEET Assets Cash 4,350 $ Supplies 9,720 Prepaid insurance 2,400 Equipment 26,000 Total assets 42,470 $ Liabilities Accounts 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 $ FASTFORWARD Balance 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 Changes in 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 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 its debt in the future. A 2 Total Liabilities Total Assets Debt Ratio = 2 - 38 END OF CHAPTER 2