analyzing and recording transactions - mgmt-026 · nalyzing and recording transactions. ... 2 - 2 ....
TRANSCRIPT
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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.
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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
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Sales Tickets
Bank Statements
Purchase Orders
Checks
SOURCE DOCUMENTS Bills from Suppliers
Employee Earnings Records
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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.
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THE ACCOUNT AND ITS ANALYSIS
Owner, Capital Owner, Withdrawals
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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
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Accrued Liabilities
Unearned Revenue
Notes Payable
Accounts Payable
Liability Accounts
LIABILITY ACCOUNTS C 2
Cash received but product service not delivered
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Equity Accounts
Revenues
Owner’s Capital
Owner’s Withdrawals
Expenses
EQUITY ACCOUNTS C 2
Owners claim on companys assets
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Liabilities Equity Assets = +
THE ACCOUNT AND ITS ANALYSIS
Owner’s Capital
Owner's Withdrawals Revenues Expenses
+ + – –
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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
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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
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When the sum of debits exceeds the credit side you have a debit balance
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Liabilities Equity Assets = +
DOUBLE-ENTRY ACCOUNTING
Debit Credit Debit Credit Debit Credit
ASSETS
+ -
LIABILITIES
- +
EQUITIES
- +
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Normal Normal Normal
For each transaction at least 2 accounts are involved one debit one credit
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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
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DOUBLE-ENTRY ACCOUNTING An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.
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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 DescriptionPost. Ref. Debit Credit
Step 3: Record journal entry
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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
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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.
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2011Dec. 1 Cash 30,000
C. Taylor, Capital 30,000 Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
1 Identify the debit account in ledger.
POSTING JOURNAL ENTRIES P 1
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2011Dec. 1 Cash 30,000
C. Taylor, Capital 30,000 Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
Dec. 1
2 Enter the date.
POSTING JOURNAL ENTRIES P 1
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2011Dec. 1 Cash 30,000
C. Taylor, Capital 30,000 Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
Dec. 1 Investment by owner 30,000
3 Enter the amount and description.
POSTING JOURNAL ENTRIES P 1
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
Dec. 1 Investment by owner G1 30,000
4 Enter the journal reference.
POSTING JOURNAL ENTRIES P 1
2011Dec. 1 Cash 30,000
C. Taylor, Capital 30,000 Investment by owner
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CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
Dec. 1 Investment by owner G1 30,000 30,000
5 Compute the balance.
POSTING JOURNAL ENTRIES P 1
2011Dec. 1 Cash 30,000
C. Taylor, Capital 30,000 Investment by owner
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2011Dec. 1 Cash 101 30,000
C. Taylor, Capital 30,000 Investment by owner
CASH ACCOUNT No. 101
Date Description PR Debit Credit Balance2011
Dec. 1 Investment by owner G1 30,000 30,000
Enter the ledger reference. 6
POSTING JOURNAL ENTRIES P 1
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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:
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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:
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Transaction: FastForward purchases equipment by paying $26,000 cash.
ANALYZING TRANSACTIONS
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
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Transaction: FastForward purchases $7,100 of supplies on credit.
ANALYZING TRANSACTIONS
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
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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:
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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.
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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.
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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.
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USING A TRIAL BALANCE TO PREPARE FINANCIAL STATEMENTS
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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
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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
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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
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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
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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.
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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:
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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.
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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 =
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END OF CHAPTER 02