Lecture Principles of financial accouting - Chapter 2: Analyzing and recording transactions

After completing this chapter you should be able to: Explain the steps in processing transactions and the role of source documents, describe an account and its use in recording transactions, describe a ledger and a chart of accounts, define debits and credits and explain double-entry accounting.

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 Winston Kwok, Ph.D., CPA

Analyzing and Recording

Transactions

McGraw­Hill/Irwin         Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.

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

Sales Tickets

Bank Statements

Purchase Orders

Checks

Source Documents

Bills from Suppliers

Employee

Earnings

Records

An account is a

record of increases and decreases in a

specific asset, liability, equity,

revenue, or expense item.

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

The general ledger is a record containing all accounts used by the company

The Account and its Analysis

Owner, Capital Owner, Withdrawals

Owner, Capital Owner, Withdrawals

Equipment Buildings

Cash

Notes Receivable

Notes Receivable

Supplies

Prepaid Accounts

Prepaid Accounts

Accounts Receivable

Accounts Receivable

Asset Accounts

Asset Accounts

Asset Accounts

Accrued Liabilities

Accrued Liabilities Unearned Revenue

Unearned Revenue

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Liability Accounts

Liability Accounts

Liability Accounts

Equity Accounts

Equity Accounts

Revenues

Owner’s Capital

Owner’s

Owner’s Withdrawals

Expenses

Equity Accounts

Liabilities Equity

The Account and its Analysis

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 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.

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

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)

Account Title

Double-Entry Accounting

An account balance is the difference between the increases

and decreases in an account Notice the T-Account.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger Step 3: Record journal entry

Date Description Debit Credit 2011

Purchased supplies for cash

 Dollar amount of debits

 Transaction explanation

 Titles of Affected

Accounts

 Titles of Affected

Accounts

Balance Column Account T-accounts are useful illustrations, but balance

column ledger accounts are used in practice.

Dec 1 Cash 30,000

C Taylor, Capital 30,000

Investment by owner

1 Identify the debit account in ledger.

Posting Journal Entries

Dec 1 Cash 30,000

C Taylor, Capital 30,000

Investment by owner

2 Enter the date.

Posting Journal Entries

Dec 1 Cash 30,000

C Taylor, Capital 30,000

Investment by owner

3 Enter the amount and description.

Posting Journal Entries

4 Enter the journal reference.

Posting Journal Entries

2011

Dec 1 Cash 30,000

C Taylor, Capital 30,000

Investment by owner

5 Compute the balance.

Posting Journal Entries

2011

Dec 1 Cash 30,000

C Taylor, Capital 30,000

Investment by owner

Supplies 126

(4) 7,100

Accounts Payable 201

Posting:

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.

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.

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.

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.

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 the trial

balance columns are

correctly added.

 Make sure account

balances are correctly

entered from the ledger.

balances are correctly

entered from the ledger.

 See if debit or credit

accounts are mistakenly

placed on the trial balance.

 See if debit or credit

accounts are mistakenly

placed on the trial balance.

 Re-compute each account balance in the ledger.

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

Statements

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

FASTFORWARD Income Statement For the Month Ended December 31, 2011

C Taylor, Capital 12/1/11 $

33,470

Connections

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

FASTFORWARD Balance Sheet December 31, 2011

Connections

33,470

Statement of Changes in Equity For the Month Ended December 31, 2011

FASTFORWARD

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.

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

in a column.

trial balance, commas are optional to indicate

thousands, millions, and so forth.

nearest dollar, or even to a higher level.

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 higher ratio indicates that there is a greater probability that a company will not be able to pay it’s debt in the future.

Total Liabilities Total Assets Debt Ratio  = 

END OF CHAPTER 2