Analyzing and Recording Transactions. Pr. SAMLAL Zoubida
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1 Analyzing and Recording Transactions Pr. SAMLAL Zoubida
2 Procedural Learning Objectives P1: Record transactions in a journal and post entries to a ledger (T account). P2: Prepare and explain the use of a trial balance. P3: Prepare financial statements from business transactions. 2-2
3 C 1 Analyzing and Recording Process Exchanges of economic consideration between two parties. External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. 2-3
4 Analyzing and Recording Process Accounting process: -Identifies business transactions and events, -Analyzes and records their effects, and -Summarizes and presents information in reports and financial statements. Steps in accounts process that focus on analyzing and recording transactions and events are: (1)Record relevant transactions and events in a journal, (2) Post journal information to ledger accounts, and (3) Prepare a trial balance. Accounting records are informally referred as the accounting books, or simply the books.
5 C 1 Analyzing and Recording Process Analyze each transaction and event from source documents Record relevant transactions and events in a journal Prepare and analyze the trial balance Post journal information to ledger (T) accounts 2-5
6 C 2 Source Documents Checks Employee Earnings Records Bills from Suppliers Purchase Orders Bank Statements Sales Tickets 2-6
7 C 3 The Account and its Analysis An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The general ledger is a record containing all accounts used by the company. 2-7
8 C 3 The Account and its Analysis Assets = Accounts Accounts Accounts Liability Accounts + Equity Equity Accounts 2-8
9 C 3 Asset Accounts Land Cash Accounts Receivable Buildings Asset Accounts Notes Receivable Equipment Supplies Prepaid Accounts 2-9
10 C 3 Liability Accounts Accounts Payable Notes Payable Accrued Liabilities Liability Accounts Unearneded Revenue Dividends Payable 2-10
11 C 3 Equity Accounts Common Stock Revenues Retained Earnings Equity Accounts Dividends Declared Expenses 2-11
12 C 3 The Account and its Analysis Assets = Liabilities + Equity + + Common Stock Dividends Revenues Expenses 2-12
13 C 4 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. 101 Cash 319 Dividends 106 Accounts receivable 403 Consulting 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 307 Common stock 690 Utilities expense 318 Retained Earnings 2-13
14 C 5 Debits and Credits A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. T- Account (Left side) (Right side) Debit Credit 2-14
15 Double-Entry Accounting NORMAL Balance ASSETS = LIABILITIES + EQUITY DR = CR CR Assets are on the left side of the equation; therefore, the left, or debit side is the normal balance side for assets. Liabilities and equities are on the right side; therefore, the right, or credit side is the normal balance side for liabilities and equity.
16 Double-Entry Accounting ASSETS = LIABILITIES + EQUITY ASSETS = LIABILITIES + Common Stock DIV + REV - EXP Total amount that is debited to accounts must equal the total amount credited to accounts for each transaction. Sum of debit account balances in the ledger must equal the sum of credit account balances.
17 C 5 Double-Entry Accounting NORMAL Balance Assets = Liabilities + Equity ASSETS LIABILITIES EQUITIES Debit Credit Debit Credit Debit Credit Whether a debit or a credit is an increase or decrease depends on the NORMAL Balance of the account. 2-17
18 C 5 Double-Entry Accounting NORMAL Balance Equity Common Stock _ Dividends + Revenues _ Expenses Stock Dividends Revenues Expenses Debit Credit - + Debit Credit + - Debit Credit - + Debit Credit
19 C 5 Double-Entry Accounting NORMAL Balance An account balance is the difference between the increases and decreases in an account. Notice the T-Account Cash Investment by owner for stock 30,000 Purchase of supplies 2,500 Consulting services revenues earned 4,200 Purchase of equipment 26,000 Collection of accounts receivable 1,900 Payment of rent 1,000 Payment of salary 700 Payment of accounts payable 900 Payment of cash dividend 200 Total increases 36,100 Total decreases 31,300 Balance 4,
20 P1 Journalizing & Posting Transactions Assets = Liabilities + Equity T- Account (Left side) (Right side) Debit Credit Step 1: Analyze transactions and source documents. Step 2: Apply doubleentry accounting ACCOUNT NAME: ACCOUNT No. Date Description PR Debit Credit Balance Date GENERAL JOURNAL Page 123 Post. Description Ref. Debit Credit Step 4: Post entry to ledger Step 3: Record journal entry 2-20
21 P1 Journalizing Transactions Transaction Date Titles of Affected Accounts GENERAL JOURNAL Page 1 Date Account Titles and Explanations PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Transaction explanation Dollar amount of debits and credits 2-21
22 P1 Balance Column Account T-accounts are useful illustrations, but balance column accounts are used in practice. CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Dec. 1 Initial investment 30,000 30,000 Dec. 2 Purchased supplies 2,500 27,500 Dec. 3 Purchased equipment 26,000 1,500 Dec. 10 Collection from customer 4,200 5,
23 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 1 Identify the debit account in ledger. CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Purchased equipment 20, ######## 2-23
24 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Dec. 1 2 Enter the date. 2-24
25 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles & Elxplanations PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 3 Enter the amount and description. CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Dec. 1 30,000 Dec. 3 Purchased equipment G1 20,000 (20,000) 2-25
26 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 4 Enter the journal reference. CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Dec. 1 G1 30,
27 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles & Elxplanations PR Debit Credit 2009 Dec. 1 Cash 30,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 5 Compute the balance. CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Dec. 1 G1 30,000 30,000 Purchased equipment 20,000 (20,000) 2-27
28 P1 Posting Journal Entries GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit 2009 Dec. 1 Cash ,000 Common stock 30,000 Investment by shareholders Dec. 2 Supplies 2,500 6 CASH ACCOUNT No. 101 Date Explanation PR Debit Credit Balance 2009 Enter the ledger reference. Dec. 1 G1 30,000 30,000 Purchased equipment 20,000 (20,000) 2-28
29 A1 Analyzing Transactions Transaction:1 Shareholders invested $30,000 in FastForward on Dec. 1. Analysis: Assets = Liabilities + Equity Cash Common Stock 30,000 30,000 Double entry: (1) Cash ,000 Common stock ,000 Cash 101 (1) 30,000 Posting: Common Stock 301 (1) 30,
30 A1 Analyzing Transactions Transaction:2 FastForward purchases supplies by paying $2,500 cash. Analysis: Assets = Liabilities + Equity Cash Supplies Common Stock (2,500) 2,500 Double entry: (2) Supplies 126 2,500 Cash 101 2,500 Supplies 126 (2) 2,500 Posting: Cash 101 (1) 30,000 (2) 2,
31 A1 Analyzing Transactions Transaction:3 FastForward purchases equipment by paying $26,000 cash. Analysis: Assets = Liabilities + Equity Cash Equipment Common Stock (26,000) 26,000 Double entry: (3) Equipment ,000 Cash ,000 Posting: Equipment 167 Cash 101 (3) 26,000 (1) 30,000 (2) 2,500 (3) 26,
32 A1 Analyzing Transactions Transaction:4 FastForward purchases $7,100 of supplies on credit. Analysis: Assets = Liabilities + Equity Supplies Accounts Payable Common Stock 7,100 7,100 Double entry: (4) Supplies 126 7,100 Accounts payable 201 7,100 Supplies 126 2,500 (4) 7,100 Posting: Accounts Payable 201 (4) 7,
33 A1 Analyzing Transactions Transaction:5 FastForward provides consulting services and immediately collects $4,200 cash. Analysis: Assets = Liabilities + Equity Cash Revenue 4,200 4,200 Double entry: (5) Cash 101 4,200 Consulting Revenue 403 4,200 Posting: Consulting Revenue 403 Cash 101 (5) 4,200 (1) 30,000 (2) 2,500 (5) 4,200 (3) 26,000
34 A1 Analyzing Transactions Transaction: 6 FastForward pays $1,000 cash for December rent. Analysis: Assets = Liabilities + Equity Cash (Expense) (1,000) (1,000) Double entry: (6) Rent Expense 640 1,000 Cash 101 1,000 Posting: Rent Expense 640 Cash 101 (6) 1,000 (1) 30,000 (2) 2,500 (5) 4,200 (3) 26,000 (6) 1,000
35 Analyzing Transactions Transactions 7: Payment of Salaries expenses in cash Analysis: - Assets (Cash) = Equity (Expenses) Double entry: Debit Salaries Expenses and credit Cash Transaction 8: Provide services and rents test facilities for credit Analysis: + Assets (Accts Receivable) = + Equity (Revenues) Double entry: Debit Accounts Receivable and Credit Consulting Revenue and Credit Rental Revenue Transaction 9: Receipt of cash from accounts receivable Analysis: + Assets (Cash) = Assets (Accounts Receivable) Double entry: Debit Cash and credit Accounts Receivable
36 Analyzing Transactions Transaction 10: Payment of accounts payable Analysis: Assets (Cash) = Liability (Accounts Payable) Double entry: Debit Accounts Payable and credit Cash Transaction 11: Payment of cash dividend Analysis: Assets (Cash) = Equity (Dividends) Double entry: Debit Dividends and credit Cash Transaction 12: Receipts of cash from a customer for future consulting services Analysis: + Assets (Cash) = + Liabilities (Unearned Revenue) Double entry: Debit Cash and credit Unearned Consulting Revenue
37 Analyzing Transactions Transaction 13: Pay cash for future insurance coverage Analysis: Assets (Cash) = + Assets (Prepaid Insurance) Double entry: Debit Prepaid Insurance and credit Cash Transaction 14: Purchase supplies for cash Analysis: - Assets (Cash) = + Assets (Supplies) Double entry: Debit Supplies and credit Cash Transactions 15: Payment of utilities expenses in cash Analysis: Assets (Cash) = Equity (Expenses) Double entry: Debit Utilities Expense and credit Cash Transactions 16: Payment of salaries expenses in cash Analysis: Assets (Cash) = Equity (Expenses) Double entry: Debit Salaries Expense and credit Cash
38 A1 After processing its remaining transactions for December, FastForward s Trial Balance is prepared. FastForward Trial Balance December 31, 2009 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 Common stock 30,000 Dividends 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300 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.
39 P2 Six Steps for 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. Recompute 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.
40 P3 Using a Trial Balance to Prepare Financial Statements Point in Time Beginning Balance Sheet Period of Time Income Statement Statement of Retained Earnings Statement of Cash Flows Point in Time Ending Balance Sheet
41 P3 Income Statement FASTFORWARD Income Statement For the Month Ended December 31, 2009 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ 6,100 Expenses: Salaries expense 1,400 Rent Expense 1,000 Utilities Expense 230 Total expenses 2,630 Net income $ 3,470
42 P3 Statement of Retained Earnings FASTFORWARD Statement of Retained Earnings For the Month Ended December 31, 2009 Balance, 12/1/09 $ - Net income for December 3,470 3,470 Less: Dividends (200) Balance, 12/31/09 $ 3,270 FASTFORWARD Income Statement For the Month Ended December 31, 2009 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
43 P3 Balance Sheet FASTFORWARD Statement of Retained Earnings For the Month Ended December 31, 2009 Balance, 12/1/09 $ - Net income for December 3,470 3,470 Less: Dividends 200 Balance, 12/31/09 $ 3,270 FASTFORWARD Balance Sheet December 31, 2009 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 Common stock 30,000 Retained earnings 3,270 Total equity 33,270 Total liabilities and equity $ 42,470
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