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© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing and Recording Transactions Chapter 2 2.

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Presentation on theme: "© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing and Recording Transactions Chapter 2 2."— Presentation transcript:

1 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing and Recording Transactions Chapter 2 2

2 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Analyzing and Recording Process Exchanges of economic consideration between two parties.

3 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyze each transaction and event form 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

4 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Sales Tickets Bank Statement Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Record

5 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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.

6 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Accounts Equity Accounts Assets Accounts =+ The Account and its Analysis

7 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Land Equipment Buildings Cash Notes Receivabl e Supplies Prepaid Accounts Accounts Receivable Asset Accounts

8 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable Liability Accounts

9 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity Accounts Revenues Owners Capital Owners Withdrawals Expenses Equity Accounts

10 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ The Account and its Analysis Owners Capital Owners Withdrawals Revenues Expenses ++ ––

11 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits

12 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ Double-Entry Accounting Debit Credit ASSETS + - LIABILITIES - + EQUITIES - +

13 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Revenues Expenses Owners Capital Owners Withdrawals _ _ + + _ _ Debit Credit Capital - + Debit Credit Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity Exh. 3.8

14 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Double-Entry Accounting An account balance is the difference between the increases and decreases in an account.

15 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Journalizing and Posting Transactions Step 1: Analyze transactions and source documents. Liabilities Equity Assets =+ Step 2: Apply double- entry accounting Step 4: Post entry to ledger Step 3: Record journal entry

16 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Dollar amount of debits and credits Journalizing Transactions Transaction Date Transaction explanation Titles of Affected Accounts

17 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Balance Column Account

18 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1 1 Identify the account. Posting Journal Entries

19 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 2 2 Enter the date. Posting Journal Entries

20 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 3 3 Enter the amount and description. Posting Journal Entries

21 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 4 4 Enter the journal reference. Posting Journal Entries

22 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 5 5 Compute the balance. Posting Journal Entries

23 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Enter the ledger reference. 6 6 Posting Journal Entries

24 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing Transactions – An Illustration Analysis: Double entry: 101 301 Posting:

25 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing Transactions – An Illustration Analysis: Double entry: 126 101 Posting:

26 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing Transactions – An Illustration Analysis: Double entry: 167 101 Posting:

27 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing Transactions – An Illustration Analysis: Double entry: 126 201 Posting:

28 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing Transactions – An Illustration Analysis: Double entry: 403 101 Posting:

29 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin After processing its remaining transactions for December, FastForwards Trial Balance is prepared. DebitsCredits Cash3,950$ Accounts receivable- Supplies9,720 Prepaid Insurance2,400 Equipment26,000 Accounts payable6,200$ Unearned consulting revenue3,000 C. Taylor, Capital30,000 C. Taylor, Withdrawals600 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForward Trial Balance December 31, 2004 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.

30 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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 into 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.

31 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Using a Trial Balance to Prepare Financial Statements Income Statement of Cash Flows Income Statement Statement of Owners Equity Beginning Balance Sheet Ending Balance Sheet Period of Time Point in Time

32 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Income Statement

33 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Statement of Owners Equity

34 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Balance Sheet

35 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin oDescribes the relationship between the amounts of the companys liabilities and assets. oHelps to assess the risk that a company will fail to pay its debts. Debt Ratio

36 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 2


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