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©CourseCollege.com 1 4 Unit 4 The Transaction Learning Objectives 1.Explain the use of journals and ledgers in the accounting process. 2.Develop experience.

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Presentation on theme: "©CourseCollege.com 1 4 Unit 4 The Transaction Learning Objectives 1.Explain the use of journals and ledgers in the accounting process. 2.Develop experience."— Presentation transcript:

1 ©CourseCollege.com 1 4 Unit 4 The Transaction Learning Objectives 1.Explain the use of journals and ledgers in the accounting process. 2.Develop experience in recognizing and properly recording basic accounting transactions. 3.Analysis: Explain and calculate a leverage ratio

2 ©CourseCollege.com 2 Objective 4.1: Journals and Ledgers Transactions are first entered into a: journal then posted to the account: ledger O4.1

3 ©CourseCollege.com 3 ACCOUNT LEDGERS TRANSACTION JOURNALIZING Identify transaction, then Record in Journal Journal to Ledger POSTING JOURNAL Post from Journal to the individual Account Ledgers O4.1

4 ©CourseCollege.com 4 Journal The Journal is the original book of entry where all transactions affecting the fundamental accounting equation are entered. O4.1

5 ©CourseCollege.com 5 Journal The date of the transaction should be entered first. O4.1

6 ©CourseCollege.com 6 Journal The account names involved in the transactions are entered in the description column O4.1

7 ©CourseCollege.com 7 Journal Total debits must equal total credits for each transaction entered into the journal O4.1

8 ©CourseCollege.com 8 Journal There can be more than 2 accounts involved in a transaction (a compound entry) still, total debits must equal total credits.* * Here the owner is investing cash and equipment into the business. O4.1

9 ©CourseCollege.com 9 Journal This is the posting reference column. When journal entries are posted to the ledger, the account ledger number is placed in this column for reference purposes. O4.1

10 ©CourseCollege.com 10 Journal The page number of the journal is used to cross reference the journal entry in the account ledger. O4.1

11 ©CourseCollege.com 11 Journal A summary description of each transaction can be entered here. O4.1

12 ©CourseCollege.com 12 Ledger Each account in the Chart of Accounts has its own Ledger. This example is for the Cash account. O4.1

13 ©CourseCollege.com 13 Ledger This example is for the Sales account. O4.1

14 ©CourseCollege.com 14 Ledger Here is the balance column that displays both a debit and a credit column. (Single column balance columns are also used.) O4.1

15 ©CourseCollege.com 15 Ledger Here is the column where the journal entries for this particular account are posted, a debit or a credit entry. JOURNAL O4.1

16 ©CourseCollege.com 16 Ledger Notice the date column O4.1

17 ©CourseCollege.com 17 Ledger This column can be used to indicate that this is a Balance Forward (from the previous page of the ledger) It also is used to indicate the type of journal entry that was posted (more on this later). For regular transactions is is usually left blank. O4.1

18 ©CourseCollege.com 18 Ledger In the posting reference column, the page number from the journal is entered when the posting is completed. The “J” stand for the type of journal used (more on this later). O4.1

19 ©CourseCollege.com 19 Ledger Once each posting is complete, the new balance resulting from the entry is updated in the Balance column. O4.1

20 ©CourseCollege.com 20 Journal to Ledger The posting process would flow like this. O4.1

21 ©CourseCollege.com 21 Journal to Ledger The resulting new balances are shown O4.1

22 ©CourseCollege.com 22 Journal to Ledger The posting references indicate the source of the entry O4.1

23 ©CourseCollege.com 23 Objective 4.2: Recording transactions Transactions must be studied to determine: Which accounts are involved? and How are they affected? O4.2

24 ©CourseCollege.com 24 Assets Liabilities Equity Revenue Expenses Debits increase Credits decrease Credits increase Debits decrease OR Loss Profit BALANCE SHEET REVENUE EXPENSES EQUITY ASSETS INCOME STATEMENT LIABILITIES Use the Color Map to learn transactions

25 ©CourseCollege.com 25 What accounts are involved? What classification are these accounts? How will the transaction affect each of these accounts –increase or decrease? What entries, debit or credit, will accomplish the desired increase or decrease to the existing balance in the account? Test the proposed changes for equality of debits and credits. The Acid Test steps A C I D Test Tips for transactions

26 ©CourseCollege.com 26 Frieda makes an investment of $15,000 cash into her new proprietor ship, Freida’s Fabulous Fashions June 1 O4.2 Which accounts are involved?

27 ©CourseCollege.com 27 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense Profit Loss OR Both of these accounts should go up. O4.2 Frieda’s Fabulous Fashions

28 ©CourseCollege.com 28 Recording Transactions O4.2

29 ©CourseCollege.com 29 Frieda signs a $5,000 note at her bank to purchase an office copier for Frieda’s Fine Fashions June 1 O4.2 Which accounts are involved?

30 ©CourseCollege.com 30 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Both of these accounts should go up. O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

31 ©CourseCollege.com 31 Recording Transactions O4.2

32 ©CourseCollege.com 32 Frieda signs a rental agreement to rent a retail store location at $1,000 per month beginning June 15 June 5 O4.2 Which accounts are involved?

33 ©CourseCollege.com 33 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Although an event has taken place, (signing a rental agreement), as of this date, nothing has affected the accounting equation and no transaction is recorded. O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

34 ©CourseCollege.com 34 Frieda purchases a business insurance policy for one year paying $1,800 in cash June 8 O4.2 Which accounts are involved?

35 ©CourseCollege.com 35 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Cost of Goods Sold Wages Expense Taxes Expense Rent Expense Utilities Expense Insurance Expense Interest expense Profit Loss OR Cash goes down Prepaid Insurance goes up O4.2 Frieda’s Fabulous Fashions

36 ©CourseCollege.com 36 Recording Transactions O4.2

37 ©CourseCollege.com 37 Frieda purchases $7,500 of inventory paying $2,000 in cash, the balance on account June 10 O4.2 Which accounts are involved?

38 ©CourseCollege.com 38 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR This is a compound entry with inventory and accounts payable up while cash goes down. Debits must still equal credits O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

39 ©CourseCollege.com 39 Recording Transactions O4.2

40 ©CourseCollege.com 40 Recording Transactions O4.2

41 ©CourseCollege.com 41 Frieda purchases supplies for $750 cash. June 12 O4.2 Which accounts are involved?

42 ©CourseCollege.com 42 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Cash should go down and Supplies should go up O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

43 ©CourseCollege.com 43 Recording Transactions O4.2

44 ©CourseCollege.com 44 Frieda pays cash for the first month’s store rent of $1,000 June 15 O4.2 Which accounts are involved?

45 ©CourseCollege.com 45 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Cash should go down and Rent expense should go up O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

46 ©CourseCollege.com 46 Recording Transactions O4.2

47 ©CourseCollege.com 47 Frieda completes a sale to her first customer who purchases a coat for $150 paying cash. The coat cost Frieda $80. Frieda updates her inventory account with each sale (perpetual inventory). June 16 O4.2 Which accounts are involved?

48 ©CourseCollege.com 48 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Lots of things are happening with this transaction. 1)Cash up, Sales up. 2) Cost of Goods Sold up and Inventory down. O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

49 ©CourseCollege.com 49 Recording Transactions O4.2

50 ©CourseCollege.com 50 Recording Transactions O4.2

51 ©CourseCollege.com 51 Frieda receives and records an invoice for coffee service charges for the past 60 days. Total invoice is $135 which she schedules for payment in 10 days. June 18 O4.2 Which accounts are involved?

52 ©CourseCollege.com 52 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Miscellaneous expense goes up and Accounts Payable goes up O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

53 ©CourseCollege.com 53 Recording Transactions O4.2

54 ©CourseCollege.com 54 Frieda completes a sale to a charge customer who makes a $475 purchase on account. These inventory items cost Frieda $210. Frieda updates her inventory account with each sale (perpetual inventory). June 21 O4.2 Which accounts are involved?

55 ©CourseCollege.com 55 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR 1)Accounts Receivable up, Sales up. 2) Cost of Goods Sold up and Inventory down. O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

56 ©CourseCollege.com 56 Recording Transactions O4.2

57 ©CourseCollege.com 57 Recording Transactions O4.2

58 ©CourseCollege.com 58 Frieda makes a scheduled $2500 cash payment to partially satisfy her account with the vendor who provided her merchandise on account. June 25 O4.2 Which accounts are involved?

59 ©CourseCollege.com 59 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Cash down, Accounts Payable down. O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

60 ©CourseCollege.com 60 Recording Transactions O4.2

61 ©CourseCollege.com 61 Frieda sends a scheduled $550 loan payment to her bank for the copier loan which includes $50 interest accrued. June 30 O4.2 Which accounts are involved?

62 ©CourseCollege.com 62 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Cash down, Notes Payable down and Interest Expense up. A compound entry O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

63 ©CourseCollege.com 63 Recording Transactions O4.2

64 ©CourseCollege.com 64 Recording Transactions O4.2

65 ©CourseCollege.com 65 Frieda withdraws $1,200 from her business for personal expenses she incurred after a visit to her jeweler June 30 O4.2 Which accounts are involved?

66 ©CourseCollege.com 66 Cash Accounts Receivable Supplies Inventory Prepaid Insurance Office Equipment Assets Accounts Payable Wages Payable Taxes Payable Unearned Revenue Notes Payable Frieda, Capital Frieda, Drawing Liabilities + Equity Balance Sheet Sales Income Statement Profit Loss OR Cash down, Frieda, Drawing up (a contra account) O4.2 Frieda’s Fabulous Fashions Cost of Goods Sold Wages Expense Rent Expense Utilities Expense Insurance Expense Interest expense Misc expense

67 ©CourseCollege.com 67 Recording Transactions O4.2

68 ©CourseCollege.com 68 Objective 4.3: Leverage ratio Leverage ratios reveal the relationship between total assets, liabilities and equity in a particular balance sheet O4.3

69 ©CourseCollege.com 69 AssetsLiabilities Balance Sheet O4.3 Equity Leverage Highly Leveraged ( claims on assets are mostly from liabilities) AssetsLiabilities Balance Sheet Equity Limited Leverage ( claims on assets are mostly from equity)

70 ©CourseCollege.com 70 Leverage and Financial Risk  Higher leverage mean higher financial risk  Financial risk is the risk that a firm may be unable to meet the payment obligations scheduled to its creditors (liabilities)  Lower leverage means less financial risk. Equity holders (owners) are not promised specific payments or returns. Payments to equity holders are discretionary.  The consequences of too much leverage and financial risk are failure and bankruptcy

71 ©CourseCollege.com 71 AssetsLiabilities Balance Sheet O4.3 Equity Leverage Highly Leveraged ( claims on assets are mostly from liabilities) AssetsLiabilities Balance Sheet Equity Limited Leverage ( claims on assets are mostly from equity)

72 ©CourseCollege.com 72 Leverage ratio: Debt to Worth Debt to Worth = Total Liabilities/ Total Equity Debt to Worth is one of several leverage ratios It answers the question: How many dollars of liabilities are supported by each dollar of equity?

73 ©CourseCollege.com 73 Debt to Worth Example #1 Each dollar of Equity supports 55 cents of Liabilities

74 ©CourseCollege.com 74 Debt to Worth Example #2 Each dollar of Equity supports $2.22 of Liabilities

75 ©CourseCollege.com 75 Which example has more leverage risk #1 or #2? #1 D/W =.55 #2 D/W = 2.22 #2 Amana Supply has to support $2.22 of Liabilities with each dollar of Equity #1 Case Supply shows less leverage risk with each Equity dollar supporting only $.55 of Liabilities

76 ©CourseCollege.com 76 End of Unit 4


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