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CASHLANDN/PO.E. DRA W REVEXP +100,000+100,000 +200,000+200,000 -5,000+25,000+20,000 -500-500 700700 -100-100 295,10025,000220,000100,000-100700-500 ASSETSLIABILITIESCAPITAL.

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Presentation on theme: "CASHLANDN/PO.E. DRA W REVEXP +100,000+100,000 +200,000+200,000 -5,000+25,000+20,000 -500-500 700700 -100-100 295,10025,000220,000100,000-100700-500 ASSETSLIABILITIESCAPITAL."— Presentation transcript:

1 CASHLANDN/PO.E. DRA W REVEXP +100, , , ,000 -5,000+25,000+20, ,10025,000220,000100, ASSETSLIABILITIESCAPITAL

2 ACCOUNT SIDE RULES ACCOUNTS INCREASE ON THE SIDE IN WHICH THEY APPEAR IN THE ACCOUNTING EQUATION ACCOUNTS INCREASE ON THE SIDE IN WHICH THEY APPEAR IN THE ACCOUNTING EQUATION ASSETS = LIABILITIES + CAPITAL ASSETS = LIABILITIES + CAPITAL LEFT = RIGHT LEFT = RIGHT ASSETS INCREASE LEFT SIDE OF THE ACCOUNT ASSETS INCREASE LEFT SIDE OF THE ACCOUNT LIABILITIES/CAPITAL INCREASE RIGHT SIDE OF THE ACCOUNT LIABILITIES/CAPITAL INCREASE RIGHT SIDE OF THE ACCOUNT

3 ASSETS = LIABILITIESCAPITAL= + LEFTRIGHT INCDEC INCDECINC ACCOUNT SIDE RULES

4 A BASIC T ACCOUNT HAS TITLE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT

5 ASSETS INCREASE ON THE LEFT SIDE OF THE ACCOUNT DECREASE ON THE RIGHT SIDE SIDE OF THE ACCOUNT

6 LIABILITES DECREASE ON THE LEFT SIDE OF THE ACCOUNT INCREASE ON THE RIGHT SIDE SIDE OF THE ACCOUNT

7 CAPITAL DECREASE ON THE LEFT SIDE OF THE ACCOUNT INCREASE ON THE RIGHT SIDE SIDE OF THE ACCOUNT

8 RECORDING TRANSACTIONS DIRECTLY INTO THE ACCOUNTS The following reflects how we would record the same transactions we have been working with directly into the accounts The following reflects how we would record the same transactions we have been working with directly into the accounts I have broken the major classifications (assets, liabilities, and capital) down into the specific accounts we must create as a result of these transactions I have broken the major classifications (assets, liabilities, and capital) down into the specific accounts we must create as a result of these transactions

9 Transaction 1 CASH LEFT SIDE ACCOUNT 100,000 RIGHT SIDE ACCOUNT

10 Transaction 1 CAPITAL LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 100,000

11 Transaction 2 CASH LEFT SIDE ACCOUNT 100, ,000 RIGHT SIDE ACCOUNT

12 Transaction 2 NOTES PAYABLE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 200,000

13 Transaction 3 LEFT SIDE ACCOUNT 25,000 RIGHT SIDE ACCOUNT LAND

14 Transaction 3 CASH LEFT SIDE ACCOUNT 100, ,000 RIGHT SIDE ACCOUNT 5,000

15 Transaction 3 NOTES PAYABLE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 200,000 20,000

16 Transaction 4 EXPENSE LEFT SIDE ACCOUNT 500 RIGHT SIDE ACCOUNT

17 Transaction 4 CASH LEFT SIDE ACCOUNT 100, ,000 RIGHT SIDE ACCOUNT 5,

18 Transaction 5 CASH LEFT SIDE ACCOUNT 100, , RIGHT SIDE ACCOUNT 5,

19 Transaction 5 REVENUE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 700

20 Transaction 6 DRAWING LEFT SIDE ACCOUNT 100 RIGHT SIDE ACCOUNT

21 Transaction 6 CASH LEFT SIDE ACCOUNT 100, , RIGHT SIDE ACCOUNT 5,

22 T ACCOUNT FORMAT Ok, cool, we have recorded those same transactions directly into the accounts using the account side rules given in the second slide. Ok, cool, we have recorded those same transactions directly into the accounts using the account side rules given in the second slide. Now, we need to do the math to determine the “amount” or “resulting balance” that we report for each of the accounts. Now, we need to do the math to determine the “amount” or “resulting balance” that we report for each of the accounts. We “foot” the account (which means we add up all the amounts on the left and right side of the accounts). We “foot” the account (which means we add up all the amounts on the left and right side of the accounts). We then determine the “balance of the account” (since one side represents increases and the other decreases, we subtract opposite sides and report the balance on the side that was the largest. We then determine the “balance of the account” (since one side represents increases and the other decreases, we subtract opposite sides and report the balance on the side that was the largest.

23 CASH LEFT SIDE ACCOUNT 100, , RIGHT SIDE ACCOUNT 5, ,700 5, ,100 This is a footing This is the balance of the account

24 LEFT SIDE ACCOUNT 25,000 RIGHT SIDE ACCOUNT LAND 25,000

25 NOTES PAYABLE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 200,000 20, ,000

26 CAPITAL LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 100,000

27 DRAWING LEFT SIDE ACCOUNT 100 RIGHT SIDE ACCOUNT 100

28 REVENUE LEFT SIDE ACCOUNTRIGHT SIDE ACCOUNT 700

29 EXPENSE LEFT SIDE ACCOUNT 500 RIGHT SIDE ACCOUNT 500

30 BEFORE WE GO ANY FURTHER THE LEFT HAND SIDE OF THE ACCOUNT IS CALLED THE DEBIT SIDE OF THE ACCOUNT THE LEFT HAND SIDE OF THE ACCOUNT IS CALLED THE DEBIT SIDE OF THE ACCOUNT THE RIGHT HAND SIDE OF THE ACCOUNT IS CALLED THE CREDIT SIDE OF THE ACCOUNT THE RIGHT HAND SIDE OF THE ACCOUNT IS CALLED THE CREDIT SIDE OF THE ACCOUNT WHY? WHY? WHY NOT? WHY NOT?

31 MEANINGS? DOES DEBIT MEAN GOOD/BAD? DOES DEBIT MEAN GOOD/BAD? NO NO DOES CREDIT MEAN INCREASE/DECREASE? DOES CREDIT MEAN INCREASE/DECREASE? NO NO DEBIT MEANS LEFT SIDE AND CREDIT MEANS RIGHT SIDE AND NOTHING ELSE DEBIT MEANS LEFT SIDE AND CREDIT MEANS RIGHT SIDE AND NOTHING ELSE

32 IF YOU REALLY WANT A LITTLE MORE INFO Debit is short for debtor (DR) – loosely translated from Latin “to have” Debit is short for debtor (DR) – loosely translated from Latin “to have” Credit is short for creditor (CR) – loosely translated from Latin “to owe” Credit is short for creditor (CR) – loosely translated from Latin “to owe” When this method was created in the 1400’s, the inventors personified the accounts and viewed them as people, and since the assets and equities have opposing positions, they use the opposite sides of the accounts to record the transactions When this method was created in the 1400’s, the inventors personified the accounts and viewed them as people, and since the assets and equities have opposing positions, they use the opposite sides of the accounts to record the transactions The cool thing about this approach is that it has a built-in mechanism to “double-check” our mechanics (ie, debits must equal credits) The cool thing about this approach is that it has a built-in mechanism to “double-check” our mechanics (ie, debits must equal credits)

33 IS THIS THE PERFECT FORMAT? (RECORDING DIRECTLY INTO THE ACCOUNTS) WHAT WAS THE $5,000 CASH PAID OUT FOR? WHAT WAS THE $5,000 CASH PAID OUT FOR? –YOU KNOW BECAUSE THIS IS A SHORT PROBLEM WE HAVE WORKED REPEATEDLY WHAT IF WE HAD 100,000 CASH TRANSACTIONS AND I ASKED YOU ON 12/31 WHY DID WE PAY OUT $14,000 ON MARCH 25 – HOW WOULD YOU ANSWER THE QUESTION? WHAT IF WE HAD 100,000 CASH TRANSACTIONS AND I ASKED YOU ON 12/31 WHY DID WE PAY OUT $14,000 ON MARCH 25 – HOW WOULD YOU ANSWER THE QUESTION? –THE ONLY WAY IS TO SEARCH FOR A CORRESPONDING DEBIT OF $14,000 ON THAT DATE (AND YOU MAY NOT FIND ONE BECAUSE MAYBE WE BOUGHT AN ASSET FOR 30,000 PAYING DOWN 14, 000 AND PUTTING 16,000 ON A NOTE)

34 ADJUST FORMAT ONE MORE THING TO ADD – AND WE WILL BE THERE ONE MORE THING TO ADD – AND WE WILL BE THERE PRIOR TO RECORDING TRANSACTIONS INTO ACCOUNT – WE FIRST RECORD IT IN THE JOURNAL PRIOR TO RECORDING TRANSACTIONS INTO ACCOUNT – WE FIRST RECORD IT IN THE JOURNAL JOURNAL – BOOK (MEDIUM) IN WHICH ALL TRANSACTIONS ARE FIRST RECORDED JOURNAL – BOOK (MEDIUM) IN WHICH ALL TRANSACTIONS ARE FIRST RECORDED

35 JOURNAL MECHANICS OF RECORDING ENTRY ORIGINALLY IN THE JOURNAL AS OPPOSED TO THE LEDGER DATEACCOUNTDEBITCREDIT 1/1/02CASH100,000 OWNERS EQUITY OWNERS EQUITY100,000 OK, what is this and what does it mean? Its just a different format (the paper looks differenct – no T account), the rules are the same. 1. We record the date. 2. We want to debit cash (remember debit means left side so, we write the account title next to the left side of the column); and we want to credit owners equity (we indent the account title to the right side (credit) of the column). We write the amounts under the appropriate Columns (debit or credit).

36 EXERCISE RECORD ALL THE TRANSACTIONS IN THIS JOURNEY ENTRY FORMAT RECORD ALL THE TRANSACTIONS IN THIS JOURNEY ENTRY FORMAT Cash 100,000 Owners Equity 100,000 Owners Equity 100,000

37 OK, LETS REVIEW STEPS IN THE ACCOUNTING CYCLE 1. TRANSACTION 2. RECORD IN THE JOURNAL BY MEANS OF A JOURNAL ENTRY 3. POST FROM THE JOURNAL TO THE LEDGER THE FOLLOWING SHOWS THE DETAILS OF STEPS 2 AND 3. THE FOLLOWING SHOWS THE DETAILS OF STEPS 2 AND 3.

38 Post. DateDescriptionRef.DebitCredit 1/1Cash 100,000 Capital 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/1 Account: Cash Account No. 11 General Journal General Ledger Page 1 Recording and Posting an Entry 1 1 Enter the transaction date in the ledger account.

39 Post. DateDescriptionRef.DebitCredit 1/1Cash 100,000 Capital 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/1 100,000 Account: Cash Account No. 11 General Journal General Ledger Page 1 Recording and Posting an Entry 2 2 Enter the debit amount in the ledger debit column.

40 Post. DateDescriptionRef.DebitCredit 1/1Cash 100,000 Capital 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/1100,000100,000 Account: Cash Account No. 11 General Journal General Ledger Page 1 Recording and Posting an Entry 3 3 Update the ledger account balance.

41 Post. DateDescriptionRef.DebitCredit 1/1Cash 100,000 Capital 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/11100,000100,000 Account: Cash Account No. 11 General Journal General Ledger Page 1 Recording and Posting an Entry 4 4 Enter the journal page in the ledger account.

42 Post. DateDescriptionRef.DebitCredit 1/1Cash11 100,000 Capital 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/11100,000100,000 Account: Cash Account No. 11 General Journal General Ledger Page 1 Recording and Posting an Entry 5 5 Enter the ledger account number in the journal.

43 Recording and Posting an Entry Post. DateDescriptionRef.DebitCredit 1/1Cash 100,000 Capital31 100,000 Post. Balance DateItemRef.DebitCredit DebitCredit 1/11100,000100,000 Account: Capital Account No. 31 General Journal General Ledger Page All five parts of the credit posting are shown.

44 FUNCTION OF JOUNAL CRONOLOGICAL ORDER CRONOLOGICAL ORDER TO SEE THE ENTIRE TRANSACTION ALL AT ONE TIME TO SEE THE ENTIRE TRANSACTION ALL AT ONE TIME TO IDENTIFY CAUSE/EFFECT TO IDENTIFY CAUSE/EFFECT EX. Q. WHY DID WE CREDIT CASH $1MM ON JUNE 29? EX. Q. WHY DID WE CREDIT CASH $1MM ON JUNE 29? EX. A. LOOK IN THE JOURNAL – DOWN PYMT ON TRACTOR. EX. A. LOOK IN THE JOURNAL – DOWN PYMT ON TRACTOR.

45 POST FROM THE JOURNAL TO THE LEDGER POST POST COPY VERBATIM COPY VERBATIM LEDGER LEDGER BOOK (MEDIUM) THAT CONTAINS ALL THE ACCOUNTS OF THE BUSINESS BOOK (MEDIUM) THAT CONTAINS ALL THE ACCOUNTS OF THE BUSINESS

46 FUNCTION OF THE LEDGER SUMMARIZATION SUMMARIZATION DEPICTS THE FINAL ENDING BALANCE OFALL THE FINANCIAL ITEMS (ACCOUNTS) WE ARE KEEPING TRACK OF DEPICTS THE FINAL ENDING BALANCE OFALL THE FINANCIAL ITEMS (ACCOUNTS) WE ARE KEEPING TRACK OF ACCOUNT TOTALS ACCOUNT TOTALS

47 NEXT STEP - PREPARE A TRIAL BALANCE LIST OF ALL THE ACCOUNTS IN THE LEDGER AND THEIR BALANCE LIST OF ALL THE ACCOUNTS IN THE LEDGER AND THEIR BALANCE PROVES THE EQUALITY OF DEBIT AND CREDITS PROVES THE EQUALITY OF DEBIT AND CREDITS PREPARE A TRAIL BALANCE ON A SHEET OF PAPER BASED UPON THE JOURNAL ENTRIES AND LEDGER YOU HAVE PREPARED. DON’T PEEK AT THE NEXT PAGE UNTIL YOU’RE FINISHED – IT HAS THE ANSWER. PREPARE A TRAIL BALANCE ON A SHEET OF PAPER BASED UPON THE JOURNAL ENTRIES AND LEDGER YOU HAVE PREPARED. DON’T PEEK AT THE NEXT PAGE UNTIL YOU’RE FINISHED – IT HAS THE ANSWER.

48 TRIAL BALANCE CASH295,100 LAND25,000 NOTES PAY 220,000 CAPITAL100,000 DRAW100 REVENUE700 EXPENSES ,700320,700

49 ADJUSTMENT PROCESS REVIEW ALL THE ACCOUNTS IN THE LEDGER REVIEW ALL THE ACCOUNTS IN THE LEDGER DO THESE ACCOUNTS AND ONLY THESE ACCOUNTS PROPERLY REPORT ALL THE FINANCIAL ITEMS WE WANT? DO THESE ACCOUNTS AND ONLY THESE ACCOUNTS PROPERLY REPORT ALL THE FINANCIAL ITEMS WE WANT? DO THEY REPORT THE PROPER BALANCE? DO THEY REPORT THE PROPER BALANCE? IF NO – WE NEED TO CHANGE THEM SO THEY DO – UPDATE THE ACCOUNTS – MAKE ADUSTMENTS IF NO – WE NEED TO CHANGE THEM SO THEY DO – UPDATE THE ACCOUNTS – MAKE ADUSTMENTS

50 ADJUSTMENTS NECESSARY? RARE – NO, BUT IN THIS CASE, NO ADJUSTMENTS ARE MADE RARE – NO, BUT IN THIS CASE, NO ADJUSTMENTS ARE MADE

51 INCOME STATEMENT REVENUES700 EXPENSE500 NET INCOME200

52 CAPITAL STATEMENT BEGINNING BALANCE0 OWNER INVESTMENT100,000 NET INCOME 200 INCREASE IN CAPITAL100,200 DRAWING -100 ENDING BALANCE100,100

53 BALANCE SHEET CASH295,100 LAND 25,000 TOTAL ASSETS320,100 NOTES PAYABLE220,000 CAPITAL100,100 TOTAL LIABILITIES & CAPITAL320,100


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