2. 2-1 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Chapter 2 Measuring Business Transactions Overview Gayle M. Richardson, CPA, Professor

3. 2-2 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Concepts Discussed u What is the generally accepted ways of solving measurement issues of recognition, valuation, and classification? u What is a Chart of Accounts and how to recognize commonly used accounts? u What is the double-entry system and what are the rules?.

4. 2-3 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u What are steps for transaction analysis and processing to simple transactions. u How to record transactions in the general journal u How to post transactions from the general journal to the ledger. u 7. How to prepare a trial balance and describe its value and limitations.

5. 2-4 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Measurement Issues Explain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification.

6. 2-5 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Measurement Issues u Business transactions are economic events that affect the financial position of a business entity. u To measure a transaction an accountant must decide: 1.When did the transaction occur? 2.What value should be placed on the transaction? 3.How should the components of the transaction be categorized? u Even though GAAP are followed, controversy does exist regarding these questions.

7. 2-6 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Recognition Issue u Recognition refers to the difficulty of deciding when a business transaction should be recorded. u The is the time determined for recording a transaction. EXAMPLE: A company orders, receives, and pays for an office desk. 4 The transaction is recorded when the title transfers--when ownership changes from one business to another. u The recognition issue is not always solved easily.

8. 2-7 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Valuation Issue u Perhaps the most controversial issue in accounting. u Valuation focuses on assigning a monetary value to a business transaction. u GAAP requires the use of historical cost. 4 Cost is defined as the exchange price associated with a business transaction at the point of recognition. 4 Purpose of accounting is to account for value in terms of cost, not in terms of value, which can change over time. 4 Value means the cost at the time of the transaction.

9. 2-8 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Cost Principle u The cost principle is the practice of recording transactions at cost. u The market value of an asset may change over the years, but its recorded cost remains in the accounting records. u The market value is the result of the actions of independent buyers and sellers who agree on a price. u The cost principle is used because the cost is verifiable.

10. 2-9 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Classification Issue u Classification is assigning all the transactions in which a business engages to appropriate categories or accounts. u Proper classification depends on: 1.Correctly analyzing the effect of each transaction on the business, and 2.Maintaining a system of accounts that reflects that effect.

11. 2-10 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Discussion Q. What three issues underlie most accounting measurement decisions? A. The three issues that underlie most accounting decisions are recognition (when a transaction should be recorded), valuation (what value should be placed on the transaction), and classification (how the components should be categorized).

12. 2-11 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Accounts and the Chart of Accounts Describe the chart of accounts and recognize commonly used accounts.

13. 2-12 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Accounts 4 Business people need to be able to retrieve transaction data quickly and in usable form. 4 A filing system consisting of accounts is used to sort out or classify all the transactions that occur in a business. 4 Accounts are the basic storage unit for accounting data and are used to accumulate amounts from similar transactions.

14. 2-13 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u An accounting system has a separate account for each asset, liability, and each component of owner’s equity, including revenues and expenses.

15. 2-14 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u An accounting system has a separate account for each asset, liability, and each component of owner’s equity, including revenues and expenses. u A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts.

16. 2-15 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u An accounting system has a separate account for each asset, liability, and each component of owner’s equity, including revenues and expenses. u A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts. u The group of company accounts is known as the general ledger or simply ledger.

17. 2-16 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u An accounting system has a separate account for each asset, liability, and each component of owner’s equity, including revenues and expenses. u A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts. u The group of company accounts is known as the general ledger or simply ledger. u The general ledger may be manual or computer-based.

18. 2-17 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Chart of Accounts u Accounts are numbered to make them easy to find. u The list of all account numbers and names is known as the chart of accounts. u Accounts are numbered for processing and reference purposes. 4 The account number may be coded to provide information about the account. 4 An asset account typically starts with 1. 4 A liability account typically starts with 2.

19. 2-18 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u Management needs a detailed breakdown of revenues and expenses for budgeting and operating purposes.

20. 2-19 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u Management needs a detailed breakdown of revenues and expenses for budgeting and operating purposes. u Accounting gives management information about whether it has achieved its primary goal of earning a net income.

21. 2-20 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Account Titles u The title should describe what is recorded in the account. u If an account title is not recognizable, examine the context of the name. 4 Determine if it is an asset, liability, owner’s investment, owner’s withdrawal, revenue, or expense. 4 Look for the kind of transaction that gave rise to the account.

22. 2-21 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Typical Asset Accounts u Cash u Accounts Receivable u Supplies u Inventory u Office Equipment u Buildings u Land u Prepaid Rent, Prepaid Insurance

23. 2-22 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Typical Liability Accounts u Accounts Payable u Notes or Loans Payable u Salaries Payable u Income Taxes Payable

24. 2-23 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Not-so-typical liability account u Unearned Revenue

25. 2-24 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Discussion Q. What is an account, and how is it related to the ledger? A. An account is the means by which management accumulates the effects of transactions; it is the basic storage unit for accounting data. The ledger is the file or book in which the company’s accounts are kept.

26. 2-25 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

27. 2-26 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

28. 2-27 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

29. 2-28 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

30. 2-29 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

31. 2-30 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense Short

32. 2-31 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

33. 2-32 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

34. 2-33 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

35. 2-34 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

36. 2-35 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

37. 2-36 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

38. 2-37 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

39. 2-38 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

40. 2-39 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

41. 2-40 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Identify each account as an Asset, Liability, Revenue or Expense

42. 2-41 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Double-Entry System: The Basic Method of Accounting The double-entry system and rules for double entry.

43. 2-42 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Double-Entry System u Evolved during the Renaissance. u Described by Luca Pacioli, Italy, 1494.

44. 2-43 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Features of the Double-Entry System u Principle of duality. u Each transaction must be recorded with at least one debit and one credit so that monetary value of debits and credits are equal. u The whole system is always in balance. u All accounting systems are based on the principle of duality.

45. 2-44 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The T Account Title of Account Debit (left) side Credit (right) side

46. 2-45 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The T Account Illustrated Cash (1) 50,000 (2) 35,000 (5) 1,500 (4) 200 (7) 1,000 (8) 1,000 (9) 400 (11) 600 52,500 37,200 Bal. 15,300 - Footings, the total of each side are computed. The difference between the debit side and the credit side is the account’s balance, either debit or credit.

47. 2-46 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Analyzing and Processing Transactions u Every transaction affects at least two accounts. u Total debits must equal total credits. u Assets = Liabilities + Owner’s Equity. Assets = Liabilities + O/E Debit for increases (+) Credit for decreases (-) Debit for decreases (-) Credit for increases (+) Debit for decreases (-) Credit for increases (+)

48. 2-47 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Application of Debit/Credit Rules to O/E Dr. Debit is commonly abbreviated Dr. Cr. Credit is commonly abbreviated Cr. + Owner’s Investment -Owner’s Withdrawal +Revenues - Expenses u Assets = Liabilities

49. 2-48 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Mrs. Richardson’s AWE/CLR u Increased with a DEBIT u Assets u Withdrawals u Expenses u Increased with a CREDIT u Contributions u Liabilities u Revenue

50. 2-49 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Are we having fun yet?????

51. 2-50 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Steps in Analyzing and Processing Transactions 1. Analyze the transaction to determine its effect on assets, liabilities, and O/E. - Supported by a source document. 2. Apply the rules of double entry. - Dr. increases an asset. - Cr. Increases a liability.

52. 2-51 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Steps in Analyzing and Processing Transactions (continued) 3. Record the entry. 4 Enter in chronological order in a journal. 4 Enter the date/debit account/debit amount on one line. 4 Enter the credit account/credit amount indented on the next line. Dr. Cr. June 1 Cash 100,000 Notes Payable 100,000 u This form is called journal form and usually is followed by an explanation. The explanation must pass the bus test.

53. 2-52 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Steps in Analyzing and Processing Transactions (continued) 4. Post the entry. 4 Post the entry to the general ledger by transferring the date and amount to the proper account. 5.Prepare the trial balance to confirm the balance of the accounts. 4 Confirm that the accounts are still in balance after recording and posting transactions.

54. 2-53 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Transaction Analysis Illustrated Apply the steps for transaction analysis and processing to simple transactions.

55. 2-54 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Exercise Michelle Donato Begins Business.

56. 2-55 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Michelle begins business. Dr. Cr. Jan. 1 Cash 4,300 Equipment1,600 Michelle, Capital 5,900 Cash Jan. 1 4,300 Michelle, Capital Jan. 1 5,900 Equipment Jan. 1 1,600

57. 2-56 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Rents an office, pays $400 rent for the current month.

58. 2-57 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Rents an office, pays $400 rent for the current month. Transaction Analysis Rules Entry Dr. Cr. Jan. 2 Rent Expense 400 Cash 400 Cash Jan. 1 4,300 Rent Expense Jan 2. 400 Jan. 2 400

59. 2-58 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Purchased repair supplies on credit $500

60. 2-59 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Purchased repair supplies on credit $500 Dr. Cr. Jan. 4 Repair Supplies 500 Accounts Payable 500 Repair Supplies Jan. 4 500 Transaction Analysis Rules Entry 4 500 Accounts Payable

61. 2-60 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Purchased additional repair equipment for cash $300

62. 2-61 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Purchased additional repair equipment for cash $300 Dr. Cr. Jan. 4 Repair Equipment 300 Cash 300 Repair Equipment Jan 1 1,600 4 300 Transaction Analysis Rules Entry Jan 2. 400 4 300 Cash Jan. 1 4,300

63. 2-62 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Paid salary to a helper $450.

64. 2-63 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Dr. Cr. Jan. 6 Salaries Expense 450 Cash 450 Salaries Expenses Jan. 6 450 Transaction Analysis Rules Entry Cash Jan. 1 4,300 Jan 2. 400 4 300 6 450 Paid salary to a helper $450.

65. 2-64 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Paid $200 of amount purchased on credit in transaction c.

66. 2-65 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Paid $200 of amount purchased on credit in transaction c. Dr. Cr. Jan. 8 Accounts Payable 200 Cash 200 Cash Jan. 1 4,300 Accounts Payable Transaction Analysis Rules Entry Jan 2. 400 4 300 6 450 6 450 8 200 Jan. 8 200 4 500

67. 2-66 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Withdrew $600 from the business for living expenses

68. 2-67 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Withdrew $600 from the business for living expenses Dr. Cr. Jan. 30 Owner’s Withdrawal 600 Cash 600 Cash Michelle, Withdrawals Transaction Analysis Rules Entry Jan. 31 600 Jan. 31 600 Jan. 1 4,300 Jan 2. 400 4 300 6 450 8 200 30 600

69. 2-68 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Collects a fee of $860 for repairs completed.

70. 2-69 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Collects a fee of $860 for repairs completed. Dr. Cr. Jan. 31 Cash 860 Repair Fees Earned 860 Cash Advertising Fees Earned Transaction Analysis Rules Entry Jan. 31 860 Jan. 1 4,300 31 860 Jan 2. 400 4 300 6 450 8 200 30 600

71. 2-70 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Still having fun?

72. 2-71 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. u Record transactions in the general journal. The General Journal

73. 2-72 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The General Journal u A journal is a record of all transactions u A separate journal entry is used to record each transaction

74. 2-73 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The General Journal u Entries include the following: u The date u Names of the accounts debited and the dollar amounts u Names of the accounts credited and the dollar amounts u An explanation of the transaction

75. 2-74 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Posting u Post transactions from the journal to the ledger

76. 2-75 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. The Trial Balance 4 The total of debits and credits in the accounts must be equal. 4 A trial balance is prepared periodically (usually on the last day of the month) to test this equality. 4 Steps in preparing a trial balance: 1. List each ledger account that has a balance, debit balances in the right column, credit balances in the left column. 2. Add (foot) each column. 3. Compare the totals of the two columns.

77. 2-76 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. 4 The trial balance proves whether or not the total of all debits recorded equals the total of all credits recorded.

78. 2-77 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. 4 An account may have a balance other than its normal balance. n An asset account may have a credit balance. n A liability account may have a debit balance. 4 The trial balance proves whether or not the total of all debits recorded equals the total of all credits recorded. 4 It does not prove that the transactions were analyzed correctly or recorded for the correct amounts or in the proper accounts.

79. 2-78 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Trial Balance u Is there something wrong??

80. 2-79 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Q. Arrange the following six items in sequence to show the flow of events through the accounting system: a. Analysis of the transaction b. Debits and credits posted from the journal to the ledger c. Occurrence of a business transaction d. Preparation of the financial statements e. Entry made in the journal f. Preparation of the trial balance A. c, a, e, b, f, d Discussion

81. 2-80 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. 1. Explain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification. 2. Describe the chart of accounts and recognize commonly used accounts. OK, LET’S REVIEW...

82. 2-81 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. 3. Define double-entry system and state the rules for double entry. 4.Apply the steps for transaction analysis and processing to simple transactions. 5. Prepare a trial balance and describe its value and limitations. CONTINUING OUR REVIEW...

83. 2-82 Copyright  Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Congratulations! The End! Click on the TaeBo Baby