Chapter 2 Analyzing and Recording Transactions

Outline of Chapter 2 Analyzing and Recording Transactions Analyzing & Recording Process Analyzing & Processing Transactions Trial Balance Source documents Source documents Account & analysis Account & analysis Types of accounts Types of accounts Source documents Source documents Account & analysis Account & analysis Types of accounts Types of accounts General ledger Double-entry Double-entry Journalizing & Posting Journalizing & Posting General ledger Double-entry Double-entry Journalizing & Posting Journalizing & Posting Trial balance preparation Search for & correction of errors Search for & correction of errors Trial balance use Trial balance use Trial balance preparation Search for & correction of errors Search for & correction of errors Trial balance use Trial balance use

External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Analyzing& Recording Process Analyzing & Recording Process Exchanges of economic consideration between two parties. C 1 2-3

Analyze each transaction and event from 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 C 原始凭证 日记账 分类账 试算平衡 Accounting Process

Sales Tickets/ Invoices Bank Statements Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Records C 2 2-5

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The Account and its Analysis 总分类账 - 总分类账 -The general ledger is a record containing all accounts used by the company. 日记账 日记账 - Journal, gives a complete record of each transaction in one place. 总分类账 - 总分类账 -The general ledger is a record containing all accounts used by the company. 日记账 日记账 - Journal, gives a complete record of each transaction in one place. C 3 2-6

Assets Accounts Asset Accounts = The Account and its Analysis + Liability Accounts Equity Accounts C 3 2-7

Land Equipment Buildings Cash Notes Receivabl e Supplies Prepaid Accounts Accounts Receivable Asset Accounts Asset Accounts ——at a minimum level C 3 2-8

 Asset Accounts Cash account: Cash account: Monetary Capital  Money and any medium of exchange accepted by a bank for deposit  Coins, checks, money orders, checking account balance Accounts Receivable Accounts Receivable: credit sales, sales on account  Held by a seller and refer to promises of payment from customers to sellers  A company needs a separate record for each customer Notes Receivable Notes Receivable:  Written promise of another entity to pay a definite sum of money on a specified future date to the holder of notes

Prepaid accounts/expenses Prepaid accounts/expenses:  Assets, represent prepayments of future expenses, not current expenses  When expenses later incurred, the amounts in accounts transferred to expense accounts  E.g. prepaid insurance, rent, club memberships adjusted When FSs prepared, prepaid accounts adjusted:  All expired and used, recorded as regular expenses;  All unexpired and used, recorded as assets. Asset Accounts  Asset Accounts

Supplies Supplies: often for shorterm use, grouped by purpose  Office supplies –stationery, paper, toner, pens  Store supplies –packaging materials, bags, boxes Equipments Equipments: often for long-term use  When used and gets worn down, cost gradually reported as expenses, called depreciation.  Office equipment –computers, printers, desks, chairs  Store equipment –counters, showcases, ladders Buildings Buildings: stores, offices, warehouses, factories LandBuildings Land: separately recorded from Buildings Asset Accounts  Asset Accounts

Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts C 应计负债 未赚取收入 OR 预收账款

Accounts payable Accounts payable: oral or implied promise  Office supplies –stationery, paper, toner, pens  Store supplies –packaging materials, bags, boxes Notes payable Notes payable: a formal promise, promissory note  Short-tem Notes payable  Long-tem Notes payable Unearned Revenue Unearned Revenue: customers’ payment in advance  A liability  A liability, settled in future when company deliver the products or services.  E.g. magazine subscriptions, season tickeks sales  Earned portion transferred to Revenue when products delivered Accrued liabilities Accrued liabilities: amounts owed, yet not paid  E.g.  E.g. wages payable, taxes payable, interest payable Liability Accounts  Liability Accounts

Equity Accounts Revenues Common Stock/ Owner, Capital Common Stock/ Owner, Capital Dividends/ Owner’s withdrawals Dividends/ Owner’s withdrawals Expenses Equity Accounts C 3 Retained Earnings Retained Earnings 2-14 Initial & further investments Not expenses! Sales, Commissions, Rents, Interests Costs of Sales, Salaries, Advertising, Rents, Interests

Liabilities Equity Assets =+ The Account and its Analysis Common Stock Dividends Revenues Expenses ++ –– C

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. C Ext.2.4 p. 32

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C To debit the account To credit the account debit balance credit balance Account Balance

Liabilities Equity Assets =+ Double-Entry Accounting each transaction affect and be recorded in at least two accounts Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + C Double-Entry accounting: total amount debited equals Double-Entry accounting: total amount debited equals total amount credited for each transaction.

Revenues Expenses Common Stock Dividends _ _ + + _ _ Debit Credit Stock - + Debit Credit Dividends + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity C

Double-Entry Accounting account balance An account balance is the difference between the increases and decreases in an account. Notice the T-Account C The ending balance is on the side with larger dollar amount. ? Normal Balance

Journalizing & 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 P1 2-21

 Dollar amount of debits and credits Journalizing Transactions  Transaction Date  Transaction explanation  Titles of Affected Accounts P A journal gives a complete record of each transaction in one place.

T-accounts are useful illustrations, but balance column accounts are used in practice. Balance Column Account 三栏式账户 P Normal balance: an account is assumed to have a normal balance. Abnormal balance: a balance on the side where decreases are recorded.

1 1 in ledger Identify the debit account in ledger. Posting Journal Entries to Ledger Account P All entries must be posted to the ledger before the FSs are prepared to ensure that account balances are up-to-date.

2 2 Enter the date in ledger. Posting Journal Entries P1 2-25

3 3 Enter the amount and description in ledger. Posting Journal Entries P1 2-26

4 4 Cross-reference Enter the journal reference in ledger. Cross-reference Posting Journal Entries P1 2-27

5 5 Compute the balance in ledger. Posting Journal Entries P1 2-28

in journal Cross-reference Enter the ledger reference in journal. Cross-reference 6 6 Posting Journal Entries P1 2-29

Analyzing Transactions Analysis: Double entry: Posting: A1 2-30

Analyzing Transactions Analysis: Double entry: Posting: A1 2-31

Analyzing Transactions Double entry: Posting: A1 Analysis: 2-32

Analyzing Transactions Analysis: Double entry: Posting: A1 2-33

Analyzing Transactions Analysis: Double entry: Posting: A1 2-34

Analyzing Transactions Analysis: Double entry: Posting: A1 2-35

Analyzing Transactions Analysis: Double entry: Posting: A1 2-36

Analyzing Transactions Analysis: Double entry: Posting: A Compound journal entry -

Analyzing Transactions Analysis: Double entry: Posting: A1 2-38

Analysis: Double entry: Posting: A1 2-39

Analysis: Double entry: Posting: A1 2-40

Analysis: Double entry: Posting: A1 2-41

Analysis: Double entry: Posting: A1 2-42

Analysis: Double entry: Posting: A1 2-43

Analysis: Double entry: Posting: A1 2-44

Analysis: Double entry: Posting: A1 2-45

Trial Balance After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. DebitsCredits Cash4,350$ Accounts receivable- Supplies9,720 Prepaid Insurance2,400 Equipment26,000 Accounts payable6,200$ Unearned consulting revenue3,000 Common stock30,000 withdraws200 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForwar d Trial Balance December 31, 2009 trial balance all account The trial balance lists all account balances in the general ledger. To verify To verify the sum of Dr. balances equal the sum of Cr. Balances. trial balance all account The trial balance lists all account balances in the general ledger. To verify To verify the sum of Dr. balances equal the sum of Cr. Balances. A 试算平衡表 Equality no guarantee no errors made.

Six Steps for Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected. ① correctly added ① Make sure the trial balance columns are correctly added. ② correctly entered ② Make sure account balances are correctly entered from the ledger. ③ debit or credit mistakenly placed ③ See if debit or credit accounts are mistakenly placed on the trial balance. ④ Re-compute in the ledger ④ Re-compute each account balance in the ledger. ⑤ posted correctly ⑤ Verify that each journal entry is posted correctly. ⑥ original journal entry ⑥ Verify that each original journal entry has equal debits and credits. P In reverse order In reverse order

Error Correcting Error in a journal entry discovered before posted:  In a manual system: drawing a line through the incorrect information  In a computerized system: replace the incorrect information directly Error in a journal entry discovered after posted: Create a correcting entry, remove the amount from wrong account and record it to correct account Dr: Equipment $100 Cr: Cash $100 Dr: Supplies $100 Cr: Equipment $100

Using a Trial Balance to Prepare Financial Statements Statement of Cash Flows Income Statement Statement of Owners’ Equity Beginning Balance Sheet Ending Balance Sheet Period of Time Point in Time P3 2-49

Income Statement P3 2-50

Statement of Retained Earnings P3 2-51

Balance Sheet P3 2-52

End of Chapter

Debits & Credits and Double-entry accounting Debit refers to left, and credit refers to right. Debits increase assets, expenses, and withdrawals while credits decrease them. Credits increase liabilities, owner capital, and revenues; debits decrease them. Debit refers to left, and credit refers to right. Debits increase assets, expenses, and withdrawals while credits decrease them. Credits increase liabilities, owner capital, and revenues; debits decrease them.

Debits & Credits and Double-entry accounting Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows from the accounting equation. Double-entry accounting means each transaction affects at least two accounts and has at least one debit and one credit. The system for recording debits and credits follows from the accounting equation. The left side of an account is the normal balance for assets, withdrawals, and expenses, and the right side is the normal balance for liabilities, capital, and revenues. The left side of an account is the normal balance for assets, withdrawals, and expenses, and the right side is the normal balance for liabilities, capital, and revenues.

Steps in Processing Transactions Identify business transactions and events Identify business transactions and events Analyze and record their effects Analyze and record their effects  Journalizing/ in journals  Double-entry accounting Summarize and prepare information useful in making decisions Summarize and prepare information useful in making decisions  Posting to ledgers  Preparing a trial balance  Prepare financial statements