Certified General Accountants Module 1 Certified General Accountants Financial Accounting Fundamentals (FA1) Module 2 Recording Transactions © 2010 McGraw-Hill Ryerson Limited.

C H A P T E R 3 Analyzing and Recording Transactions Slides Content 1-4 Learning objectives and the accounting cycle 5-8 Accounts and the ledger 9-20 Double entry accounting 21 Chart of accounts 22-37 Transaction analysis 38-40 General journal and posting 41-42 Trial balance 43-44 Review and end of chapter © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Learning Objectives Explain the transactions recorded in accounting systems and the importance of source documents in these systems. (Level 1) Record the effects of transactions in accounts and explain the chart of accounts and ledger. (Level 1) Analyze transactions using debits and credits and record their effects in accounts. (Level 1) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Learning Objectives 4. Record transactions in a general journal and post entries from the journal to the ledger using the balance column format. (Level 1) 5. Prepare a trial balance and explain its usefulness. (Level 1) © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. The Accounting Cycle Analyze transactions Prepare post-closing trial balance 1 9 Journalize 2 2 Close 8 Post 3 Prepare statements 7 Prepare unadjusted trial balance 4 Adjust Prepare adjusted trial balance 5 6 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. The Account A detailed record of increases and decreases in a specific asset, liability, or equity item. Liabilities Equity Assets = + Examples: Cash Accounts Payable V.Climb, Capital Accounts Receivable Notes Payable V.Climb, Withdrawals Supplies Service Revenue Furniture Salaries Expense © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. The Ledger A record containing all accounts used by a business. May be computerized or maintained manually. Each company has its own unique set of accounts. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. The T Account Represents an account in the ledger. Used as a learning tool. The difference between the debit side and credit side is the balance. © 2010 McGraw-Hill Ryerson Limited.

Calculating the Account Balance Example: 1 2 3 Steps: Add the amounts on the debit side. Add the amounts on the credit side. Calculate the difference between the debits and credits. © 2010 McGraw-Hill Ryerson Limited.

Double-Entry Accounting Transactions are recorded using debits and credits. Every transaction affects at least two accounts. Equal debits and credits will keep the accounting equation in balance. Debits = Credits Always ! © 2010 McGraw-Hill Ryerson Limited.

= + Double-Entry Accounting Assets Assets Liabilities Liabilities Equity Equity Assets Liabilities Equity Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases + - - + © 2010 McGraw-Hill Ryerson Limited.

Double-Entry Accounting Equity Accounts Capital Withdrawals Revenues Expenses Debit for decreases Credit for increases Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for increases Credit for decreases - + + - - + + - © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Normal Balances An account’s normal balance is the debit or credit side where increases are recorded. Liabilities Equity Assets = + © 2010 McGraw-Hill Ryerson Limited.

Remembering Debits and Credits Account Type Normal Balance To ↑ Balance To ↓ Assets Dr Cr Liabilities Capital Revenue Expenses Withdrawals © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Mini-Quiz Indicate whether a debit or credit is needed to: Increase Rent Expense Decrease Accounts Payable Decrease Accounts Receivable Decrease Cash Increase Withdrawals Debit Debit Credit Credit Debit © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Chart of Accounts A list of all accounts used in the ledger by a company. Unique for each company. Accounts are usually numbered. © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Steps: Determine which accounts are being affected. Determine if account balances are increasing or decreasing. Apply rules of debits and credits. © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #1: The owner invests $10,000 in the business. Accounts affected Increase/ Decrease Debit/ Credit Cash Increase Debit V.Klimb, capital 1 2 3 © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #1: The owner invests $10,000 in the business. Debit cash for $10,000 Credit V.Klimb, capital for $10,000 © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease Debit/ Credit Supplies Increase Debit Cash Decrease 1 2 3 © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #2: The company purchases supplies by paying $2,500 cash. Debit supplies for $2,500 Credit cash for $2,500 © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease Debit/ Credit Supplies Increase Debit Accounts Payable 1 2 3 © 2010 McGraw-Hill Ryerson Limited.

Analyzing Transactions Example #3: The company purchases supplies for $1,100 on credit. Debit supplies for $1,100 Credit accounts payable for $1,100 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. The General Journal Entries are originally recorded in the General Journal. This process is called journalizing. © 2010 McGraw-Hill Ryerson Limited.

Posting Journal Entries General Journal information is transferred to the General Ledger. Account balances are updated. This process is called posting. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Posting The Posting Process LO 6 General journal information is transferred to the general ledger 1 3 2 5 5 4 Steps: Identify the account. Enter date Enter amount Calculate new account balance Enter posting references © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Trial Balance A list of accounts and their balances at a point in time. Used to determine if total debits equals total credits. Also used to prepare financial statements. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Trial Balance © 2010 McGraw-Hill Ryerson Limited.

Appendix 4A Correcting Errors © 2010 McGraw-Hill Ryerson Limited. Errors found before posting Draw a line through the incorrect information. Insert correct information above the original entry. Errors found after posting Two alternatives: Prepare a single correcting entry. Reverse the original entry and record the correct entry. © 2010 McGraw-Hill Ryerson Limited.

Correcting Errors — Example A payment of $1,200 for Salaries Expense is erroneously posted to Interest Expense. The original entry was recorded as: Interest Expense 1,200 Cash 1,200 The original should have been recorded as: Salaries Expense 1,200 Cash 1,200 © 2010 McGraw-Hill Ryerson Limited.

Correcting Errors — Example Alternative 1 -Prepare a single correcting entry. The original entry was recorded as: Interest Expense 1,200 Cash 1,200 The correcting entry would be: Salaries Expense 1,200 Interest Expense 1,200 © 2010 McGraw-Hill Ryerson Limited.

Correcting Errors — Example Alternative 2 -Reverse the original entry and enter the correct entry. The original entry was recorded as: Interest Expense 1,200 Cash 1,200 The entry to reverse this would be: Cash 1,200 Interest Expense 1,200 The correct entry would be: Salaries Expense 1,200 Cash 1,200 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. End of chapter © 2010 McGraw-Hill Ryerson Limited.