4 The Transaction Learning Objectives

Name: 4 The Transaction Learning Objectives
Uploaded: 2018-01-09T12:52:06+00:00
Duration: PTM29S32
Channel: Jayden Bose
Description: 4 The Transaction Learning Objectives

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

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

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

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

The date of the transaction should be entered first.
Journal The date of the transaction should be entered first. O4.1

Journal The account names involved in the transactions are entered in the description column O4.1

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

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

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

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

A summary description of each transaction can be entered here.
Journal A summary description of each transaction can be entered here. O4.1

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

This example is for the Sales account.
Ledger This example is for the Sales account. O4.1

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

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

Ledger Notice the date column O4.1

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

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

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

The posting process would flow like this.
Journal to Ledger The posting process would flow like this. O4.1

The resulting new balances are shown
Journal to Ledger The resulting new balances are shown O4.1

The posting references indicate the source of the entry
Journal to Ledger The posting references indicate the source of the entry O4.1

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

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

Tips for transactions A C I D 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. A The Acid Test steps C I D Test

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

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

Recording Transactions

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

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

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

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

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

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

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

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

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

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

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

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

June 16 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). Which accounts are involved? O4.2

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

June 18 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. Which accounts are involved? O4.2

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

June 21 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). Which accounts are involved? O4.2

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

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

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

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

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

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

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

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

Leverage Balance Sheet Balance Sheet
Assets Liabilities Assets Liabilities Equity Equity Highly Leveraged (claims on assets are mostly from liabilities) Limited Leverage (claims on assets are mostly from equity) O4.3

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

Leverage Higher Risk Lower Risk Balance Sheet Balance Sheet
Assets Liabilities Assets Liabilities Higher Risk Lower Risk Equity Equity Highly Leveraged (claims on assets are mostly from liabilities) Limited Leverage (claims on assets are mostly from equity) O4.3

of several leverage ratios
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?

Each dollar of Equity supports 55 cents of Liabilities
Debt to Worth Example #1 Each dollar of Equity supports 55 cents of Liabilities

Each dollar of Equity supports $2.22 of Liabilities
Debt to Worth Example #2 Each dollar of Equity supports $2.22 of Liabilities

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

End of Unit 4

4 The Transaction Learning Objectives

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