1. Analyzing Business transactions2

2. Measurement Issues
OBJECTIVE 1: Explain how the concepts of recognition, valuation, and classification apply to business transactions and why they are important factors in ethical financial reporting.

3. Figure 1: The Role of Measurement Issues

4. Measurement Issues
Three measurement issues must be resolved before a business transaction is recorded.
Recognition issue—When should the transaction be recorded?
Valuation issue—What dollar amount should be recorded?
Classification issue—Which accounts are affected?

5. Measurement Issues
A sale is recognized when title passes to the buyer (recognition point).

6. Measurement Issues
Transactions should be recorded at their original cost (historical cost).
The fair value is the exchange price, which results from an agreement between the buyer and seller that can be verified by evidence at the time of the transaction.
Assets are valued at the initial fair value or cost unless there is evidence that the fair value has changed and an adjustment must be made.

7. Measurement Issues
OBJECTIVE 1: Explain how the concepts of recognition, valuation, and classification apply to business transactions and why they are important factors in ethical financial reporting.

8. Measurement Issues
Three measurement issues must be resolved before a business transaction is recorded.
Recognition issue—When should the transaction be recorded?
Valuation issue—What dollar amount should be recorded?
Classification issue—Which accounts are affected?

9. Measurement Issues
A sale is recognized when title passes to the buyer (recognition point).

10. Measurement Issues
Transactions should be recorded at their original cost (historical cost).
The fair value is the exchange price, which results from an agreement between the buyer and seller that can be verified by evidence at the time of the transaction.
Assets are valued at the initial fair value or cost unless there is evidence that the fair value has changed and an adjustment must be made.

11. Measurement Issues
Transactions must classified according to the appropriate categories or accounts.

12. Measurement Issues
Recognition, valuation, and classification are important factors in ethical financial reporting.

14. Double-Entry System
OBJECTIVE 2: Explain the double-entry system and the usefulness of T accounts in analyzing business transactions.

15. Table 1: Normal Account Balances of Major Account Categories

16. Figure 2: Relationships of Owner’s Equity Accounts

17. Describe the nature of the double-entry system of accounting.
Principle of duality

18. Double-Entry System
Accounts are the basic storage units for accounting data and are used to accumulate amounts from similar transactions.

19. A T account (the simplest form of an account) has three parts.
Double-Entry System
A T account (the simplest form of an account) has three parts.
A title expressing the name of the asset, liability, etc.
A debit (left) side
A credit (right) side

20. The T Account Illustrated
Double-Entry System
The T Account Illustrated

21. State the rules of double entry.
Double-Entry System
State the rules of double entry.
Increases in assets are debited.
Decreases in assets are credited.
Increases in liabilities and owner’s equity are credited.
Decreases in liabilities and owner’s equity are debited.
Increases in revenues are credited.
Increases in expenses are debited.

22. Double-Entry System

23. Double-Entry System
The normal balance of an account is what it takes (debit or credit) to increase the account.

24. Double-Entry System
Typical owner’s equity accounts, such as Owner’s Capital and Withdrawals.

26. Business Transaction Analysis
OBJECTIVE 3: Demonstrate how the double-entry system is applied to common business transactions.

27. Exhibit 1: Summary of Transactions of Miller Design Studio

28. Exhibit 1: Summary of Transactions of Miller Design Studio (cont.)

29. Business Transaction Analysis
Explain the five-step process for analyzing and applying transactions.
State the transaction.
Analyze the transaction to determine which accounts are affected and how (increased or decreased).
Apply the rules of double-entry accounting using T accounts to show how the transaction affects the accounting equation.
Show the transaction in journal form.
Provide a comment that will help you apply the rules of double-entry accounting.

30. Business Transaction Analysis

31. Business Transaction Analysis

32. Business Transaction Analysis

33. Business Transaction Analysis

34. Business Transaction Analysis

35. Business Transaction Analysis

36. Business Transaction Analysis

37. Business Transaction Analysis

38. Business Transaction Analysis

39. Business Transaction Analysis

40. Business Transaction Analysis

41. Business Transaction Analysis

43. The Trial Balance
OBJECTIVE 4: Prepare a trial balance, and describe its value and limitations.

44. The Trial Balance
A trial balance tests the equality of debits and credits in the ledger before the financial statements are prepared. A three-step process is followed.
List each ledger account and its debit or credit balance.
Add each column.
Compare the column totals.

45. The Trial Balance
If the trial balance does not balance, one or more of the following has occurred:
A debit was entered as a credit, or vice versa.
The balance was computed incorrectly.
The balance was carried to the trial balance incorrectly.
The trial balance was summed incorrectly.

46. The Trial Balance
It is possible to make an error in the records that does not cause the trial balance to be out of balance, such as the following:
A transaction was omitted or entered twice.
Both debit and credit amounts are incorrect but equal.
The wrong account was debited or credited.

47. Cash Flows and the Timing of Transactions
OBJECTIVE 5: Show how the timing of transactions affects cash flows and liquidity.

48. Exhibit 2: Trial Balance

50. Figure 3: Transactions of Miller Design Studio

51. Discuss the importance of maintaining good liquidity.
The Trial Balance
Discuss the importance of maintaining good liquidity.
Discuss the timing of cash flows in maintaining a company’s adequate liquidity to pay bills.

53. Recording and Posting Transactions
SUPPLEMENTAL OBJECTIVE 6: Define the chart of accounts, record transactions in the general journal, and post transactions to the ledger.

54. Figure 4: Analyzing and Processing Transactions

55. Exhibit 3A: Chart of Accounts for a Small Business

56. Exhibit 3A: Chart of Accounts for a Small Business

57. Exhibit 4: The General Journal

58. Exhibit 5: Accounts Payable in the General Ledger

59. Exhibit 6: Posting from the General Journal to the Ledger

60. Recording and Posting Transactions
Chart of Accounts
An account is the basic storage unit for accounting data.
An account occupies its own page in the general ledger.
A chart of accounts lists all the accounts in the ledger.

61. Recording and Posting Transactions
Chart of Accounts (cont.)
Discuss typical asset accounts, such as Cash, Accounts Receivable, Notes Receivable, Supplies, Inventory, Prepaid Expenses, Land, Buildings, and Equipment.
Discuss typical liability accounts, such as Accounts Payable, Notes Payable, Wages Payable, Income Taxes Payable, Rent Payable, Interest Payable, and Unearned Revenue.

62. Recording and Posting Transactions
General Journal
Transactions are initially recorded in the journal (book of original entry).
Every journal entry contains five components.
The date
The account names
The dollar amounts debited and credited
An explanation
The account identification number, if appropriate

63. Recording and Posting Transactions
General Journal (cont.)
A space should be skipped between journal entries.
A compound entry is an entry with more than one debit or credit.
Illustrate the ledger account form, and state its advantage over the T account form.

64. Recording and Posting Transactions
Journal entries are posted (transferred) to the ledger when convenient (usually daily).
Post the date and amounts.
Compute a new account balance.
Place the journal page number in the Post. Ref. column of the ledger account.
Place the account number in the Post. Ref. column of the journal.

65. Recording and Posting Transactions
Rules and customs regarding ruled lines, dollar signs, commas, and periods should be followed.