1. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin1 Analyzing and Recording Transactions Chapter 2 2

2. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin2 Learning objective  Explain the steps in processing transactions.  Describe source documents and their purpose.  Describe an account and its use in recording transactions.  Define debits and credits and explain their role in double-entry accounting.  Analyze business transactions using the accounting equation.  Analyze the impact of transactions on accounts.  Identify and prepare basic financial statements and explain how they interpret

3. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin3 Analyzing and Recording Process Transactions: Exchanges of economic consideration between two parties. External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Events refer to those happenings that affect an entity’s accounting equation and can be reliably measured.

4. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin4 Learning objective  Describe source documents and their purpose.

5. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin5 Source documents  Source documents identify and describe transactions and events entering the accounting process.  They are the sources of accounting information.  Source documents obtained from outside the organization, provide objective and reliable evidence about transactions and events and their amount.

6. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin6 Sales Tickets Bank Statement Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Record

7. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin7 Learning objective  Describe an account and its use in recording transactions.

8. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin8 An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The Account and its Analysis The general ledger is a record containing all accounts used by the company.

9. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin9 Land Equipment Buildings Cash Notes Receivabl e Supplies Prepaid Accounts Accounts Receivable Asset Accounts

10. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin10 Asset account  Cash: reflects a company’s cash balance.  Account receivable: held by a seller and refer to promises of payment from customers to sellers. → credit sales or sales on account  Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.  Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)

11. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin11 Asset account  Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts.  Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).

12. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin12 Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable Liability Accounts

13. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin13 Liability accounts  Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise.  Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount.  Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).

14. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin14 Liability accounts  Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).

15. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin15 Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses Equity Accounts

16. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin16 Liabilities Equity Assets =+ Equity Accounts Owner’s Capital Owner’s Withdrawals Revenues Expenses ++ ––

17. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin17 Equity accounts  Revenues: gross increase in equity from a company’s earnings activities.  Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.  Owner investments: the amounts an owner puts into the company.  Owner withdrawals: the amounts take away from the company for personal use.

18. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin18 Learning objective  Define debits and credits and explain their role in double-entry accounting.

19. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin19 A T-account represents an account and is a tool used to understand the effects of one or more transactions. Debits and Credits ( 借 & 貸 )

20. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin20 Liabilities Equity Assets =+ Double-Entry Accounting Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + Normal Balance Nomal Balance

21. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin21 Revenues Expenses Owner’s Capital Owner’s Withdrawals _ _ + + _ _ Debit Credit Capital - + Debit Credit Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity Exh. 3.8 Normal Balance

22. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin22 Double-Entry Accounting  When there is a debited account, there must be a credited account.  The total amount debited must be equal to the total amount credited for each transaction.  The left side is the normal balance side for assets, and the right side is the normal balance side for liabilities and equity.  有借必有貸，借貸必相等。

23. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin23 Double-Entry Accounting An account balance is the difference between the increases and decreases in an account.

24. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin24 Analyzing and Recording Process 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

25. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin25  Dollar amount of debits and credits Journalizing Transactions  Transaction Date  Transaction explanation  Titles of Affected Accounts

26. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin26 General journal ( 普通日記賬 )  General journal is used to record any transaction and includes the following information about each transaction: (1) date of transaction; (2) titles of affected accounts; (3) dollar amount of each debit and credit, and (4) explanation of the transaction.

27. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin27 T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Balance Column Account

28. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin28 1 1 Identify the account. Posting Journal Entries

29. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin29 2 2 Enter the date. Posting Journal Entries

30. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin30 3 3 Enter the amount and description. Posting Journal Entries

31. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin31 4 4 Enter the journal reference. Posting Journal Entries

32. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin32 5 5 Compute the balance. Posting Journal Entries

33. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin33 Enter the ledger reference. 6 6 Posting Journal Entries

34. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin34 Analyzing Transactions – An Illustration Analysis: Double entry: 101 301 Posting:

35. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin35 Learning objective  Analyze business transactions using the accounting equation.  Analyze the impact of transactions on accounts.

36. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin36 The accounting equation must remain in balance after each transaction. Liabilities Equity Assets =+ Transaction Analysis Equation

37. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin37 The accounts involved are: (1) Cash (asset) (2) Taylor, Capital (equity) Chuck Taylor, the owner, contributed $30,000 cash to start the business, FastForward. Transaction Analysis (1)

38. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin38 Transaction Analysis (1) Chuck Taylor, the owner, contributed $30,000 cash to start the business.

39. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin39 Transaction Analysis (1) 101 301 Dr. Cash 30,000 Cr. C. Taylor, Capital 30,000

40. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin40 The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis (2) FastForward purchased supplies paying $2,500 cash.

41. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin41 Transaction Analysis (2) Purchased supplies paying $2,500 cash.

42. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin42 Transaction Analysis (2) 126 101 Dr. Supplies 2,500 Cr. Cash 2,500

43. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin43 The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis (3) FastForward purchased equipment for testing athletic shoes for $26,000 cash.

44. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin44 Transaction Analysis (3) Purchased equipment for $26,000 cash.

45. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin45 Transaction Analysis (3) 167 101 Dr. Equipment 26,000 Cr. Cash 26,000

46. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin46 The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Transaction Analysis (4) FastForward purchased Supplies of $7,100 on credit from CalTech.

47. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin47 Transaction Analysis (4) Purchased Supplies of $7100 on credit.

48. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin48 Transaction Analysis (4) 126 201 Dr. Supplies 7,100 Cr. Accounts Payable 7,100

49. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin49 The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis (5) FastForward earned revenues of $4,200 from consulting with clients about test results on athletic shoes.

50. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin50 Transaction Analysis (5) Earned revenues of $4,200.

51. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin51 Transaction Analysis (5) 403 101 Cr. Cash 4,200 Dr. Consulting revenue 4,200

52. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin52 Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at some other transactions.

53. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin53 The accounts involved are: (1) Cash (asset) (2) Expense (equity) Transaction Analysis (6)(7) Paid $1000 rent to the landlord of the building where the store is located, and paid biweekly $700 salary to employee.

54. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin54 Transaction Analysis (6)(7) Remember that the balance in the rent and salaries expense accounts actually increases. But, equity actually decreases because expenses reduce equity.

55. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin55 Transaction Analysis (6) (7) Paid $1000 rent to the landlord and biweekly $700 salary to employee.

56. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin56 Transaction Analysis (6) (7) Remember that expenses decrease equity.

57. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin57 Transaction Analysis (6) (7)

58. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin58 Transaction Analysis (6) (7) Dr. Rent Expense 1,000 Dr. Salaries Expense 700 Cr. Cash 1,700

59. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin59 Transaction Analysis (8) Provided services of $1600 and rent its test facilities for $300. The cash will be received in the future. The accounts involved are: (1) Accounts Receivable (asset) (2) Revenue (equity)

60. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin60 Transaction Analysis (8) Provided services of $1600 and rent its test facilities for $300.

61. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin61 Transaction Analysis (8) Dr. Accounts Receivable 1,900 Cr. Consulting Revenue 1,600 Cr. Rental Revenue 300

62. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin62 Transaction Analysis (9)  The client in transaction 8 paid $1900 to FastForward 10 days later. The accounts involved are: (1) Cash (asset) (2) Accounts Receivable (asset)

63. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin63 Transaction Analysis (9) The client in transaction 8 paid $1900 to Fastforward.

64. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin64 Transaction Analysis (9) Dr. Cash 1,900 Cr. Accounts Receivable 1,900

65. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin65 Transaction Analysis (10)  Paid $900 cash as partial payment for its earlier $7100 purchase of supplies, leaving $6200 unpaid. The accounts involved are: (1) Cash (asset) (2) Accounts Payable (liability)

66. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin66 Transaction Analysis (10) Paid $900 cash as partial payment for its earlier purchase on credit.

67. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin67 Transaction Analysis (10) Dr. Accounts Payable 900 Cr. Cash 900

68. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin68 The accounts involved are: (1) Cash (asset) (2) Taylor, Withdrawals (equity) Transaction Analysis (11) Taylor withdrew $600 from the business for personal use.

69. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin69 Transaction Analysis (11) Remember that the balance in the Taylor, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

70. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin70 Transaction Analysis (11) Taylor withdrew $600 from the business for personal use.

71. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin71 Transaction Analysis (11) Remember that withdrawals decrease equity.

72. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin72 Transaction Analysis (11) Dr. Taylor, Withdrawals 600 Cr. Cash 600

73. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin73  Ending Balance = Beginning Balance + Total Increase – Total Decrease

74. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin74 Ending balance = Beginning balance + total debits – total credits

75. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin75 Ending balance = Beginning balance + total credits – total debits

76. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin76 After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. DebitsCredits Cash4,400$ Accounts receivable- Supplies Prepaid Insurance2,400 Equipment26,000 Accounts payable6,200$ Unearned consulting revenue3,000 C. Taylor, Capital30,000 C. Taylor, Withdrawals600 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForward Trial Balance December 31, 2004 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. 9,270

77. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin77 Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected.  Make sure the trial balance columns are correctly added.  Make sure account balances are correctly entered into the ledger.  See if debit or credit accounts are mistakenly placed on the trial balance.  Recompute each account balance in the ledger.  Verify that each journal entry is posted correctly.  Verify that each original journal entry has equal debits and credits.

78. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin78 Using a Trial Balance to Prepare Financial Statements Income Statement of Cash Flows Income Statement Statement of Owner’s Equity Beginning Balance Sheet Ending Balance Sheet Period of Time Point in Time

79. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin79 Learning objective  Identify and prepare basic financial statements and explain how they interpret.

80. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin80 Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows

81. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin81 Financial Statements  Income Statement: revenues and expenses together with the how much profit the firm makes.  Statement of Owner’s Equity: reports information how equity changes over the reporting period.  Balance Sheet: a company’s financial position at a point of time.  Statement of cash flows: cash receipts and cash payments over a period of time.

82. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin82 Income summary Dr. Consulting revenue 5,800 Dr. Rental revenue 300 Cr. Income summary 6,100 (p61)

83. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin83 Income summary Dr. Income summary 1,700 Cr. Rent expense 1,000 Cr. Salaries expense 700 p.58

84. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin84 Income summary Dr. Income summary 4,400 Cr. C. Taylor, Capital 4,400

85. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin85 Income summary  If the debit amount is larger than credit amount in Income Summary account, it indicates the company makes a loss. Dr. C. Taylor, Capital 900 Cr. Income Summary 900

86. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin86 Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

87. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin87 The net income of $4,400 increases Scott’s capital by $4,400. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.

88. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin88 The Balance Sheet describes a company’s financial position at a point in time.

89. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin89 The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

90. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin90 Net income ÷ Average total assets ROA is viewed as an indicator of operating efficiency. Return on Assets (ROA)

91. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin91 ROA of mobile phone service companies in HK  SUNDAY: 0.34%  SMARTONE: 9.92%  Hutchison Telecommunications: 0.18%  PEOPLES: 15.47%  City Telecom: 2.94% - Which company is better?

92. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin92 oDescribes the relationship between the amounts of the company’s liabilities and assets. oHelps to assess the risk that a company will fail to pay its debts. Debt Ratio

93. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin93 Review of Chap 2  Identify asset accounts, liability accounts and equity accounts.  Know the meaning of double-entry accounting and how to do journals and post journal entries correctly.  Prepare trial balance and use a trial balance to prepare income statement, statement of owner’s equity and balance sheet statement.  ROA and debt ratio.

94. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin94 Homework of chapter 2  Ex 2-1, 2-3, 2-4, 2-19  Problem 2-1A, 2-4A  Due on June 12 (Monday)

95. © The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin95 End of Chapter 2