1. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyzing and Recording Transactions Chapter 2 2

2. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Learning objectives 1.Analyzing and Recording Process 2.Source document, Accounts & Ledger 3.T-account vs. Debit & Credit 4.Double-Entry Accounting 5.Journalizing and Posting transactions 6.Transaction analysis for FastForward 7.Trial Balance 8.Decision analysis: Debt ratio  Wells Fargo, Hangseng Bank, CCB

3. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. 1.Analyzing and Recording Process - Transactions Exchanges of economic consideration between two parties.

4. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Analyze each transaction and event form source documents 1.Analyzing and Recording Process - Transaction recording process Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trial balance

5. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Sales Tickets Bank Statement Purchase Orders Checks 2.Source Documents, Accounts & Ledger - Source documents Bills from Suppliers Employee Earnings Record

6. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. 2.Source Documents, Accounts & Ledger - The Account and its Analysis The general ledger is a record containing all accounts used by the company.

7. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Accounts Equity Accounts Assets Accounts =+ 2.Source Documents, Accounts & Ledger - The Account and its Analysis

8. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Land Equipment Buildings Cash Notes Receivabl e Supplies Prepaid Accounts Accounts Receivable Asset Accounts 2.Source Documents, Accounts & Ledger - Asset Accounts

9. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable Liability Accounts 2.Source Documents, Accounts & Ledger - Liability Accounts

10. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses 2.Source Documents, Accounts & Ledger - Equity Accounts

11. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ 2.Source Documents, Accounts & Ledger - The Account and its Analysis Owner’s Capital Owner’s Withdrawals Revenues Expenses ++ ––

12. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. 3. T-Account VS. Debits & Credits

13. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ 3. T-Account VS. Debits & Credits - Rules for debit & credit accounts Debit Credit ASSETS + - LIABILITIES - + EQUITIES - +

14. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Revenues Expenses Owner’s Capital Owner’s Withdrawals _ _ + + _ _ Debit Credit Capital - + Debit Credit Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + 3. T-Account VS. Debits & Credits - Rules for debit & credit accounts(cont.) Equity Exh. 3.8

15. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 3. T-Account VS. Debits & Credits - account balance An account balance is the difference between the increases and decreases in an account.

16. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ 4. Double-Entry Accounting  Each transaction affect al least 2 accounts  In each transactions, amount debited = amount credited  For all transactions, sum of debits = sum of credits  Sum of debit account balance = sum of credit account balance Debit Credit ASSETS + - LIABILITIES - + EQUITIES - +

17. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 5. Journalizing and Posting Transactions - 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

18. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Dollar amount of debits and credits 5. Journalizing and Posting Transactions - Journalizing Transactions  Transaction Date  Transaction explanation  Titles of Affected Accounts

19. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  T-accounts are useful illustrations, but balance column ledger accounts are used in practice.  Three more columns Post reference column Description column Balance column 5. Journalizing and Posting Transactions - Balance Column Account

20. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1 1 Identify the account. 5. Journalizing and Posting Transactions - Posting Journal Entries

21. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 2 2 Enter the date. 5. Journalizing and Posting Transactions - Posting Journal Entries (cont.)

22. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 3 3 Enter the amount and description. 5. Journalizing and Posting Transactions - Posting Journal Entries (cont.)

23. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 4 4 Enter the journal reference. 5. Journalizing and Posting Transactions - Posting Journal Entries (cont.)

24. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 5 5 Compute the balance. 5. Journalizing and Posting Transactions - Posting Journal Entries (cont.)

25. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Enter the ledger reference. 6 6 5. Journalizing and Posting Transactions - Posting Journal Entries (cont.)

26. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - 16 Transactions 1.Chuke Taylor invests $30,000 cash in Fastward 2.FastForward pay $2,500 cash for supplies 3.FastForward pay $26,000 cash for equipment 4.FastForward purchase $7,100 supplies on credit 5.FastForward collect $4,200 cash for consulting service 6.FastForward pay $1,000 cash for December rent 7.FastForward pay $700 cash for employee salary 8.FastForward provide consulting service of $1,600 and rent its facility for $300. the customer is billed $1,900 for these services.

27. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - 16 Transactions (cont.) 9.FastForward receive $1,900 cash from client of transaction 8 10.FastForward pay $900 cash to supplier of transaction 4 11.Chuke Taylor withdraw $600 cash from Fastward 12.FastForward receive $3,000 cash in advance from customer for consulting service 13.FastForward pay $2,400 cash insurance premium for a 24-month coverage beginning from December 1. 14.FastForward pay $120 fro supplies 15.FastForward pay $230 cash for December utilities 16.FastForward pay $700 cash in employee salary for work performed in the latter part of December.

28. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 1 Analysis: Double entry: 101 301 Posting:

29. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 2 Analysis: Double entry: 126 101 Posting:

30. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 3 Analysis: Double entry: 167 101 Posting:

31. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 4 Analysis: Double entry: 126 201 Posting:

32. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 5 Analysis: Double entry: 403 101 Posting:

33. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 6 Analysis: Double entry: 640 101 Posting:

34. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 7 Analysis: Double entry: 101 Posting:

35. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 8 Provided services of $1600 and rent its test facilities for $300. the customer is billed $1,900 for these services. The accounts involved are: (1) Accounts Receivable (asset) (2) Consulting Revenue (equity) (3) Rental Revenue (equity)

36. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 8 Double entry: 403 406 Posting: Provided services of $1600 and rent its test facilities for $300.

37. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 9 The client in transaction 8 paid $1900 to FastForward. The accounts involved are: (1) Cash (asset) (2) Accounts Receivable (asset)

38. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 9 Double entry: 106 101 Posting: The client in transaction 8 paid $1900 to FastForward.

39. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 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)

40. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 10 Double entry: Paid $900 cash as partial payment for its earlier $7100 purchase of supplies, leaving $6200 unpaid. 201 101 Posting:

41. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Taylor, Withdrawals (equity) 6. Transactions Analysis for FastForward - Transaction 11 Taylor withdrew $600 from the business for personal use. Remember that the balance in the Taylor, Withdraws account actually increases. But, equity actually decreases because withdraws reduce equity.

42. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 11 Double entry: Taylor withdrew $600 from the business for personal use. 101 Posting:

43. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Unearned Consulting Revenue (liability) 6. Transactions Analysis for FastForward - Transaction 12 FastForward receive $3,000 cash in advance from customer for consulting service

44. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 12 Double entry: FastForward receive $3,000 cash in advance from customer for consulting service 101 Posting:

45. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Prepaid Insurance (asset) (2) Cash (asset) 6. Transactions Analysis for FastForward - Transaction 13 FastForward pay $2,400 cash insurance premium for a 24-month coverage beginning from Dec. 1.

46. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 13 Double entry: FastForward pay $2,400 cash insurance premium for a 24-month coverage beginning from Dec. 1. 101 Posting:

47. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward pay $120 cash for supplies The accounts involved are: (1) Supplies (asset) (2) Cash (asset) 6. Transactions Analysis for FastForward - Transaction 14

48. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 14 Double entry: FastForward pay $120 cash for supplies 101 Posting:

49. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward pay $230 cash for Dec. utilities The accounts involved are: (1) Utility Expense (equity) (2) Cash (asset) 6. Transactions Analysis for FastForward - Transaction 15 Remember that the balance in the utility expense account actually increases. But, equity actually decreases because expenses reduce equity.

50. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 15 Double entry: FastForward pay $230 cash for Dec. utilities 101 Posting:

51. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward pay $700 cash in employee salary for work performed in the latter part of December. The accounts involved are: (1) Salary Expense (equity) (2) Cash (asset) 6. Transactions Analysis for FastForward - Transaction 16 Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.

52. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 6. Transactions Analysis for FastForward - Transaction 16 Double entry: FastForward pay $700 cash in employee salary for work performed in the latter part of December. 101 Posting:

53. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 7. Trial Balance  Trial Balance  A list of accounts and their balance at a point of time  3 steps to prepare Trial Balance  list each account and balance of account  compute total debits and credit balance  verify: total debits = total credits

54. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. DebitsCredits Cash3,950$ Accounts receivable- Supplies9,720 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.

55. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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.

56. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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

57. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Income Statement

58. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Statement of Owner’s Equity

59. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Balance Sheet

60. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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. oHigher financial leverage involves greater risk because liabilities must be paid and often require regular interest payment. 8. Decision Analysis - Debt Ratio

61. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin oIndustry Characteristics oHighly leveraged oClosely monitored by central bank oCapital adequacy requirement oKey success factor oControl risk, especially in loan loss oThree company for analysis oWells Fargo & Co. (US) o Hang Seng Bank Limited (HongKong, China) oChina Construction Bank Corporation (China) Debt Ratio - Banking Industry

62. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Debt Ratio - Banking Industry Debt Ratio200520042003200220012000 WFC91.56%91.15%91.11%91.32%91.16%90.29% Hangseng92.47%92.36%91.99%90.83%90.51% CCB93.73%95.00%94.74%104.66% Industry 90.90%91.43%91.63%

63. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Banking Industry - ROA ROA200520042003200220012000 WFC1.69%1.72%1.68%1.65%1.18%1.47% Hangseng2.01%2.16%1.95%2.09%2.13% CCB1.11%1.31%0.70%0.40% Industry 1.43%1.40%1.44%

64. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Banking Industry - ROE ROE200520042003200220012000 WFC19.54%19.39%19.15%18.90%12.72%15.16% Hangseng27.17%28.16%23.06%22.51%22.44% CCB19.50%25.63%12.04% Industry 16.41%17.02%17.59%

65. © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 2