Chapter 3 recording transtion

OPEN UNIVERSITY HCMC MBA PREPARATORY COURSE Principles of Financial Accounting 06/04/16 NGUYEN TAN BINH - PHAN DUC DUNG Chapter Recording Transactions 06/04/16 NGUYEN TAN BINH - P Learning Objectives After studying this chapter, you should be able to:      Use double-entry accounting Analyze and journalize transactions Post journal entries to the ledgers Prepare and use a trial balance Close revenue and expense accounts and update retained income 06/04/16 NGUYEN TAN BINH - P Learning Objectives After studying this chapter, you should be able to:  Correct erroneous journal entries and describe how errors affect accounts  Use T-accounts to analyze accounting relationships  Explain how computers have transformed processing of accounting data 06/04/16 NGUYEN TAN BINH - P The Double-Entry Accounting System  Some businesses enter into thousands of transactions daily or even hourly   Accountants must carefully keep track of and record these transactions in a systematic manner Accountants use a double-entry accounting system in which at least two accounts are always affected by each transaction 06/04/16 NGUYEN TAN BINH - P The Double-Entry Accounting System  Each transaction must still be analyzed to determine which accounts are involved, whether the accounts increase or decrease, and how much the balance will change  The balance sheet equation can be used for this analysis, but with so many transactions, this is not realistic  In practice, accountants use ledgers 06/04/16 NGUYEN TAN BINH - P Ledger Accounts  Ledger - a group of related accounts kept current in a systematic manner  Think of a ledger as a book with one page for each account  The ledger is a company’s “books.”  General ledger - the collection of accounts that accumulates the amounts reported in the major financial statements 06/04/16 NGUYEN TAN BINH - P Ledger Accounts  A simplified version of a ledger account is called the T-account   They allow us to capture the essence of the accounting process without having to worry about too many details The account is divided into two sides for recording increases and decreases in the accounts Account Title Left Side 06/04/16 Right Side NGUYEN TAN BINH - P Ledger Accounts  Balance - difference between total left-side amounts and total right-side amounts at any particular time  Assets have left-side balances    Increased by entries to the left side Decreased by entries to the right side Liabilities and Owners’ Equity have right-side balances   Decreased by entries to the left side Increased by entries to the right side 06/04/16 NGUYEN TAN BINH - P Ledger Accounts  T-accounts and the balance sheet equation: Assets = Liabilities + Owners’ Equity Assets Increases Decreases Liabilities Decreases Increases Owners’ Equity Decreases 06/04/16 Increases NGUYEN TAN BINH - P 10 Revenue and Expense Transactions  Retained Income is merely accumulated revenues less expenses, but we cannot just increase or decrease the Retained Income account directly   This would make preparing the income statement very difficult By accumulating revenues and expenses separately, a more meaningful income statement can be easily prepared 06/04/16 NGUYEN TAN BINH - P 27 Revenue and Expense Transactions  Revenue and expense accounts are a part of Retained Income Retained Income Decrease Expense Increase Revenue Debit Credit Increase Increase 06/04/16 NGUYEN TAN BINH - P 28 Revenue and Expense Transactions  Summary of revenue and expense transactions:  A credit to a revenue increases the revenue and increases Retained Income  A debit to a revenue decreases the revenue and decreases Retained Income   A credit to an expense decreases the expense and increases Retained Income A debit to an expense increases the expense and decreases Retained Income 06/04/16 NGUYEN TAN BINH - P 29 Revenue and Expense Transactions  Keeping revenues and expenses in separate accounts makes the preparation of the income statement easier  The income statement provides a detailed explanation of how operations caused the balance of Retained Income shown on the balance sheet to change from the beginning of the year to the end of the year 06/04/16 NGUYEN TAN BINH - P 30 Prepaid Expense and Depreciation Transactions  Prepaid expenses relate to assets having useful lives that will expire sometime in the future   The expiration, or using up, of those assets is an expense With depreciation, a new account, Accumulated Depreciation, is introduced  Accumulated depreciation - the cumulative sum of all depreciation recognized since the date of acquisition of a particular asset 06/04/16 NGUYEN TAN BINH - P 31 Prepaid Expense and Depreciation Transactions   An accounts such as Accumulated Depreciation is called a contra account, which is a separate but related account that offsets or is a deduction from a companion account Book value - the balance of an account, net of any contra accounts (a.k.a net book value, carrying amount, or carrying value)  The book value of an asset is its acquisition cost minus accumulated depreciation 06/04/16 NGUYEN TAN BINH - P 32 A Note on Accumulated Depreciation  Why use accumulated depreciation? Why not just reduce the asset account as it expires?   Accountants want the acquisition cost to remain on the books, so the asset must be “reduced” in some manner Also, the acquisition cost of the asset is a reliable and objective number, whereas accumulated depreciation is an estimate of the allocation of the cost of that asset over the period that it benefits 06/04/16 NGUYEN TAN BINH - P 33 Transactions in the Journal and Ledger  Some details to remember:    Do not use dollar signs in either the journal or the ledger Do not use negative numbers The effect on the account is conveyed by the side (debit or credit) on which the number appears For ledgers that not have a running balance (such as T-accounts), the balances may be updated from time to time 06/04/16 NGUYEN TAN BINH - P 34 Preparing the Trial Balance  Once all transactions have been posted to the ledger, a trial balance is prepared  Trial balance - a list of all of the accounts with their balances  It is prepared as a test or check before continuing the recording process 06/04/16 NGUYEN TAN BINH - P 35 Preparing the Trial Balance  The purposes of the trial balance:   To help check on accuracy of posting by proving whether the total debits equal the total credits To establish a convenient summary of balances in all accounts for the preparation of formal financial statements 06/04/16 NGUYEN TAN BINH - P 36 Preparing the Trial Balance   The trial balance is usually prepared with the balance sheet accounts first, followed by the income statement accounts An example of a short trial balance: Account Number Account Title Debit 111 156 311 411 Cash Inventory Note payable Paid-in capital $350,000 150,000 $500,000 06/04/16 NGUYEN TAN BINH - P Credit $100,000 400,000 $500,000 37 Deriving Financial Statements from the Trial Balance  The trial balance is the starting point for the preparation of the balance sheet and the income statement   The income statement accounts are summarized in a single account called Net Income, which becomes part of Retained Income in the Balance sheet The trial balance shows the beginning balance in Retained Income because no changes have actually been made to the account during the year 06/04/16 NGUYEN TAN BINH - P 38 Deriving Financial Statements from the Trial Balance  Note that a trial balance may balance even when errors were made in recording or posting  A transaction may be recorded as different amounts in two different accounts  A transaction may be recorded in a wrong account  In both situations, the total debits will still equal total credits on the trial balance Dr = Cr 06/04/16 NGUYEN TAN BINH - P 39 Closing the Accounts  Once the financial statements are prepared, the ledger accounts must be prepared to record the next period’s transactions This process is called closing the books  The balances in all “temporary” stockholders’ equity accounts are transferred to a “permanent” stockholders’ equity account  The revenue and expense accounts are “reset” to zero and the current net income is transferred to Retained Income 06/04/16 NGUYEN TAN BINH - P 40 Closing the Accounts  The Closing Process:  The revenue accounts are closed to Income Summary in the first entry  The expense accounts are closed to Income Summary in the second entry  The amount of Net Income (revenues expenses) is then transferred from Income Summary to Retained Income References: Horngren, Introduction to financial accounting 06/04/16 NGUYEN TAN BINH - P 41 [...]... all account titles used to record transactions Account Number Account Title Account Number Account Title 111 131 156 142 211 214 Cash 31 1 Notes payable Accounts receivable 33 1 Accounts payable Inventory 411 Paid-in capital Prepaid rent 421 Retained income Equipment 511 Revenue Accumulated 632 Cost of goods sold depreciation 641 Rent expense 642 Depreciation expense 06/04/16 NGUYEN TAN BINH - P 21 Posting... transaction  The amounts that the accounts are to be debited and credited 06/04/16 NGUYEN TAN BINH - P 19 Journalizing Transactions  The conventional form for recording in the general journal: Date 2001 31 /12 31 /12 2002 2/1 Entry No 1 2 3 06/04/16 Accounts and Explanations Debit Cash Paid-in capital 400,000 Cash Note payable 100,000 Merchandise inventory Cash 150,000 NGUYEN TAN BINH - P Credit 400,000...  The running balance provides a status report for an account at a glance at any given point in time CASH Date Explanation 2001 31 /12 31 /12 2002 2/1 Account No 111 Journal Ref Debit 1 2 400,000 100,000 3 06/04/16 NGUYEN TAN BINH - P Credit Balance 400,000 500,000 150,000 35 0,000 25 Analyzing, Journalizing, and Posting Transactions  Types of journal entries:    Simple entry - an entry for a transaction... NGUYEN TAN BINH - P 13 The Recording Process  In the second step, an analysis of the transaction is placed in the book of original entry, which is a chronological record of how the transactions affect the balances of applicable accounts  The most common example is the general journal a diary of all events (transactions) in an entity’s life 06/04/16 NGUYEN TAN BINH - P 14 The Recording Process  In... Remember:  Debit is always the left side!  Credit is always the right side! 06/04/16 NGUYEN TAN BINH - P 11 The Recording Process  The sequence of steps in recording transactions: Transactions Financial Statements 06/04/16 Documentation Journal Trial Balance Ledger NGUYEN TAN BINH - P 12 The Recording Process  The process starts with source documents, which are the supporting original records of any... be updated from time to time 06/04/16 NGUYEN TAN BINH - P 34 Preparing the Trial Balance  Once all transactions have been posted to the ledger, a trial balance is prepared  Trial balance - a list of all of the accounts with their balances  It is prepared as a test or check before continuing the recording process 06/04/16 NGUYEN TAN BINH - P 35 Preparing the Trial Balance  The purposes of the trial... the asset is a reliable and objective number, whereas accumulated depreciation is an estimate of the allocation of the cost of that asset over the period that it benefits 06/04/16 NGUYEN TAN BINH - P 33 Transactions in the Journal and Ledger  Some details to remember:    Do not use dollar signs in either the journal or the ledger Do not use negative numbers The effect on the account is conveyed... periodically 06/04/16 NGUYEN TAN BINH - P 15 The Recording Process  The fourth step includes the preparation of the trial balance, which is a simple listing of all accounts in the general ledger with their balances   Aids in verifying accuracy and the financial statements in preparing Prepared periodically as necessary 06/04/16 NGUYEN TAN BINH - P 16 The Recording Process  In the final step, the financial... Accumulated Depreciation, is introduced  Accumulated depreciation - the cumulative sum of all depreciation recognized since the date of acquisition of a particular asset 06/04/16 NGUYEN TAN BINH - P 31 Prepaid Expense and Depreciation Transactions   An accounts such as Accumulated Depreciation is called a contra account, which is a separate but related account that offsets or is a deduction from... account, net of any contra accounts (a.k.a net book value, carrying amount, or carrying value)  The book value of an asset is its acquisition cost minus accumulated depreciation 06/04/16 NGUYEN TAN BINH - P 32 A Note on Accumulated Depreciation  Why use accumulated depreciation? Why not just reduce the asset account as it expires?   Accountants want the acquisition cost to remain on the books, so the asset