After completing this chapter you should be able to: Explain the steps in processing transactions and the role of source documents, describe an account and its use in recording transactions, describe a ledger and a chart of accounts, define debits and credits and explain double-entry accounting.
Chapter Analyzing and Recording Transactions PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 2 2 C 1 Analyzing and Recording Process Analyze each transaction and event from source documents Prepare and analyze the trial balance Record relevant transactions and events in a journal Post journal information to ledger accounts 2 3 C 1 Source Documents Checks Employee Earnings Records Bills from Suppliers Purchase Orders Bank Statements Sales Tickets 2 4 C 2 The Account and its Analysis An An account account is is aa record record of of increases increases and and decreases decreases in in aa specific specific asset, asset, liability, liability, equity, equity, revenue, revenue, or or expense expense item item The The general general ledger ledger is is aa record record containing containing all all accounts accounts used used by by the the company company 2 5 C 2 The Account and its Analysis Owner, Owner, Capital Capital Owner, Owner, Withdrawals Withdrawals 2 6 C 2 Asset Accounts Cash Cash Land Land Buildings Buildings Asset Asset Accounts Accounts Equipment Equipment Supplies Supplies Accounts Accounts Receivable Receivable Notes Notes Receivable Receivable Prepaid Prepaid Accounts Accounts 2 7 C 2 Liability Accounts Accounts Accounts Payable Payable Notes Notes Payable Payable Liability Liability Accounts Accounts Accrued Accrued Liabilities Liabilities Unearned Unearned Revenue Revenue 2 8 C 2 Equity Accounts Owner’s Owner’s Capital Capital Owner’s Owner’s Withdrawals Withdrawals Equity Accounts Revenues Revenues Expenses Expenses 2 9 C 2 The Account and its Analysis Assets = Liabilities + Equity 2 10 C 3 Ledger and Chart of Accounts The The ledger ledger is is aa collection collection of of all all accounts accounts for for an an information information system system A A company company’s ’s size size and and diversity diversity of of operations operations affect affect the the number number of of accounts accounts needed needed The chart of accounts is a list of all accounts and includes an identifying number for each account Account Number 101 106 126 128 167 201 236 301 Account Name Cash Accounts receivable Supplies Prepaid insurance Equipment Accounts payable Unearned revenue C Taylor, Capital Account Number 302 403 406 622 637 640 652 690 Account Name C Taylor, Withdrawals Revenues Rental revenue Salaries expense Insurance expense Rent expense Supplies expense Utilities expense 2 24 A 1 Analyzing Transactions Analysis: Posting: (1) Cash 30,000 101 C Taylor, Capital (1) 301 301 30,000 2 25 A 1 Analyzing Transactions Analysis: Double entry: (2) Supplies Cash 126 101 2,500 2,500 Posting: (2) Supplies 2,500 126 (1) Cash 30,000 101 (2) 2,500 2 26 A 1 Analyzing Transactions Analysis: Double entry: (3) Equipment Cash 167 101 26,000 26,000 Posting: (3) Equipment 26,000 167 (1) Cash 30,000 101 (2) (3) 2,500 26,000 2 27 A 1 Analyzing Transactions Analysis: Double entry: (4) Supplies Accounts payable 126 201 7,100 7,100 Posting: (2) (4) Supplies 2,500 7,100 126 Accounts Payable (4) 201 7,100 2 28 A 1 Analyzing Transactions Analysis: Double entry: (5) Cash Consulting Revenue 101 403 4,200 4,200 Posting: (1) (5) Cash 30,000 4,200 (2) (3) 101 403 2,500 26,000 Consulting Revenue 101 403 (5) 4,200 2 29 P 2 After After processing processing its its remaining remaining transactions transactions for for December, December, FastForward’s FastForward’s Trial Trial Balance Balance is is prepared prepared FastForward Trial Balance December 31, 2011 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue C Taylor, Capital Owner's Withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Debits $ 4,350 9,720 2,400 26,000 Credits $ 6,200 3,000 30,000 200 5,800 300 1,400 1,000 230 $ 45,300 $ 45,300 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 2 30 P 2 Preparing a Trial Balance Preparing a trail balance involves three steps: List each account title and its amount (from ledger) in the trial balance If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely) Compute the total of debit balances and the total of credit balances Verify (prove) total debit balances equal total credit balances 2 31 P 2 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 Re-compute each account balance in the ledger Make sure account balances are correctly entered from the ledger Verify that each journal entry is posted correctly See if debit or credit accounts are mistakenly placed on the trial balance Verify that each original journal entry has equal debits and credits 2 32 P 3 Using a Trial Balance to Prepare Financial Statements 2 33 P 3 Income Statement FASTFORWARD Income Statement For the Month Ended December 31, 2011 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ 6,100 Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income $ 3,470 2 34 P 3 STATEMENT OF CHANGES IN EQUITY FASTFORWARD Statement of Changes in Equity For the Month Ended December 31, 2011 C Taylor, Capital 12/1/11 Net income for December Plus: Investments by Owner Connections Less: Owner Withdrawals C Taylor, Capital, 12/31/11 FASTFORWARD Income Statement For the Month Ended December 31, 2011 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses Net income $ 6,100 2,630 3,470 $ $ 3,470 30,000 33,470 200 33,270 2 35 P 3 Balance Sheet FASTFORWARD Statement of Changes in Equity For the Month Ended December 31, 2011 C Taylor, Capital 12/1/11 $ Net income for December Plus: Investments by Owner Less: Owner Withdrawals C Taylor, Capital, 12/31/11 $ - FASTFORWARD Balance Sheet December 31, 2011 Assets $ 3,470 30,000 Cash 33,470 Supplies 200 Prepaid insurance 33,270 Connections Equipment Total assets Liabilities Accounts payable Unearned revenue Total liabilities Equity C Taylor, Capital Total equity Total liabilities and equity $ 4,350 9,720 2,400 26,000 42,470 $ 6,200 3,000 9,200 $ 33,270 33,270 42,470 $ 2 36 P 3 Presentation Issues Dollar signs are not used in journals and ledgers Dollar signs appear in financial statements and other reports such as trial balances The usual practice is to put dollar signs beside only the first and last numbers in a column When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth Commas are always used in financial statements Companies commonly round amounts in reports to the nearest dollar, or even to a higher level 2 37 A 2 Debt Ratio Total Liabilities Debt Ratio = Total Assets Evaluates the level of debt risk A higher ratio indicates that there is a greater probability that a company will not be able to pay it’s debt in the future 2 38 END OF CHAPTER ... size size and and diversity diversity of of operations operations affect affect the the number number of of accounts accounts needed needed The chart of accounts is a list of all accounts and includes...2 2 C 1 Analyzing and Recording Process Analyze each transaction and event from source documents Prepare and analyze the trial balance Record relevant transactions and events in a journal... expense Utilities expense 2 11 C 4 Debits and Credits A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions Account Title (Left side) (Right