Analyzing and Recording Transactions PDF

Analyzing and Recording Transactions Chapter 2 Wild and Shaw Fundamental Accounting Principles 25th Edition Copyright ©2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of...

Analyzing and Recording Transactions Chapter 2 Wild and Shaw Fundamental Accounting Principles 25th Edition Copyright ©2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  1-2 Chapter 2 Learning Objectives CONCEPTUAL C1 Describe an account and its use in recording transactions. C2 Define debits and credits and explain double-entry accounting. ANALYTICAL A1 Analyze and record transactions and their impact on financial statements. PROCEDURAL P1 Prepare financial statements from a trial balance. © McGraw-Hill Education. © McGraw-Hill Education 2-2  1-3 Learning Objective C1 Describe an account and its use in recording transactions. © McGraw-Hill Education 2-3  1-4 Does a financial accountant depend on the tabular analysis method? Of course, he doesn’t because companies perform hundreds of transactions per day. Ok, how does the accountant work? He works through 9 sequential steps (called Accounting cycle), which can be classified as follows Daily steps Interim steps Annually steps First 3 steps Next 4 steps which he should Last 2 steps which he should do when preparing financial do after preparing official statements. annually financial statements. © McGraw-Hill Education 2-4  1-5 Da e p lly ily a s nu st e An st ps Interim steps All steps are mandatory (not optional) in the same sequence & repeated in each accounting period © McGraw-Hill Education 2-5  1-6 © McGraw-Hill Education 2-6  1-7 Asset Accounts Cash Accounts Land Receivable Buildings Asset Asset Notes Receivable Accounts Accounts Prepaid Equipment Accounts Supplies Learning Objective C1: Describe an account and its use in©recording transactions. McGraw-Hill Education. © McGraw-Hill Education 2-7  1-8 Liability Accounts Accounts Notes Payable Payable Liability Accounts Accrued Accrued Unearned Liabilities Liabilities Revenue Learning Objective C1: Describe an account and its use in recording transactions. © 2-8 McGraw-Hill Education © McGraw-Hill Education 2-8  1-9 Equity Accounts + - Owner, Owner, Capital Withdrawals Equity Accounts + - Revenues Expenses © McGraw-Hill Education Learning Objective C1: Describe an account and its use in recording transactions. © McGraw-Hill Education 2-9 Debits and Credits 1-10 Double-entry accounting system Each transaction must affect two or more accounts to keep the basic accounting equation in balance. Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS. © McGraw-Hill Education 2-10 Debits/Credits Rules 1-11 R E D If an account + it takes the same of its nature. If an account (-) it takes the opposite of its nature. Uses Source Their normal balance (natural) Their normal balance (natural) is: is: © McGraw-Hill Education 2-11  Debits/Credits Rules 1-12 Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense Debit Credit LO 1 © McGraw-Hill Education 2-12 Debits/Credits Rules 1-13 Question Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities. LO 1 © McGraw-Hill Education 2-13 Debits/Credits Rules 1-14 Question Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and equity. c. assets, liabilities, and owner’s drawing. d. assets, owner’s drawing, and expenses. LO 1 © McGraw-Hill Education 2-14 15 The Journal  Book of original entry.  Transactions recorded in chronological order.  Contributions to the recording process: 1. Discloses the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. 4. Journalizing means recording of all business transactions in the general journal LO 2 The The Journal Journal Note: All business transactions should be recorded in the General journal using the Double-entry accounting system. The steps of writing the entry: 1- Analyze the transaction to determine its effect on the accounts. 2- Use the role of debit and credit to determine the accounts that will be debited or will be credited. 3- Write the entry on the journal as follows:  Journalizing a. Transactions Transaction b. Title of accounts debited Date and amount entered in Debit column. Exhibit 2.10 c. Title of accounts credited d. Transaction and amount entered in explanation Credit column. Learning Objective A1: Analyze and record transactions and their impact on financial statements. © McGraw-Hill Education 2-18 Steps in the Recording Process JOURNALIZING - Entering transaction data in the journal. Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. Illustration 2-13 GENERAL JOURNAL Date Account Title Ref. Debit Credit Sept. 1 Cash 15,000 Owner’s Capital 15,000 Equipment 7,000 Cash 7,000 LO 2 Steps in the Recording Process SIMPLE AND COMPOUND ENTRIES Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account. Illustration 2-14 Compound journal entry GENERAL JOURNAL Date Account Title Ref. Debit Credit July 1 Equipment 14,000 Cash 8,000 Accounts payable 6,000 LO 2 21 3- Posting to the Ledger Posting is the process of transferring journal entries to the ledger accounts. - Ledger Account: An account includes all increase and decrease of one account to get its balance. - General ledger: An accounting record contains all accounts of assets, liabilities, and Capital, Expenses, Revenues, and Drawings accounts. Describe how accounts, debits, and credits are used to record business transactions. The  Record of increases and decreases in a specific asset, liability, owners’ Account equity, revenue, or expense item.  Debit = “Left”  Credit = “Right” An account can Account Name be illustrated in a Debit / Dr. Credit / Cr. T-account form. LO 1  Debits and Credits If the sum of Debit entries are greater than the sum of Credit entries, the account will have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 LO 1  Debits and Credits If the sum of Credit entries are greater than the sum of Debit entries, the account will have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 LO 1  Debits and Credits Assets  Assets - Debits should exceed credits. Debit / Dr. Credit / Cr.  Liabilities – Credits should Normal Balance exceed debits.  Normal balance is on the Chapter 3-23 increase side. Liabilities Debit / Dr. Credit / Cr. Normal Balance Chapter 3-24 2-26 LO 1  Debits and Credits Owner’s Equity  Owner’s investments and revenues increase owner’s equity Debit / Dr. Credit / Cr. (credit). Normal Balance  Owner’s drawings and expenses Chapter 3-25 decrease owner’s equity (debit). Owner’s Capital Owner’s Drawing Revenue Expense Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Normal Balance Normal Balance Normal Balance Normal Balance Chapter Chapter Chapter Chapter 3-25 3-23 3-26 3-27 2-27 LO 1  Debits/Credits Rules Liabilities Debit / Dr. Credit / Cr. Assets Normal Normal Normal Normal Debit / Dr. Credit / Cr. Balance Balance Balance Balance Debit Debit Credit Credit Normal Balance Normal Balance Chapter 3-24 Owner’s Equity Chapter 3-23 Owner’s Drawing Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Normal Balance Normal Balance Revenue Chapter 3-25 Chapter 3-23 Debit / Dr. Credit / Cr. Expense Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-26 2-28 Chapter 3-27 LO 1  Processing Transactions Double-entry accounting is useful in analyzing and processing transactions. Analysis of each transaction follows these four steps. Remember The Accounts that Increase in Debit and Decrease in Credit are: Assets, expenses, and owners’ drawings. The Accounts that Increase in Credit and Decrease in Debit are : Liabilities, revenues, and, owners’ capital. 2-29 LO 2  Processing Transactions #1 © McGraw-Hill Education 2-30 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #2 © McGraw-Hill Education 2-31 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #3 © McGraw-Hill Education 2-32 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #4 © McGraw-Hill Education 2-33 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #5 © McGraw-Hill Education 2-34 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #6 © McGraw-Hill Education 2-35 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #7 © McGraw-Hill Education 2-36 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #8 © McGraw-Hill Education 2-37 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #9 © McGraw-Hill Education 2-38 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #10 © McGraw-Hill Education 2-39 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #11 © McGraw-Hill Education 2-40 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #12 © McGraw-Hill Education 2-41 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #13 © McGraw-Hill Education 2-42 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #14 © McGraw-Hill Education 2-43 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #15 © McGraw-Hill Education 2-44 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Processing Transactions #16 © McGraw-Hill Education 2-45 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Summarizing Transactions in a Ledger Exhibit 2.13 © McGraw-Hill Education 2-46 Learning Objective A1: Analyze and record transactions and their impact on financial statements.  Learning Objective P1 Prepare financial statements from a trial balance. © McGraw-Hill Education 2-43  Preparing a Trial Balance Exhibit 2.14 The trial balance lists all ledger accounts and their balances at a point in time. If the books are in balance, the total debits will equal the total credits. © McGraw-Hill Education 2-48 Learning Objective P1: Prepare financial statements from a trial balance. Trial Balance Limitations of a Trial Balance Trial balance may balance even when: 1. A transaction is not journalized. 2. A correct journal entry is not posted. 3. A journal entry is posted twice. 4. Incorrect accounts are used in journalizing or posting. 5. Offsetting errors are made in recording the amount of a transaction. LO 4  1 - 50 Financial Statements Prepared from Trial Balance The four financial statements and their purposes are: 1. Income statement—reports revenues less expenses incurred by a business over a period of time. 2. Statement of owner’s equity—reports changes in equity over the reporting period from net income (or loss) and from any owner investments or withdrawals over a period of time. 3. Balance sheet—reports the financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of Cash Flows—lists the cash inflows and cash outflows for the period. **For simplicity, we do not show the statement of cash flows for FastForward in this chapter, but we do return to this statement in the next chapter.** © McGraw-Hill Education 2-50 Learning Objective P1: Prepare financial statements from a trial balance.  Income Statement Exhibit 2.16 © McGraw-Hill Education 2-51 Learning Objective P1: Prepare financial statements from a trial balance.  Statement of Owner’s Equity Exhibit 2.16 © McGraw-Hill Education 2-52 Learning Objective P1: Prepare financial statements from a trial balance.  Balance Sheet Exhibit 2.16 © McGraw-Hill Education 2-53 Learning Objective P1: Prepare financial statements from a trial balance.  Presentation Issues 1. Dollar signs are not used in journals and ledgers. 2. Dollar signs appear in financial statements and other reports such as trial balances. 3. Put dollar signs beside only the first and last numbers in a column. © McGraw-Hill Education 2-54 Learning Objective P1: Prepare financial statements from a trial balance. Exercis e:1 55  Exercis e:2 On July 1, 2024, ABC co. hadExercise (5) of $10,000.During July the a cash balance following summary transactions were completed. 1. Received $1,200 cash from customers on account. 2. Received $2,400 cash for services performed in July. 3. Purchased store equipment on account $3,000. 4. Paid cash $ 2000 for a one – year insurance policy. 5. Purchased supplies on account $1,200. 6. Paid creditors $4,400 on account. 7. Performed services on account and billed customers for services provided $1,500. 8. Signed a contract with Alex company to buy furniture of $2,000 next month. 9. Received $800 from customers for future service. 10. Paid salaries of $5,000. 11. Rent of $400 was unpaid at July 31. Required: (a) Journalize the transactions. (b) Post to the cash ledger account. Notes: 1- Prepaid Expense: (Asset) - Any Expense paid in advance, should be recorded as an asset called "Prepaid expense". Such as: Rent paid for one year in advance (Prepaid rent(Asset). 2- Unpaid Expense:(Liability) If the business did not pay any of its expenses until the end of the accounting period, this expense should be recorded as a Liability called Expense payable. 3- Unearned Revenue: (Liability) If the business collected cash from a customer in advance (before rendering services),it should be recorded as a liability called "Unearned Revenue". Exercis e:3 58 Exercis e:4 Exercise (4): End of Chapter 2 © McGraw-Hill Education 2-60