02-Material-Transaction-Analysis PDF

BUSINESS TRANSACTIONS AND EVENTS TRANSACTION ANALYSIS Transaction – is an economic event or Source documents – are the evidential condition that involves the transfer of matters, forms, or legal/...

BUSINESS TRANSACTIONS AND EVENTS TRANSACTION ANALYSIS Transaction – is an economic event or Source documents – are the evidential condition that involves the transfer of matters, forms, or legal/official papers that something of value between two entities. serve to support the underlying economic Accounting focuses on transactions. A transactions recorded in the accounting books. good bookkeeping system captures and records They ensure faithful representation of every transaction that takes place without financial information. missing a beat. Transactions are economic exchanges between a business or other entity “NO data must be recorded in the accounting and the parties with which the entity interacts books of accounts without supporting and makes deals. Transactions are the documents and approval of recording by an lifeblood of every business, the heartbeat of authorized officer of an entity” activity that keeps it going. Understanding accounting, to a large extent, means Examples of documents: understanding how accountants record the financial effects of transactions. The 1. Sales invoice- issued to evidence a sale for cash immediate and future financial effects of 2. Delivery receipt- evidence the some transactions can be difficult to acceptance/receipt of the goods delivered to the determine. customer 3. Official receipt- issued to evidence the receipt DOUBLE ENTRY SYSTEM of cash from customers 4. Vendor’s invoice- issued to the enterprise by the enterprise’s suppliers Based on the Dual Aspect Concept that 5. Purchase requisition forms- evidences an for every change in financial set up employee’s request for the purchase of needed (transaction), there would always be a two- goods or suppliers sided effect to the extent of the same amount 6. IOUs- note acknowledging indebtedness to the in the accounting books. The first is the assets enterprise of the business and the second is the claims 7. Promissory notes- unconditional promise in against the asset. writing made by one person to another 8. Bank statements- summary of all financial transactions occurring over a certain period on a A record summarizing all the bank account information pertaining to a single item in the 9. Minutes of meetings- record of a meeting accounting equation is called an account. The 10. Business letters- business correspondences name given to an account is called an account 11. Job time tickets- time spent working at a Title. Each part of the accounting equation particular customer order consists of one or more accounts. For example, 12. Certificates of stock-ownership of shares in a one of the asset account is titled cash. The corporation cash account is used to summarize information 13. Time records/timesheets- time-in and time-out about the amount of money the business has of employees 14. Check voucher- authorization of cash available. disbursement transactions 15. Journal voucher - documents used for Before recording, the following are mentally transactions and journal entries for which there is answered: no other source document 1. What is the value received? (debit) 2. What is the value parted with? (credit) 1  3. What accounting elements are affected? (Asset, liabilities, Owner’s Equity, etc.) 4. What are their effects to the affected accounting elements? (increase or decrease in asset, liabilities or owner’s equity) 5. What appropriate account title will “Enter an amount in the Normal Balance Side describe the effect of transactions? of an Account to Increase the Balance of an 6. How much is the amount to be Account and in the Opposite Side of an recorded for a particular account Account to Decrease the Balance of an title? Account” Debit is the value received or paid for T-Account – an account may be expresses in a in an economic transaction. The place of debit “T” device form where the debits are recorded in the equation is on the left-hand side. on the left-hand side and the credits are recorded on the right-hand side of the letter Credit is the value parted with or T. It shows the changes of an account caused value given up. The place of credit in the by an economic transaction. It is a simplified equation is on the right-hand side. In every form of a ledger. value received, there must be a corresponding value parted with. For every transaction, the value of debit is always equal to the value of credit. An analysis of the effect of a transaction should always be guided by the basic rules of debit and credit as follows: Debit Credit Increase in Decrease in Asset Assets Expenses Expenses The T accounts are arranged following Decrease in Increase in the accounting equation. It starts with assets, Liabilities Liabilities liabilities and owners’ equity followed by Owner’s Equity Owner’s Equity revenue accounts and expense accounts. Revenues Revenues Balances of each are determined by getting the differences of the debit totals and credit Normal Balance of Accounts totals. These balances are reflected to the trial balance. 2 Chart of Accounts – a list of all account titles and account codes used for referencing and journalizing business transactions. Sample Chart of Account 1. Gutierrez Inc. 29 Naguilian Rd., Baguio City Chart of Accounts 100 Assets 400 Revenues 101 Cash 401 Sales 102 Accounts Receivables 402 Sales Return and Allowances 103 Notes Receivables 403 Sales Discounts 104 Allowance for Impairment Loss 105 Interest Receivables 500 Cost of Sales 106 Merchandise Inventory 501 Purchases 107 Supplies Inventory 502 Freight-in 108 Prepaid Insurance 503 Purchase returns and allowances 110 VAT Input Taxes 504 Purchase discounts 121 Delivery Equipment 122 Accumulated Depreciation – 600 Operating Expenses Delivery Equipment 601 Salaries and Wages 123 Store Equipment 602 Advertising Expense 124 Accumulated Depreciation – Store 603 Commission Expense Equipment 604 Delivery Expense 605 Miscellaneous Expense 200 Liabilities 606 Depreciation Expense – Delivery 201 Accounts Payable Equipment 202 Notes Payable 607 Depreciation Expense – Store 203 Accrued Sundry Payable Equipment 210 VAT Output 608 Rent Expense 211 VAT Payable 609 Insurance Expense 610 Office Supplies Expense 300 Owner’s Equity 301 B. Gutierrez, Capital 700 Other Income 302 B. Gutierrez, Drawing 701 Interest Income 303 Income Summary 702 Rent Income 800 Other Expenses 801 Interest Expense 3 2. 4  Definition, Classification and Examples of Accounts Accounting uses several account titles to describe economic transactions and events. A. REAL ACCOUNTS Assets Liabilities Owner’s Equity -are resources or things of value owned -are present obligations to -a residual amount after by the enterprise. For as long as the pay cash or cash equivalents deducting liabilities from future economic benefits are expected by an entity. They represent assets. It comprises the from it to flow to the entity and if it is claims against the assets of capital contribution and controlled by the entity, It is asset. the business. Liability account withdrawals by the owner. has a normal credit balance. It is increased by capital Examples of asset account titles are: contributions of the owner Current Asset Examples of Liability account and net income to the  Cash and Cash Equivalents titles are: business and decreased by  Accounts Receivable Current Liability the owner’s withdrawals and  Notes / loans Receivable  Accounts Payable net losses of the business.  Accrued interest receivables  Notes Payable  Inventories  Loans Payable Examples of Owner’s Equity  Prepaid Expenses  Accrued Interest payable account titles are:  Prepaid Supplies  SSS Premium Payable  Owner, Capital  Prepaid Rent  Withholding Tax Payable  Drawings – temporary account used to record Non-current asset Non-current liability initially the amount Property Plant and Equipment -is one that does not meet the taken by the owner  Land criteria of a current liability. from the business  Building Generally, it comprises the  Income summary-  Furniture and Fixtures portion payable beyond one temporary account  Equipment year of a long term liability. used to summarize all Accumulated Depreciation income and expenses Intangible Assets for a given period  Goodwill, Patents, Copyrights, Accrued liabilities- amounts Licenses, Franchises, trademarks, owed to others for unpaid brand, secret processes expenses Unearned revenues- Owners’ Equity is described enterprise receives payments as: Held for trading securities- temporary before providing its investments of excess cash which are customers with goods or *Owner’s Capital – Sole primarily held for short-term gain services Proprietorship Long-term investments- asset held by an Mortgage payable- used for *Partner’s Capital – enterprise for the accretion of wealth recording long-term debts of Partnership through capital distribution for capital an enterprise *Shareholder’s Equity - appreciation or for other benefits to Bonds payable- large sums of Corporation the investing enterprise money are often required by a business for working capital and expansion purposes and is often obtained by floating bonds 5 Contra-valuation Accounts 1. Allowance for Doubtful Accounts – refers to an amount estimated uncollectible on receivable in compliance with the principle of conservatism. It is credited to serve as a contra account for the related receivable. Other terms used to describe this account are “ allowance for uncollectible accounts” and “allowance for bad debts”. 2. Accumulated Depreciation – the aggregate periodic cost of using a depreciable plant asset (the sum of periodic depreciation charges). In accordance with the systematic cost allocation principle, the acquisition cost of depreciable plant asset should be allocated as expense over its useful life. *Straight line depreciation is the default method used to gradually reduce the carrying amount of a fixed asset over its useful life. Salvage value- the estimated value that an asset will realize upon its sale at the end of its useful life. B. NOMINAL ACCOUNTS Revenue / Income Accounts Expense -represents the earnings of the business -are cost incurred in conducting the business from sales of goods or service rendered. activities. Expense accounts have a normal debit Revenue accounts have a normal credit balances. balance. Examples of expense account titles are:  Cost of Sales Examples of revenue account titles are:  Supplies Expense  Sales  Utilities Expense  Service Income/Revenue  Rent Expense  Professional Fees  Bad Debt Expense - amount of receivables  Interest Income estimated to be uncollectible and charged as  Rent Income expense during an accounting period  Gain on Sales of Other Assets  Interest Expense  Salaries and Wages Expense  Insurance Expense  Taxes and Licenses Expense  Depreciation Expense Estimated expenses:  Doubtful Account Expense  Depreciation Expense 6 Example of business transactions: ABC Company Debit (Dr) Credit (Cr) Transaction Value/s received or paid Value/s given up or for parted with 1. B, Gutierrez invested P200,000 to Cash B Gutierrez, Capital start an accounting business. 2. She bought a computer equipment Equipment Accounts Payable worth P25,000 on account. 3. She bought office supplies for cash, Supplies Cash P6,000. 4. Paid 50% of the computer equipment Accounts Payable Cash purchases in transaction 2. 5. B. Gutierrez granted a loan of Cash Loans Payable P50,000 from RCBC bank. 6. Receive an amount of P60,000 for Cash Service Revenue services rendered. 7. Repair services rendered on account, Accounts Receivable Service Revenue P 40,000 8. The business paid P 10,000 for rent. Rent Expense Cash 9. Collected from customer’s account, Cash Accounts Receivable P11,000 10. B. Gutierrez paid the salaries of 3 Salaries Expense Cash employees, P 15,000. 11. Billed a customer for 14,000 service Accounts Receivable rendered and received a partial Service Revenue Cash payment of 8,000. 12. Purchased shop supplies, 7,000 and Accounts Payable Supplies made a down payment of 3,000.00 Cash 13. Supplies bought for cash and used, Supplies Expense Cash 8,000. 14. The owner withdraw 15,000 for B Gutierrez, Drawing Cash personal use. 7 ACCOUNTING EQUATION - Means assets are equal to liabilities plus owner’s equity. ASSETS = LIABILITIES + OWNERS EQUITY Asset, Liabilities and Owner’s Equity The properties owned by a business enterprise are referred to as asset and the rights or claims to the properties are referred to as equities. (Ownership) If the assets owned by a business amount to P500,000 the equities in the assets must also amount of P500,000. The relationship between the two may be stated in the form of an equation, as follows: Assets = Equities Equities may be subdivided into two principal types; the right of creditors and the rights of owners. The equities creditor’s represents debts of the business and are called liabilities. The equity of the owners is called capital or owner’s equity. Expansion of the equation to give recognition to the two basic types of equities yields the following which is known as the EXPANDED ACCOUNTING EQUATION: ASSETS = LIABILITIES+ OWNERS EQUITY + (INCOME - EXPENSES) The income and expenses are written in the income statement. The excess of income over expenses is a net income and the excess of expenses is a net income and the excess of expenses over income is a net loss. It is customary to place “liabilities” before “capital” in the accounting equation because creditors have preferential rights to the assets. The residual claim of the owner or owns is sometimes given greater emphasis by transposing liabilities to the other side of the equation, yielding: Assets – Liabilities = Capital How business activities change the accounting equation? Business activities change the amounts in the accounting equation. A business activity that changes assets, liabilities, or owner’s equity is called transaction. For example, a business that pays cash for supplies is engaging in a transaction. After each transaction, the accounting equation must remain in balance. ASSETS = LIABILITIES + OWNERS EQUITY Cash + Accounts Accounts payable + bank Owner’s Equity - Drawings Receivables + Supplies + loans + (Revenues – expenses) equipment Example: P 600,000.00 = P 100,000.00 + P 500,000.00 8 Expanded Accounting Equation (observe how the dual accounting system and the increase or decrease in the account title applied in the transactions below.) 1. B, Gutierrez invested P200,000 to start an accounting business. ASSET LIABILITIES OWNER’S EQUITY Cash A/R Supplies Equip. = A/P Bank loan + BG Capital Revenues (-) expenses 200,000 200,000 2. She bought a computer equipment worth P50,000 on account. 50,000 = 50,000 + 3. She bought office supplies for cash, P6,000. -6,000 6,000 = + 4. Paid 50% of the computer equipment purchases in transaction 2. -25,000 = -25,000 + 5. B. Gutierrez granted a loan of P50,000 from RCBC bank. 50,000 = 50,000 + 6. Receive an amount of P60,000 for services rendered. 60,000 = + 60,000 7. Repair services rendered on account, P 40,000 40,000 = + 40,000 8. The business paid P 10,000 for rent. - 10,000 = + 10,000 9. Collected from customer’s account, P11,000 11,000 -11,000 = + 10. B. Gutierrez paid the salaries of 3 employees, P 15,000. -15,000 = + 15,000 11. Billed a customer for 14,000 service rendered and received a partial payment of 8,000. 8,000 6,000 = + 14,000 12. Purchased shop supplies, 7,000 and made a down payment of 3,000.00 -3000 7000 = 4000 + 13. Supplies bought for cash and used, 8,000. -8,000 = + 8,000 14. The owner withdraw 15,000 for personal use. -15,000 = + -15,000 9 The Book of Accounts General Journal – a two-column journal called the book of original entry because it is where business transactions are first recorded. It is composed of the date, description, posting reference, debit and credit. Date Description PR DEBIT CREDIT Jan 1 Cash 110 3 5 0 0 0 0 00 B. Gutierrez, Capital 310 3 5 0 0 0 0 00 To record initial investment. 2 Taxes, permits and licenses 510 2 5 0 0 00 Cash 110 2 5 0 0 00 To record payment of pre- operating expenses *special journal will be discussed in another chapter. General Ledger This is known as the “book of final entry” because the balances of accounts contained in it are used to prepare the financial reports. The ledger serves the same as the T account but more formal and detailed. It is an accounting book in which the account and their related amounts recorded in the journal are posted and summarized periodically. a. General Ledger Source: Roxas, G. & Valencia, E. (2014). Basic Accounting 4 th Ed.2014-2015. Baguio City. Valencia Educational Supply 10  b. Subsidiary Ledger A separate record set up to record the individual items relating to a single general ledger account (control account). Examples include an accounts receivable and accounts payable ledger. Source: Roxas, G. & Valencia, E. (2014). Basic Accounting 4 th Ed.2014-2015. Baguio City. Valencia Educational Supply The Accounting Worksheet - A device used as a convenient and orderly way of organizing the accounting data to facilitate the checking of accounting records and the preparation of adjusting entries, financial statements and closing entries. Source: Roxas, G. & Valencia, E. (2014). Basic Accounting 4 th Ed.2014-2015. Baguio City. Valencia Educational Supply 11