Horngren's Financial & Managerial Accounting PDF

Horngren’s Financial & Managerial Accounting Eighth Edition Chapter 2 Recording Business Transactions Copyright © 2024, 2020, 201...

Horngren’s Financial & Managerial Accounting Eighth Edition Chapter 2 Recording Business Transactions Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Chapter 2 Learning Objectives (1 of 2) 2.1 Explain accounts as they relate to the accounting equation and describe common accounts 2.2 Define debits, credits, and normal account balances using double-entry accounting and T-accounts 2.3 Record transactions in a journal and post journal entries to the ledger Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Chapter 2 Learning Objectives (2 of 2) 2.4 Prepare the unadjusted trial balance 2.5 Describe the accounting cycle 2.6 Use the debt ratio to evaluate business performance Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.1 Explain accounts as they relate to the accounting equation and describe common accounts Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Is an Account? Assets = Liabilities + Equity The accounting equation contains three categories: assets, liabilities, and equity. Each part contains accounts. An account is the detailed record of all increases and decreases that have occurred in an account during a specified period. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Assets Exhibit F:2-1 Asset Accounts Account Name Explanation Cash A business’s money. Includes bank balances, bills, coins, and checks. Accounts A customer’s promise to pay in the future for services or goods sold. Often Receivable described as “On Account.” Notes Receivable A written promise that a customer will pay a fixed amount of money (principal) and interest by a certain date in the future. Usually more formal than an Accounts Receivable. Prepaid Expense A payment of an expense in advance. It is considered an asset because the prepayment provides a benefit in the future. Examples of prepaid expenses are Prepaid Rent, Prepaid Insurance, and Office Supplies. Land The cost of land a business uses in operations. Building The cost of an office building, a store, or a warehouse. Equipment, The cost of equipment, furniture, and fixtures (such as light fixtures and Furniture, and shelving). A business has a separate asset account for each type. Fixtures Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Liabilities Exhibit F:2-2 Liability Accounts Account Name Explanation Accounts A promise made by the business to pay a debt in the future. Arises Payable from a credit purchase. Notes Payable A written promise made by the business to pay a debt, usually involving interest, in the future. Accrued Liability An amount owed but not paid. A specific type of payable such as Taxes Payable, Rent Payable, and Salaries Payable. Unearned Occurs when a company receives cash from a customer but has not Revenue provided the product or service. The promise to provide services or deliver goods in the future. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Equity Exhibit F:2-3 Equity Accounts Account Name Explanation Common Stock Represents the net contributions of the stockholders in the business. Increases equity. Dividends Distributions of cash or other assets to the stockholders. Decreases equity. Revenues Earnings that result from delivering goods or services to customers. Increases equity. Examples include Service Revenue and Rent Revenue. Expenses The cost of selling goods or services. Decreases equity. Examples include Rent Expense, Salaries Expense, and Utilities Expense. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Chart of Accounts A chart of Exhibit F:2-4 Chart of Accounts—Smart Touch Learning accounts is used to organize a company’s accounts. A ledger is a record holding all the accounts of a business, the changes in those accounts, and their balances. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Data Analytics in Accounting The number of accounts in a company’s chart of accounts depends on its size, complexity, number of locations, and activities. The chart of accounts can be used to: – process transactions and business activities – analyze accounting data – compare prior period amounts to current year – identify errors – track changes in accounts Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.2 Define debits, credits, and normal account balances using double-entry accounting and T-accounts Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Is Double-Entry Accounting? Transactions always involve at least two accounts. Accounting uses the double-entry system to record the dual effects of each transaction. – For example, office supplies are purchased for cash requiring an increase in Office Supplies and a decrease in Cash. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The T-Account A shortened form of the ledger is called the T-account. – The left side of the T-account is called the debit. – The right side of the T-account is called a credit. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Increases and Decreases in the Accounts (1 of 2) How we record increases and decreases to an account is determined by the account type. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Increases and Decreases in the Accounts (2 of 2) To increase the Cash account, a business would record a debit to Cash. To decrease the Cash account, a business would record a credit to Cash. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Expanding the Rules of Debit and Credit The accounting equation is expanded to include the rules of debits and credits for the elements of equity: Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Normal Balance of an Account (1 of 2) All accounts are summarized on one side of the T-account, called the normal balance. An account’s normal balance appears on the increase side of the account. – Assets increase with a debit, so the normal balance is a debit. – Liabilities and equity increase with a credit, so the normal balance is a credit. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Normal Balance of an Account (2 of 2) Exhibit F:2-5 Rules of Debits and Credits and Normal Balances for Each Account Type Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Determining the Balance of a T-Account Use the T-account to determine the ending balance in an account. The ending balance is shown on the side with the larger number. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.3 Record transactions in a journal and post journal entries to the ledger Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Record Transactions? Accountants use source documents to provide evidence and data for recording transactions. The documents help businesses determine how to record the transactions. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Source Documents—The Origin of the Transactions Exhibit F:2-6 Flow of Accounting Data Other source documents used include: – Purchase invoices – Bank checks – Sales invoices Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (1 of 24) After reviewing source documents, accountants record the transactions. Transactions are recorded in a journal, the record of the transactions in date order. The data from the journal is then transferred to the ledger, a process called posting. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (2 of 24) The journalizing and posting process has five steps: Step 1: Identify the accounts and the account type (asset, liability, or equity). Step 2: Decide whether each account increases or decreases, then apply the rules of debits and credits. Step 3: Record the transaction in the journal. Step 4: Post the journal entry to the ledger. Step 5: Determine whether the accounting equation is in balance. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (3 of 24) Transaction 1—Stockholder Contribution On November 1, the e-learning company received $30,000 cash from Sheena Bright, and the business issued common stock to her. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (4 of 24) Transaction 1—Stockholder Contribution Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (5 of 24) Transaction 1—Stockholder Contribution Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (6 of 24) Transaction 2—Purchase of Land for Cash On November 2, Smart Touch Learning paid $20,000 cash for land. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (7 of 24) Transaction 2—Purchase of Land for Cash Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (8 of 24) Transaction 2—Purchase of Land for Cash Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (9 of 24) Transaction 3—Purchase of Office Supplies on Account Smart Touch Learning buys $500 of office supplies on account on November 3. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (10 of 24) Transaction 4—Earning of Service Revenue for Cash On November 8, Smart Touch Learning collected cash of $5,500 for service revenue that the business earned by providing e-learning services for clients. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (11 of 24) Transaction 5—Earning of Service Revenue on Account On November 10, Smart Touch Learning performed services for clients, for which the clients will pay the company later. The business earned $3,000 of service revenue on account. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (12 of 24) Transaction 6—Payment of Expenses with Cash Smart Touch Learning paid the following cash expenses on November 15: office rent, $2,000, and employee salaries, $1,200. Note: A compound journal entry is a journal entry with multiple debits and/or credits. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (13 of 24) Transaction 6—Payment of Expenses with Cash Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (14 of 24) Transaction 7—Payment on Account (Accounts Payable) On November 21, Smart Touch Learning paid $300 on the accounts payable created in Transaction 3. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (15 of 24) Transaction 8—Collection on Account (Accounts Receivable) On November 22, Smart Touch Learning collected $2,000 cash from a client in Transaction 5. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (16 of 24) Transaction 9—Payment of Cash Dividend On November 25, a payment of $5,000 cash was paid for dividends. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (17 of 24) Transaction 10—Prepaid Expenses On December 1, Smart Touch Learning prepays three months’ office rent of $3,000. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (18 of 24) Transaction 11—Payment of Expense with Cash On December 1, Smart Touch Learning paid employee salaries of $1,200. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (19 of 24) Transaction 12—Purchase of Building with Notes Payable On December 1, Smart Touch Learning purchased a $60,000 building in exchange for a note payable. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (20 of 24) Transaction 13—Stockholder Contribution On December 2, Smart Touch Learning received a contribution of furniture with a fair market value of $18,000 from Sheena Bright. In exchange, Smart Touch Learning issued common stock. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (21 of 24) Transaction 14—Accrued Liability On December 15, Smart Touch Learning received a telephone bill for $100 and will pay this expense next month. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (22 of 24) Transaction 15—Payment of Expense with Cash On December 15, Smart Touch Learning paid employee salaries of $1,200. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (23 of 24) Transaction 16—Unearned Revenue On December 21, a law firm engages Smart Touch Learning to provide e-learning services and agrees to pay $600 in advance. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Journalizing and Posting Transactions (24 of 24) Transaction 17—Earning of Service Revenue for Cash On December 28, Smart Touch Learning collected cash of $8,000 for Service Revenue that the business earned by providing e-learning services for clients. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Ledger Accounts After Posting (1 of 2) Exhibit F:2-7 (on the following slide) shows Smart Touch Learning’s accounts after posting journal entries in November and December. Notice the total assets of $114,700 equals the total liabilities of $60,900 plus equity of $53,800. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Ledger Accounts After Posting (2 of 2) Exhibit F:2-7 Smart Touch Learning’s Accounts After Posting Journal Entries in November and December Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Four-Column Account: An Alternative to the T-Account Exhibit F:2-8 T-Account Versus Four-Column Account Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:2-8 T-Account Versus Four- Column Account Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:2-9 Posting References Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.4 Prepare the unadjusted trial balance and illustrate how to use the trial balance to prepare financial statements Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved What Is the Trial Balance? A trial balance is a list of Exhibit F:2-10 Trial Balance all ledger accounts with their balances at a point in time. The asset accounts are listed first, followed by liabilities, and then equity. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F:2-11 Smart Touch Learning’s Financial Statements Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Correcting Trial Balance Errors If total debits do not equal total credits: 1. Search the trial balance for a missing account. 2. Divide the difference between total debits and total credits by 2. – This helps to locate missing debits or credits. 3. Divide the out-of-balance amount by 9. – This helps to locate slide or transposition errors. Note: Even if total debits equal total credits, there can still be errors, such as the use of the wrong accounts. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.5 Describe the accounting cycle Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Exhibit F: 2-13 The Accounting Cycle Steps 1–4 Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2.6 Use the debt ratio to evaluate business performance Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Use the Debt Ratio to Evaluate Business Performance? (1 of 2) The debt ratio shows the proportion of assets financed with debt. It can be used to evaluate a business’s ability to pay its debts and to determine if the company has too much debt to be considered financially “healthy.” Debt ratio = Total liabilities / Total assets Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved How Do You Use the Debt Ratio to Evaluate Business Performance? (2 of 2) Pepsico’s balance sheet for the year ending on December 25, 2021, reported (in millions) total liabilities of $76,226 and total assets of $92,377. The debt ratio for Pepsico as of December 25, 2021 is as follows: Debt ratio = Total liabilities/Total assets = $76,226 / $92,337 = 0.8255 = 82.6% Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2024, 2020, 2017 Pearson Education, Inc. All Rights Reserved