Analyzing and Recording Transactions Pr. SAMLAL Zoubida

Procedural Learning Objectives P1: Record transactions in a journal and post entries to a ledger (T account). P2: Prepare and explain the use of a trial balance. P3: Prepare financial statements from business transactions. 2-2

External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Analyzing and Recording Process Exchanges of economic consideration between two parties. C 1 2-3

Analyzing and Recording Process Accounting process: -Identifies business transactions and events, -Analyzes and records their effects, and -Summarizes and presents information in reports and financial statements. Steps in accounts process that focus on analyzing and recording transactions and events are: (1)Record relevant transactions and events in a journal, (2) Post journal information to ledger accounts, and (3) Prepare a trial balance. Accounting records are informally referred as the accounting books, or simply the books.

Analyze each transaction and event from source documents Analyzing and Recording Process Record relevant transactions and events in a journal Post journal information to ledger (T) accounts Prepare and analyze the trial balance C 1 2-5

Sales Tickets Bank Statements Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Records C 2 2-6

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. The Account and its Analysis The general ledger is a record containing all accounts used by the company. C 3 2-7

Assets Accounts Asset Accounts = The Account and its Analysis + Liability Accounts Equity Accounts C 3 2-8

Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts C 3 2-9

Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts C Dividends Payable Dividends Payable

Equity Accounts Revenues Common Stock Dividends Declared Dividends Declared Expenses Equity Accounts C 3 Retained Earnings Retained Earnings 2-11

Liabilities Equity Assets =+ The Account and its Analysis Common Stock Dividends Revenues Expenses ++ –– C

Ledger and Chart of Accounts The ledger is a collection of all accounts for an information system. A company’s size and diversity of operations affect the number of accounts needed. The ledger is a collection of all accounts for an information system. A company’s size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts and includes an identifying number for each account. C

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C

Double-Entry Accounting NORMAL Balance ASSETS = LIABILITIES + EQUITY DR = CR CR Assets are on the left side of the equation; therefore, the left, or debit side is the normal balance side for assets. Liabilities and equities are on the right side; therefore, the right, or credit side is the normal balance side for liabilities and equity.

Double-Entry Accounting Total amount that is debited to accounts must equal the total amount credited to accounts for each transaction. Sum of debit account balances in the ledger must equal the sum of credit account balances. ASSETS = LIABILITIES + EQUITY || ASSETS = LIABILITIES + Common Stock – DIV + REV - EXP

Liabilities Equity Assets =+ Double-Entry Accounting NORMAL Balance Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + C Whether a debit or a credit is an increase or decrease depends on the NORMAL Balance of the account.

Revenues Expenses Common Stock Dividends _ _ + + _ _ Debit Credit Stock - + Debit Credit Dividends + - Debit Credit Expenses + - Debit Credit Revenues - + Equity C Double-Entry Accounting NORMAL Balance

An account balance is the difference between the increases and decreases in an account. Notice the T-Account C Double-Entry Accounting NORMAL Balance

Journalizing & Posting Transactions Step 1: Analyze transactions and source documents. Liabilities Equity Assets =+ Step 2: Apply double- entry accounting Step 4: Post entry to ledger Step 3: Record journal entry P1 2-20

 Dollar amount of debits and credits Journalizing Transactions  Transaction Date  Transaction explanation  Titles of Affected Accounts P1 2-21

T-accounts are useful illustrations, but balance column accounts are used in practice. Balance Column Account P1 2-22

1 1 Identify the debit account in ledger. Posting Journal Entries P1 2-23

2 2 Enter the date. Posting Journal Entries P1 2-24

3 3 Enter the amount and description. Posting Journal Entries P1 2-25

4 4 Enter the journal reference. Posting Journal Entries P1 2-26

5 5 Compute the balance. Posting Journal Entries P1 2-27

Enter the ledger reference. 6 6 Posting Journal Entries P1 2-28

Analyzing Transactions Analysis: Double entry: Posting: A1 2-29

Analyzing Transactions Analysis: Double entry: Posting: A1 2-30

Analyzing Transactions Double entry: Posting: A1 Analysis: 2-31

Analyzing Transactions Analysis: Double entry: Posting: A1 2-32

Analyzing Transactions Analysis: Double entry: Posting: A1

Analyzing Transactions Analysis: Double entry: 101 Posting: A1

Analyzing Transactions Transactions 7: Payment of Salaries expenses in cash Analysis: - Assets (Cash) = – Equity (Expenses) Double entry: Debit Salaries Expenses and credit Cash Transaction 8: Provide services and rents test facilities for credit Analysis: + Assets (Accts Receivable) = + Equity (Revenues) Double entry: Debit Accounts Receivable and Credit Consulting Revenue and Credit Rental Revenue Transaction 9: Receipt of cash from accounts receivable Analysis: + Assets (Cash) = – Assets (Accounts Receivable) Double entry: Debit Cash and credit Accounts Receivable

Analyzing Transactions Transaction 10: Payment of accounts payable Analysis: – Assets (Cash) = – Liability (Accounts Payable) Double entry: Debit Accounts Payable and credit Cash Transaction 11: Payment of cash dividend Analysis: – Assets (Cash) = – Equity (Dividends) Double entry: Debit Dividends and credit Cash Transaction 12: Receipts of cash from a customer for future consulting services Analysis: + Assets (Cash) = + Liabilities (Unearned Revenue) Double entry: Debit Cash and credit Unearned Consulting Revenue

Analyzing Transactions Transaction 13: Pay cash for future insurance coverage Analysis: – Assets (Cash) = + Assets (Prepaid Insurance) Double entry: Debit Prepaid Insurance and credit Cash Transaction 14: Purchase supplies for cash Analysis: - Assets (Cash) = + Assets (Supplies) Double entry: Debit Supplies and credit Cash Transactions 15: Payment of utilities expenses in cash Analysis: – Assets (Cash) = – Equity (Expenses) Double entry: Debit Utilities Expense and credit Cash Transactions 16: Payment of salaries expenses in cash Analysis: – Assets (Cash) = – Equity (Expenses) Double entry: Debit Salaries Expense and credit Cash

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. DebitsCredits Cash4,350$ Accounts receivable- Supplies9,720 Prepaid Insurance2,400 Equipment26,000 Accounts payable6,200$ Unearned consulting revenue3,000 Common stock30,000 Dividends200 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForward Trial Balance December 31, 2009 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. A1

Six Steps for 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.  Make sure account balances are correctly entered from the ledger.  See if debit or credit accounts are mistakenly placed on the trial balance.  Recompute each account balance in the ledger.  Verify that each journal entry is posted correctly.  Verify that each original journal entry has equal debits and credits. P2

Using a Trial Balance to Prepare Financial Statements Statement of Cash Flows Income Statement Statement of Retained Earnings Beginning Balance Sheet Ending Balance Sheet Period of Time Point in Time P3

Income Statement P3

Statement of Retained Earnings P3

Balance Sheet P3