2 - 1 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 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing and Recording Transactions Chapter 2

2 - 2 C 1 Analyzing and Posting Process The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements. These reports and statements are used for making investing, lending, and other business decisions.

2 - 3 Sales Tickets Bank Statements Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Records C 1

2 - 4 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 2

2 - 5 The Account and its Analysis Owner, Capital Owner, Withdrawals Owner, Capital Owner, Withdrawals C 2

2 - 6 Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts C 2

2 - 7 Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts C 2

2 - 8 Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses Equity Accounts C 2

2 - 9 The Account and its Analysis C 2 Revenues and owner’s contributions increase equity. Expenses and owner’s withdrawals decrease equity.

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 chart of accounts is a list of all accounts and includes an identifying number for each account. C 3

Debits and Credits A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. C 4

Liabilities Equity Assets =+ Double-Entry Accounting C 4

Double-Entry Accounting C 4 Here is the expanded accounting equation showing the equity section.

Double-Entry Accounting An account balance is the difference between the increases and decreases in an account. Notice the T-Account. C 4

Journalizing and Posting Transactions P 1

c.Dollar amount of debits and credits Journalizing Transactions a.Transaction Date d.Transaction explanation b.Titles of Affected Accounts P 1

Balance Account Column T-accounts are useful illustrations, but balance column ledger accounts are used in practice. P 1

Posting Journal Entries P 1 1

Analyzing Transactions A 1 Double-entry accounting is useful in analyzing and processing transactions. Analysis of each transaction follows these four steps.

Analyzing Transactions A 1

Analyzing Transactions A 1

Analyzing Transactions A 1

Analyzing Transactions A 1

Analyzing Transactions A 1

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. 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. P 2

Preparing the Trial Balance Preparing a trial balance involves three steps: 1.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). 2.Compute the total of debit balances and the total of credit balances. 3.Verify (prove) total debit balances equal total credit balances. Preparing a trial balance involves three steps: 1.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). 2.Compute the total of debit balances and the total of credit balances. 3.Verify (prove) total debit balances equal total credit balances. 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.  Make sure account balances are correctly entered from the ledger.  See if debit or credit accounts are mistakenly placed on the trial balance.  Re-compute 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. P 2

Using a Trial Balance to Prepare Financial Statements P 3

Income Statement P 3

Statement of Owner’s Equity P 3

Balance Sheet P 3 Net income from income statement

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. The usual practice is to put dollar signs beside only the first and last numbers in a column. 3.When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4.Commas are always used in financial statements. 5.Companies commonly round amounts in reports to the nearest dollar, or even to a higher level. 1.Dollar signs are not used in journals and ledgers. 2.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. 3.When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4.Commas are always used in financial statements. 5.Companies commonly round amounts in reports to the nearest dollar, or even to a higher level. P 3

Global View Both U.S. GAAP and IFRS prepare the same four basic financial statements. A few differences are found within each statement, but over time these differences are likely to be eliminated. Here is a typical IFRS balance sheet presentation.

Accounting Controls and Assurance Accounting systems depend on control procedures that assure the proper principles were applied in processing accounting information. The passage of SOX legislation strengthened U.S. control procedures in recent years. The percentage of employees in information technology that report observing specific types of misconduct in 2009.

Debt Ratio 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 its debt in the future. A 2 Total Liabilities Total Assets Debt Ratio =

End of Chapter 2