1. Financial Accounting John J. Wild Seventh Edition John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Chapter 2 Accounting System and Financial Statements

3. 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

4. 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 accounts Prepare and analyze the trial balance C 1 2-4

5. Sales Tickets Bank Statements Purchase Orders Checks Source Documents Bills from Suppliers Employee Earnings Records C 1 2-5

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 2 2-6

7. Assets Accounts Asset Accounts = The Account and Its Analysis + Liability Accounts Equity Accounts C2 2-7

8. Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts C 2 2-8

9. Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts C 2 2-9

10. Equity Accounts Revenues Common Stock Dividends Expenses Equity Accounts C 2 Retained Earnings Retained Earnings 2-10

11. Liabilities Equity Assets =+ The Account and Its Analysis Common Stock Dividends Revenues Expenses ++ –– C 2 2-11

12. 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 3 2-12

13. A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C4 2-13

14. Liabilities Equity Assets =+ Double-Entry Accounting Debit Credit ASSETS + - LIABILITIES - + EQUITY - + C4 2-14

15. Revenues Expenses Common Stock Dividends _ _ + + _ _ Debit Credit Stock - + Debit Credit Dividends + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity C 4 2-15

16. Double-Entry Accounting An account balance is the difference between the increases and decreases in an account. Notice the T-Account C4 2-16

17. Journalizing and 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 2-17

18.  Dollar Amount of Debits and Credits Journalizing Transactions  Transaction Date  Transaction Explanation  Titles of Affected Accounts P1 2-18

19. T-accounts are useful illustrations, but balance column accounts are used in practice. Balance Column Account P1 2-19

20. 1 1 Identify the debit account in ledger. Posting Journal Entries P1 2-20

21. 2 2 Enter the date in the ledger. Posting Journal Entries P1 2-21

22. 3 3 Enter the amount and description. Posting Journal Entries P1 2-22

23. 4 4 Enter the journal reference. Posting Journal Entries P1 2-23

24. 5 5 Compute the balance. Posting Journal Entries P1 2-24

25. Enter the ledger reference into the general journal. 6 6 Posting Journal Entries P1 2-25

26. Analyzing Transactions Analysis: Double entry: 101 307 Posting: A1 2-26 Transaction: Shareholder invested $30,000 in FastForward on Dec. 1 (1) 30,000 Common Stock

27. Analyzing Transactions Analysis: Double entry: 126 101 Posting: A1 2-27 Transaction: FastForward purchases supplies by paying $2,500 in cash

28. Analyzing Transactions Double entry: 167 101 Posting: A1 Analysis: 2-28 Transaction: FastForward purchases equipment by paying $26,000 cash.

29. Analyzing Transactions Analysis: Double entry: 126 201 Posting: A1 2-29

30. Analyzing Transactions Analysis: Double entry: 403 101 Posting: A1 2-30 (3) 4,200 Consulting Revenue (1) 30,000(2) 2,500 (5) 4,200(3) 26,000 Cash

31. After processing its remaining transactions for December, FastForward’s trial balance is prepared. Debits Credits 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 Totals45,300$ $ FASTFORWARD December 31, 2013 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. P2 2-31 Trial Balance

32. Six Steps for Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected.  Verify that the trial balance columns are correctly added.  Verify that account balances are correctly entered from the ledger.  See whether a debit (or credit) balance is mistakenly listed as a credit (or debit).  Recompute each account balance in the ledger.  Verify that each journal entry is properly posted.  Verify that each original journal entry has equal debits and credits. P2 2-32

33. 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 2-33

34. Income Statement P3 2-34

35. Statement of Retained Earnings P3 2-35

36. Balance Sheet P3 2-36

37. o Describes the relationship between the amounts of the company’s liabilities and assets. o Helps to assess the risk that a company will fail to pay its debts. Debt Ratio A2 2-37

38. End of Chapter 2 2-38