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 Chapter 02 A NALYZING AND RECORDING TRANSACTIONS McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 2 - 2 Analyze each transaction and event from source documents A NALYZING AND R ECORDING P ROCESS Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trial balance C 1

3. 2 - 3 Sales Tickets Bank Statements Purchase Orders Checks S OURCE D OCUMENTS Bills from Suppliers Employee Earnings Records C 1

4. 2 - 4 An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. T HE A CCOUNT AND ITS A NALYSIS The general ledger is a record containing all accounts used by the company. C 2

5. 2 - 5 T HE A CCOUNT AND ITS A NALYSIS Owner, Capital Owner, Withdrawals Owner, Capital Owner, Withdrawals C 2

6. 2 - 6 Land Equipment Buildings Cash Notes Receivable Supplies Prepaid Accounts Accounts Receivable Asset Accounts A SSET A CCOUNTS C 2

7. 2 - 7 Accrued Liabilities Unearned Revenue Notes Payable Accounts Payable Liability Accounts L IABILITY A CCOUNTS C 2

8. 2 - 8 Equity Accounts Revenues Owner’s Capital Owner’s Withdrawals Expenses E QUITY A CCOUNTS C 2

9. 2 - 9 Liabilities Equity Assets =+ T HE A CCOUNT AND ITS A NALYSIS C 2

10. 2 - 10 L EDGER AND C HART OF A CCOUNTS 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

11. 2 - 11 D EBITS AND C REDITS A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. C 4

12. 2 - 12 Liabilities Equity Assets =+ D OUBLE -E NTRY A CCOUNTING Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + C 4 Normal

13. 2 - 13RevenuesRevenuesExpensesExpenses Owner’sCapitalOwner’sCapital Owner's Withdrawals _ _ + + _ _ Debit Credit Owner’s Capital - + Debit Credit Owner's Withdrawals + - Debit Credit Expenses + - Debit Credit Revenues - + D OUBLE -E NTRY A CCOUNTING EquityEquity C 4

14. 2 - 14 D OUBLE -E NTRY A CCOUNTING An account balance is the difference between the increases and decreases in an account. Notice the T-Account. C 4

15. 2 - 15 J OURNALIZING & P OSTING T RANSACTIONS 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 P 1

16. 2 - 16  Dollar amount of debits and credits J OURNALIZING T RANSACTIONS  Transaction Date  Transaction explanation  Titles of Affected Accounts P 1

17. 2 - 17 B ALANCE C OLUMN A CCOUNT T-accounts are useful illustrations, but balance column ledger accounts are used in practice. P 1

18. 2 - 18 1 1 Identify the debit account in ledger. P OSTING J OURNAL E NTRIES P 1

19. 2 - 19 2 2 Enter the date. P OSTING J OURNAL E NTRIES P 1

20. 2 - 20 3 3 Enter the amount and description. P OSTING J OURNAL E NTRIES P 1

21. 2 - 21 4 4 Enter the journal reference. P OSTING J OURNAL E NTRIES P 1

22. 2 - 22 5 5 Compute the balance. P OSTING J OURNAL E NTRIES P 1

23. 2 - 23 Enter the ledger reference. 6 6 P OSTING J OURNAL E NTRIES P 1

24. 2 - 24 A NALYZING T RANSACTIONS Analysis: Double entry: 101 301 Posting: A 1

25. 2 - 25 A NALYZING T RANSACTIONS Analysis: Double entry: 126 101 Posting: A 1

26. 2 - 26 A NALYZING T RANSACTIONS Analysis: Double entry: 167 101 Posting: A 1

27. 2 - 27 A NALYZING T RANSACTIONS Analysis: Double entry: 126 201 Posting: A 1

28. 2 - 28 A NALYZING T RANSACTIONS Analysis: Double entry: 403 101 Posting: A 1

29. 2 - 29 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 C. Taylor, Capital30,000 Owner's Withdrawals200 Consulting revenue5,800 Rental revenue300 Salaries expense1,400 Rent expense1,000 Utilities expense230 Total45,300$ $ FastForward Trial Balance December 31, 2011 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

30. 2 - 30 P REPARING A T RIAL B ALANCE Preparing a trail 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 trail 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

31. 2 - 31 S EARCHING FOR AND C ORRECTING E RRORS 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

32. 2 - 32 U SING A T RIAL B ALANCE TO P REPARE F INANCIAL S TATEMENTS P 3

33. 2 - 33 I NCOME S TATEMENT P 3

34. 2 - 34 STATEMENT OF OWNER'S EQUITY C. Taylor, Capital 12/1/11-$ Net income for December3,470 Plus: Investments by Owner30,000 33,470 Less: Owner Withdrawals200 C. Taylor, Capital, 12/31/1133,270$ Statement of Owner's Equity For the Month Ended December 31, 2011 FASTFORWARD Connections P 3

35. 2 - 35 B ALANCE S HEET Connections P 3 C. Taylor, Capital 12/1/11-$ Net income for December3,470 Plus: Investments by Owner30,000 33,470 Less: Owner Withdrawals200 C. Taylor, Capital, 12/31/1133,270$ Statement of Owner's Equity For the Month Ended December 31, 2011 FASTFORWARD

36. 2 - 36 P RESENTATION I SSUES 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

37. 2 - 37 G LOBAL V IEW 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:

38. 2 - 38 A CCOUNTING C ONTROLS AND A SSURANCE 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.

39. 2 - 39 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 it’s debt in the future. A 2 Total Liabilities Total Assets Debt Ratio =

40. 2 - 40 END OF CHAPTER 02