ANALYZING AND RECORDING TRANSACTIONS Chapter 2 2009 The

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ANALYZING AND RECORDING TRANSACTIONS Chapter 2 © 2009 The Mc. Graw-Hill Companies, Inc. ,

ANALYZING AND RECORDING TRANSACTIONS Chapter 2 © 2009 The Mc. Graw-Hill Companies, Inc. ,

ANALYZING AND RECORDING PROCESS C 1 Analyze each transaction and event from source documents

ANALYZING AND RECORDING PROCESS C 1 Analyze each transaction and event from source documents Prepare and analyze the trial balance Mc. Graw-Hill/Irwin Record relevant transactions and events in a journal Post journal information to ledger accounts Slide 2

C 3 THE ACCOUNT AND ITS ANALYSIS Assets Asset Accounts = Liability Accounts +

C 3 THE ACCOUNT AND ITS ANALYSIS Assets Asset Accounts = Liability Accounts + Equity Accounts Owner, Capital Owner, Withdrawals Mc. Graw-Hill/Irwin Slide 3

THE ACCOUNT AND ITS ANALYSIS C 3 Assets + Owner’s Capital Mc. Graw-Hill/Irwin =

THE ACCOUNT AND ITS ANALYSIS C 3 Assets + Owner’s Capital Mc. Graw-Hill/Irwin = Liabilities + – + Owner's Withdrawals Revenues Equity – Expenses Slide 4

C 5 DEBITS AND CREDITS A T-account represents a ledger account and is a

C 5 DEBITS AND CREDITS A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Mc. Graw-Hill/Irwin Slide 5

C 5 DOUBLE-ENTRY ACCOUNTING Assets ASSETS Debit + Mc. Graw-Hill/Irwin = Liabilities LIABILITIES Credit

C 5 DOUBLE-ENTRY ACCOUNTING Assets ASSETS Debit + Mc. Graw-Hill/Irwin = Liabilities LIABILITIES Credit - Debit - Credit + + Equity EQUITIES Debit - Credit + Slide 6

C 5 DOUBLE-ENTRY ACCOUNTING Equity Owner’s Capital _ Owner's Withdrawals + Revenues Owner’s Capital

C 5 DOUBLE-ENTRY ACCOUNTING Equity Owner’s Capital _ Owner's Withdrawals + Revenues Owner’s Capital Owner's Withdrawals Revenues Debit Credit - Mc. Graw-Hill/Irwin + + - - + _ Expenses Debit Credit + - Slide 7

C 5 DOUBLE-ENTRY ACCOUNTING An account balance is the difference between the increases and

C 5 DOUBLE-ENTRY ACCOUNTING An account balance is the difference between the increases and decreases in an account. Notice the T-Account. Mc. Graw-Hill/Irwin Slide 8

P 1 BALANCE COLUMN ACCOUNT T-accounts are useful illustrations, but balance column ledger accounts

P 1 BALANCE COLUMN ACCOUNT T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Mc. Graw-Hill/Irwin Slide 9

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 101 Mc. Graw-Hill/Irwin 301 Slide 10

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 101 Mc. Graw-Hill/Irwin 301 Slide 10

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 126 Mc. Graw-Hill/Irwin 101 Slide 11

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 126 Mc. Graw-Hill/Irwin 101 Slide 11

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 167 Mc. Graw-Hill/Irwin 101 Slide 12

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 167 Mc. Graw-Hill/Irwin 101 Slide 12

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 126 Mc. Graw-Hill/Irwin 201 Slide 13

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 126 Mc. Graw-Hill/Irwin 201 Slide 13

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 403 Mc. Graw-Hill/Irwin 101 Slide 14

A 1 ANALYZING TRANSACTIONS Analysis: Double entry: Posting: 403 Mc. Graw-Hill/Irwin 101 Slide 14

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

After processing its remaining transactions for December, Fast. Forward’s Trial Balance is prepared. P 2 Fast. Forward Trial Balance December 31, 2009 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue C. Taylor, Capital Owner's Withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Mc. Graw-Hill/Irwin Debits $ 4, 350 9, 720 2, 400 26, 000 Credits $ 6, 200 3, 000 30, 000 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. 200 5, 800 300 1, 400 1, 000 230 $ 45, 300 Slide 15

P 2 PREPARING A TRIAL BALANCE Preparing a trail balance involves three steps: 1.

P 2 PREPARING A TRIAL BALANCE 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. Mc. Graw-Hill/Irwin Slide 16

P 2 SEARCHING FOR AND CORRECTING ERRORS If the trial balance does not balance,

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. Re-compute each account balance in the ledger. Make sure account balances are correctly entered from the ledger. Verify that each journal entry is posted correctly. See if debit or credit accounts are mistakenly placed on the trial balance. Verify that each original journal entry has equal debits and credits. Mc. Graw-Hill/Irwin Slide 17

P 3 Mc. Graw-Hill/Irwin INCOME STATEMENT Slide 18

P 3 Mc. Graw-Hill/Irwin INCOME STATEMENT Slide 18

P 3 STATEMENT OF OWNER'S EQUITY FASTFORWARD Statement of Owner's Equity For the Month

P 3 STATEMENT OF OWNER'S EQUITY FASTFORWARD Statement of Owner's Equity For the Month Ended December 31, 2009 Connections C. Taylor, Capital 12/1/09 Net income for December Plus: Investments by Owner Less: Owner Withdrawals. C. Taylor, Capital, 12/31/09 Mc. Graw-Hill/Irwin $ $ 3, 470 30, 000 33, 470 200 33, 270 Slide 19

P 3 BALANCE SHEET Connections Mc. Graw-Hill/Irwin Slide 20

P 3 BALANCE SHEET Connections Mc. Graw-Hill/Irwin Slide 20

A 2 DEBT TO ASSETS RATIO Total Debt Total Assets Evaluates the level of

A 2 DEBT TO ASSETS RATIO Total Debt Total Assets 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. Mc. Graw-Hill/Irwin Slide 21