Analyzing and Recording Transactions Pr SAMLAL Zoubida Procedural

Analyzing and Recording Transactions Pr. SAMLAL Zoubida

Procedural Learning Objectives P 1: Record transactions in a journal and post entries to a ledger (T account). P 2: Prepare and explain the use of a trial balance. P 3: Prepare financial statements from business transactions. 2 -2

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

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

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

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

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

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

Liability Accounts C 3 Accounts Payable Notes Payable Liability Accounts Accrued Liabilities Dividends Payable Unearned Revenue 2 -10

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

The Account and its Analysis C 3 Assets + Common Stock = Liabilities – Dividends + + Revenues Equity – Expenses 2 -12

C 4 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. 2 -13

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. 2 -14

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 ASSETS = LIABILITIES + EQUITY || ASSETS = LIABILITIES + Common Stock – DIV + REV - EXP 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.

Double-Entry Accounting NORMAL Balance C 5 Assets ASSETS Debit + Credit - = Liabilities LIABILITIES Debit - Credit + + Equity EQUITIES Debit - Credit + Whether a debit or a credit is an increase or decrease depends on the NORMAL Balance of the account. 2 -17

Double-Entry Accounting NORMAL Balance C 5 Equity Common Stock _ Dividends + Revenues _ Expenses Stock Dividends Revenues Expenses Debit Credit - + + - 2 -18

C 5 Double-Entry Accounting NORMAL Balance An account balance is the difference between the increases and decreases in an account. Notice the T-Account 2 -19

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

P 1 Journalizing Transactions ŒTransaction Date Transaction explanation Titles of Affected Accounts Dollar amount of debits and credits 2 -21

P 1 Balance Column Account T-accounts are useful illustrations, but balance column accounts are used in practice. 2 -22

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

P 1 Posting Journal Entries 2 Enter the date. 2 -24

P 1 3 Posting Journal Entries Enter the amount and description. 2 -25

P 1 4 Posting Journal Entries Enter the journal reference. 2 -26

P 1 5 Posting Journal Entries Compute the balance. 2 -27

P 1 Posting Journal Entries 6 Enter the ledger reference. 2 -28

A 1 Analyzing Transactions Analysis: Double entry: Posting: 101 301 2 -29

A 1 Analyzing Transactions Analysis: Double entry: Posting: 126 101 2 -30

A 1 Analyzing Transactions Analysis: Double entry: Posting: 167 101 2 -31

A 1 Analyzing Transactions Analysis: Double entry: Posting: 126 201 2 -32

A 1 Analyzing Transactions Analysis: Double entry: Posting: 403 101

A 1 Analyzing Transactions Analysis: Double entry: Posting: 101

Analyzing 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

A 1 After processing its remaining transactions for December, Fast. Forward’s Trial Balance is prepared. Fast. Forward Trial Balance December 31, 2009 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue Common stock Dividends Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Debits $ 4, 350 9, 720 2, 400 26, 000 Credits $ 6, 200 3, 000 30, 000 200 5, 800 300 1, 400 1, 000 230 $ 45, 300 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 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. Recompute 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.

Using a Trial Balance to Prepare Financial Statements P 3 Point in Time Period of Time Point in Time Income Statement of Retained Earnings Beginning Balance Sheet Statement of Cash Flows Ending Balance Sheet

P 3 Income Statement

P 3 Statement of Retained Earnings

P 3 Balance Sheet