Chapter 2 Principles of Accounting Analyzing Business Transactions

Chapter 2 Principles of Accounting Analyzing Business Transactions Slide 1 -1

Measurement Issues Slide 1 -2

Measurement Issues Question: Are the following events recorded in the accounting records? Discuss Event Criterion Record/ Don’t Record Slide 1 -3 Purchased a computer. product design with potential customer. Pay rent. Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed?

Measurement Issues Recognition Note 1 - Summary of Significant Accounting Policies: “We recognize sales for commercial airplane deliveries as each unit is completed and accepted by the customer. ” Once Boeing reaches final agreements with customers, it receives deposits from them for the airplanes they have ordered. Question: Is this event recorded in the accounting records of Boeing? Slide 1 -4

Measurement Issues Ethics and Measurement Issues Slide 1 -5

Accounting Transactions Transaction Analysis Assets = Liabilities + Owners’ Equity Capital Revenue Slide 1 -6 Withdrawal Expense

The Account Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” An Account can be illustrated in a T-Account form. Slide 1 -7

Debit and Credit Procedures Double-entry accounting system Each transaction must affect two or more accounts to keep the basic accounting equation in balance. Recording done by debiting at least one account and crediting another. DEBITS must equal CREDITS. Slide 1 -8

Debit and Credit Procedures If Debits are greater than Credits, the account will have a debit balance. Transaction #1 $10, 000 Transaction #3 8, 000 Balance Slide 1 -9 $15, 000 $3, 000 Transaction #2

Debit and Credit Procedures If Credits are greater than Debits, the account will have a credit balance. Transaction #1 Balance Slide 110 $10, 000 $3, 000 Transaction #2 8, 000 Transaction #3 $1, 000

Dr. /Cr. Procedures for Assets and Liabilities Assets - Debits should exceed credits. Liabilities – Credits should exceed debits. The normal balance is on the increase side. Slide 111

Dr. /Cr. Procedures for Stockholders’ Equity Owner’s investments and revenues increase owners’ equity (credit). Withdrawals and expenses decrease owners’ equity (debit). Slide 112

Dr. /Cr. Procedures for Revenue and Expense The purpose of earning revenues is to benefit the owners. The effect of debits and credits on revenue accounts is the same as their effect on owners’ equity. Expenses have the opposite effect: expenses decrease owners’ equity. Slide 113

Debits and Credits Summary Normal Balance Debit Slide 114 Normal Balance Credit

Debits and Credits Summary Balance Sheet Asset = Liability + Equity Debit Credit Slide 115 Income Statement Revenue - Expense =

Debits and Credits Summary Review Question Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities. Slide 116

Debits and Credits Summary Review Question Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and equity. c. assets, liabilities, and withdrawals. d. assets, withdrawals, and expenses. Slide 117

Slide 118

Summary of the Accounting Cycle 1. Analyze business transactions Slide 119 9. 2. Journalize the transactions 8. 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. 5.

Accounting Cycle Slide 120

Accounting Cycle Slide 121

Accounting Cycle Slide 122

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