Financial Accounting Fundamentals John J Wild Fourth Edition

Financial Accounting Fundamentals John J. Wild Fourth Edition Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights

Chapter 2 Accounting for Transactions

Conceptual Learning Objectives C 1: Explain the steps in processing transactions and the role of source documents. C 2: Describe an account and its use in recording transactions. C 3: Describe a ledger and a chart of accounts. C 4: Define debits and credits and explain double-entry accounting. 2 -3

Analytical Learning Objectives A 1: Analyze the impact of transactions on accounts and financial statements. A 2: Compute the debt ratio and describe its use in analyzing financial condition. 2 -4

Procedural Learning Objectives P 1: Record transactions in a journal and post entries to a ledger. P 2: Prepare and explain the use of a trial balance. P 3: Prepare financial statements from business transactions. 2 -5

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 accounts 2 -6

C 2 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 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 -8

C 4 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 -9

C 4 Double-Entry Accounting Assets ASSETS Debit + Credit - = Liabilities LIABILITIES Debit - Credit + + Equity EQUITY Debit - Credit + 2 -10

Double-Entry Accounting C 4 Equity Common Stock _ Dividends + Revenues _ Expenses Stock Dividends Revenues Expenses Debit Credit - + + - 2 -11

P 1 Journalizing and 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 -12

P 2 Trial Balance Fast. Forward Trial Balance December 31, 2013 Debits Credits Cash $ 4, 350 Accounts receivable Supplies 9, 720 Prepaid insurance 2, 400 Equipment 26, 000 Accounts payable $ 6, 200 Unearned consulting revenue 3, 000 Common stock 30, 000 Dividends 200 Consulting revenue 5, 800 Rental revenue 300 Salaries expense 1, 400 Rent expense 1, 000 Utilities expense 230 Total $ 45, 300 After processing its remaining transactions for December, Fast. Forward’s trial balance is prepared. 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. 2 -13

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. Verify that the trial balance columns are correctly added. Recompute each account balance in the ledger. Verify that account balances are correctly entered from the ledger. Verify that each journal entry is properly posted. See whether a debit (or credit) balance is mistakenly listed as a credit (or debit). Verify that each original journal entry has equal debits and credits. 2 -14

P 3 Using a Trial Balance to Prepare Financial Statements Point in Time Period of Time Point in Time Income Statement of Retained Earnings Beginning Balance Sheet Statement of Cash Flows Ending Balance Sheet 2 -15

End of Chapter 2 2 -16