Preparing and Posting Journal Entries Start with Transaction

Preparing and Posting Journal Entries

Start with Transaction Analysis � What we did on Wednesday: 1. Understand the Transaction 2. Identify the Accounts in the transaction (at least two accounts for each transaction) 3. For each account, identify the TYPE of account (ASSET, LIABILITY, STOCKHOLDERS’s EQUITY, REVENUE, EXPENSE) 4. For each account, determine if it is increasing or decreasing. 5. Is the Accounting Equation still in balance?

Next Step � Apply ◦ ◦ the DEBIT/CREDIT Rules Use all the information from steps 1 -5. Need to know these Rules! Debit means LEFT (nothing more) Credit means RIGHT (nothing more) – R’s

Direction of Transaction Effects The left side of the The right side of the T-account is always the credit side. debit side. Account Name Left Debit Right Credit

STEP 6: Apply the DEBIT/CREDIT RULES A = L + SE ASSETS LIABILITIES EQUITIES Debit Credit for Increase Debit Credit for Decrease Increase Remember that Stockholders’ Equity includes Contributed Capital and Retained Earnings.

How Do Companies Keep Track of Account Balances? T-accounts Journal entries

Analytical Tool: The Journal Entry A journal entry might look like this: Reference: Letter, number, or date. Account Titles: • Debited accounts on top. • Credited accounts on bottom AND indented to the right. Amounts: • Debited amounts on left. • Credited amounts on right.

Papa John’s issues $2, 000 of additional common stock to new investors for cash. (a)

The company borrows $6, 000 from the local bank, signing a three-year note.

Work the Handout in Groups.

Key Ratio Analysis Financial Leverage Ratio Average Total Assets = Average Stockholders’ Equity (Beginning Balance + Ending Balance) ÷ 2 The 2006 financial leverage ratio for Papa John’s was: ($351, 000 + $380, 000) ÷ 2 = 2. 37 ($161, 000 + $148, 000) ÷ 2 The ratio tells us how well management is using debt to increase assets the company employs to earn income.

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