Analyzing and Recording Transactions

1. Analyzing and Recording Transactions Chapter 2

2. Learning objective • Explain the steps in processing transactions. • Describe source documents and their purpose. • Describe an account and its use in recording transactions. • Define debits and credits and explain their role in double-entry accounting. • Analyze business transactions using the accounting equation. • Analyze the impact of transactions on accounts. • Identify and prepare basic financial statements and explain how they interpret

3. Analyzing and Recording Process Transactions: Exchanges of economic consideration between two parties. External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Eventsrefer to those happenings that affect an entity’s accounting equation and can be reliably measured.

4. Learning objective • Describe source documents and their purpose.

5. Source documents • Source documents identify and describe transactions and events entering the accounting process. • They are the sources of accounting information. • Source documents obtained from outside the organization, provide objective and reliable evidence about transactions and events and their amount.

6. Source Documents Bills from Suppliers Checks Purchase Orders Employee EarningsRecord Bank Statement Sales Tickets

7. Learning objective • Describe an account and its use in recording transactions.

8. 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.

9. Asset Accounts Cash Accounts Receivable Land AssetAccounts Notes Receivable Buildings Prepaid Accounts Equipment Supplies

10. Asset account • Cash: reflects a company’s cash balance. • Account receivable: held by a seller and refer to promises of payment from customers to sellers. → credit sales or sales on account • Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note. • Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)

11. Asset account • Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts. • Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).

12. Liability Accounts Accounts Payable Notes Payable LiabilityAccounts Unearned Revenues Accrued Liabilities

13. Liability accounts • Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise. • Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount. • Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).

14. Liability accounts • Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).

15. Equity Accounts Owner’s Capital Owner’s Withdrawals EquityAccounts Revenues Expenses

16. – – + + Owner’s Capital Owner’s Withdrawals Revenues Expenses Equity Accounts = + Assets Liabilities Equity

17. Equity accounts • Revenues: gross increase in equity from a company’s earnings activities. • Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity. • Owner investments: the amounts an owner puts into the company. • Owner withdrawals: the amounts take away from the company for personal use.

18. Learning objective • Define debits and credits and explain their role in double-entry accounting.

19. A T-account represents an account and is a tool used to understand the effects of one or more transactions. Debits and Credits (借&貸)

20. = + Assets Liabilities Equity EQUITIES ASSETS LIABILITIES Debit Credit Debit Credit Debit Credit +- - + - + Double-Entry Accounting Normal Balance Normal Balance Nomal Balance

21. _ _ Owner’s Capital Owner’s Withdrawals + Revenues Expenses Capital Withdrawals Revenues Expenses Debit Credit Debit Credit Debit Credit Debit Credit - + +- - + +- Exh. 3.8 Double-Entry Accounting Equity Normal Balance Normal Balance Normal Balance Normal Balance

22. Double-Entry Accounting • When there is a debited account, there must be a credited account. • The total amount debited must be equal to the total amount credited for each transaction. • The left side is the normal balance side for assets, and the right side is the normal balance side for liabilities and equity. • 有借必有貸，借貸必相等。

23. Double-Entry Accounting An account balance is the difference between the increases and decreases in an account.

24. = + Assets Liabilities Equity Step 1: Analyze transactions and source documents. Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry Analyzing and Recording Process

25. Titles of Affected Accounts • Transaction Date • Transaction explanation • Dollar amount of debits and credits Journalizing Transactions

26. General journal (普通日記賬) • General journal is used to record any transaction and includes the following information about each transaction: (1) date of transaction; (2) titles of affected accounts; (3) dollar amount of each debit and credit, and (4) explanation of the transaction.

27. T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Balance Column Account

28. Posting Journal Entries 1 Identify the account.

29. Posting Journal Entries Enter the date. 2

30. Posting Journal Entries Enter the amount and description. 3

31. Posting Journal Entries 4 Enter the journal reference.

32. Posting Journal Entries Compute the balance. 5

33. Posting Journal Entries 6 Enter the ledger reference.

34. Analysis: Double entry: 101 301 Posting: Analyzing Transactions – An Illustration

35. Learning objective • Analyze business transactions using the accounting equation. • Analyze the impact of transactions on accounts.

36. The accounting equation must remain in balance after each transaction. = + Assets Liabilities Equity Transaction Analysis Equation

37. The accounts involved are: (1) Cash (asset) (2) Taylor, Capital (equity) Transaction Analysis (1) Chuck Taylor, the owner, contributed $30,000 cash to start the business, FastForward.

38. Transaction Analysis (1) Chuck Taylor, the owner, contributed $30,000 cash to start the business.

39. 101 301 Transaction Analysis (1) Dr. Cash 30,000 Cr. C. Taylor, Capital 30,000

40. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis (2) FastForward purchased supplies paying $2,500 cash.

41. Transaction Analysis (2) Purchased supplies paying $2,500 cash.

42. 101 126 Transaction Analysis (2) Dr. Supplies 2,500 Cr. Cash 2,500

43. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis (3) FastForwardpurchased equipment for testing athletic shoes for $26,000 cash.

44. Transaction Analysis (3) Purchased equipment for $26,000 cash.

45. 101 167 Transaction Analysis (3) Dr. Equipment 26,000 Cr. Cash 26,000

46. Transaction Analysis (4) FastForwardpurchased Supplies of $7,100 on credit from CalTech. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)

47. Transaction Analysis (4) Purchased Supplies of $7100 on credit.

48. 201 126 Transaction Analysis (4) Dr. Supplies 7,100 Cr. Accounts Payable 7,100

49. Transaction Analysis (5) FastForwardearned revenues of $4,200 from consulting with clients about test results on athletic shoes. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

50. Transaction Analysis (5) Earned revenues of $4,200.