2-1

Analyzing and Recording Transactions

Chapter 2
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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C1

Analyzing and Posting Process

The accounting process identifies business transactions and events, analyzes and records their effects, and summarizes and presents information in reports and financial statements. These reports and statements are used for making investing, lending, and other business decisions.

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C1

Source Documents
Checks Bills from Suppliers Purchase Orders

Employee Earnings Records

Bank Statements Sales Tickets

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C2

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.

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C2

The Account and its Analysis

Owner, Capital Owner, Withdrawals

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C2

Asset Accounts
Cash

Land

Accounts Receivable

Buildings

Asset Accounts
Supplies

Notes Receivable

Equipment

Prepaid Accounts

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C2

Liability Accounts
Accounts Payable Notes Payable

Liability Accounts
Accrued Liabilities Unearned Revenue

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C2

Equity Accounts
Owners Capital Owners Withdrawals

Equity Accounts
Revenues Expenses

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The Account and its Analysis

Revenues and owners contributions increase equity. Expenses and owners withdrawals decrease equity.

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C3

Ledger and Chart of Accounts

The ledger is a collection of all accounts for an information system. A companys 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.

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C4

Debits and Credits

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions.

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C4

Double-Entry Accounting
Assets

Liabilities

Equity

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C4

Double-Entry Accounting
Here is the expanded accounting equation showing the equity section.

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C4

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

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P1

Journalizing and Posting Transactions

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P1

Journalizing Transactions
a. Transaction Date b. Titles of Affected Accounts

d. Transaction explanation

c. Dollar amount of debits and credits

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P1

Balance Account Column

T-accounts are useful illustrations, but balance column ledger accounts are used in practice.

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P1

Posting Journal Entries

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A1

Analyzing Transactions
Double-entry accounting is useful in analyzing and processing transactions. Analysis of each transaction follows these four steps.

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A1

Analyzing Transactions

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Analyzing Transactions

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Analyzing Transactions

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Analyzing Transactions

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Analyzing Transactions

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P2

After processing its remaining transactions for December, FastForwards 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.

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P2

Preparing the Trial Balance

Preparing a trial balance involves three steps: 1. List each account title and its amount (from ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely). 2. Compute the total of debit balances and the total of credit balances. 3. Verify (prove) total debit balances equal total credit balances.

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P2

Searching for and Correcting Errors

If the trial balance does not balance, the error(s) must be found and corrected. Re-compute each account balance in the ledger. Verify that each journal entry is posted correctly. Verify that each original journal entry has equal debits and credits.

Make sure the trial balance columns are correctly added. Make sure account balances are correctly entered from the ledger. See if debit or credit accounts are mistakenly placed on the trial balance.

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P3

Using a Trial Balance to Prepare Financial Statements

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P3

Income Statement

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P3

Statement of Owners Equity

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P3

Balance Sheet

Net income from income statement

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P3

Presentation Issues

1. Dollar signs are not used in journals and ledgers. 2. Dollar signs appear in financial statements and other reports such as trial balances. The usual practice is to put dollar signs beside only the first and last numbers in a column. 3. When amounts are entered in the journal, ledger, or trial balance, commas are optional to indicate thousands, millions, and so forth. 4. Commas are always used in financial statements. 5. Companies commonly round amounts in reports to the nearest dollar, or even to a higher level.

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Global View
Both U.S. GAAP and IFRS prepare the same four basic financial statements. A few differences are found within each statement, but over time these differences are likely to be eliminated. Here is a typical IFRS balance sheet presentation.

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Accounting Controls and Assurance

Accounting systems depend on control procedures that assure the proper principles were applied in processing accounting information. The passage of SOX legislation strengthened U.S. control procedures in recent years.
The percentage of employees in information technology that report observing specific types of misconduct in 2009.

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A2

Debt Ratio
Total Liabilities Debt Ratio = Total Assets

Evaluates the level of debt risk.

A higher ratio indicates that there is a greater probability that a company will not be able to pay its debt in the future.

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End of Chapter 2