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Finance

Training
Module September 2008

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Exh.
2.2
The Accounting Process

Source
Transaction documents Analysis
or event

Reporting
Trial balance Recording &
posting
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Source Documents
Checks Purchase
Orders

Bank
Statement

Sales
Invoices

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The Account
Detailed
Detailed record
record of
of
increases
increases and
and
decreases
decreases inin
specific
specific assets,
assets,
liabilities,
liabilities, equities,
equities,
revenues,
revenues, or
or
expenses.
expenses.
Separate
Separate accounts
accounts are
are
maintained
maintained forfor each
each
item
item of
of importance.
importance.

Training Workshop for Accounts Officers/Tellers


Exh.
2.4

Expanded Accounting Equation


Assets
Assets = Liabilities
Liabilities + Equity
Equity

+ + + –
Common
Common Retained
Retained Revenues
Revenues Expenses
Expenses
Stock
Stock Earnings
Earnings

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Asset Accounts
Prepaid
Prepaid Cash
Cash Notes
Notes
Insurance
Insurance Receivable
Receivable

Accounts
Accounts Prepaid
Prepaid
Receivable
Receivable Expenses
Expenses

Office
ASSETS
ASSETS
Office
Supplies
Supplies Land
Land

Store
Store
Supplies Buildings
Buildings
Supplies
Equipment
Equipment
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LiabilityAccounts

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

LIABILITIES
LIABILITIES

Accrued
Accrued Unearned
Unearned
Liabilities
Liabilities Revenues
Revenues

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Analyzing Transactions
Analyze the transaction
and its source.
Identify the impact of
the transaction on
account balances.
 Also identify the
financial statements that
are impacted by the
transaction.

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Transaction Analysis

Buck Johnson forms a


building consulting
business. It is set up
as a corporation
called Build-Up, Inc..
Analyze the following
transactions.

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Transaction Analysis
Buck Johnson invests $50,000 in the
company in exchange for common stock.

The accounts involved are:


(1) Cash (asset)
(2) Owner’s Equity (equity)

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Transaction Analysis
Build-Up, Inc. purchased supplies paying
$4,800 cash.

The accounts involved are:


(1) Cash (asset)
(2) Supplies (asset)

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Transaction Analysis
Build-Up, Inc. purchased equipment for
$30,000 cash.

The accounts involved are:


(1) Cash (asset)
(2) Equipment (asset)

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Transaction Analysis
Build-Up, Inc. purchased additional
supplies of $9,400 on account.

The accounts involved are:


(1) Supplies (asset)
(2) Accounts Payable (liability)

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Transaction Analysis
Build-Up, Inc. purchased additional
supplies of $9,400 on account.

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Transaction Analysis
The balances so far appear below. Note that the Balance
Sheet Equation is still in balance.

Now let’s look at transactions involving


revenues and expenses.
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Transaction Analysis
Rendered consulting services receiving
$9,800 cash.

The accounts involved are:


(1) Cash (asset)
(2) Revenues (equity)

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Transaction Analysis
Rendered consulting services receiving
$9,800 cash.

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Transaction Analysis
Paid $2,800 rent to the landlord of the
building where the business is located.

The accounts involved are:


(1) Cash (asset)
(2) Rent Expense (equity)

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Transaction Analysis
Paid $2,800 rent to the landlord of the
building where the business is located.

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Transaction Analysis
Paid Salaries of $2,300.

The accounts involved are:


(1) Cash (asset)
(2) Salary Expense (equity)

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Transaction Analysis
Paid Salaries of $2,300.

Training Workshop for Accounts Officers/Tellers


Exh.
2.8

Chart of Accounts & the T-Account


Used as a simple tool for
Typically,
illustrating the balance in a given
Typically, aa account.
company
company
keeps
keeps aa listing
listing
of
of all
all the
the Account Name
accounts
accounts is is (Left Side) (Right Side)
uses.
uses. This
This list
list
is Debit Credit
is called
called the
the
Chart
Chart ofof
Accounts.
Accounts.

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Exh.
2.9

Balance of an Account
An account balance is the difference between
the increases and decreases in an account.

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Exh.
2.10

Double-Entry Accounting

Assets
Assets = Liabilities
Liabilities + Equity
Equity
ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit


+ - - + - +

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Exh.

Double-Entry Accounting - Detail


2.11

of Effects on Equity

Retained
Retained _ Dividends _
Earnings
Earnings
Dividends
+ Revenues
Revenues Expenses
Expenses

Ret. Earnings Dividends Revenues Expenses

Debit Credit Debit Credit Debit Credit Debit Credit


- + + - - + + -
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Steps in Processing Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity

Step 1: Examine
source documents. Step 2: Analyze
transactions.

Remember these two steps?


Now let’s look at some additional
steps.

Training Workshop for Accounts Officers/Tellers


Steps in Processing Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity

Step 1: Examine
source documents. Step 2: Analyze
transactions.

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 5: Prepare a Step 3: Record


Step 4: Record the journal transactions in a
trial balance. information in a ledger. journal.
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General Journal for FastForward

Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts


Transaction
Transaction 
Dollar
Dollar amount
amount of
of
explanation
explanation debits
debits and
and credits
credits
Training Workshop for Accounts Officers/Tellers
Balance Column Ledger
T-accounts are useful illustrations, but
balance column ledger accounts are used
in practice.

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Balance Column Ledger
Note the the t-account tool is derived from the
debit and credit columns of the ledger.

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Exh.
2.16

Balance Column Ledger


The
The last
last line
line in
in the
the balance
balance column
column shows
shows the
the
current
current balance
balance in
in the
the account.
account.

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Posting Journal Entries - Example

1
Identify the account.

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Posting Journal Entries - Example

2 Enter the date.

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Posting Journal Entries - Example

Enter the amount. 3

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Posting Journal Entries - Example

4
Enter the journal reference.

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Posting Journal Entries - Example

Compute the balance.

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Posting Journal Entries - Example

6
Enter the ledger reference.

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AATrial
Trial
Balance
Balanceis isaa
listing
listingofofall
all
accounts
accounts and and
their
their
balances
balancesat at aa
point
pointin intime.
time.

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Exh.
2.19

Income Statement
Inflows
Inflowsof
ofassets
assetsin
in
exchange
exchangefor
for
products
productsand
and
services
servicesprovided
providedtoto
customers.
customers.

Outflows
Outflowsor orthe
the
using
usingup upof
ofassets
assets
that
thatresult
resultfrom
from
providing
providing
products
productsandand
services
servicestoto
customers.
customers.

Training Workshop for Accounts Officers/Tellers


Exh.
2.19

Statement of Retained Earnings


Beginning
Beginningof
of period
periodRetained
RetainedEarnings
Earningsis isadjusted
adjustedfor
for
dividends
dividendspaid
paidand
andnet
netincome
income(or
(orloss)
loss) as
asreported
reportedon
onthe
the
Income
Income Statement.
Statement.

Training Workshop for Accounts Officers/Tellers


Exh.
2.19

Balance Sheet
Assets
Assetsare
areeconomic
economicresources
resourcesowned
ownedby byaa Liabilities
Liabilitiesare
are
business.
business. They
Theyare
areexpected
expectedto
toprovide
providefuture
future obligations
obligationsof ofthe
the
benefits
benefitsto
tothe
thebusiness.
business. business.
business. They
They
are
areclaims
claimsagainst
against
the
theassets
assetsof ofthe
the
business.
business.

Equity
Equityis isthe
theowner’s
owner’s
claim
claimononthe
theassets
assets
of
ofthe
thebusiness.
business.ItItisis
the
theresidual
residualinterest
interest
in
inthe
theassets
assetsafter
after
deducting
deductingliabilities.
liabilities.

Training Workshop for Accounts Officers/Tellers


Exh.
2.19

Describes
Describes
the
the
sources
sources
and
and uses
uses
of
of cash
cash
for
for aa
reporting
reporting
period.
period.

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Formatting Conventions

Generally,
Generally, dollar
dollar signs
signs ($)
($) are
are
ACCOUNT NAME: ACCOUNT No. not
not used
used in
in the
the journals
journals or
or
ledgers.
Date Description PR Debit Credit Balance

ledgers.

Round
Round numbers
numbers in in financial
financial
Rounding
Rounding statements
statements to
to the
the nearest
nearest dollar.
dollar.

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Using the Information - Return on
Equity
 Describes the relationship between net income
for the period and average equity.

 Helps an owner judge the compnay’s


profitability compared to other business or
personal opportunities.
Training Workshop for Accounts Officers/Tellers
End of Chapter 2
Now, was that debits
to the left or credits to
the left?
I sure wish I had paid
more attention in
class!

Training Workshop for Accounts Officers/Tellers

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