Kế toán tài chính 2 - Chapter 2: Measuring business transactions

Measuring Business TransactionsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 2Learning ObjectivesExplain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification.Describe the chart of accounts and recognize commonly used accounts.Define double-entry system and state the rules for double entry.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Apply the steps for transaction analysis and processing to simple transactions.Prepare a trial balance and describe its value and limitations.Record transactions in the general journal and post transactions from the general journal to the ledger.3Copyright © Houghton Mifflin Company. All rights reserved.Measurement IssuesObjective 1Explain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification4Copyright © Houghton Mifflin Company. All rights reserved.Measuring Business TransactionsOnce accountants have determined a transaction has occurred (discussed in Chapter 1), they must decideWhen the transaction occurredThe recognition issueWhat value to place on the transactionThe valuation issueHow to categorize the components of the transactionThe classification issue5Copyright © Houghton Mifflin Company. All rights reserved.Measurement IssuesRecognition issueValuation issueClassification issueThese issues underlie almost every major decision in financial accountingControversies exist; solutions are not cut and dried6Copyright © Houghton Mifflin Company. All rights reserved.The Recognition IssueRecognition means the recording of a transaction Refers to the difficulty of deciding when a business transaction occurredPoint of recognition is important because it affects the financial statements7Copyright © Houghton Mifflin Company. All rights reserved.Point of Recognition for Sales and PurchasesSales and purchases of productsUsually recognized when title of property transfersOr, may set up a recognition pointPredetermined time at which a transaction should be recordedSales and purchases of servicesUsually recognized when services have been performedIf services are performed over a long period of time, may set up billing at specific points of timeTransaction recorded at each billing8Copyright © Houghton Mifflin Company. All rights reserved.Business Event versus Business TransactionBusiness EventAny occurrence related to the course of running a businessBusiness TransactionEconomic event that affects the financial position of a business entity9Copyright © Houghton Mifflin Company. All rights reserved.Business Events That Are Not TransactionsAre TransactionsReceiving products previously orderedOrdering products from suppliersPaying employees for work performedHiring new employeesCustomer buys a serviceCustomer inquires about a service10Copyright © Houghton Mifflin Company. All rights reserved.The Valuation IssueFocuses on assigning a monetary value to a transactionMost controversial issue in accountingAccording to GAAP, use original costAlso called historical cost Practice of recording transactions at cost follows the cost principle11Copyright © Houghton Mifflin Company. All rights reserved.Cost PrincipleThe principle that a purchased asset should be recorded at its actual costCostExchange price associated with a business transaction at the point of recognitionExchange priceAmount a buyer is willing to pay and a seller is willing to receiveIs objective (not influenced by emotion or personal feelings)Cost principle is used because cost is verifiable12Copyright © Houghton Mifflin Company. All rights reserved.Applying the Cost PrincipleCompany BCompany ACompany A purchases building for $80,000Company A offers same building for sale for $120,000Company ARecords sale of building at sales price (exchange price) of $110,000 and profit or loss is recognizedCompany BRecords purchase of building at cost (exchange price) of $110,000Company ARecords purchase of building at original cost (exchange price) of $80,000Company A sells building to Company B for $110,000Only amounts involved in business transactions (exchanges of value) are recorded in the company booksAnalyzing InformationRecall - the cost principle requires that a purchased asset is recorded at its actual cost, or the exchange priceExchange price The amount a buyer is willing to pay and a seller is willing to receive for an exchange of valueIs objective (not influenced by emotion or personal feelings)14Copyright © Houghton Mifflin Company. All rights reserved.The Classification IssueClassification is the process of assigning transactions to the appropriate accounts Proper classification depends onCorrectly analyzing the effect of each transaction on the businessMaintaining a system of accounts that reflects that effectThe classification issue refers to the uncertainties associated with assigning transactions to the appropriate accounts15Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat three issues underlie most accounting decisions?The recognition issueWhen a transaction should be recordedThe valuation issueWhat value should be placed on the transactionThe classification issueHow the components should be categorized16Copyright © Houghton Mifflin Company. All rights reserved.Accounts and the Chart of AccountsObjective 2Describe the chart of accounts and recognize commonly used accounts17Copyright © Houghton Mifflin Company. All rights reserved.AccountsUsed to record transaction dataRecord data in a usable formData can be quickly retrievedSeparate account used for each AssetLiabilityComponent of owner’s equity (includes revenues and expenses)18Copyright © Houghton Mifflin Company. All rights reserved.General LedgerGroup of company accountsSometimes simply referred to as the ledgerTwo types of systemsManual systemEach account on separate page or cardPages or cards placed together in book or fileComputerized systemAccounts maintained on magnetic tapes or disks19Copyright © Houghton Mifflin Company. All rights reserved.Chart of AccountsList of account numbers with corresponding account namesHelps identify accounts in the ledgerFirst digit in account number refers to major financial statement classificationAssetsLiabilities Owner's equityRevenuesExpenses 20Copyright © Houghton Mifflin Company. All rights reserved.Owner's Equity AccountsRevenue and expense accounts separated from other owner's equity accountsImportant for legal and financial reporting purposesOwner's equity accounts represent how much interest in the assets of a company the owner hasLaw requires that Capital and Withdrawal accounts be separate from revenues and expenses for tax and financial reportingManagement needs a detailed breakdown of revenues and expenses for budgeting and operating purposes21Copyright © Houghton Mifflin Company. All rights reserved.Account TitlesShould describe what is recorded in the account An account name can be analyzed to understand its purposeIdentify account’s classification as asset, liability, owner's equity, revenue, or expenseIdentify the type of transaction that gave rise to the accountDifferent companies may use different account names for the same account22Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is an account?AccountMeans by which management accumulates the effects of transactionsBasic storage unit for accounting dataQ. How is an account related to the ledger?The ledger is a file or book in which the company’s accounts are kept23Copyright © Houghton Mifflin Company. All rights reserved.The Double-Entry System:The Basic Method of AccountingObjective 3Define double-entry system and state the rules for double entry24Copyright © Houghton Mifflin Company. All rights reserved.Example:Pay cash to purchase suppliesCash paid = effort, sacrifice, sourceSupplies received = reward, benefit, useDouble-Entry SystemBased on principle of dualityEvery economic event has two aspects that balance, or offset, each otherThe two aspects representEffort and rewardSacrifice and benefitSource and use25Copyright © Houghton Mifflin Company. All rights reserved.Principle of DualityEach transaction recorded with at least one debit and one credit Total amount of debits = total amount of creditsWhole system always in balanceAll accounting systems based on principle of duality26Copyright © Houghton Mifflin Company. All rights reserved.The T AccountThree partsTitle of Account A left side, called the debit sideDebit(left) side A right side, called the credit sideCredit(right) side A title that describes the account27Copyright © Houghton Mifflin Company. All rights reserved.The T Account IllustratedTitle of AccountDebit(left) sideCredit(right) sideIn Chapter 1, Shannon Realty had several transactions that affected the Cash accountTransactions can be summarized in T accountsRecord cash receipts (increases) on debit (left) sideRecord cash payments (decreases) on credit (right) side Cash Cash Receipts(+)Cash Payments(–)28Copyright © Houghton Mifflin Company. All rights reserved.CashDebit(left) sideCredit(right) sideShannon RealtyDeposited $50,000 in a bank account in the name of Shannon RealtyPurchased a lot for $10,000 and a small building on a lot for $25,000Paid $200 of the $500 owed for suppliesEarned and received a commission of $1,500 in cash 50,000(2) 35,000(5) 1,500Transaction 3 does not affect the Cash accountPurchased office supplies for $500 on credit(4) 200CashDebit(left) sideCredit(right) side 50,000(2) 35,000(5) 1,500(4) 200Shannon Realty (cont’d)Received $1,000 from client for commission earned earlier in the monthPaid $1,000 to rent equipment for officePaid $400 in wages to part-time helper Owner withdrew $600 in cash for personal use(7) 1,000Transaction 6 does not affect the Cash accountA $2,000 commission is earned, to be received laterTransaction 10 does not affect the Cash account Liability of $300 for utilities expense is recorded(8) 1,000(9) 400(11) 60030Copyright © Houghton Mifflin Company. All rights reserved.Footings and the Account BalanceFootings Working totals of columnsCalculated at end of each monthAccount balanceDifference between total debit footing and total credit footingAlso simply called the balanceDebit balance recorded on left side of T accountCredit balance recorded on right side of T account31Copyright © Houghton Mifflin Company. All rights reserved.Footings and the Account Balance (cont’d)Cash(1) 50,000(5) 1,500(7) 1,000(2) 35,000(4) 200(8) 1,000(9) 400(11) 60052,50037,200Bal. 15,300Total Debit FootingTotal Credit FootingDebit Account Balance($52,500 - $37,200)Total the debit side of the T accountTotal the credit side of the T account32Copyright © Houghton Mifflin Company. All rights reserved.Analyzing and Processing TransactionsRules of double-entry bookkeeping Every transaction affects at least two accountsAt least one account is debited and at least one account is creditedTotal debits must equal total credits For each transactionFor whole system (all accounts as a group)33Copyright © Houghton Mifflin Company. All rights reserved.Keeping the Accounting Equation in Balance=For the accounting equation to stay in balance, each transaction mustAssets = Liabilities + Owner's EquityIncrease both sides of equal sign by same amountDecrease both sides of equal sign by same amountIncrease and decrease one side of equal sign by same amountCash+500Capital+500Cash–250Accounts Payable–250Wages Payable+100Wages Expense–10034Copyright © Houghton Mifflin Company. All rights reserved.Accounts and the Accounting Equation Owner'sAssets = Liabilities + EquityDebitforIncreases(+)CreditforIncreases(+)CreditforIncreases(+)Assets increase with debitsLiabilities and owner's equity increase with creditsAssets decrease with creditsCreditforDecreases(–)Liabilities and owner's equity decrease with debitsDebitforDecreases(–)DebitforDecreases(–)35Copyright © Houghton Mifflin Company. All rights reserved.Accounts and the Accounting Equation (cont’d) 5005001,000If a debit increases assetsa credit must increaseliabilities or owner's equityfor the accounting equation to remain in balance 1,0001,5005001,000 1,500 = 500 + 1,000 Owner'sAssets = Liabilities + Equity36Copyright © Houghton Mifflin Company. All rights reserved. Owner'sAssets = Liabilities + Equity 5005001,000 1,000Accounts and the Accounting Equation (cont’d)If a credit increases liabilitiesa debit must decreaseliabilities or owner's equityfor the accounting equation to remain in balance750750250250 1,500 1,250 250 1,500 = 1,250 + 250 37Copyright © Houghton Mifflin Company. All rights reserved.Components of Owner's EquityCapitalWithdrawalsRevenuesExpenses38Copyright © Houghton Mifflin Company. All rights reserved.Owner's EquityCapital – Withdrawals + Revenues – ExpensesEffects of Withdrawals, Revenues, and Expenses on Owner's EquityWithdrawals and expenses decrease owner's equityTransactions that increase withdrawals or expenses decrease owner's equity– Withdrawals– Expenses + RevenuesRevenues increase owner's equityTransactions that increase revenues increase owner's equity39Copyright © Houghton Mifflin Company. All rights reserved.Capital Withdrawals Revenues Expenses – + – Assets = Liabilities + Owner's EquityNow that the components of owner's equity have been identifiedThe accounting equation can be expanded to include these componentsAnd their effects on owner's equity are understoodExpanding the Accounting EquationCapital – Withdrawals + Revenues – Expenses 40Copyright © Houghton Mifflin Company. All rights reserved.Rearranging the Accounting EquationAssets = Liabilities + Capital – Withdrawals + Revenues – Expenses Because Withdrawals and Expenses are deductions from owner's equity, move them to the left side of the equationAssets + Withdrawals + Expenses = Liabilities + Capital + Revenues Accounts increased by debits Accounts increased by credits =41Copyright © Houghton Mifflin Company. All rights reserved.Analyzing and Processing TransactionsAnalyze the transactionTransactions are supported by source documentsDetermine accounts to use and effects of transaction on accountsApply the rules of double entryDebits increase assets and decrease liabilities and owner's equityCredits decrease assets and increase liabilities and owner's equity42Copyright © Houghton Mifflin Company. All rights reserved.Analyzing and Processing Transactions (cont’d)Record the entryRecord in chronological order in a journalPost the entryTransfer dates and amounts from journal to proper accounts in ledgerPrepare the trial balanceConfirms that accounts are still in balance43Copyright © Houghton Mifflin Company. All rights reserved.June 1Recording a Transaction inJournal FormCr. Notes Payable100,000Dr.Cash100,000DateDebit account and debit amount recorded on one lineCredit account and credit amount recorded on next line, indented44Copyright © Houghton Mifflin Company. All rights reserved.CashNotes PayableLedgerPosting Journal Entry to Accounts100,000 Notes Payable100,000CashJune 1Cr.Dr.JournalJune 1 100,000June 1 100,00045Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy do debits, which decrease owner's equity, also increase withdrawals and expenses, which are components of owner's equity? Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses Withdrawals and expenses are deductions from owner’s equityTransactions that increase withdrawals and expenses decrease owner's equity Owner's equity is decreased by debitsDebit ↓ Cap↓ OEDebit ↑ Div↓ OEDebit ↑ Exp↓ OEDebit ↓ Rev↓ OE + –– +– +– + + – + –46Copyright © Houghton Mifflin Company. All rights reserved.Transaction Analysis IllustratedObjective 4Apply the steps for transaction analysis and processing to simple transactions47Copyright © Houghton Mifflin Company. All rights reserved.Investment in CompanyBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 1: Joan Miller invests $20,000 to start her own advertising agencyIncrease in assetsIncrease in owner’s equityDebits increase assets (Cash)Credits increase owner’s equity (Joan Miller, Capital)48Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitCash 20,000CreditJoan Miller, Capital 20,000 Owner's Equity + Liabilities = Assets 49Copyright © Houghton Mifflin Company. All rights reserved.Purchase AssetsBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 2: Rents office and pays two months’ rent in advance, $1,600Increase in assetsDecrease in assetsDebits increase assets (Prepaid Rent)Credits decrease assets (Cash)50Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitPrepaid Rent 1,600CreditCash 1,600 Owner's Equity + Liabilities = Assets 51Copyright © Houghton Mifflin Company. All rights reserved.PurchasesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 3: Purchases art equipment for cash, $4,200Increase in assetsDecrease in assetsDebits increase assets (Art Equipment)Credits decrease assets (Cash)52Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitArt Equipment 4,200CreditCash 4,200 Owner's Equity + Liabilities = Assets 53Copyright © Houghton Mifflin Company. All rights reserved.PurchasesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 4: Orders art supplies, $1,800, and office supplies, $800No entry because transaction has not occurred54Copyright © Houghton Mifflin Company. All rights reserved.PurchasesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 5: Purchases office equipment, $3,000. Pays $1,500 in cash and the remaining amount on creditIncrease in assetsDecrease in assetsIncrease in liabilitiesDebits increase assets (Office Equipment)Credits decrease assets (Cash)Credits increase liabilities (Accounts Payable)55Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitOffice Equipment 3,000CreditCash 1,500Accts. Payable 1,500 Owner's Equity + Liabilities = Assets 56Copyright © Houghton Mifflin Company. All rights reserved.PurchasesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 6: Purchases art supplies, $1,800, and office supplies, $800, on creditIncrease in assetsIncrease in liabilitiesDebits increase assets (Art Supplies and Office Supplies)Credits increase liabilities (Accounts Payable)57Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitArt Supplies 1,800Office Supplies 800CreditAccts. Payable 2,600 Owner's Equity + Liabilities = Assets 58Copyright © Houghton Mifflin Company. All rights reserved.Purchase AssetsBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 8: Pays for one-year life insurance policy, effective July 1, $960Increase in assetsDecrease in assetsDebits increase assets (Prepaid Insurance)Credits decrease assets (Cash)59Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitPrepaid Insurance 960CreditCash 960 Owner's Equity + Liabilities = Assets 60Copyright © Houghton Mifflin Company. All rights reserved.Partial Payment of LiabilityBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 9: Pays Taylor Supply Company $1,000 of amount owedDecrease in liabilitiesDecrease in assetsDebits decrease liabilities (Accts. Payable)Credits decrease assets (Cash)61Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitAccts. Payable 1,000CreditCash 1,000 Owner's Equity + Liabilities = Assets 62Copyright © Houghton Mifflin Company. All rights reserved.RevenuesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 10: Performs service by placing advertisements and collects fee of $1,400Increase in assetsIncrease in owner’s equity Debits increase assets (Cash)Credits increase owner’s equity (Advertising Fees Earned)63Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitCash 1,400CreditAd. Fees Earned 1,400 Owner's Equity + Liabilities = Assets 64Copyright © Houghton Mifflin Company. All rights reserved.ExpensesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 12: Pays secretary two weeks’ wages, $1,200Decrease in owner’s equity (increase in expenses)Decrease in assetsDebits decrease owner’s equity (increase Wages Expense)Credits decrease assets (Cash)65Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitWages Expense 1,200CreditCash 1,200 Owner's Equity + Liabilities = Assets 66Copyright © Houghton Mifflin Company. All rights reserved.RevenueBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 15: Accepts advance fee for artwork to be done for another agency, $1,000(Payment received for future services)Increase in assetsIncrease in liabilitiesDebits increase assets (Cash)Credits increase liabilities (Unearned Art Fees)67Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitCash 1,000CreditUnearned Art Fees 1,000 Owner's Equity + Liabilities = Assets 68Copyright © Houghton Mifflin Company. All rights reserved.RevenueBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 19: Performs advertising service for which payment will be collected at later date, $4,800(Revenue earned, to be received later)Increase in assetsIncrease in owner's equity (revenues)Debits increase assets (Accounts Receivable)Credits increase owner's equity (Advertising Fees Earned)69Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitAccts. Receivable 4,800CreditAd. Fees Earned 4,800 Owner's Equity + Liabilities = Assets 70Copyright © Houghton Mifflin Company. All rights reserved.ExpensesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 26: Pays secretary two more weeks’ wages, $1,200Decrease in owner's equity (increase in expenses)Decrease in assetsDebits decrease owner's equity (increase Wages Expense)Credits decrease assets (Cash)71Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitWages Expense 1,200CreditCash 1,200 Owner's Equity + Liabilities = Assets 72Copyright © Houghton Mifflin Company. All rights reserved.ExpensesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 29: Receives and pays utility bill, $200Decrease in owner's equity (increase in expenses)Decrease in assetsDebits decrease owner's equity (increase Utilities Expense)Credits decrease assets (Cash)73Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitUtilities Expense 200CreditCash 200 Owner's Equity + Liabilities = Assets 74Copyright © Houghton Mifflin Company. All rights reserved.ExpensesBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 30: Receives (but does not pay) telephone bill, $140(Expense incurred, to be paid later)Decrease in owner's equity (increase in expenses)Increase in liabilitiesDebits decrease owner's equity (increase Telephone Expense)Credits increase liabilities (Accts. Payable)75Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone ExpenseDebitTelephone Exp. 140CreditAccts. Payable 140 Owner's Equity + Liabilities = Assets 76Copyright © Houghton Mifflin Company. All rights reserved.WithdrawalsBusiness TransactionStep 1AnalyzeStep 2Apply rulesStep 3RecordJuly 31: Joan Miller withdraws $1,400 from the business for personal living expensesDecrease in owner's equityDecrease in assets Debits decrease owner's equity (increase Joan Miller, Withdrawals)Credits decrease assets (Cash)77Copyright © Houghton Mifflin Company. All rights reserved.Step 4PostCashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone Expense Owner's Equity + Liabilities = Assets DebitJoan Miller, Withdrawals 1,400CreditCash 1,40078Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy does Joan Miller record the expense for the telephone bill even though she hasn’t paid it yet?An expense has been incurred for telephone services usedAn obligation to pay existsJoan Miller records the expense and the liability for the telephone service79Copyright © Houghton Mifflin Company. All rights reserved.The Trial BalanceObjective 5Prepare a trial balance and describe its value and limitations80Copyright © Houghton Mifflin Company. All rights reserved.The Trial BalanceFor every amount debited, an equal amount must be creditedResult: The total of debits and credits for all the T accounts must be equalTrial balance is prepared to test thisUsually prepared at the end of a month or an accounting periodCan be prepared anytime81Copyright © Houghton Mifflin Company. All rights reserved.Normal Account BalancesNormal balance means usual balanceRefers to whether increases in the accounts are made with debits or creditsAccounts that are increased with debits have a normal debit balanceAccounts that are increased with credits have a normal credit balanceAn account may have an “abnormal” balanceCopy into the trial balance as it stands82Copyright © Houghton Mifflin Company. All rights reserved.Debit Credit (–) (+)Debit Credit (–) (+)Debit Credit (+) (–)Assets = Liabilities + Owner's EquityRecall the basic accounting equation:Assets are increased by debitsLiabilities and owner's equity are increased by creditsNormal Account Balances and the Accounting Equation83Copyright © Houghton Mifflin Company. All rights reserved.Normal Account Balances and the Accounting Equation (cont’d)Assets = Liabilities + Capital – Withdrawals + Revenues – Expenses + –– +– + + – + –– +However, when the basic accounting equation is expanded to include all the components of owner's equity,We see that Withdrawals and expense accounts reduce owner's equity84Copyright © Houghton Mifflin Company. All rights reserved.Normal Account Balances and the Accounting Equation (cont’d)Accounts increased by creditsAccounts increased by debitsAssets + Withdrawals + Expenses = Liabilities + Capital + RevenuesWithdrawals and expenses can be moved to the left side of the equation so that– +– +– + + – + – + –Accounts with anormal debit balanceAccounts with anormal credit balance85Copyright © Houghton Mifflin Company. All rights reserved.Steps in Preparing a Trial BalanceList each T account that has a balanceRecord debit balances in the left columnRecord credit balances in the right columnList accounts in the order that they appear in the ledgerAdd each columnCompare the column totalsTotal debits should equal total credits86Copyright © Houghton Mifflin Company. All rights reserved.Joan Miller Advertising AgencyDetermine the T account balances for Joan Miller Advertising AgencyUse footingsTransfer account balances to the trial balanceTotal each columnCompare column totals87Copyright © Houghton Mifflin Company. All rights reserved.CashAccts. PayableWages ExpenseJoan Miller, WithdrawalsUtilities ExpenseJoan Miller, CapitalUnearned Art FeesOffice EquipmentPrepaid RentOffice SuppliesArt SuppliesArt EquipmentPrepaid InsuranceAccts. ReceivableAdvertising Fees EarnedTelephone Expense Owner's Equity + Liabilities = Assets Determine account balancesJoan Miller Advertising Agency88Copyright © Houghton Mifflin Company. All rights reserved.Trial BalanceRecord debit balances in the left columnRecord credit balances in the right columnThe trial balance proves the ledger is in balanceTotal debits = Total creditsAdd each column89Copyright © Houghton Mifflin Company. All rights reserved.Trial Balance (cont’d.)The trial balance proves whether or not the ledger is in balanceTotal of all debits recorded = Total of all credits recordedWhat it does not doProve that all transactions were analyzed correctlyProve that amounts were recorded in the proper accountsDetect whether transactions have been omittedDetect errors of the same amount made in both a debit and a credit90Copyright © Houghton Mifflin Company. All rights reserved.Detecting Errors in the Trial BalanceIf the debit and credit columns are not equal, look for the following errorsA debit entered as a credit, or visa versaAn incorrectly computed account balanceError in carrying the account balance to the trial balanceTrial balance summed incorrectly91Copyright © Houghton Mifflin Company. All rights reserved.Detecting Errors in the Trial Balance (cont’d)If trial balance is out of balance by an amount divisible by 2Caused by recording an account with a debit balance as a credit, or visa versaIf trial balance is out of balance by an amount divisible by 9Caused by transposing two numbers when transferring an amount to the trial balance92Copyright © Houghton Mifflin Company. All rights reserved.Does the trial balance detect whether transactions have been omitted?No. The trial balance proves whether or not the ledger is in balance (total debits = total credits). It does notProve that all transactions were analyzed correctlyProve that amounts were recorded in the proper accountsDetect whether transactions have been omittedDetect errors of the same amount made in both a debit and a creditDiscussion93Copyright © Houghton Mifflin Company. All rights reserved.Recording and Posting TransactionsObjective 6Record transactions in the general journal and post transactions from the general journal to the ledger94Copyright © Houghton Mifflin Company. All rights reserved.The General JournalWhy aren’t transactions entered directly into the accounts?Since the debit is recorded in one account and the credit in another, it would be very difficult toIdentify individual transactionsFind errorsSolutionRecord all transactions chronologically in a journal95Copyright © Houghton Mifflin Company. All rights reserved.Journalizing is the process of recording transactionsGeneral journal is the simplest and most flexibleAlso called book of original entrySeparate journal entry records each transaction96Copyright © Houghton Mifflin Company. All rights reserved.Journalizing TransactionsThe dateNames of accounts debited and dollar amounts on same lines in debit columnNames of accounts credited (indented) and dollar amounts on same lines in credit columnExplanation of transactionAccount identification numbers, if appropriateJuly 6: Purchase art supplies, $1,800, and office supplies, $800, on creditBusiness TransactionRecord inJournal97Copyright © Houghton Mifflin Company. All rights reserved.Journalizing Transactions (cont.)July 8: Pays for one-year life insurance policy, effective July 1, $960Business TransactionA compound entry has more than one debit or credit entryThe July 6 entry is a compound entry because it has two debit entriesSkip a line between each entry98Copyright © Houghton Mifflin Company. All rights reserved.General LedgerUsed to record the details of each transactionUsed to update each accountT account is a simple, direct formIn practice, the ledger account form is usedAdvantage of ledger account form over T account is that current balance of account is always available99Copyright © Houghton Mifflin Company. All rights reserved. Ledger Account FormAccount title and number appear at top of account formThe date appears in the first two columns (as in the journal)Item column is rarely used because explanations already appear in the journalPost. Ref. column used to note journal page where the original entry for the transaction can be foundDollar amount of entry is entered in appropriate debit or credit columnNew account balance computed in final two columns after each entry100Copyright © Houghton Mifflin Company. All rights reserved.Posting to the Ledger Locate debit account in the ledgerEnter date of transactionEnter journal page number in Post. Ref. columnEnter in Debit column amount of debit from journalCalculate account balance and enter in appropriate Balance columnIn journal Post. Ref. column enter account number to which amount was postedRepeat for credit entry101Copyright © Houghton Mifflin Company. All rights reserved.Posting to the Ledger (cont.) In journal Post. Ref. column enter account number to which amount was postedEnter in Credit column amount of credit from journalEnter journal page number in Post. Ref. columnLocate credit account in the ledgerEnter date of transactionCalculate account balance and enter in appropriate Balance column102Copyright © Houghton Mifflin Company. All rights reserved.Some Notes on PresentationA ruled line appears before each subtotal or totalA double line appears under a final total that has been verifiedDollar signs are required and are placed before the first amount in each column103Copyright © Houghton Mifflin Company. All rights reserved.Post debits and credits from journal to ledgerAnalyze the transactionBusiness transaction occursPrepare financial statementsMake entry in journalPrepare the trial balance Prepare the trial balance Make entry in journal Business transaction occurs Analyze the transactionDiscussionArrange the following six items in sequence to show the flow of events through the accounting system:Post debits and credits from journal to ledger Prepare financial statements104Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewExplain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classificationDescribe the chart of accounts and recognize commonly used accountsDefine double-entry system and state the rules for double entry105Copyright © Houghton Mifflin Company. All rights reserved.And FinallyApply the steps for transaction analysis and processing to simple transactionsPrepare a trial balance and describe its value and limitationsRecord transactions in the general journal and post transactions from the general journal to the ledger106Copyright © Houghton Mifflin Company. All rights reserved.