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2-2C1 ANALYZING AND RECORDING PROCESSAnalyze each transaction and Record relevant transactionsevent from source documents and events in a journal Prepare and analyze Post journal information the trial balance to ledger accounts
2-3C1 SOURCE DOCUMENTS Bills from Checks Suppliers Purchase OrdersEmployeeEarningsRecords Bank Statements Sales Tickets
2-4C2 THE ACCOUNT AND ITS ANALYSIS An account is a An account is a record of record of increases and The general The general increases and ledger is a record decreases in a decreases in a ledger is a record specific asset, containing all containing all specific asset, accounts used by liability, equity, liability, equity, accounts used by revenue, or the company. the company. revenue, or expense item. expense item.
2-5C2 THE ACCOUNT AND ITS ANALYSIS Owner, Capital Owner, Capital Owner, Withdrawals Owner, Withdrawals
2-8C2 EQUITY ACCOUNTS Owner’s Owner’s Owner’s Owner’s Capital Capital Withdrawals Withdrawals Equity Accounts Revenues Revenues Expenses Expenses
2-9C2 THE ACCOUNT AND ITS ANALYSIS Assets = Liabilities + Equity
2 - 10C3 LEDGER AND CHART OF ACCOUNTS The ledger is a collection of all accounts for an The ledger is a collection of all accounts for an information system. A company’s size and diversity information system. A company’s size and diversity of operations affect the number of accounts needed. 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.Account Number Account Name Account Number Account Name 101 Cash 302 C. Taylor, Withdrawals 106 Accounts receivable 403 Revenues 126 Supplies 406 Rental revenue 128 Prepaid insurance 622 Salaries expense 167 Equipment 637 Insurance expense 201 Accounts payable 640 Rent expense 236 Unearned revenue 652 Supplies expense 301 C. Taylor, Capital 690 Utilities expense
2 - 11C4 DEBITS AND CREDITS A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Account Title (Left side) (Right side) Debit Credit
2 - 12C4 DOUBLE-ENTRY ACCOUNTING Assets = Liabilities + Equity ASSETS LIABILITIES EQUITIES Debit Credit Debit Credit Debit Credit + - - + - + Normal Normal Normal Normal Normal Normal
2 - 16P1 JOURNALIZING TRANSACTIONS Transaction Transaction Titles of Affected Titles of Affected Date Date Accounts Accounts Date Description Debit Credit 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner Dec. 2 Supplies 2,500 Cash 2,500 Purchased supplies for cash Transaction Transaction Dollar amount of debits Dollar amount of debits explanation explanation and credits and credits
2 - 17P1 BALANCE COLUMN ACCOUNT T-accounts are useful illustrations, but balance column ledger accounts are used in practice.
2 - 18P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 1 Identify the debit account in ledger.
2 - 19P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 2 Enter the date.
2 - 20P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 3 Enter the amount and description.
2 - 21P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 4 Enter the journal reference.
2 - 22P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 30,000 C. Taylor, Capital 30,000 Investment by owner 5 Compute the balance.
2 - 23P1 POSTING JOURNAL ENTRIES 2011 Dec. 1 Cash 101 30,000 C. Taylor, Capital 30,000 Investment by owner 6 Enter the ledger reference.
2 - 24A1 ANALYZING TRANSACTIONS Analysis: Posting: Cash 101 C. Taylor, Capital 301 301 (1) 30,000 (1) 30,000
2 - 29P2 After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. FastForward Trial Balance The trial balance December 31, 2011 lists all account Debits Credits balances in the Cash $ 4,350 Accounts receivable - general ledger. If Supplies 9,720 the books are in Prepaid Insurance 2,400 Equipment 26,000 balance, the total Accounts payable $ 6,200 debits will equal the Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 total credits. Owners Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300
PREPARING A TRIAL 2 - 30P2 BALANCE Preparing a trail 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.
2 - 31P2 SEARCHING FOR AND CORRECTING ERRORS If the trial balance does not balance, the error(s) must be found and corrected.Make sure the trial Re-compute eachbalance columns are account balance in thecorrectly added. ledger.Make sure account Verify that each journalbalances are correctly entry is posted correctly.entered from the ledger.See if debit or credit Verify that each originalaccounts are mistakenly journal entry has equalplaced on the trial balance. debits and credits.
2 - 32P3 USING A TRIAL BALANCE TO PREPARE FINANCIAL STATEMENTS
2 - 33P3 INCOME STATEMENT FASTFORWARD Income Statement For the Month Ended December 31, 2011 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ 6,100 Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income $ 3,470
2 - 34P3 STATEMENT OF OWNERS EQUITY FASTFORWARD Statement of Owners Equity For the Month Ended December 31, 2011 C. Taylor, Capital 12/1/11 $ - Net income for December 3,470 Connections Plus: Investments by Owner 30,000 33,470 Less: Owner Withdrawals 200 C. Taylor, Capital, 12/31/11 $ 33,270 FASTFORWARD Income Statement For the Month Ended December 31, 2011 Revenues: Consulting revenue $ 5,800 Rental revenue 300 Total revenues $ 6,100 Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses 2,630 Net income $ 3,470
2 - 35 P3 BALANCE SHEET FASTFORWARD Statement of Owners Equity For the Month Ended December 31, 2011 FASTFORWARDC. Taylor, Capital 12/1/11 $ - Balance Sheet December 31, 2011 Net income for December 3,470 AssetsPlus: Investments by Owner 30,000 Cash $ 4,350 33,470 Supplies 9,720 Less: Owner Withdrawals 200 Prepaid insurance 2,400C. Taylor, Capital, 12/31/11 $ 33,270 Equipment 26,000 Total assets $ 42,470 Liabilities Accounts payable $ 6,200 Connections Unearned revenue 3,000 Total liabilities 9,200 Equity C. Taylor, Capital $ 33,270 Total equity 33,270 Total liabilities and equity $ 42,470
2 - 36P3 PRESENTATION ISSUES1. 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.
2 - 37 GLOBAL VIEWBoth U.S. GAAP and IFRS prepare the same four basic financialstatements. A few differences are found within each statement, butover time these differences are likely to be eliminated. Here is a typicalIFRS balance sheet presentation:
2 - 38ACCOUNTING CONTROLS AND ASSURANCEAccounting systems depend on control procedures thatAccounting systems depend on control procedures thatassure the proper principles were applied in processingassure the proper principles were applied in processingaccounting information. The passage of SOX legislationaccounting information. The passage of SOX legislationstrengthened U.S. control procedures in recent years.strengthened U.S. control procedures in recent years.The percentage of employees in information technology thatreport observing specific types of misconduct in 2009.
2 - 39A2 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 it’s debt in the future.