PRESENTATION       ONGENERAL LEDGER        &  TRAIL BALANCE  Prepared by  HASHIBUL HASANh.hashibul@yahoo.com
General ledger          HASHIBUL HASAN       DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY       DHAKA,BANGLADESH
DefinitionThe General Ledger contains all of the balance sheet                                                            ...
The ledger page is actually a T-account in a more detailed format. It has theaccount title and its corresponding account n...
An example of a page from a ledger is as follows:-Accounts receivable                                                  Acc...
The posting procedure   Step 1- Locate the account title used by the journal entry in the general ledger.   Step 2- Dete...
Explain With A Example :-          HASHIBUL HASAN       DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY       DHAKA,BAN...
Selected transaction for tina cordero company during its first month in business are presenter below :-                   ...
TRAIL BALANCE          HASHIBUL HASAN       DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY       DHAKA,BANGLADESH
Trial Balance                                                  Trial Balance Calculation A basic rule of double-entry acc...
Steps to Prepare the Trial Balance For each ledger account — Cash, Accounts Payable, etc. — total  your credits and debit...
Unbalanced Trial BalanceIf you have an unbalanced trial balance, then you have an errorsomewhere in the accounting process...
Balanced Trial Balance If all of your journal entries were posted properly (and error-free) in the  general ledger, your ...
LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been  recorded or that the ledge...
Accounting Principles, 7th Edition     Weygandt • Kieso • Kimmel       Chapter 2The Recording   Process     Prepared by Na...
CHAPTER 2             THE RECORDING                PROCESSAfter studying this chapter, you should be able to:1 Explain wha...
CHAPTER 2             THE RECORDING After studying PROCESS                this chapter, you should be able to:5 Explain wh...
THE ACCOUNT    STUDY OBJECTIVE 1   An account is an individual    accounting record of increases    and decreases in a sp...
BASIC FORM OF ACCOUNT                STUDY OBJECTIVE 2  The simplest form an account consists of      1 the title of the ...
DEBITS AND CREDITS Debit   indicates left and Credit indicates right Recording $s on the left side of an account is  deb...
TABULAR SUMMARYCOMPARED TO ACCOUNT       FORM
DEBITING AN ACCOUNT                   Cash     Debits                Credits          15,000  Example: The owner makes an ...
CREDITING AN ACCOUNT                   Cash      Debits                 Credits                                    7,000  ...
DEBITING / CREDITING ANACCOUNT                    Cash       Debits                 Credits            15,000             ...
DOUBLE-ENTRY SYSTEMequal  debits and credits made accounts for each transactiontotal debits always equal the total credi...
DEBIT AND CREDIT EFFECTS— ASSETS AND LIABILITIES        Debits               Credits   Increase assets      Decrease asset...
NORMAL BALANCEeveryaccount has adesignated normal balance. It   is either a debit or credit.accountsrarely have anabnor...
NORMAL BALANCES —ASSETS AND LIABILITIES           Assets      Increase   Decrease      Normal          Liabilities      B...
DEBIT AND CREDIT EFFECTS   — OWNER’S CAPITAL          Debits                 Credits  Decrease owner’s capital   Increase ...
NORMAL BALANCE — OWNER’S        CAPITAL          Owner’s Capital     Decrease          Increase                       Norm...
DEBIT AND CREDIT EFFECTS   — OWNER’S DRAWING             Debits                    Credits   Increase owner’s drawing     ...
NORMAL BALANCE — OWNER’S DRAWING      Owner’s Drawing  Decrease          Increase Normal Balance                 Debit    ...
DEBIT AND CREDIT EFFECTS— REVENUES AND EXPENSES       Debits           Credits   Decrease revenues   Increase revenues   I...
NORMAL BALANCES —REVENUES AND EXPENSES         Revenues      Decrease   Increase                 Normal                 Ba...
EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES      AND EFFECTS   Asset      = Liabilities +             Owner’s Equity   ...
Which of the following is not true of theterms debit and credit.    a. They can be abbreviated as Dr. and Cr.    b. They c...
THE RECORDING        PROCESS           STUDY OBJECTIVE 31 analyze each transaction (+, -)2 enter transaction in a journal3...
THE JOURNAL      STUDY OBJECTIVE 4 Transactions  Are   initially recorded in chronological     order before they are tra...
THE JOURNALA journal makes several contributions torecording process:1 discloses in one place the complete effect of a  tr...
JOURNALIZING Entering  transaction data in the journal  is known as journalizing. Separate journal entries are made for ...
TECHNIQUE OF           JOURNALIZINGThe date of the transaction is entered into the        date column.                  GE...
TECHNIQUE OF           JOURNALIZINGThe debit account title is entered at the extremeleft margin of the Account Titles and ...
TECHNIQUE OF        JOURNALIZINGThe amounts for the debits are recorded in theDebit column and the amounts for the credits...
TECHNIQUE OF      JOURNALIZINGA brief explanation of the transaction is given.
TECHNIQUE OF          JOURNALIZINGA space is left between journal entries. Theblank space separates individual journal ent...
TECHNIQUE OF         JOURNALIZINGThe column entitled Ref. is left blank at the timejournal entry is made and is used later...
SIMPLE AND COMPOUND  JOURNAL ENTRIESIf an entry involves only two accounts, one debitand one credit, it is considered a si...
COMPOUND JOURNAL         ENTRY    When three or more accounts are required in    one journal entry, the entry is referred ...
COMPOUND JOURNAL        ENTRYThis is the wrong format; all debits must be listedbefore the credits are listed.
THE LEDGER         STUDY OBJECTIVE 5A Group of accounts maintained by acompany is called the ledger.A general ledger conta...
POSTING A JOURNAL ENTRY                          STUDY OBJECTIVE 6 In the ledger, enter in the appropriate columns of the ...
POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, ...
POSTING A JOURNAL          ENTRYIn the reference column of the journal, write the accountnumber to which the debit amount ...
POSTING A JOURNAL                    ENTRY                                    GENERAL LEDGER                              ...
POSTING A JOURNAL          ENTRYIn the reference column of the journal, write the account number to which thecredit amount...
CHART OF ACCOUNTSA Chart of Accounts lists the accounts and theaccount numbers which identify their location inthe ledger.
INVESTMENT OF CASH BY       OWNER               October 1, C.R. Byrd invests $10,000 cash in anTransaction    advertising ...
PURCHASE OF OFFICE     EQUIPMENTJOURNAL ENTRYPOSTING
RECEIPT OF CASH FOR    FUTURE SERVICE               October 2, a $1,200 cash advance is received from aTransaction    clie...
RECEIPT OF CASH FOR  FUTURE SERVICEJOURNAL ENTRYPOSTING
PAYMENT OF             MONTHLY RENT               October 3, office rent for October is paid in cash,Transaction    $900. ...
PAYMENT OF MONTHLY       RENTJOURNAL ENTRYPOSTING
PAYMENT FOR INSURANCE               October 4, $600 Paid one-year insurance policy- Transaction   expires next year on Sep...
PAYMENT FOR        INSURANCEJOURNAL ENTRYPOSTING                     Prepaid Insurance   130                Oct. 4    600
PURCHASE OF  SUPPLIES ON CREDIT               October 5, an estimated 3-month supply ofTransaction    advertising material...
PURCHASE OF SUPPLIES ON CREDITJOURNAL ENTRYPOSTING
HIRING OF EMPLOYEES               October 9, hire four employees to begin work on               October 15. Each employee ...
WITHDRAWAL OF CASH     BY OWNER               October 20, C. R. Byrd withdraws $500 cash forTransaction    personal use.  ...
WITHDRAWAL OF CASH     BY OWNERJOURNAL ENTRYPOSTING
PAYMENT OF SALARIES               October 26, employee salaries of $4,000 are owedTransaction    and paid in cash. (See Oc...
PAYMENT OF SALARIESJOURNAL ENTRYPOSTING                        Salaries Expense   726                Oct. 26    4,000
RECEIPT OF CASH FOR FEES         EARNED                October 31, received $10,000 in cash from Copa Transaction    Compa...
RECEIPT OF CASH FOR FEES         EARNED JOURNAL ENTRY  POSTING
THE TRIAL BALANCESTUDY OBJECTIVE 7   The   trial balance is a list of accounts and     their balances at a given time.  ...
THE TRIAL BALANCEThe Steps in preparing the Trial Balance are:  1.   List the account titles and balances  2.   Total the ...
A TRIAL BALANCE    The total debits    must equal the    total credits.
LIMITATIONS OF A TRIAL     BALANCEA trial balance does not prove all transactions have been recorded or the ledger is cor...
Which one of the following represents the expandedbasic accounting equation?    a. Assets = Liabilities + Owner’s Capital ...
Stockholders’ Equity   Fundamentals of Corporate            Finance by Robert Parrino and David S.            KidwellJohn ...
Fundamentals of Corporate Financeby Robert Parrino and David S. KidwellJohn Wiley & Sons, Inc.. (c) 2010. CopyingProhibite...
Learning Objectives• Explain the advantages and disadvantages of a  corporation• Measure the effect of issuing stock on a ...
Characteristics of Corporate Form• Separate legal entity• Continuous life and transferability of  ownership• Limited liabi...
Organizing a Corporation• Obtain a charter from the state• Bylaws• Stockholders elect Board of Directors• Board of Directo...
Stockholders’ Rights• Vote – one vote for each share of stock• Dividends –right to participate in dividend  distributions•...
Stockholders’ Equity• Paid-in capital (contributed capital)• Retained earnings• Classes of stock  – Common and Preferred  ...
Issuing StockIssue 6.2 million shares of $10 par value stock at par.     Cash                    62,000,000       Common S...
Issuing StockIssue 3,000 shares of no-par stock for $20 per share.     Cash                             60,000       Commo...
Common Stock Issued for Other Assets• Value the exchange at the current market  value of the assets received.Issued 15,000...
Ethical Issues• When shares are issued for assets other  than cash, care should be taken to not  over-value those assets a...
Treasury Stock• A company’s own stock that it has issued  and later reacquired is treasury stock.• Reasons companies have ...
Preferred Stock• Entries are similar to entries for common  stock.• Paid-in Capital in Excess of Par –  Preferred is a sep...
Treasury StockPurchased shares of treasury stock for $19,000.     Treasury Stock                   19,000        Cash     ...
Other Stock-Related Issues• If treasury stock is sold below its cost,  retained earnings is debited for the  difference be...
Dividends• To pay dividends, a company must have  – enough retained earnings to declare the    dividend  – enough cash to ...
DividendsDeclaration date – a liability is created.     Retained Earnings                       50,000        Dividends Pa...
Computing Dividends• Dividends on preferred stock are either  – percentage rate  – dollar amount• Preferred stock may be  ...
Stock Dividend• A proportional distribution by a corporation  of its own stock to the stockholders• Increase stock account...
Stock Dividend• Small stock dividend (less that 25%)  reduces retained earnings for the current  market value of the stock...
Stock Dividend10% stock dividend declared when 20,000,000 shares ofcommon stock are outstanding. Market price of the stock...
Stock Split• An increase in the number of authorized,  issued, and outstanding shares of stock,  coupled with a proportion...
Chapter 10   Partnerships: Formation,   Operation and Basis   Corporations, Partnerships,   Estates & Trusts© 2011 Cengage...
Partnership Definition       • An association of two or more persons to carry         on a trade or business              ...
Entities Taxed as Partnerships                                                                                       (slid...
Entities Taxed as Partnerships                                                                                       (slid...
Entities Taxed as Partnerships                                                                                       (slid...
Entities Taxed as Partnerships                                                                                       (slid...
“Check-The-Box” Regs                                                                                       (slide 1 of 2) ...
“Check-The-Box” Regs                                                                                       (slide 2 of 2) ...
Partnership Taxation                                                                                      (slide 1 of 3)  ...
Partnership Taxation                                                                                    (slide 2 of 3)    ...
Partnership Taxation                                                                                        (slide 3 of 3)...
Partnership Reporting       • Partnership files Form 1065                  – On page 1 of Form 1065, partnership reports o...
Conceptual Basis for                                         Partnership Taxation (slide 1 of 2)       • Involves 2 legal ...
Conceptual Basis for                                         Partnership Taxation (slide 2 of 2)       • Involves 2 legal ...
Partner’s Ownership Interest       • Each owner normally has a:                  – Capital interest                       ...
Inside and Outside Bases       • Inside basis                  – Refers to adjusted basis of each partnership asset       ...
Basis Issues                                                                                      (slide 1 of 3)       • P...
Basis Issues                                                                                      (slide 2 of 3)       • P...
Basis Issues                                                                                      (slide 3 of 3)       • P...
Partnership Formation Transaction© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, o...
Tax Consequences of                                       Partnership Formation (slide 1 of 2)       • Usually, no gain or...
Tax Consequences of                                       Partnership Formation (slide 2 of 2)       • Partner’s basis in ...
WST Partnership Formation                                            Example (slide 1 of 2)            • William contribut...
WST Partnership Formation                                            Example (slide 2 of 2)                     Gain or lo...
Exceptions to Tax-Free Treatment on Partnership                      Formation (slide 1 of 4)       • Transfers of appreci...
Exceptions to Tax-Free Treatment on Partnership                      Formation (slide 2 of 4)       • If transaction is es...
Exceptions to Tax-Free Treatment on Partnership                      Formation (slide 3 of 4)       • Disguised Sale      ...
Exceptions to Tax-Free Treatment on Partnership                      Formation (slide 4 of 4)       • Receipt of partnersh...
Tax Issues Relative to Contributed Property                                                                               ...
Tax Issues Relative to Contributed Property                                                                               ...
Tax Issues Relative to Contributed Property                                                                               ...
Elections Made by Partnership                                                                                       (slide...
Elections Made by Partnership                                                                                       (slide...
Organizational Costs                                                                                       (slide 1 of 2) ...
Organizational Costs                                                                                       (slide 2 of 2) ...
Start-up Costs                                                                                       (slide 1 of 2)       ...
Start-up Costs                                                                                       (slide 2 of 2)       ...
Method of Accounting                                                                                       (slide 1 of 2) ...
Method of Accounting                                                                                       (slide 2 of 2) ...
Required Taxable Year       • Partnership must adopt tax year under earliest         of following tests met:              ...
Least Aggregate Deferral Example                                                                                       (sl...
Least Aggregate Deferral Example                                                                                       (sl...
Alternative Tax Years       • Other alternatives may be available if:                  – Establish to IRS’s satisfaction t...
Measuring Income of Partnership       • Calculation of partnership income is a         2-step approach                  – ...
Separately Stated Items                                                                                       (slide 1 of ...
Separately Stated Items                                                                                       (slide 2 of ...
Examples of Separately Stated Items                                                                                       ...
Examples of Separately Stated Items                                                                                       ...
Partnership Taxable Income                                               Example (slide 1 of 3)          Sales revenue    ...
Partnership Taxable Income                                               Example (slide 2 of 3)       • Partnership ordina...
Partnership Taxable Income                                               Example (slide 3 of 3)       • Separately stated ...
Partnership Allocations                                                                                       (slide 1 of ...
Partnership Allocations                                                                                       (slide 2 of ...
Partnership Allocations                                                                                       (slide 3 of ...
Basis of Partnership Interest                                                                                       (slide...
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  • Fix the Equation Assets = Liabilities + Equity.
  • This needs some rework.
  • Mbali proff

    1. 1. PRESENTATION ONGENERAL LEDGER & TRAIL BALANCE Prepared by HASHIBUL HASANh.hashibul@yahoo.com
    2. 2. General ledger HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
    3. 3. DefinitionThe General Ledger contains all of the balance sheet DAFFODIL INTERNATIONAL UNIVERSITYaccounts of an accounting system. The balance sheet DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASANaccounts are the assets, liabilities, and fund balanceaccounts of the school district. Values in General Ledger areexpressed as debits or credits.
    4. 4. The ledger page is actually a T-account in a more detailed format. It has theaccount title and its corresponding account number on top. It also has twosides, namely, the debit side and the credit side. Each T-account or ledgeraccount has the following columns. Date (debit side)- the date of the debit entry is entered in this column. DAFFODIL INTERNATIONAL UNIVERSITY Explanation (debit side)- A brief explanation of the debit entry is entered in this column. DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN “F” or folio (debit side)- The journal page number from where the debit entry was taken is entered in this column. Debit- The amount of the debit entry is entered in this column. Date (credit side) - the date of the credit entry is entered in this column. Explanation (credit side) - A brief explanation of the credit entry is entered in this column. “F” or folio (credit side)- The journal page number from where the credit entry was taken is entered in this column. Credit - The amount of the credit entry is entered in this column
    5. 5. An example of a page from a ledger is as follows:-Accounts receivable Account No: 2001 Date Explanation F Debit Date Explanation F Credit DAFFODIL INTERNATIONAL UNIVERSITY 2008 2008 DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASANSept-29 Service on credit 1 50, 000.00 Sept. 30 Collection 1 20,000.00 10 Collection 1 30,000.00 50,000.00 Balance 0.0
    6. 6. The posting procedure Step 1- Locate the account title used by the journal entry in the general ledger. Step 2- Determine if the journal entry is a debit entry or a credit. If it is a debit entry, it should be posted on the debit side of the located ledger account. If it is credit entry, it should be posted on the credit side of the located ledger account. Step 3- Record the date of the journal entry in the date column. If the posting is to be done on a fresh page, write the year on the first line. Then write the month and day of the journal entry on the second line. For succeeding entries, only the day of the journal entry should be written. The month DAFFODIL INTERNATIONAL UNIVERSITY should be written only if it is different from the month of the last entry made. DEPARTMENT OF CSE DHAKA,BANGLADESH Step 4- Write a brief explanation of the journal entry in the explanation column. It should be on the HASHIBUL HASAN same line as that of the date. Step 5- Write the amount of the journal entry in the amount column. It should be on the same line as that of the date and explanation. Step 6- In the folio column, write the page number of the general journal page that contains the posted journal entry. It should be on the same line as that of the date, the explanation, and the amount. Step 7- In the folio column of the general journal, write the account number of the page number of the ledger account in which the journal entry was posted. The account number of the page number should be on the same line as of the journal entry. Step 8- Do not leave a blank line between entries in the general ledger.
    7. 7. Explain With A Example :- HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
    8. 8. Selected transaction for tina cordero company during its first month in business are presenter below :- st. 1. Invested $10000 cash in the business Sept. 5. Purchased equipment for $12000 paying $5000 in cash and the balance on account. Sept.25. Paid $3000 cash on balance owed for equipment. Sept.30. Withdrew $500 cash for personal use. General Journal General Ledger >>Equipment Date Account Title & Ref Debit Credit Date Explanation Re Debit Credit Balance Description f Sept-1 Cash 10,000 Sept.5 J1 12,000 12,000 Tina 10,000 Cordero,capital General Ledger >>Account PayableDAFFODIL INTERNATIONAL UNIVERSITY 5 Equipment 12,000 Cash 5,000 Date Explanation Ref Debit Credit Balance DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN Account Payable 7,000 Sept.5 J1 7,000 7,000 25 Account Payable 3,000 25 J1 3,000 4,000 Cash 3,000 30 Drawings 500 General Ledger >>Tina Cordero,capital Cash 500 Date Explanation Ref Debit Credit Balance General Ledger>>cash Sept.1 J1 10,000 10,000 Date Explanation Ref Debit Credit Balance Sept.1 J1 10,000 10,000 General Ledge >>Tina Cordero,drawing 5 J1 5,000 5,000 25 J1 3,000 2,000 Date Explanation Ref Debit Credit Balance 30 J1 500 1,500 Sept.30 J1 500 500
    9. 9. TRAIL BALANCE HASHIBUL HASAN DEPARTMENT OF CSEDAFFODIL INTERNATIONAL UNIVERSITY DHAKA,BANGLADESH
    10. 10. Trial Balance Trial Balance Calculation A basic rule of double-entry accounting Account Debits Credits is that for every credit there must be an equal debit amount. From this Account 1 xxxx.xx concept, one can say that the sum of Account 2 xxxx.xx DAFFODIL INTERNATIONAL UNIVERSITY all debits must equal the sum of all credits in the accounting system. If Account 3 xxxx.xx DEPARTMENT OF CSE DHAKA,BANGLADESH debits do not equal credits, then an HASHIBUL HASAN . error has been made. The trial balance is a tool for detecting such . errors. . Account 4 xxxx.xx The trial balance is calculated by summing the balances of all the ledger Account 5 xxxx.xx accounts. The account balances are Account 6 xxxx.xx used because the balance summarizes the net effect of all of the . debits and credits in an account. To . calculate the trial balance, construct a . table in the following format : Total xxxx.xx xxxx.xx
    11. 11. Steps to Prepare the Trial Balance For each ledger account — Cash, Accounts Payable, etc. — total your credits and debits.  If the credit total is larger, subtract the debit total from the credit total to DAFFODIL INTERNATIONAL UNIVERSITY get your ledger account total which goes in the credit column of the trial DEPARTMENT OF CSE DHAKA,BANGLADESH balance HASHIBUL HASAN  If the debit total is larger, subtract the credit total from the debit total to get your ledger account total which goes in the debit column of the trial balance  Put the ledger account total in the credit or debit column of your trial balance (as identified above). When you have debit or credit totals for each ledger account, add all of your credit totals to get a credit grand total. Add all of your debit totals to get a debit grand total. This is your trial balance.
    12. 12. Unbalanced Trial BalanceIf you have an unbalanced trial balance, then you have an errorsomewhere in the accounting process. Examples of problems that canunbalance a trial balance include: DAFFODIL INTERNATIONAL UNIVERSITY DEPARTMENT OF CSE DHAKA,BANGLADESH Adding the debits and credits for the trial balance incorrectly; HASHIBUL HASAN Forgetting to include a ledger account balance on the trial balance; Putting the ledger account balances in the wrong debit/credit column in the trial balance; Writing the wrong ledger account balances in the trial balance columns; Miscalculating the ledger account totals; Posting a journal entry incorrectly to the general ledger, whether using the wrong number or getting your debits/credits mixed up; Making an error in your journal entry, whether using the wrong number or forgetting part of a compound journal entry.
    13. 13. Balanced Trial Balance If all of your journal entries were posted properly (and error-free) in the general ledger, your debit grand total and credit grand total should balance, and you can move on in the accounting cycle. If the debit and credit grand totals do not balance, then you have an error to find somewhere in your DAFFODIL INTERNATIONAL UNIVERSITY transaction posting process (journal to general ledger to trial balance). DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN Its possible to have a posting error even if the debits and credits do balance, but that will get found and solved later in the accounting cycle. Examples of problems that would not show up in the trial balance include: * Putting the credit amount in the debit column and the debit amount in the credit column for a particular transaction; * Recording a transaction in an incorrect account; * Forgetting to record a journal entry as a general ledger transaction; * Neglecting to make a journal entry at all.
    14. 14. LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance columns agree. The trial balance may balance even when: DAFFODIL INTERNATIONAL UNIVERSITY * a transaction is not journalized, DEPARTMENT OF CSE DHAKA,BANGLADESH HASHIBUL HASAN * a correct journal entry is not posted, * a journal entry is posted twice, * incorrect accounts are used in journalizing or posting, * offsetting errors are made in recording the amount of the transaction.
    15. 15. Accounting Principles, 7th Edition Weygandt • Kieso • Kimmel Chapter 2The Recording Process Prepared by Naomi Karolinski Monroe Community College and Marianne Bradford Bryant College John Wiley & Sons, Inc. © 2005
    16. 16. CHAPTER 2 THE RECORDING PROCESSAfter studying this chapter, you should be able to:1 Explain what an account is and how it helps in the recording process2 Define debits and credits and explain how they are used to record business transactions3 Identify the basic steps in the recording process4 Explain what a journal is and how it helps in the recording process
    17. 17. CHAPTER 2 THE RECORDING After studying PROCESS this chapter, you should be able to:5 Explain what a ledger is and how it helps in the recording process6 Explain what posting is and how it helps in the recording process7 Prepare a trial balance and explain its purpose
    18. 18. THE ACCOUNT STUDY OBJECTIVE 1 An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. There are separate accounts for the items we used in transactions such as cash, salaries expense, accounts payable, etc.
    19. 19. BASIC FORM OF ACCOUNT STUDY OBJECTIVE 2 The simplest form an account consists of 1 the title of the account 2 a left or debit side 3 a right or credit side The alignment of these parts resembles the letter T = T account Title of Account Left or debit side Right or credit side Debit balance Credit balance
    20. 20. DEBITS AND CREDITS Debit indicates left and Credit indicates right Recording $s on the left side of an account is debiting the account Recording $s on the right side is crediting the account If the total of debit amounts is bigger than credits, the account has a debit balance If the total of credit amounts is bigger than debits, the account has a credit balance
    21. 21. TABULAR SUMMARYCOMPARED TO ACCOUNT FORM
    22. 22. DEBITING AN ACCOUNT Cash Debits Credits 15,000 Example: The owner makes an initial investment of $15,000 to start the business. Cash is debited as the owner’s Capital is credited.
    23. 23. CREDITING AN ACCOUNT Cash Debits Credits 7,000 Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited.
    24. 24. DEBITING / CREDITING ANACCOUNT Cash Debits Credits 15,000 7,000 8,000 Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
    25. 25. DOUBLE-ENTRY SYSTEMequal debits and credits made accounts for each transactiontotal debits always equal the total creditsaccounting equation always stays in balanceAssets Liabilities Equity
    26. 26. DEBIT AND CREDIT EFFECTS— ASSETS AND LIABILITIES Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities
    27. 27. NORMAL BALANCEeveryaccount has adesignated normal balance. It is either a debit or credit.accountsrarely have anabnormal balance.
    28. 28. NORMAL BALANCES —ASSETS AND LIABILITIES Assets Increase Decrease Normal Liabilities Balance Decrease Debit Increase Credit Normal Balance
    29. 29. DEBIT AND CREDIT EFFECTS — OWNER’S CAPITAL Debits Credits Decrease owner’s capital Increase owner’s capital
    30. 30. NORMAL BALANCE — OWNER’S CAPITAL Owner’s Capital Decrease Increase Normal Balance Debit Credit
    31. 31. DEBIT AND CREDIT EFFECTS — OWNER’S DRAWING Debits Credits Increase owner’s drawing Decrease owner’s drawing Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital account).
    32. 32. NORMAL BALANCE — OWNER’S DRAWING Owner’s Drawing Decrease Increase Normal Balance Debit Credit
    33. 33. DEBIT AND CREDIT EFFECTS— REVENUES AND EXPENSES Debits Credits Decrease revenues Increase revenues Increase expenses Decrease expenses
    34. 34. NORMAL BALANCES —REVENUES AND EXPENSES Revenues Decrease Increase Normal Balance Expenses Increase Debit Decrease Credit Normal Balance
    35. 35. EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS Asset = Liabilities + Owner’s Equity s Owner’s Owner’s Assets = Liabilities + - Capital Drawing Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - + Revenues - Expense s Dr. Cr. Dr. Cr. - + + -
    36. 36. Which of the following is not true of theterms debit and credit. a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.Chapter 2
    37. 37. THE RECORDING PROCESS STUDY OBJECTIVE 31 analyze each transaction (+, -)2 enter transaction in a journal3 transfer journal information toledger accounts
    38. 38. THE JOURNAL STUDY OBJECTIVE 4 Transactions  Are initially recorded in chronological order before they are transferred to the ledger accounts.A general journal has 1 spaces for dates 2 account titles and explanations 3 references 4 two amount columns
    39. 39. THE JOURNALA journal makes several contributions torecording process:1 discloses in one place the complete effect of a transaction2 provides a chronological record of transactions3 helps to prevent or locate errors as debit andcredit amounts for each entry can be compared
    40. 40. JOURNALIZING Entering transaction data in the journal is known as journalizing. Separate journal entries are made for each transaction. A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, 3 a brief explanation of transaction.
    41. 41. TECHNIQUE OF JOURNALIZINGThe date of the transaction is entered into the date column. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
    42. 42. TECHNIQUE OF JOURNALIZINGThe debit account title is entered at the extremeleft margin of the Account Titles and Explanationcolumn. The credit account title is indented onthe next line. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
    43. 43. TECHNIQUE OF JOURNALIZINGThe amounts for the debits are recorded in theDebit column and the amounts for the creditsare recorded in the Credit column.
    44. 44. TECHNIQUE OF JOURNALIZINGA brief explanation of the transaction is given.
    45. 45. TECHNIQUE OF JOURNALIZINGA space is left between journal entries. Theblank space separates individual journal entriesand makes the entire journal easier to read. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2005Sept. 1 Cash 15,000 R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment 7,000 Cash 7,000 (Purchased equipment for cash)
    46. 46. TECHNIQUE OF JOURNALIZINGThe column entitled Ref. is left blank at the timejournal entry is made and is used later when thejournal entries are transferred to the ledgeraccounts.
    47. 47. SIMPLE AND COMPOUND JOURNAL ENTRIESIf an entry involves only two accounts, one debitand one credit, it is considered a simple entry.
    48. 48. COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.123
    49. 49. COMPOUND JOURNAL ENTRYThis is the wrong format; all debits must be listedbefore the credits are listed.
    50. 50. THE LEDGER STUDY OBJECTIVE 5A Group of accounts maintained by acompany is called the ledger.A general ledger contains all theassets, liabilities, and owner’sequity accounts
    51. 51. POSTING A JOURNAL ENTRY STUDY OBJECTIVE 6 In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
    52. 52. POSTING A JOURNAL ENTRY In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal.
    53. 53. POSTING A JOURNAL ENTRYIn the reference column of the journal, write the accountnumber to which the debit amount was posted.
    54. 54. POSTING A JOURNAL ENTRY GENERAL LEDGER CASH NO. 10 Date Explanation Ref. Debit Credit Balance 2005Sept. 1 J1 15,000 15,000 In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.
    55. 55. POSTING A JOURNAL ENTRYIn the reference column of the journal, write the account number to which thecredit amount was posted.
    56. 56. CHART OF ACCOUNTSA Chart of Accounts lists the accounts and theaccount numbers which identify their location inthe ledger.
    57. 57. INVESTMENT OF CASH BY OWNER October 1, C.R. Byrd invests $10,000 cash in anTransaction advertising business known as: The Pioneer Advertising Agency. Basic •The asset Cash is increased $10,000 Analysis •Owner’s equity, C. R. Byrd, Capital is increased $10,000. Debits increase assets: debit Cash $10,000.Debit-Credit Credits increase owner’s equity: credit C.R. Byrd, Analysis Capital $10,000.
    58. 58. PURCHASE OF OFFICE EQUIPMENTJOURNAL ENTRYPOSTING
    59. 59. RECEIPT OF CASH FOR FUTURE SERVICE October 2, a $1,200 cash advance is received from aTransaction client, for advertising services expected to be completed by December 31. Asset Cash is increased $1,200 Liability Unearned Fees is increased $1,200 Basic •Service has not been rendered yet. Analysis Liabilities often have the word “payable” in their title, Unearned fees are a liability. Debits increase assets: debit Cash $1,200.Debit-Credit Credits increase liabilities: credit Unearned Fees Analysis $1,200.
    60. 60. RECEIPT OF CASH FOR FUTURE SERVICEJOURNAL ENTRYPOSTING
    61. 61. PAYMENT OF MONTHLY RENT October 3, office rent for October is paid in cash,Transaction $900. Basic The expense Rent is increased $900 Analysis Payment pertains only to the current month Asset Cash is decreased $900.Debit-Credit Debits increase expenses: debit Rent Expense $900. Analysis Credits decrease assets: credit Cash $900.
    62. 62. PAYMENT OF MONTHLY RENTJOURNAL ENTRYPOSTING
    63. 63. PAYMENT FOR INSURANCE October 4, $600 Paid one-year insurance policy- Transaction expires next year on September 30. -Asset Prepaid Insurance increases $600 -Payment extends to more than the current month Basic -Asset Cash is decreased $600. Analysis -Payments of expenses benefiting more than one period are prepaid expenses or prepayments.Debit-Credit Debits increase assets: debit Prepaid Insurance Analysis $600. Credits decrease assets: credit Cash $600.
    64. 64. PAYMENT FOR INSURANCEJOURNAL ENTRYPOSTING Prepaid Insurance 130 Oct. 4 600
    65. 65. PURCHASE OF SUPPLIES ON CREDIT October 5, an estimated 3-month supply ofTransaction advertising materials is purchased on account from Aero Supply for $2,500. Basic The asset Advertising Supplies is increased $2,500; Analysis the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising SuppliesDebit-Credit $2,500. Credits increase liabilities: credit Analysis Accounts Payable $2,500.
    66. 66. PURCHASE OF SUPPLIES ON CREDITJOURNAL ENTRYPOSTING
    67. 67. HIRING OF EMPLOYEES October 9, hire four employees to begin work on October 15. Each employee is to receive a weeklyTransaction salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. A business transaction has not occurred only an Basic agreement between the employer and the Analysis employees to enter into a business transaction beginning on October 15.Debit-Credit A debit-credit analysis is not needed because there is Analysis no accounting entry.
    68. 68. WITHDRAWAL OF CASH BY OWNER October 20, C. R. Byrd withdraws $500 cash forTransaction personal use. Basic The owner’s equity account C. R. Byrd, Drawing is Analysis increased $50 The asset Cash is decreased $500. Debits increase drawings: debit C. R. Byrd,Debit-Credit Drawing $500. Credits decrease assets: credit Analysis Cash $500.
    69. 69. WITHDRAWAL OF CASH BY OWNERJOURNAL ENTRYPOSTING
    70. 70. PAYMENT OF SALARIES October 26, employee salaries of $4,000 are owedTransaction and paid in cash. (See October 9 transaction.) Basic The expense account Salaries Expense is increased Analysis $4,000; the asset Cash is decreased $4,000.Debit-Credit Debits increase expenses: debit Salaries Expense Analysis $4,000. Credits decrease assets: credit Cash $4,000.
    71. 71. PAYMENT OF SALARIESJOURNAL ENTRYPOSTING Salaries Expense 726 Oct. 26 4,000
    72. 72. RECEIPT OF CASH FOR FEES EARNED October 31, received $10,000 in cash from Copa Transaction Company for advertising services rendered in October. Basic The asset Cash is increased $10,000; the revenue Analysis Fees Earned is increased $10,000. Debit-Credit Debits increase assets: debit Cash $10,000. Credits Analysis increase revenues: credit Fees Earned $10,000.
    73. 73. RECEIPT OF CASH FOR FEES EARNED JOURNAL ENTRY POSTING
    74. 74. THE TRIAL BALANCESTUDY OBJECTIVE 7  The trial balance is a list of accounts and their balances at a given time.  The primary purpose of a trial balance is to prove debits = credits after posting.  If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
    75. 75. THE TRIAL BALANCEThe Steps in preparing the Trial Balance are: 1. List the account titles and balances 2. Total the debit and credit columns 3. Prove the equality of the two columns
    76. 76. A TRIAL BALANCE The total debits must equal the total credits.
    77. 77. LIMITATIONS OF A TRIAL BALANCEA trial balance does not prove all transactions have been recorded or the ledger is correct. Numerouserrors may exist even though the trial balance columns agree. For example, the trial balance may balance even when:  a transaction is not journalized  a correct journal entry is not posted  a journal entry is posted twice  incorrect accounts used in journalizing or posting  offsetting errors are made in recording
    78. 78. Which one of the following represents the expandedbasic accounting equation? a. Assets = Liabilities + Owner’s Capital + Owner’s Drawings – Revenue - Expenses. b. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenue. c. Assets – Liabilities – Owner’s Drawings = Owner’s Capital + Revenue – Expenses. d. Assets = Revenue + Expenses – Liabilities.Chapter 2
    79. 79. Stockholders’ Equity Fundamentals of Corporate Finance by Robert Parrino and David S. KidwellJohn Wiley & Sons, Inc.. (c) 2009. Copying Prohibited
    80. 80. Fundamentals of Corporate Financeby Robert Parrino and David S. KidwellJohn Wiley & Sons, Inc.. (c) 2010. CopyingProhibited.Reprinted for Sai Chakrala, Bank ofAmericaReprinted with permission as asubscription benefit of Books24x7,
    81. 81. Learning Objectives• Explain the advantages and disadvantages of a corporation• Measure the effect of issuing stock on a company’s financial position• Describe how treasury stock transactions affect a company• Account for dividends and measure their impact on a company• Use different stock values in decision making• Evaluate a company’s return on assets and return on common equity
    82. 82. Characteristics of Corporate Form• Separate legal entity• Continuous life and transferability of ownership• Limited liability for stockholders• Separation of ownership and management• Corporate taxation – income is taxed at the corporate level; dividends are taxed at the shareholder level• Government regulation
    83. 83. Organizing a Corporation• Obtain a charter from the state• Bylaws• Stockholders elect Board of Directors• Board of Directors sets policy and appoints officers• Board elects a chairperson• Board selects the president
    84. 84. Stockholders’ Rights• Vote – one vote for each share of stock• Dividends –right to participate in dividend distributions• Liquidation – right to receive proportionate share of assets remaining after creditors have been paid• Preemption – right to maintain one’s proportionate share of ownership in the corporation
    85. 85. Stockholders’ Equity• Paid-in capital (contributed capital)• Retained earnings• Classes of stock – Common and Preferred – Par or No-Par
    86. 86. Issuing StockIssue 6.2 million shares of $10 par value stock at par. Cash 62,000,000 Common Stock 62,000,000 To issue common stockIssue 6.2 million shares of $0.01 par value stock at $10 pershare. Cash 62,000,000 Common Stock 62,000 Paid-in Capital in Excess of Par – Common (6,200,000 x 9.99) 61,938,000 To issue common stock
    87. 87. Issuing StockIssue 3,000 shares of no-par stock for $20 per share. Cash 60,000 Common Stock 60,000 To issue common stockIssued 3,000 shares of no-par stock with a stated value of $1for $20 per share Cash 60,000 Common Stock (3,000 x $1 stated value) 3,000 Paid-in Capital in Excess of Stated Value – Common (3,000 x 19) 57,000 To issue common stock
    88. 88. Common Stock Issued for Other Assets• Value the exchange at the current market value of the assets received.Issued 15,000 shares of $1 par common for equipment worth$4,000 and a building worth $120,000. Equipment 4,000 Building 120,000 Common Stock (15,000 x $1 par) 15,000 Paid-in Capital in Excess of Par – Common (124,000 – 15,000) 109,000 To issue common stock
    89. 89. Ethical Issues• When shares are issued for assets other than cash, care should be taken to not over-value those assets and thus inflate values on the balance sheet.
    90. 90. Treasury Stock• A company’s own stock that it has issued and later reacquired is treasury stock.• Reasons companies have treasury stock – to use for employee stock purchase plans – to increase net assets by buying shares at a low price and selling at a higher price – to avoid takeover by outside parties• Treasury Stock is a contra stockholders’ equity account
    91. 91. Preferred Stock• Entries are similar to entries for common stock.• Paid-in Capital in Excess of Par – Preferred is a separate equity account.
    92. 92. Treasury StockPurchased shares of treasury stock for $19,000. Treasury Stock 19,000 Cash 19,000 To purchase treasury stockSold treasury stock for $25,000 that was previouslypurchased for $19,000. Cash 25,000 Treasury Stock 19,000 Paid-in Capital in from Treasury Stock 6,000 Sold treasury stock
    93. 93. Other Stock-Related Issues• If treasury stock is sold below its cost, retained earnings is debited for the difference between cost and selling price.• Stock retirement involves purchasing stock and removing it from “issued” status.• To retire stock, remove the stock account, any related paid-in capital accounts, and increase cash.
    94. 94. Dividends• To pay dividends, a company must have – enough retained earnings to declare the dividend – enough cash to pay the dividend• Relevant dates related to dividends – Declaration date – Date of record – Payment date
    95. 95. DividendsDeclaration date – a liability is created. Retained Earnings 50,000 Dividends Payable 50,000 Declared a cash dividendDate of record – no entry requiredDate of payment – a liability is settled Dividends Payable 50,000 Cash 50,000 Paid cash dividend
    96. 96. Computing Dividends• Dividends on preferred stock are either – percentage rate – dollar amount• Preferred stock may be – cumulative (dividends in arrears must be paid before other stockholders receive a dividend) – non-cumulative – dividends not paid in one year are not made up later.
    97. 97. Stock Dividend• A proportional distribution by a corporation of its own stock to the stockholders• Increase stock account and decrease retained earnings.• Total equity is unchanged, and assets and liabilities are unaffected.• Reasons for stock dividends: – to conserve cash – to reduce the per-share market price of the stock
    98. 98. Stock Dividend• Small stock dividend (less that 25%) reduces retained earnings for the current market value of the stock• Large stock dividend (greater than 25%) reduces retained earnings for par value of the stock.
    99. 99. Stock Dividend10% stock dividend declared when 20,000,000 shares ofcommon stock are outstanding. Market price of the stock is$15. 20,000,000 shares of common outstanding x .10 stock dividend x $15 market value per share of common Retained Earnings 30,000,000 Common Stock 20,000 Paid-in Capital in Excess of Par – Common 29,980,000 Distributed a 10% stock dividend 20,000,000 x 0.10 x $.01 par value per share
    100. 100. Stock Split• An increase in the number of authorized, issued, and outstanding shares of stock, coupled with a proportionate reduction in the stock’s par value.• Total equity does not change. Only par value, number of shares issued, and number of shares authorized are affected.
    101. 101. Chapter 10 Partnerships: Formation, Operation and Basis Corporations, Partnerships, Estates & Trusts© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 101
    102. 102. Partnership Definition • An association of two or more persons to carry on a trade or business – Contribute money, property, labor – Expect to share in profit and losses • For tax purposes, includes: – Syndicate Joint venture, etc© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 102
    103. 103. Entities Taxed as Partnerships (slide 1 of 4) • General partnership – Consists of at least 2 partners – Partners are jointly and severally liable • Creditors can collect from both partnership and partners’ personal assets • General partner’s assets are at risk for malpractice of other partners even though not personally involved© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 103
    104. 104. Entities Taxed as Partnerships (slide 2 of 4) • Limited liability partnership (LLP) – An LLP partner is not personally liable for malpractice committed by other partners – Popular organizational form for large accounting firms© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 104
    105. 105. Entities Taxed as Partnerships (slide 3 of 4) • Limited partnership – Has at least one general partner • One or more limited partners – Only general partner(s) are personally liable to creditors • Limited partners’ loss is limited to equity investment© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 105
    106. 106. Entities Taxed as Partnerships (slide 4 of 4) • Limited liability company (LLC) – Combines the corporate benefit of limited liability with benefits of partnership taxation • Unlike corporations, income is subject to tax only once • Special allocations of income, losses, and cash flow are available – Owners are “members,” not partners, but if properly structured will receive partnership tax treatment© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 106
    107. 107. “Check-The-Box” Regs (slide 1 of 2) • Allows most unincorporated entities to select their federal tax status – If 2 or more owners, can choose to be treated as: • Partnership, or • Corporation – Permits some flexibility • Not all entities have a choice • e.g., New publicly traded partnerships must be taxed as corporations© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 107
    108. 108. “Check-The-Box” Regs (slide 2 of 2) • Some entities can be excluded from partnership treatment if organized for: – Investment (not active trade or business) – Joint production, extraction, or use of property – Underwriting, selling, or distributing a specific security • Owners simply report their share of operations on their own tax return© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 108
    109. 109. Partnership Taxation (slide 1 of 3) • Partnership is not a taxable entity – Flow through entity • Income taxed to owners, not entity • Partners report their share of partnership income or loss on their own tax return© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 109
    110. 110. Partnership Taxation (slide 2 of 3) • Generally, the calculation of partnership income is a 2-step approach – Step 1: Net ordinary income and expenses related to the trade or business of the partnership – Step 2: Segregate and report separately some partnership items – If an item of income, expense, gain or loss might affect any 2 partners’ tax liabilities differently, it is separately stated – e.g., Charitable contributions© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 110
    111. 111. Partnership Taxation (slide 3 of 3) • Electing large partnerships can net some items that would otherwise be separately stated – Must have at least 100 partners and elect simplified reporting procedures – Such partnerships separately report less than a dozen categories of items to their partners • e.g., Combine interest, nonqualifying dividends, and royalty income into one amount, and report the net amount to partners© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 111
    112. 112. Partnership Reporting • Partnership files Form 1065 – On page 1 of Form 1065, partnership reports ordinary income or loss from its trade or business activities – Schedule K accumulates information to be reported to partners • Provides ordinary income (loss) and separately stated items in total – Each partner (and the IRS) receives a Schedule K-1 • Reports each partner’s share of ordinary income (loss) and separately stated items© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 112
    113. 113. Conceptual Basis for Partnership Taxation (slide 1 of 2) • Involves 2 legal concepts: – Aggregate (or conduit) concept—Treats partnership as a channel with income, expense, gains, etc. flowing through to partners • Concept is reflected by the imposition of tax on the partners, not the partnership© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 113
    114. 114. Conceptual Basis for Partnership Taxation (slide 2 of 2) • Involves 2 legal concepts (cont’d): – Entity concept—Treats partners and partnerships as separate and is reflected by: • Partnership requirement to file its own information return • Treating partners as separate from the partnership in certain transactions between the two© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 114
    115. 115. Partner’s Ownership Interest • Each owner normally has a: – Capital interest • Measured by capital sharing ratio – Partner’s percentage ownership of capital – Profits (loss) interest • Partner’s % allocation of partnership ordinary income (loss) and separately stated items • Certain items may be “specially allocated” – Specified in the partnership agreement© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 115
    116. 116. Inside and Outside Bases • Inside basis – Refers to adjusted basis of each partnership asset – Each partner “owns” a share of the partnership’s inside basis for all its assets • Outside basis – Represents each partner’s basis in the partnership interest – All partners should maintain a record of their respective outside bases© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 116
    117. 117. Basis Issues (slide 1 of 3) • Partner’s outside basis is adjusted for income and losses that flow through from partnership • This ensures that partnership income is only taxed once© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 117
    118. 118. Basis Issues (slide 2 of 3) • Partner’s basis is important for determining: – Deductibility of partnership losses – Tax treatment of partnership distributions – Calculating gain or loss on the partner’s disposition of the partnership interest© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 118
    119. 119. Basis Issues (slide 3 of 3) • Partner’s capital account balance is usually not a good measure of a partner’s adjusted basis in a partnership interest for several reasons • e.g., Basis includes partner’s share of partnership liabilities; Capital account does not© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 119
    120. 120. Partnership Formation Transaction© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 120
    121. 121. Tax Consequences of Partnership Formation (slide 1 of 2) • Usually, no gain or loss is recognized by a partner or partnership on the contribution of money or property in exchange for a partnership interest • Gain (loss) is deferred until taxable disposition of: – Property by partnership, or – Partnership interest by partner© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 121
    122. 122. Tax Consequences of Partnership Formation (slide 2 of 2) • Partner’s basis in partnership interest = basis of contributed property – If partner contributes capital assets and §1231 assets, holding period of partnership interest includes holding period of assets contributed – For other assets including cash, holding period begins on date partnership interest is acquired – If multiple assets are contributed, partnership interest is apportioned and separate holding period applies to each portion© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 122
    123. 123. WST Partnership Formation Example (slide 1 of 2) • William contributes cash – Amount $20,000 • Sarah contributes land – Basis $ 6,000 – FMV $20,000 • Todd contributes equipment – Basis $22,000 – FMV $20,000© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 123
    124. 124. WST Partnership Formation Example (slide 2 of 2) Gain or loss Basis in Partnership’s Partner Recognized Interest Property Basis William $-0- $20,000 $20,000 Sarah $-0- $ 6,000 $ 6,000 Todd $-0- $22,000 $22,000 Neither the partnership nor any of the partners recognizes gain or loss on the transaction© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 124
    125. 125. Exceptions to Tax-Free Treatment on Partnership Formation (slide 1 of 4) • Transfers of appreciated stock to investment partnership – Gain will be recognized by contributing partner – Prevents multiple investors from diversifying their portfolios tax-free© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 125
    126. 126. Exceptions to Tax-Free Treatment on Partnership Formation (slide 2 of 4) • If transaction is essentially a taxable exchange of properties, gain will be recognized – e.g., Individual A contributes land and Individual B contributes equipment to a new partnership; shortly thereafter, the partnership distributes the land to B and the equipment to A; Partnership liquidates – IRS will disregard transfer to partnership and treat as taxable exchange between A & B© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 126
    127. 127. Exceptions to Tax-Free Treatment on Partnership Formation (slide 3 of 4) • Disguised Sale – e.g., Partner contributes property to a partnership; Shortly thereafter, partner receives a distribution from the partnership • Payment may be viewed as a purchase of the property by the partnership© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 127
    128. 128. Exceptions to Tax-Free Treatment on Partnership Formation (slide 4 of 4) • Receipt of partnership interest in exchange for services rendered to partnership – Services are not treated as “property” – Partner recognizes ordinary compensation income = FMV of partnership interest received • Partnership may deduct the amount included in the service partner’s income if the services are of a deductible nature – If the services are not deductible by the partnership, they must be capitalized to an asset account© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 128
    129. 129. Tax Issues Relative to Contributed Property (slide 1 of 3) • Contributions of depreciable property and intangible assets – Partnership “steps into shoes” of contributing partner • Continues the same cost recovery and amortization calculations • Cannot expense contributed depreciable property under §179© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 129
    130. 130. Tax Issues Relative to Contributed Property (slide 2 of 3) • Gain or loss is ordinary when partnership disposes of: – Contributed unrealized receivables – Contributed property that was inventory in contributor’s hands, if disposed of within 5 years of contribution • Inventory includes all tangible property except capital assets and real or depreciable business assets© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 130
    131. 131. Tax Issues Relative to Contributed Property (slide 3 of 3) • If contributed property is disposed of at a loss and the property had a ‘‘built-in’’ capital loss on the contribution date – Loss is treated as a capital loss if disposed of within 5 years of the contribution – Capital loss is limited to amount of ‘‘built-in’’ loss on date of contribution© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 131
    132. 132. Elections Made by Partnership (slide 1 of 2) • Inventory method • Accounting method – Cash, accrual or hybrid • Depreciation method • Tax year • Organizational cost amortization • Start-up expense amortization© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 132
    133. 133. Elections Made by Partnership (slide 2 of 2) • Optional basis adjustment (§754) • §179 deduction • Nonrecognition treatment for involuntary conversions • Election out of partnership rules© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 133
    134. 134. Organizational Costs (slide 1 of 2) • For organization costs incurred after October 22, 2004, the partnership may elect to deduct up to $5,000 of the costs in year business begins – Deductible amount must be reduced by organization costs that exceed $50,000 – Remaining amounts are amortizable over 180 months beginning with month the partnership begins business • For organization costs incurred before that date, the taxpayer could elect to amortize the amount over 60 months© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 134
    135. 135. Organizational Costs (slide 2 of 2) • Organizational costs include costs: – Incident to creation of the partnership, chargeable to a capital account, and of a character that, if incident to the creation of a partnership with an ascertainable life, would be amortized over that life • Includes accounting fees and legal fees connected with the partnership’s formation • Costs incurred for the following items are not organization costs: – Acquiring and transferring assets to the partnership – Admitting and removing partners, other than at formation – Negotiating operating contracts – Syndication costs© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 135
    136. 136. Start-up Costs (slide 1 of 2) • Start-up costs—include operating costs incurred after entity is formed but before it begins business including: – Marketing surveys prior to conducting business – Pre-operating advertising expenses – Costs of establishing an accounting system – Costs incurred to train employees before business begins, and – Salaries paid to executives and employees before the start of business© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 136
    137. 137. Start-up Costs (slide 2 of 2) • Partnership may elect to deduct up to $5,000 of start- up costs in the year it begins business – Deductible amount must be reduced by start-up costs in excess of $50,000 – Costs that are not deductible under this provision are amortizable over 180 months beginning with the month in which the partnership begins business • For start-up costs incurred before October 23, 2004, the taxpayer could elect to amortize those costs over 60 months© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 137
    138. 138. Method of Accounting (slide 1 of 2) • New partnership may adopt cash, accrual or hybrid method – Cash method cannot be adopted if partnership: • Has one or more C corporation partners • Is a tax shelter© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 138
    139. 139. Method of Accounting (slide 2 of 2) • New partnership may adopt cash, accrual or hybrid method (cont’d) – C Corp partner does not preclude use of cash method if: • Partnership has average annual gross receipts of $5 million or less for preceding 3 year period • C corp partner(s) is a qualified personal service corp, or • Partnership is engaged in farming business© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 139
    140. 140. Required Taxable Year • Partnership must adopt tax year under earliest of following tests met: – Majority partner’s tax year (partners with same tax year owning >50%) – Principal partners’ tax year (all partners owning 5% or more) – Least aggregate deferral rule© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 140
    141. 141. Least Aggregate Deferral Example (slide 1 of 2) • George owns 50% and has June 30 year end • Henry owns 50% and has October 31 year end • Neither partner owns a “majority” (>50%) • Both are “principal partners” (5% or more), but do not have same year end – Must use least aggregate deferral test to determine required taxable year© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 141
    142. 142. Least Aggregate Deferral Example (slide 2 of 2) 1. Test June 30 as possible year end: Partner. Year End % Mo. Deferral Weight George June 50% 0 0.0 Henry October 50% 4 2.0 Total weighted deferral 2.0 2. Test October 31 as possible year end: George June 50% 8 4.0 Henry October 50% 0 0.0 Total weighted deferral 4.0 June has the least aggregate deferral so it is the tax year for partnership.© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 142
    143. 143. Alternative Tax Years • Other alternatives may be available if: – Establish to IRS’s satisfaction that a business purpose exists for another tax year • e.g., Natural business year at end of peak season – Choose tax year with no more than 3 month deferral • Partnership must maintain with the IRS a prepaid, non- interest-bearing deposit of estimated deferred taxes – • Elect a 52- to 53-week taxable year© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 143
    144. 144. Measuring Income of Partnership • Calculation of partnership income is a 2-step approach – Step 1: Net ordinary income and expenses related to the trade or business of the partnership – Step 2: Segregate and report separately some partnership items© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 144
    145. 145. Separately Stated Items (slide 1 of 2) • If an item of income, expense, gain or loss might affect any 2 partners’ tax liabilities differently, it is separately stated© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 145
    146. 146. Separately Stated Items (slide 2 of 2) • Separately stated items fall under the “aggregate” concept – Each partner owns a specific share of each item of partnership income, gain, loss or deduction • Character is determined at partnership level • Taxation is determined at partner level© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 146
    147. 147. Examples of Separately Stated Items (slide 1 of 2) • Short and long-term capital gains and losses • §1231 gains and losses • Domestic production activities deduction • Charitable contributions • Interest income and other portfolio income • Expenses related to portfolio income© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 147
    148. 148. Examples of Separately Stated Items (slide 2 of 2) • Personalty expensed under §179 • Special allocations of income or expense • AMT preference and adjustment items • Passive activity items • Self-employment income • Foreign taxes paid© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 148
    149. 149. Partnership Taxable Income Example (slide 1 of 3) Sales revenue $100,000 Salaries 35,000 Rent 15,000 Utilities 6,000 Interest income 1,500 Charitable contribution 2,000 AMT adjustment for depreciation 3,600 Payment of partner’s medical expenses 4,000© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 149
    150. 150. Partnership Taxable Income Example (slide 2 of 3) • Partnership ordinary taxable income: Sales revenue $100,000 Salaries -35,000 Rent -15,000 Utilities -6,000 Partnership Ordinary Income $ 44,000© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 150
    151. 151. Partnership Taxable Income Example (slide 3 of 3) • Separately stated items: – Interest income $1,500 – Charitable contribution 2,000 – AMT adjustment for depreciation 3,600 • Distribution to partner: – Payment of partner’s medical exp. $4,000© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 151
    152. 152. Partnership Allocations (slide 1 of 3) • Partnership agreement can provide that a partner share capital, profits, and losses in different ratios – e.g., Partnership agreement may provide that a partner has a 30% capital sharing ratio, yet be allocated 40% of the profits and 20% of the losses – Such special allocations are permissible if certain rules are followed • e.g., Economic effect test© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 152
    153. 153. Partnership Allocations (slide 2 of 3) • The economic effect test requires that: – An allocation must be reflected in a partner’s capital account – When partner’s interest is liquidated, partner must receive assets with FMV = the positive balance in the capital account – A partner with a negative capital account must restore that account upon liquidation© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 153
    154. 154. Partnership Allocations (slide 3 of 3) • Precontribution gain or loss – Must be allocated to partners taking into account the difference between basis and FMV of property on date of contribution • For nondepreciable property this means any built-in gain or loss must be allocated to the contributing partner when disposed of by partnership in taxable transaction • For depreciable property, allocations related to the built-in loss can be made only to the contributing partner – For allocations to other partners, the partnership’s basis in the loss property is treated as being the fair market value of the property at the contribution date© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 154
    155. 155. Basis of Partnership Interest (slide 1 of 3) • For new partnerships, partner’s basis usually equals: – Adjusted basis of property contributed, plus – FMV of any services performed by partner in exchange for partnership interest© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 155

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