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Chapter 2 power point notes( BUAD 111 Financial Accounting I)
- 1. AAnnaallyyzziinngg aanndd RReeccoorrddiinngg TTrraannssaaccttiioonnss © 2013 McGraw-Hill Ryerson Limited. CHAPTER 2 PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College
- 2. LLeeaarrnniinngg OObbjjeeccttiivveess 1. Explain the accounting cycle. (LO1) 2. Describe an account, its use, and its relationship to the ledger. (LO2) 3. Define debits and credits and explain their role in double-entry accounting. (LO3) 4. Describe a chart of accounts and its relationship to the ledger. (LO4) 2 © 2013 McGraw-Hill Ryerson Limited.
- 3. LLeeaarrnniinngg OObbjjeeccttiivveess 5. Analyze the impact of transactions on accounts. (LO5) 6. Record transactions in a journal and post entries to a ledger. (LO6) 7. Prepare and explain the use of a trial balance. (LO7) 3 © 2013 McGraw-Hill Ryerson Limited.
- 4. TThhee AAccccoouunnttiinngg CCyyccllee Prepare post-closing trial balance 9 1 Analyze transactions Journalize Close Post Prepare unadjusted trial balance Prepare statements Prepare adjusted trial balance Adjust 2 3 4 8 7 6 5 LO 1 4 © 2013 McGraw-Hill Ryerson Limited. Ch 1-2 Ch 2 Ch 2 Ch 2 Ch 3 Ch 4 Ch 4 Ch 1-4 Ch 3
- 5. TThhee AAccccoouunntt A detailed record of increases and decreases in a specific asset, liability, or equity item. Assets = Liabilities + Equity Examples: Cash Accounts Payable V.Climb, Capital Accounts Receivable Notes Payable V.Climb, Withdrawals Supplies Service Revenue Furniture Salaries Expense 5 © 2013 McGraw-Hill Ryerson Limited. LO 2
- 6. TThhee LLeeddggeerr • A record containing all accounts used by a business. • May be computerized or maintained manually. • Each company has its own unique set of accounts. 6 © 2013 McGraw-Hill Ryerson Limited. LO 2
- 7. TThhee TT AAccccoouunntt • Represents an account in the ledger. • Used as a learning tool. • The difference between the debit side and credit side is the balance. Account Title (Left side)/Debit (Right side)/Credit Debit balance Credit balance 7 © 2013 McGraw-Hill Ryerson Limited. LO 2
- 8. CCaallccuullaattiinngg tthhee AAccccoouunntt BBaallaannccee Cash Example: Cash sale 500 325 Paid salary Owner's investment 1000 450 Paid rent Total debits 1 1500 775 Total credits balance 3 725 2 Steps: 1. Add the amounts on the debit side. 2. Add the amounts on the credit side. 3. Calculate the difference between the Steps: 1. Add the amounts on the debit side. 2. Add the amounts on the credit side. 3. Calculate the difference between the debits and credits. debits and credits. 8 © 2013 McGraw-Hill Ryerson Limited. LO 2
- 9. DDoouubbllee-EEnnttrryy AAccccoouunnttiinngg • Transactions are recorded using debits and credits. • Every transaction affects at least two accounts. • Equal debits and credits will keep the accounting equation in balance. DDeebbiittss == CCrreeddiittss AAllwwaayyss !! 9 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 10. DDoouubbllee-EEnnttrryy AAccccoouunnttiinngg = Liabilities + Equity Assets LLiiaabbiilliittiieess Assets Liabilities Equity Debit for increases Credit for decreases Debit for decreases Credit for increases Debit for decreases Credit for increases + - - + - + 10 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 11. DDoouubbllee-EEnnttrryy AAccccoouunnttiinngg Capital - + Equity Accounts Withdrawals + - Expenses + - Revenues - + Debit for decreases Debit for decreases Credit for increases Credit for increases Debit for increases Debit for increases Credit for decreases Credit for decreases 11 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 12. NNoorrmmaall BBaallaanncceess An account’s normal balance is the debit or credit side where increases are recorded. Assets = Liabilities + Equity 12 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 13. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type Assets Liabilities Capital Revenue Expenses Withdrawals AALLCCRREEWW Step 1 Write down the account types using ALCREW. 13 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 14. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance Assets Liabilities Capital Revenue Expenses Withdrawals Step 2 Write down the normal balance (debit) of A,E,W. The others are credits. 14 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 15. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance Assets Dr Liabilities Capital Revenue Expenses Dr Withdrawals Dr Step 2 Write down the normal balance, debit, of A,E,W. The others are credits. 15 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 16. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance Assets Dr Liabilities Cr Capital Cr Revenue Cr Expenses Dr Withdrawals Dr Step 2 Write down the normal balance, debit, of A,E,W. The others are credits. 16 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 17. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance To ↑ Balance To ↓ Balance Assets Dr Dr Liabilities Cr Cr Capital Cr Cr Revenue Cr Cr Expenses Dr Withdrawals Dr Step 3 Remember, increases are the same as the normal balances, decreases are the opposite. 17 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 18. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance To ↑ Balance To ↓ Balance Assets Dr Dr Cr Liabilities Cr Cr Dr Capital Cr Cr Dr Revenue Cr Cr Dr Expenses Dr Withdrawals Dr Step 3 Remember, increases are the same as the normal balances, decreases are the opposite. 18 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 19. Remembering DDeebbiittss aanndd CCrreeddiittss Account Type AALLCCRREEWW Normal Balance To ↑ Balance To ↓ Balance Assets Dr Dr Cr Liabilities Cr Cr Dr Capital Cr Cr Dr Revenue Cr Cr Dr Expenses Dr Dr Cr Withdrawals Dr Dr Cr 19 © 2013 McGraw-Hill Ryerson Limited. LO 3
- 20. MMiinnii--QQuuiizz Indicate whether a debit or credit is needed to: • Increase Rent Expense • Decrease Accounts Payable • Decrease Accounts Receivable • Decrease Cash • Increase Withdrawals 20 © 2013 McGraw-Hill Ryerson Limited. Debit Debit Credit Credit Debit LO 3
- 21. Homework Questions QS 2-3 QS 2-4 QS 2-5 Read Pages 71-86 21 © 2013 McGraw-Hill Ryerson Limited.
- 22. TTrriiaall BBaallaannccee • A list of accounts and their balances at a point in time. • Used to determine if total debits equals total credits. • Also used to prepare financial statements. 22 © 2013 McGraw-Hill Ryerson Limited. LO 7
- 23. TTrriiaall BBaallaannccee 23 © 2013 McGraw-Hill Ryerson Limited. LO 7
- 24. CChhaarrtt ooff AAccccoouunnttss • A list of all accounts used in the ledger by a company. • Unique for each company. • Accounts are usually numbered. 24 © 2013 McGraw-Hill Ryerson Limited. LO 4
- 25. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Steps: 1. Determine which accounts are being affected. 2. Determine if account balances are increasing or decreasing. 3. Apply rules of debits and credits. 25 © 2013 McGraw-Hill Ryerson Limited. LO 5
- 26. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #1: The owner invests $10,000 cash in the business. Accounts affected Increase/ Decrease 26 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit 1 2 3 LO 5
- 27. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #1: The owner invests $10,000 cash in the business. Accounts affected Increase/ Decrease 1 2 3 27 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Cash V. Klimb, capital LO 5
- 28. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #1: The owner invests $10,000 cash in the business. Accounts affected Increase/ Decrease 1 2 3 28 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Cash Increase V.Klimb, Increase capital LO 5
- 29. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #1: The owner invests $10,000 cash in the business. Accounts affected Increase/ Decrease 1 2 3 29 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Cash Increase Debit V.Klimb, capital Increase Credit LO 5
- 30. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #1: The owner invests $10,000 cash in the business. Debit cash for $10,000 Credit V.Klimb, capital for $10,000 30 © 2013 McGraw-Hill Ryerson Limited. LO 5
- 31. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease 31 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit 1 2 3 LO 5
- 32. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease 1 2 3 32 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Cash LO 5
- 33. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease 1 2 3 33 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Increase Cash Decrease LO 5
- 34. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #2: The company purchases supplies by paying $2,500 cash. Accounts affected Increase/ Decrease 1 2 3 34 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Increase Debit Cash Decrease Credit LO 5
- 35. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #2: The company purchases supplies by paying $2,500 cash. Debit supplies for $2,500 Credit cash for $2,500 35 © 2013 McGraw-Hill Ryerson Limited. LO 5
- 36. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease 36 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit 1 2 3 LO 5
- 37. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease 1 2 3 37 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Accounts Payable LO 5
- 38. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease 1 2 3 38 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Increase Accounts Increase Payable LO 5
- 39. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #3: The company purchases supplies for $1,100 on credit. Accounts affected Increase/ Decrease 1 2 3 39 © 2013 McGraw-Hill Ryerson Limited. Debit/ Credit Supplies Increase Debit Accounts Payable Increase Credit LO 5
- 40. AAnnaallyyzziinngg TTrraannssaaccttiioonnss Example #3: The company purchases supplies for $1,100 on credit. Debit supplies for $1,100 Credit accounts payable for $1,100 40 © 2013 McGraw-Hill Ryerson Limited. LO 5
- 41. TThhee GGeenneerraall JJoouurrnnaall Entries are originally recorded in the General Journal. This process is called journalizing. GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit 2014 Jan. 1 Cash 10 000 V.Klimb, Capital 10 000 Investment by owner Jan. 1 Supplies 2 500 Cash 2 500 Purchased store supplies for cash Jan. 1 Supplies 1 100 Equipment 6 000 Accounts payable 1 100 Notes payable 6 000 Purchased supplies and equip. on credit 41 © 2013 McGraw-Hill Ryerson Limited. LO 6
- 42. PPoossttiinngg JJoouurrnnaall EEnnttrriieess • General Journal information is transferred to the General Ledger. • Account balances are updated. • This process is called posting. 42 © 2013 McGraw-Hill Ryerson Limited. LO 6
- 43. The Posting Process GENERAL JOURNAL Page 1 Date Account Titles and Explanation PR Debit Credit Jan. 1 Cash 101 1 0 000 Virgil Klimb, Capital 301 10 000 Investment by owner 1 3 GENERAL LEDGER General journal information is transferred to the general ledger Cash ACCOUNT NO. 101 2 DATE EXPLANATION PR DEBIT CREDIT BALANCE Jan. 1 G1 10 0 0 0 10 0 0 0 Steps: 1. Identify the account. 2. Enter date 3. Enter amount 4. Calculate new account balance 5. Enter posting references Virgil Klimb, Capital ACCOUNT NO. 301 DATE EXPLANATION PR DEBIT CREDIT BALANCE Jan . 1 G1 10 0 0 0 10 0 0 0 4 5 5 43 © 2013 McGraw-Hill Ryerson Limited. LO 6
- 44. Homework Problems Page 98 - Exercise 2-1 44 © 2013 McGraw-Hill Ryerson Limited.