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8/10/2019 Chapter 2 accounts receivable 101
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Financial and ManagerialAccounting
Wild, Shaw, and Chiappetta
Fifth Edition
McGraw-Hill/Irwin
Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 2
Analyzing and RecordingTransactions
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Conceptual Learning Objectives
C1:Explain the steps in processingtransactions and the role of source
documents.C2:Describe an account and its use in
recording transactions.
C3:Describe a ledger and a chart ofaccounts.
C4:Define debits and credits and explaindouble-entry accounting.
2-3
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Analytical Learning Objectives
A1:Analyze the impact of transactionson accounts and financial statements.
A2: Compute the debt ratio and describeits use in analyzing financialcondition.
2-4
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Procedural Learning Objectives
P1:Record transactions in a journal andpost entries to a ledger.
P2:Prepare and explain the use of a trialbalance.
P3:Prepare financial statements from
business transactions.
2-5
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External Transactionsoccur between the
organization and anoutside party.
Internal Transactionsoccur within the
organization.
Analyzing and RecordingProcess
Exchanges of economic considerationbetween two parties.
C 1
2-6
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Analyze each transaction andevent from source documents
Analyzing and RecordingProcess
Record relevant transactionsand events in ajournal
Post journalinformation
to ledgeraccountsPrepare and analyze
the trial balance
C 1
2-7
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Sales
Tickets
Bank
Statements
Purchase
Orders
Checks
Source Documents
Bills fromSuppliers
Employee
EarningsRecords
C 1
2-8
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An accountis arecord of
increases anddecreases in aspecific asset,
liability, equity,revenue, orexpense item.
The Accountand Its Analysis
The generalledgeris a record
containing allaccounts used by
the company.
C 2
2-9
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AssetsAccountsAssets
AccountsAsset
Accounts =
The Accountand Its Analysis
+Liability
AccountsLiability
AccountsLiability
Accounts
EquityAccountsEquity
AccountsEquity
Accounts
C2
2-10
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Land
Equipment
Buildings
Cash
NotesReceivable
Supplies
PrepaidAccounts
AccountsReceivable
AssetAccounts
Asset AccountsC 2
2-11
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AccruedLiabilities
UnearnedRevenue
NotesPayable
AccountsPayable
LiabilityAccounts
Liability AccountsC 2
2-12
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Liabilities EquityAssets = +
The Account and Its Analysis
Common
Stock Dividends Revenues Expenses
+ +
C 2
2-14
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Ledger and Chart of Accounts
The ledgeris a collection of all accounts foran information system. A companys size anddiversity of operations affect the numberof accounts needed.
The chart of accoun ts is a list of all accounts andincludes an identifying number for each account.
Acct # Acct # Account Name
101 Cash 319 Dividends
106 Accounts receivable 403 Consulting revenue
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense201 Accounts payable 640 Rent expense
236 Unearned consulting revenue 652 Supplies expense
307 Common stock 690 Utilities expense
Account Name
C 3
2-15
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A T-account represents a ledger accountand is a tool used to understand the effectsof one or more transactions.
Debits andCredits
(Left side) (Right side)
Debit Credit
T- Account
C4
2-16
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Liabilities EquityAssets = +
Double-Entry Accounting
Debit Credit Debit Credit Debit Credit
ASSETS
+ -
LIABILITIES
- +
EQUITY
- +
C4
2-17
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Revenues Expenses
Common
StockDividends
_+
_
Debit Credit
Stock
- +Debit Credit
Dividends
+ -Debit Credit
Expenses
+ -Debit Credit
Revenues
- +
Double-Entry Accounting
Equity
C 4
2-18
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Investment by owner for stock 30,000 Purchase of supplies 2,500
Consulting services revenue earned 4,200 Purchase of equipment 26,000
Collection of account receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of account payable 900
Payment of cash dividend 200
Total increases 36,100 Total decreases 31,300
Balance 4,800
Cash
Double-Entry Accounting
An account balance is the difference between theincreases and decreases in an account.
Notice the T-Accoun t
C4
2-19
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Journalizing and
Posting Transactions
Step 1: Analyzetransactions and source
documents.
Liabilities EquityAssets = +
Step 2: Apply double-
entry accounting
(Left side) (Right side)
Debit Credit
T- Account
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record journal entry
P1
2-20
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GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000Investment by shareholder
Dollar Amount of Debitsand Credits
Journalizing Transactions
TransactionDate
TransactionExplanation
Titles of AffectedAccounts
P1
2-21
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CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1 Initial investment 30,000 30,000
Dec. 2 Purchased supplies 2,500 27,500
Dec. 3 Purchased equipment 26,000 1,500
Dec. 10 Collection from customer 4,200 5,700
T-accounts are useful illustrations, butbalance column accounts are used inpractice.
Balance Column AccountP1
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GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000
Investment by shareholder
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
1 Identify the debit account in ledger.
Posting Journal EntriesP1
2-23
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GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000Investment by shareholder
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1
2 Enter the date in the ledger.
Posting Journal EntriesP1
2-24
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GENERAL JOURNAL Page 1Date Account Titles & Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000
Investment by shareholder
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1 30,000
3 Enter the amount and description.
Posting Journal EntriesP1
2-25
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GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000Investment by shareholder
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1 G1 30,000
4 Enter the journal reference.
Posting Journal EntriesP1
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CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1 G1 30,000 30,000
5 Compute the balance.
GENERAL JOURNAL Page 1Date Account Titles & Explanation PR Debit Credit
2013
Dec. 1 Cash 30,000
Common Stock 30,000
Investment by shareholder
Posting Journal EntriesP1
2-27
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GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit
2013
Dec. 1 Cash 101 30,000
Common Stock 30,000
Investment by shareholder
CASH ACCOUNT No. 101
Date Explanation PR Debit Credit Balance
2013
Dec. 1 G1 30,000 30,000
Enter the ledger reference into the general journal.6
Posting Journal EntriesP1
2-28
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Analyzing Transactions
Assets = + Equity
Cash CommonStock
30,000 30,000
LiabilitiesAnalysis:
(1) Cash 101 30,000
Common Stock 307 30,000
Double entry:
(1) 30,000
Cash 101 307
Posting:
A1
2-29
Transaction: Shareholder invested $30,000 in FastForward on Dec. 1
(1) 30,000
Common Stock
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Analyzing Transactions
Assets = + EquityCash Supplies
2 500 2 500
Liabilities
Analysis:
(2) Supplies 126 2,500Cash 101 2,500
Double entry:
(2) 2,500
Supplies 126
(1) 30,000 (2) 2,500
Cash 101
Posting:
A1
2-30
Transaction: FastForward purchases supplies by paying$2,500 in cash
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Analyzing Transactions
Assets = + Equity
Cash Equipment
(26,000) 26,000
Liabilities
(3) Equipment 167 26,000
Cash 101 26,000
Double entry:
(1) 30,000 (2) 2,500
(3) 26,000
Cash
(3) 26,000
Equipment 167 101
Posting:
A1
Analysis:
2-31
Transaction: FastForward purchases equipment by paying $26,000cash.
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Transaction: FastForward purchases $7,100 of supplies on credit.
Analyzing Transactions
Assets = + Equity
Supplies Accounts Payable7,100 7,100
Liabilities
Analysis:
(4) Supplies 126 7,100
Accounts Payable 201 7,100
Double entry:
(2) 2,500
(4) 7,100
Supplies 126
(4) 7,100
Accounts Payable 201
Posting:
A1
2-32
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Analyzing Transactions
Transaction:FastForward provides consulting services andimmediately collects $4,200 cash.
Assets = + Equity
Cash Revenue4,200 4,200
Liabilities
Analysis:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Double entry:
403 101
Posting:
A1
2-33
(3) 4,200
Consulting Revenue
(1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
Cash
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After processing itsremaining transactions
for December,FastForwards trial
balance is prepared.Debits Credits
Cash 4,350$
Accounts receivable -Supplies 9,720Prepaid insurance 2,400Equipment 26,000Accounts payable 6,200$Unearned consulting revenue 3,000Common stock 30,000Dividends 200Consulting revenue 5,800Rental revenue 300Salaries expense 1,400Rent expense 1,000Utilities expense 230Totals 45,300$
45,300$
FASTFORWARD
December 31, 2013
The trial balance listsall account balancesin the general ledger.
If the books are in
balance, the totaldebits will equal the
total credits.
P2
2-34
Trial Balance
Trial Balance
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Six Steps for Searching forand Correcting Errors
If the trial balance does not balance, theerror(s) must be found and corrected.
Verify that the trial balance
columns are correctly added.
Verify that account balancesare correctly entered from theledger.
See whether a debit (orcredit) balance is mistakenlylisted as a credit (or debit).
Recompute each account
balance in the ledger.
Verify that each journalentry is properly posted.
Verify that each originaljournal entry has equaldebits and credits.
P2
2-35
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Using a Trial Balance toPrepare Financial Statements
Statement of CashFlows
Income Statement
Statement of Retained Earnings
BeginningBalanceSheet
EndingBalanceSheet
Period of TimePoint in
TimePoint in
Time
P3
2-36
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Income Statement
Revenues:
Consulting revenue 5,800$Rental revenue 300
Total revenues 6,100$
Expenses:
Rent expense 1,000
Salaries expense 1,400Utilities expense 230
Total expenses 2,630
Net income 3,470$
FASTFORWARD
Income Statement
For the Month Ended December 31, 2013
P3
2-37
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Statement of Retained Earnings
Retained earnings 12/1/13 -$
Net income for December 3,470
3,470
Less: Cash Dividends (200)
Retained earnings 12/31/13 3,270$
FASTFORWARDStatement of Retained Earnings
For the Month Ended December 31, 2013
Revenues:
Consulting revenue 5,800$
Rental revenue 300Total revenues 6,100$
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income 3,470$
FASTFORWARD
Income Statement
For the Month Ended December 31, 2013
P3
2-38
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Balance Sheet
Assets
Cash 4,350$
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Total assets 42,470$
Liabilities
Accounts payable 6,200$
Unearned revenue 3,000
Total liabilities 9,200
Equity
Common stock 30,000
Retained earnings 3,270
Total equity 33,270
Total liabilities and equity 42,470$
FASTFORWARD
Balance Sheet
December 31, 2013
Retained earnings 12/1/13 -$
Net income for December 3,470
3,470
Less: Cash dividends 200Retained earnings 12/31/13 3,270$
FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2013
P3
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o Describes the relationship between theamounts of the companys liabilities
and assets.
o Helps to assess the risk that acompany will fail to pay its debts.
Debt Ratio =Total Liabilities
Total Assets
Debt RatioA2
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End of Chapter 2