FINANCIAL ACCOUNTING IFRS EDITION SLIDES ch02

7/26/2019 FINANCIAL ACCOUNTING IFRS EDITION SLIDES ch02

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Chapter 2 The Recording ProcessLearning Objectives

After studying this chapter, you should be able to:

[1] Explain what an account is and how it helps in the recording process.

[2]

Define debits and credits and explain their use in recording business

transactions.

[3] Identify the basic steps in the recording process.

[4]

Explain what a journal is and how it helps in the recording process.

[5] Explain what a ledger is and how it helps in the recording process.

[6]

Explain what posting is and how it helps in the recording process.

[7] Prepare a trial balance and explain its purposes.


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Preview of Chapter 2

Financial Accounting

IFRS Second Edition

Weygandt Kimmel Kieso


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Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreasesin a specific asset, liability, equity,revenue, or expense item.

Debit = Left

Credit = Right

Account

An account can beillustrated in a T-

account form.

LO 1 Explain what an account is and how it helps in the recording process.

The Account


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Double-entry system

Each transaction must affect two or more accounts to

keep the basic accounting equation in balance.

Recording done by debiting at least one account and

crediting another.

DEBITSmust equalCREDITS.

LO 2 Define debits and credits and explain their usein recording business transactions.

The Account

Debits and Credits


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Account Name


If Debit amounts are greater thanCredit amounts, theaccount will have a debit balance.

$10,000 Transaction #2$3,000

$15,000

8,000Transaction #3

Balance

Transaction #1

Debits and Credits



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Account Name


$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000

8,000 Transaction #3

If Debit amounts are less thanCredit amounts, theaccount will have a credit balance.

Debits and Credits



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Assets- Debits should exceedcredits.

LiabilitiesCredits should

exceed debits.

Normal balanceis on the

increase side.

Chapter3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter3-24

LiabilitiesLiabilities



Debits and Credits



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Issuance of share capitalandrevenuesincrease equity (credit).

Dividendsand expenses

decrease equity (debit).

Chapter3-25



Share CapitalShare Capital

Chapter3-23

DividendsDividends



Chapter3-25



EquityEquity

Chapter3-25



Retained EarningsRetained Earnings

Debits and Credits

LO 2


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Chapter3-27



ExpenseExpense

Chapter3-26



RevenueRevenue

Debits and Credits


The purpose of earningrevenuesis to benefit the

shareholders.

The effect of debits and credits

on revenue accounts is the

same astheir effect on equity.

Expenseshave the opposite

effect: expenses decrease

equity.


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Chapter3-23

AssetsAssets



Chapter3-27



ExpenseExpense

Normal

BalanceCredit

Normal

BalanceDebit

Debit/Credit Rules

Chapter3-24

LiabilitiesLiabilities



Chapter

3-25



EquityEquity

LO 2

Chapter3-26

Debit / Dr.Credit / Cr.


RevenueRevenue


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Income Statement

= + -Asset Liability Equity Revenue Expense

Debit

Credit

Debit/Credit Rules


Statement of

Financial Position


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Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Debit/Credit Rules

Question



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Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Debit/Credit Rules

Question



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Equity Relationships

LO 2

Illustration 2-11


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Illustration 2-12

Summary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of abusiness:

The equation must be in balance after every transaction.

For every Debitthere must be a Credit.



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Kate Browne, president of Hair It Is, Inc., has just rented space in ashopping mall in which she will open and operate a beauty salon. A

friend has advised Kate to set up a double-entry set of accounting

records in which to record all of her business transactions. Identify the

balance sheet accounts that Hair It Is, Inc., will likely need to record

the transactions needed to establish and open the business. Also,

indicate whether the normal balance of each account is a debit or a

credit.

LO 2

Assets

Cash (debit)

Supplies (debit)

Equipment (debit)

Liabilities

Notes payable (credit)

Accounts payable (credit)

Equity

Share capital (credit)


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Business documents, such as a sales slip, a check, a bill, ora cash register tape, provide evidence of the transaction.

LO 3 Identify the basic steps in the recording process.

Illustration 2-13

Analyze each transaction Enter transaction in a journalTransfer journal information to

ledger accounts

Steps in the Recording Process


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Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological recordof transactions.

3. Helps toprevent or locate errorsbecause the debit and

credit amounts can be easily compared.

LO 4 Explain what a journal is and how it helps in the recording process.


The Journal


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Journalizing- Entering transaction data in the journal.


Illustration: On September 1, shareholders invested 15,000 cash

in the corporation in exchange for share of stock, and Softbyte

purchased computer equipment for7,000 cash.

Account Title Ref. Debit CreditDate

Cash

Share capital-ordinary

Sept. 1 15,000

15,000

General Journal

Equipment

Cash

7,000

7,000

Illustration 2-14



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Simple and Compound Entries


Illustration: On July 1, Tsai Company purchases a delivery truck

costing NT$420,000. It pays NT$240,000 cash now and agrees to

pay the remaining NT$180,000 on account.

Account Title Ref. Debit CreditDate

Equipment

Cash

July 1 420,000

240,000

General Journal

180,000Accounts payable

Illustration 2-15



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General Ledgercontains the entire group of accounts

maintained by a company.

LO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-16

The Ledger



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2-25 LO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-17


Standard Form of Account


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Postingprocess of

transferring

amounts from

the journal tothe ledger

accounts.

Illustration 2-18

LO 6 Explain what posting is and how it helps in the recording process.

Steps


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Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.


Posting

Question


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Accounts and account numbers arranged in sequence in which

they are presented in the financial statements.


Illustration 2-19

Chart of Accounts


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2-29 LO 6

Follow these steps:

1. Determine what

type of account is

involved.

2. Determine what

items increased or

decreased and by

how much.

3. Translate the

increases anddecreases into

debits and credits.

Illustration 2-20

The Recording Process Illustrated


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LO 6

Illustration 2-21


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LO 6

Illustration 2-22


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LO 6

Illustration 2-23


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LO 6

Illustration 2-24


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LO 6

Illustration 2-25


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Illustration 2-26

LO 6


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LO 6

Illustration 2-27


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LO 6

Illustration 2-28


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LO 6

Illustration 2-29


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Basel Company recorded the following transactions in a general journalduring the month of March. Post these entries to the Cash account.

Mar. 4 Cash 2,280

Service Revenue 2,280

Mar. 15 Salaries and Wages Expense 400

Cash 400

Mar. 19 Utilities Expense 92

Cash 92

LO 6


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2-40Illustration 2-31


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2-41 LO 7 Prepare a trial balance and explain its purposes.

Illustration 2-32

Trial Balance


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The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a

transaction.

LO 7 Prepare a trial balance and explain its purposes.

Trial Balance

Limitations of a Trial Balance


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Key Points Rules for accounting for specific events sometimes differ across

countries. For example, IFRS companies rely less on historical cost and

more on fair value than U.S. companies. Despite the differences, the

double-entry accounting system is the basis of accounting systems

worldwide.

Both the IASB and FASB go beyond the basic definitions provided in

this textbook for the key elements of financial statements, that is,

assets, liabilities, equity, revenues, and expenses. The more

substantive definitions, using the FASB definitional structure, areprovided in the Chapter 1 Another Perspective section on page 48.

A trial balance under GAAP follows the same format as shown in the

textbook.

Another Perspective


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Key Points In the United States, equity is often referred to as either shareholders

equity or stockholdersequity, and Share CapitalOrdinary is referred

to as Common Stock. The statement of financial position is often called

the balance sheet in the United States.

As shown in the textbook, currency signs are typically used only in the

trial balance and the financial statements. The same practice is followed

under GAAP, using the U.S. dollar.

Another Perspective


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Key Points In February 2010, the U.S. Securities and Exchange Commission (SEC)

expressed a desire to continue working toward a single set of high-quality

standards. In deciding whether the United States should adopt IFRS, some

of the issues the SEC said should be considered are:

Whether IFRS is sufficiently developed and consistent in application.

Whether the IASB is sufficiently independent.

Whether IFRS is established for the benefit of investors.

Issues involved in educating investors about IFRS.

Impact of a switch to IFRS on U.S. laws and regulations.

Impact on companies including changes to their accounting systems,

contractual arrangements, corporate governance, and litigation.

The issues involved in educating accountants.

Another Perspective


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Looking to the FutureThe basic recording process shown in this textbook is followed by

companies across the globe. It is unlikely to change in the future. The

definitional structure of assets, liabilities, equity, revenues, and expenses

may change over time as the IASB and FASB evaluate their overall

conceptual framework for establishing accounting standards.

Another Perspective


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A trial balance:

a) is the same under GAAP and IFRS.

b) proves that transactions are recorded correctly.

c) proves that all transactions have been recorded.

d) will not balance if a correct journal entry is posted twice.

GAAP Self-Test Questions

Another Perspective


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One difference between GAAP and IFRS is that:

a) IFRS uses accrual-accounting concepts, and GAAP uses

primarily the cash basis of accounting.

b) GAAP uses a different posting process than IFRS.

c) IFRS uses more fair value measurements than GAAP.

d) the limitations of a trial balance are different between GAAPand IFRS.


Another Perspective


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The general policy for using proper currency signs (dollar, yen,

pound, etc.) is the same for both GAAP and this textbook. This policy

is as follows:

a) Currency signs only appear in ledgers and journal entries.

b) Currency signs are only shown in the trial balance.

c) Currency signs are shown for all compound journal entries.

d) Currency signs are shown in trial balances and fi nancial

statements.


Another Perspective


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FINANCIAL ACCOUNTING IFRS EDITION SLIDES ch02