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CHAPTER 2
Analysis
Transactions
OBJECTIVES :
Accounting cycle .
Transaction .
Analyzing Transactions for Balance
sheet.
Analyzing Transactions for income
statement.
ACCOUNTING CYCLE : Transactions
(economic activities &
business condion)
Journal(record
transactions in the journal)
Ledger(Posting
transactons to ledger)
Unadjusted trail balance(Prepar
unadjusted trail balanc)
Adjustment(journalizing &
posting adjusting entries)
Adjusted Trail Balance
(Prepar adjusted trail balanc)
Financial Statement
(Prepar 4 financial statement)
Closing Entries(journalizing & posting closing
entries)
TRANSACTION
A transaction
is a business activity that affects the basic
accounting equation.
Example :
1- Sale a land.
2- Buy a car.
3 - Borrow a loan.
ANALYZING TRANSACTIONS FOR
BALANCE SHEET
LEARNING OBJECTIVE 1
Identify financial effects of common financing and
investing activities.
2-6
BUILDING A BALANCE SHEET
Assets
The rights of creditors
The rights of the owners
Resources owned by the business
Stockholders’ Equity
Liabilities
=
+
2-7
LEARNING OBJECTIVE 2
Apply transaction analysis to financing and investing
transactions.
2-8
STUDY THE ACCOUNTING METHODS
1 Analyze 2 Record 3 Summarize
A systematic accounting process is used to capture and report the financial effects of a company’s transactions.
A transaction is a business activity that affects the basic accounting equation.
Duality of Effects
Every transaction has at least two effects on the basic
accounting equation.
A = L+ SE
Assets must equal liabilities plus stockholders’ equity for every accounting transaction.
2-9
STEP 1: ANALYZE TRANSACTIONS(a) Issue Stock to Owners.
Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,
which is deposited in the company’s bank account.
1. Pizza Aroma receives $50,000 Cash.
2. Pizza Aroma gives $50,000 Stock (Contributed Capital).
Assets = Liabilities + Stockholders' Equity(a) Cash +$50,000 Contributed
Capital + $50,000
2-10
STEP 1: ANALYZE TRANSACTIONS(b) Investment in Equipment.
1. Pizza Aroma receives $42,000 of Equipment.
2. Pizza Aroma gives $42,000 Cash.
Assets = Liabilities + Stockholders' Equity(b) Equipment +$42,000 Cash -$42,000
Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.
2-11
STEP 1: ANALYZE TRANSACTIONS(c) Obtain Loan from Bank.
1. Pizza Aroma receives $20,000 Cash.
2. Pizza Aroma gives a note, payable to the bank for $20,000.
Assets = Liabilities + Stockholders' Equity(c) Cash +$20,000 = Note Payable +$20,000
Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.
2-12
STEP 1: ANALYZE TRANSACTIONS
(d) Investment in Equipment.
1. Pizza Aroma receives $18,000 in equipment (pizza ovens).
2. Pizza Aroma gives a Cash of $16,000 and Accounts Payable of $2,000.
Assets = Liabilities + Stockholders' Equity(d) Cash -$16,000 = Accounts Payable +$2,000
Equipment +$18,000
Pizza Aroma purchases $18,000 in pizza ovens and other restaurant equipment, paying $16,000 in cash and giving an informal promise to pay
$2,000 at the end of the month.
2-13
STEP 1: ANALYZE TRANSACTIONS
(e) Order Cookware.
1. An exchange of only promises is not a transaction.
2. This does not affect the accounting equation.
Assets = Liabilities + Stockholders' EquityNo Impact = No Impact No Impact
Pizza Aroma orders $630 of pans, dishes, and other cookware. None have been received yet.
2-14
STEP 1: ANALYZE TRANSACTIONS
(f) Pay Suppliers.
1. Pizza Aroma gives cash to settle its debt to the supplier.
2. Pizza Aroma receives a release from its promise to pay.
Assets = Liabilities + Stockholders' Equity(f) Cash -$2,000 = Accounts Payable -$2,000
Pizza Aroma pays $2,000 to the equipment supplier from transaction (d).
2-15
STEP 1: ANALYZE TRANSACTIONS
(g) Receive Cookware.
1. Pizza Aroma receives cookware with a cost of $630.
2. Pizza Aroma gave a promise to pay $630 on account.
Assets = Liabilities + Stockholders' Equity(g) Cookware +$630 = Accounts Payable +$630
Pizza Aroma receives $630 of the cookware ordered in (e) and promises to pay for it next month.
2-16
STEP 2 AND 3: RECORD AND SUMMARIZE
Most companies use computerized accounting systems, which can handle a large number of transactions. These systems
follow a cycle, called the accounting cycle, which is repeated day-after-day, month-after-month, and year-after-year.
2-17
CHAPTER 2SOLVED EXERCISES
M2-13 Identifying Transactions and Preparing Journal Entries
1- Borrowed $25,000 from the bank with a plan to use the funds to build a small workshop in August. The loan must be report in two years.
1- dr Cash (+A) 25,000cr Notes Payable (+L)
25,000
2-19
M2-14 Identifying Transactions and Preparing Journal Entries
2- The company purchased bookshelves for $2,000 cash. The bookshelves are expected to be used for ten or more years.
2- dr Equipment (+A) 2,000cr Cash (-A) 2,000
2-20
M2-14 Identifying Transactions and Preparing Journal Entries
3- The company paid $1,500 cash, for books purchased on account earlier in the month.
3- dr Accounts Payable (-L) 1,500cr Cash (-A) 1,500
2-21
M2-15 Identifying Transactions and Preparing Journal Entries
4- Repaid a $5,000 bank loan. (Ignore interest).5- The company purchased an air hockey table for $2,200, paying $1,000 cash and signing short-term note for $1,200.
4- dr Notes Payable (-L) 5,000cr Cash (-A) 5,000
5- dr Equipment (+A) 2,200cr Cash (-A) 1,000cr Notes Payable (+L) 1,200
2-22
ANALYZING TRANSACTIONS FOR
INCOME STATEMENT
CASH BASIS ACCOUNTING
Cash basis accounting records revenues when cash
is received and expenses when cash is paid.
3-24
LEARNING OBJECTIVE 2
Explain and apply the revenue and matching
principles.
3-25
PIZZA AROMA’S ACCOUNTING RECORDS
(a) Provided services for cash.
In September, Pizza Aroma delivered pizza to customers for $15,000 cash.
Assets = Liabilities + Stockholders' Equity(a) Cash +$15,000 Pizza
Revenue (+R) + $15,000
1 Analyze
(a) dr Cash (+A) 15,000 cr Pizza Revenue (+R, +SE) 15,000
2 Record
3-26
PIZZA AROMA’S ACCOUNTING RECORDS
(b) Receive cash for future services.
Pizza Aroma sold three $100 gift cards at the beginning of September.
Assets = Liabilities + Stockholders' Equity(b) Cash +$300 Unearned
Revenue +$300
1 Analyze
2 Record(b) dr Cash (+A) 300 cr Unearned Revenue (+L) 300
3-27
PIZZA AROMA’S ACCOUNTING RECORDS
(c) Provide services on credit.
Pizza Aroma delivers $500 of pizza to a college organization, billing this customer on account.
Assets = Liabilities + Stockholders' Equity(c) Accounts Pizza Receivable +$500 Revenue (+R) +$500
1 Analyze
2 Record(c) dr Accounts Receivable (+A) 500 cr Pizza Revenue (+R, +SE) 500
3-28
PIZZA AROMA’S ACCOUNTING RECORDS
(d) Receive payment on account.
Pizza Aroma received a $300 check from the college organization, as partial payment of its account balance.
Assets = Liabilities + Stockholders' Equity(d) Cash +$300 Accounts Receivable -$300
1 Analyze
2 Record(d) dr Cash (+A) 300 cr Accounts Receivable (-A) 300
3-29
PIZZA AROMA’S ACCOUNTING RECORDS
(e) Pay cash to employees.
Pizza Aroma wrote checks to employees, totaling $8,100 for wages related to hours worked in September.
Assets = Liabilities + Stockholders' Equity(e) Cash -$8,100 Wages
Expense (+E) -$8,100
1 Analyze
2 Record(e) dr Wages Expense (+E, -SE) 8,100 cr Cash (-A) 8,100
3-30
PIZZA AROMA’S ACCOUNTING RECORDS (f) Pay cash in advance.
On September 1, Pizza Aroma paid $7,200 in advance for September, October, and November rent.
Assets = Liabilities + Stockholders' Equity(f) Cash -$7,200 Prepaid Rent +$7,200
1 Analyze
2 Record(f) dr Prepaid Rent (+A) 7,200 cr Cash (-A) 7,200
3-31
PIZZA AROMA’S ACCOUNTING RECORDS(g) Pay cash in advance.
On September 2, Pizza Aroma wrote a check for $1,600 for pizza sauce, dough, cheese, and paper products.
Assets = Liabilities + Stockholders' Equity(g) Cash -$1,600 Supplies +$1,600
1 Analyze
2 Record(g) dr Supplies (+A) 1,600 cr Cash (-A) 1,600
3-32
PIZZA AROMA’S ACCOUNTING RECORDS
(h) Incur cost to be paid later.
Pizza Aroma received a bill for $400 for running a newspaper ad in September. The bill will be paid in October.
Assets = Liabilities + Stockholders' Equity(h) Accounts Advertising
Payable +$400 Expense (+E) -$400
1 Analyze
2 Record(h) dr Advertising Expense (+E, -SE) 400 cr Accounts Payable (+L) 400
3-33
PIZZA AROMA’S ACCOUNTING RECORDS
(i) Pay cash for expenses.
Pizza Aroma received and paid bills totaling $600 for September utilities services.
Assets = Liabilities + Stockholders' Equity(i) Cash -$600 Utilities
Expense (+E) -$600
1 Analyze
2 Record(i) dr Utilities Expense (+E, -SE) 600 cr Cash (-A) 600
3-34
CHAPTER 3SOLVED EXERCISES
M3-13 Preparing Journal Entries for Business Activitiesc. Paid wages for the current month, totaling $2,000.d. Performed cleaning services on account worth $2,800.e. Some of Quick Cleaners’ equipment was repaired at a
total cost of $150. The company paid the full amount immediately.
c. dr Wages Expense (+E -SE) 2,000cr Cash (-A) 2,000
d. dr Accounts Receivable (+A) 2,800cr Services/Cleaning Revenue (+R +SE) 2,800
e. dr Repairs and Maintenance Expense (+E -SE) 150cr Cash (-A) 150
3-36
M3-14 Preparing Journal Entries for Business ActivitiesJunktrader is an online company that specializes in matching buyers and sellers of used items. Buyers and sellers can purchase a membership with Junktrader, which provides them advance notice of potentially attractive offers. Prepare journal entries for the following transactions, which occurred during a recent month.a. Junktrader provided online advertising services for
another company for $200 on account.b. On the last day of the month, Junktrader paid $50
cash to run an ad promoting the company’s services. The ad ran that day in the local newspaper.
a. dr Accounts Receivable (+A) 200cr Advertising Revenue (+R +SE) 200
b. dr Advertising Expense (+E -SE) 50cr Cash (-A) 50
3-37
M3-14 Preparing Journal Entries for Business Activitiesc. Received $200 cash in membership fees for the
month from new members.d. Received an electricity bill for $85, for usage this
month. The bill will be paid next month.e. Billed a customer $180 for helping them sell their
junk. The customer is expected to pay by the end of next month.c. dr Cash (+A) 200cr Membership Revenue (+R +SE) 200
d. dr Electricity Expense (+E -SE) 85cr Accounts Payable (+L) 85
e. dr Accounts Receivable (+A) 180cr Services Revenue (+R +SE) 180
3-38