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8/10/2019 Principles of Accounting-wk2&3-Business Transaction (2)
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Principles of AccountingBPA 11403
Prepared by:Nur Aniza Quantaniah binti Jusoh
Fakulti Pengurusan Teknologi dan Perniagaan
Universiti Tun Hussein Onn Malaysia
Room:J-701-13
Tel : 07-4533930
E-mail: [email protected]
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OBJECTIVES
Define and use key accounting
terms.Define doub le-entry system and
state the rules for double entry.
Apply the rules of debit andcredit.
Record transactions in the
journal.
RECORDING BUSINESSTRANSACTION
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OBJECTIVES
Post from the journal to the
ledger.Set up a chart of accounts for a
business.
Analyze transactions without ajournal.
Prepare and use a trial balance.
RECORDING BUSINESSTRANSACTION
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ACCOUNTING TERMS
Account
Journal
Double-entryaccounting
T-account Ledger
Trial Balance
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ACCOUNTING TERMS
Accountdetailed record of thechangesin a particular asset,liability or owners equity
Ledgerthe recordholding allaccounts
Journalthe chronological recordof transactions
Trial Balancethe list of allaccountswith their balances
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Accounting process-set of activitiesinvolved in converting information about
transactions
into financial statements.
The Accounting Cycle
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The Accounting Cycle
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The Accounting Cycle
1. Examining source documents
2. Recording transactions
3. Posting transactions4. Preparing financial statements
The end results of the accountingprocess are a series of financialstatements.
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The Accounting Cycle
1. Transaction or event occurs
Could simply be the passage of time.
2. Recorded in the Journal using a Journal
Entry. event is translated into accounting
language.
3. Journal is posted to Ledger
the information from all the journalentries in the period is aggregated.
4. Ledger accounts are totalled.
5. Financial statements are prepared.
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Accounting Process and Preparation ofFinancial Statements (Cont.)
a.Using the accounting equation.
Accounting Equation:
Assets = Liabilities + Stockholders Equityb. Using the double-entry system
-the process includes the recording of
Journal entries, posting Journal entries
to ledger accounts, work sheet (including
adjustments), prepare financial
statements and closing entries)
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Accounting Process andPreparation of Financial Statements
How do accountants preparefinancial statements?
Identify,measureand recordbusiness transactions for businessentities
Using the accounting equation
Using the double-entry
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The basic elements
The two basic elements of any organisation are whatit owns and what it owes.
What it owns are the organisationseconomic resources. Theseeconomic resources are used to help the organisation generate
revenues. In accounting, these economic resources are calledASSETS.
What it owes are the organisationssources of financing for theeconomic resources.
The main source of financing usually comes from EQUITY.
Equity indicates the amount of financing provided by owners ofthe organisation.
The next source of financing comes from debt. Debt is theresult of the organisation purchasing goods, services or assetson credit. Debt also results from loan borrowings. Debt is given
the term LIABILITIES.
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The Framework
The accounting equation can be said to be theframework for the entire accounting process.
The accounting equation is an essential building block of
accounting.
The accounting equation is the basis of all accounting
systems.
The accounting equation can be used to illustrate simply
the double entry system of accounting.
The two sides of the equation must be equal.
The accounting equation is also called the balance sheetequation.
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The accounting equation
what it owns = what it owesThe equation shows the relationship among items
of value a business has and the financial rightsto the item.
Assets = Liabilities + Equity
A Balance Sheet (Statement of Financial Position) shows thatthe assets of an organisation should equal to its liabilities plusequity.
This is why the accounting equation is also called a balance
sheet equation.
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The Accounting Equation
The relationship between assets,liabilities, and owners equity
Assets
Things ofvalue thata firmowns
Liabilities
A firmsdebts and
obligations
Owners Equity
The differencebetween a firms
assets anditsliabilities
= +
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THE ACCOUNTINGEQUATION
A L + O.E
Assets Liabilities +Owners
Equity=
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Basic Accounting Equation
Always maintained in doubleentry accounting
Assets will always equal liabilitiesplus equity
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Different versions of theaccounting equation
The accounting equation can be expressedin a number of different ways:
Asset emphasis:
Assets = Liabilities + EquityLiability emphasis:
Liabilities = Assets Equity
Equity emphasis:
Equity = Assets - Liabilities
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Expanded accounting equation
The accounting equation can be expanded to
include Revenue and Expenses.We begin with:
Assets = Liabilities + Equity
We bring in the profit element:
Assets = Liabilities + Equity+ Profit
Note: Profit= Revenue (Income)Expenses
Expanded we have:
Assets = Liabilities + Equity+ Revenue(Income) ExpensesWhich can also be written as:
Assets+ Expenses= Liabilities + Equity+ Revenue (Income)
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Accounting Equation Example
Assets = Liabilities + Owners Equity
(a) $50,000 $20,000
(b) $30,000 $10,000
(c) $40,000 $15,000
$70,000
$20,000
$25,000
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The Account
Account - A group of items havingcommon characteristicsA separate record used to summarize
changes in each asset, liability, andowners equity of a businessTypes of Accounts
Asset
LiabilityIncomeExpenseEquity
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Definitions of Accounts on FinancialStatements
Assets: economic resources owned by thebusiness that benefit the business in thefuture
Must be owned not rented Doesnt have to be paid off, could still be
making payments on it.
Characterized as current and non-current-
(fixed, tangible and intangible)
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Definitions of Accounts on FinancialStatements -Classification of Assets
Current assetshave less thantwelve months of future use
Fixed assetshave over twelve
months of future use Tangible assetsare physical such
as land, buildings and equipment
Intangible assetsare non physicaland examples include goodwill,brands, patents and copyrights
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Element structures
Assets
Current assets
Cash
Cash on hand
Bank accounts
Accounts receivable
Accounts receivable customer 1
Accounts receivable customer 2
Inventory
Raw materials
Work in process
Finished goods
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Element structures
Assets
Long-term assets
Buildings
VehiclesCars
Trucks
Equipments
Fixture & FittingsFurniture
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Processing Accounting Information 26
Definitions of Accounts onFinancial Statements
Assets includes:
Cash: in all forms: (coins, currency, checkingaccounts,)
Account receivable: an oral promise for future cashreceipt as a result of sales. The amount of money owedto the business by its customers as a result of makingsales on account or on credit. Simply, customerswho have promised to pay sometime in the future
Inventory (or merchandise): goods for sale.
Note receivable: a written promissory note that thecustomer will pay a fixed amount by a certain date.
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Processing Accounting Information 27
Definitions of Accounts onFinancial Statements (contd.)
Assets includes: Prepaid expenses: expenses paid in
advance.
Land: recorded at cost of land. Buildings: record at cost, subject todepreciation.
Motor vehicle,equipment, furniture andfixture: record at cost, subject to
depreciation.
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Definitions of Accounts on FinancialStatements (contd.)
Liabilitiesotherwise known as claims thatothers have against the assets, normallyarise on behalf of suppliers of goods,
services and loans, (debts and accruals) butthey may include an obligation to provide aservice that has been paid for in advance(deferral)
Probable future outflow of Assets as a resultof a past transaction or event -debts/obligations of the business that can bepaid with cash,goods or services
Also current and non current
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Element structures
Liabilities
Current liabilities
Accounts payable
Accrued liabilities
Long-term liabilities
Bank loans
Loan from RBC
Loan from Scotiabank
Notes payable
Bonds payable
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Processing Accounting Information 30
Definitions of Accounts onFinancial Statements (contd.)
Liabilities: legal obligations.
Note Payable: a written promissory notethat the business promises to pay.
Account payable: an oral promise to pay,arising from credit purchases of inventory
and other goods. Referred to as making apurchase on account or on credit
Accrued liabilities: liabilities that haveoccurred but have not been paid. Forexample: salary payable, interest payable,etc.
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Definitions of Accounts on FinancialStatements (contd.)
Equityis the ownership interest, theclaims that the owner has against theassets.This is normally in the form of
investment in shares of a business Equity is the difference between value of
assets and liabilities
Equity is also called Net Worthor Capital
The Accounting concept of entitystipulates that the owners of thebusiness are a separate legal entity fromthe business itself
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Element structures
Owners equity
Capital stock (direct investment)
Retained earnings (indirect investment)
Revenue
Expenses Although revenue and expenses are not sub-
pieces of Retained earnings the way Current
assets are a sub-piece of Total assets, for thepurposes of understanding how they fit in to theequation, this representation is helpful.
Dividends
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Processing Accounting Information 33
Definitions of Accounts onFinancial Statements (contd.)
Equity/Capital:the owners claims tothe assets of a corporation including:
Common stock: represents the owners
investment. Retained earnings: the cumulative net
income earned by the corporation over itslifetime , minus cumulative losses anddividends.
Dividends: distribution of earnings tostockholders.
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Shareholders Equity
Paid-in capital
Amounts invested by stockholders
Common stock
Drawings
Withdrawal is an asset taken out of a
business for owners personal use.
1-34
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Shareholders Equity
Retained Earnings Amounts earned and kept for use in the company
Increased by Revenues
Decreased by Expenses
Revenues Earned by delivering goods or services
increase or inflow of assets; will eventuallyincrease stockholders equity (i.e., sales revenue)
Expenses
Costs of doing business Rent, utilities, insurance
decrease or outflow of assets; will eventuallydecrease stockholders equity.
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REVENUE AND EXPENSE
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REVENUE AND EXPENSEACCOUNTS
Revenues minus expenses equal netincome
If expense are greater then revenues, a netloss occurs
Revenue and expense accounts are notconsidered owners equity accounts--even though they effectively increase ordecrease equity!
They are calledincome statementaccounts,often called temporary ornominal accounts.
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Dividends
Distributions of assets (usuallycash) to shareholders
Decrease Retained Earnings Do NOT impact net income
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CLASSIFICATION OF ASSET, LIABILITY,EQUITY, REVENUE, EXPENSES
Next to each item, indicate whether it is anAsset, Liability, Equity, Revenue or Expense.
_____ Cash
_____ Common Stock ($1 par)
_____ Depreciation Expense
_____ Insurance Expense
_____ Interest Receivable
_____ Interest Earned
_____ Investment in Govt. Bonds
Asset
Equity
Expense
Expense
Asset
Revenue
Asset
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CLASSIFICATION OF ASSET, LIABILITY,EQUITY, REVENUE, EXPENSES
_____ Miscellaneous Expense
_____ Prepaid Insurance
_____ Rent Revenue
_____ Retained Earnings
_____ Salaries Expense
_____ Salaries Payable
_____ Service Revenue
_____ Supplies Used
_____ Unearned Rent
Expenses
Asset
Revenue
Equity
Expense
Liability
Revenue
Expenses
Liability
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Business Transactions
Business activities that change the accountingequation are called transactions.
An economic event that has a direct impacton the business
Usually requires an exchange with an outsideentity
Must be able to measurethis exchange indollars
All transactions affect the accounting equationthrough specific accounts
After each transaction the accounting equationmust remain in balance.
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Business Transactions
Transactions dont always affect both sides ofthe equation
The increases and decreases caused bybusiness transactions are recorded in specificaccounts.
Accounts may be classified as either assets,liabilities, or owners equity
When analyzing transactions, always
Read the transaction Identify the accounts
Classify the accounts (Asset, Liability orOwners Equity
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EXAMPLES OF TRANSACTIONS
Exchanging Asset for Asset
Purchasing Equipment, Supplies orInventory for Cash
Exchanging Asset for Liability Purchasing Equipment, Supplies or
Inventory for Credit
Using Cash to Repay Creditors
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EXAMPLES OF TRANSACTIONS
Exchanging Asset for Equity
Receiving Cash fromOwner/Investors
Extending Credit to Customers whopurchase Goods or Services
Exchanging Liability for Equity
Incurring Expenses on Account
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Effects of Business Transactionson the Accounting Equation
Analyzing business transactions:
ANALYSIS Ident i fy
Classify
+ / -
Balance
1. Identify the accounts affected.2. Classify the accounts affected.
3. Determine the amount of increaseor decrease for each account.
4. Make sure the accounting
equation remains in balance.
Business Transaction
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Analyzing Business Transactions
THREE QUESTIONS:
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Questions to ask
Questions #1
WHAT HAPPENED?
Make certain you understand the event thathas taken place.
Questions #2
WHICH ACCOUNTS ARE AFFECTED?Identify the accounts that are affected.Classify these accounts as assets, liabilities, orowners equity.
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Questions to ask
Questions #3
HOW IS THE ACCOUNTING
EQUATION AFFECTED?Determine which accounts have increased ordecreased.Make certain that the accounting equation
remains in balance after the transaction hasbeen entered.
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Lets analyze the effect of transactions on theaccounting equation for Mary Adams Consulting
EXAMPLE
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EXAMPLE:
MARY ADAMS, THE OWNER, INVESTED$25,000 IN THE BUSINESS
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QUESTION #1
What happened?
Mary took $25,000 from herpersonal bank account and deposited itin a new account in the business name
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QUESTION #2a
Identify accounts that areaffected
CASH M. A.
CAPITAL
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QUESTION #2b
Classify these accounts
CASH M. A.CAPITAL
ASSET OWNERSEQUITY
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QUESTION #3a
Determine whether the accountshave increased or decreased
CASH M. A.CAPITAL
INCREASED INCREASED
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QUESTION #3b
Does accounting equation balance?
ASSETS= LIABILITIES + OWNERS EQUITY
+$25,000
CASH M. A.,CAPITAL=+$25,000=
It Balances!Assets of $25,000 = Liab. of $0plus Owners Equity of $25,000
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QUESTION #3a
Increase or Decrease?
OFFICESUPPLIES CASH
ASSET ASSET
INCREASED DECREASED
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QUESTION #3b
Lets look at the accounting equation
ASSETS = LIAB. O. E.
-$800CASH =
=
+ OFF. SUPPLIES+$800
Right hand sideof equation isnot affected
+
+
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QUESTION #3b
Does transaction balance?
ASSETS = LIAB. O. E.
-$800CASH =
=
Yes!Total Assets stayed the same.
One Asset increased, the otherdecreased. No change in
Liabilities or Owners Equity
OFF. SUPPLIES+$800
+++
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DRAWING EXAMPLE:
MARY WITHDREW $1,500 FORPERSONAL EXPENSES
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QUESTIONS #1 & #2
Understand the transaction,Identify and Classify the
affected accounts
Mary is withdrawing some of herequity in the business by taking home an
asset (Cash). This will reduce the Assets &reduce her Owners Equity.
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QUESTIONS #1 & #2
Understand the transaction,Identify and Classify the
affected accountsM. A.,
DRAWINGCASH
O.E.DRAWING
ASSET
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QUESTION #3a
Increase or Decrease?
M. A.,DRAWING CASH
INCREASE DECREASE
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QUESTION #3a
Increase or Decrease?
M. A.,DRAWING CASH
BE CAREFUL! Just like Expenses,Drawing account will increase in this situation,
but it will cause an overallDECREASE IN OWNERS EQUITY.
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QUESTION #3b
Does transaction balance?
ASSETS = LIAB. OWNERS EQUITY
-$1,500
CASH =
=It Balances!
Assets decreased by $1,500 =Owners Eq. decreased by $1,500
M.A.,DRAWING
+$1,500
+
Introduction of the Double Entry
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Processing Accounting Information 66
Introduction of the Double-EntrySystem and Journal Entries
A. Double-entry system
B. The T- accounts
C. Increases and decreases in theaccounts
D.Examples of journalizing and postingtransactions
Double vs Single Entry
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Double vs Single EntryAccounting
Single One account entry for eachtransaction
Double Two account entries foreach transaction
One debit and one credit
THE DOUBLE ENTRY SYSTEM: THE BASIC
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THE DOUBLE-ENTRY SYSTEM: THE BASICMETHOD OF ACCOUNTING
Evolved during the
Renaissance.
Described by Fra Luca Pacioli,
Italy, 1494.
THE DOUBLE ENTRY
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One debit One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
THE DOUBLE ENTRYSYSTEM
FEATURES OF THE DOUBLE
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FEATURES OF THE DOUBLEENTRY SYSTEM
Principle ofduality.
Each transaction must berecorded with at least onedebit
and onecreditso thatmonetaryvalueof debits and credits areequal.
The whole system isalways in
balance. All accounting systems are based
on the principle of duality.
HOW DOES THIS DEBIT/CREDIT
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HOW DOES THIS DEBIT/CREDITSTUFF WORKS
We can represent an account with a T, whereone side is the place where we put the increasesand the other side is for decreases.
Theleftside is always called the debitside.
When we put something on the left side of an account,we are debiting the account.The rightside is always called the creditside.When we put something on the right side of an account,we are crediting the account.
DEBITmeansLEFTsideCREDITmeansRIGHT side
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A. Double-Entry System (contd.)
ASSET = LIABILITY + EQUITY REVENUE EXPENSES
1 + -
2 + +
3 + +
4 - -
5 - -
6 + +
7 - -
RULES OF DEBIT AND CREDIT
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Owners EquityAssets Liabilities
Debit+ DebitCredit Debit Credit+ Credit+
= +
RULES OF DEBIT AND CREDIT
Revenue
Debit
Credit+
Expenses
Debit+
Credit-
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THE CHEAT SHEET
AccountType
Increase Decrease
Asset Debit Credit
Liability Credit Debit
OwnerEquity
Credit Debit
Revenue Credit Debit
Expense Debit Credit
SUMMARY:
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SUMMARY:DOUBLE-ENTRY ACCOUNTING
Each account can be increased ordecreased.
Debit means left side
Credit means right side Asset, drawings and expense accounts
are increased with debits anddecreased with credits.
Liability, equity-capital, and revenueaccounts are increased with creditsand decreased with debits.
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Record transactions
in the journal.
Th R di P
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The Recording Process
The sequence of steps inrecording transactions:
Transactions Documentation Journal
Financial
Statements
Trial
BalanceLedger
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Journals
Journals- Books of Original Entry Record transactions or events
i.e, Journal entries
In chronological order A diary of all events (transactions) in an
entitys life. Only basic information is contained in the
journal.
Complete record of effects of transactionon accounts
Accounts and amounts debited /credited
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Journal Entries
All journal entries have two sides: Debit and Credit
For every journal entry, the total debitsmust equal the total credits -equal
dollar amounts of debits and creditsThis ensures that the fundamental
accounting equation (A = L + OE) isalways in balance.
The basic journal entry:
DebitAccount name1 $amount
Credit Account name2 $amount
To record
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Recording transaction in
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Recording transaction injournal
What does a journal entry include?
date of the transaction
title of the account debited
title of the account credited
amount of the debit and credit
description of the transaction
dollar signs are omitted
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Sample Transaction
Paid $1,000 on Account to XYZSupplies on 3rdJuly 2012
Journal Entry
3/7 Dr. Accounts Payable 1,000
Cr. Cash 1,000
Paid accounts payable
Introduction of the T-
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Introduction of the Taccount
Title of Account
Debit
(left) side
Credit
(right) side
I d i f h T
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Processing Accounting Information 86
Introduction of the T- account
Assets
Liabilities
Owners Equity
Expenses
Revenue
Debit(+) Credit(-)
Debit(-) Credit(+)
Debit(-) Credit(+)
Debit(+) Credit(-)
Debit(-) Credit(+)
Increases and Decreases in the
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Increases and Decreases in theAccounts
Debit
Credit
Debit
Credit
DebitCredit
Debit
Credit
Debit
Credit
Revenue
Expenses
Asset
Liabilities
O.Equity
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Journal Entries
To increase an Asset or Expense: Debit To increase a Liability, Revenue, or
Owners Equity: Credit To decrease an Asset or Expense: Credit
To decrease a Liability, Revenue, orOwners Equity: Debit
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Journal Entries
BalanceSheet
IncomeStatement
Balance Sheet/
Stmt of RetainedEarnings
Debit Asset Expense
Credit Liability RevenueOwnersEquity
The Basic Accounting Elements:
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Journal Entries
Going back to the FundamentalAccounting Equation:
Assets = Liabilities + Owners Equity
Debit Credit Credit
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Post from the journal
to the ledger.
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Ledgers
Ledgers - Contain Accounts
General Ledger
Contains accounts for financialstatement elements
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An Example of the Journal and A
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Processing Accounting Information 96
Journal Page 1
Date Accounts andExplanation..
Debit Credit
Apr 2 Cash.Common stock..
Issued common stock toowners
50,00050,000
Apr 3. Land ..Cash ..
Paid Cash for Land
40,00040,000
pLedger Account (cash):
An Example of the Journal and A
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Processing Accounting Information 97
pLedger Account (cash): (contd.)
Account:Cash
Date Item Jrnl.Ref.
Debit Credit Debit Credit
20xx J.2 50.000 50.000
Apr: 2 J.1 40.000 10.000
3
Balance
Account No. 101
The Ledger: all individual accounts (assets, liability, andstockholders equity accounts) combined make up the ledger.
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P ti
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Posting
What is posting?
It is the transfer of information
from the journal to theappropriate accounts in theledger.
Details of Journals andL d
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Ledgers
Date Accounts and Explanation Debit Credit
April 2 Cash 30,000
Gay Gillen, Capital 30,000Received initialinvestment from owner
Journal Page 1
Details of Journals and Ledgers
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Details of Journals and Ledgers
Journal Page 1
Date Account and
Explanation Post Ref. Debit CreditApril 2 Cash 101 30,000
Gay Gillen, Capital 301 30,000
Initial investmentfrom owner
Insert the ledger account in the journal.
Details of Journals and Ledgers
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Details of Journals and Ledgers
Balance
Date Ref. Debit Credit Debit CreditApril 2 jrl 30,000 30,000
Account: Cash Account: 101
Insert the number of thejournal page.
Posting to the ledger
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The Four-Column Account Format
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Balance
Account: Cash Account No. 101
Date Item Ref. Debit Credit Debit Credit
April 2 01 30,000 30,000
5 02 20,000 10,000
18 04 300 9,700
26 06 2,100 7,600
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The Normal Balance of an Account
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Processing Accounting Information 107
The Normal Balance of an Account
Assets DebitLiabilities CreditStockholders Equity Credit(overall)Common Stock CreditRetained Earnings CreditDividends Debit
Revenues CreditExpenses Debit
Summary: Steps in Analyzing
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and Processing Transactions
1. Analyze the transaction todetermine its effect on assets,liabilities, and S/E.
- Supported by a sourcedocument.
2. Apply the rules of double entry.
- Dr. increases an asset.- Cr. Increases a liability.
Summary: Steps in Analyzing andi i ( i d)
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Processing Transactions (continued)
3. Record the entry. Enter in chronological order in a journal.
Enter the date/debit account/debitamount on one line.
Enter the credit account/credit amountindented on the next line.
Dr. Cr.
June 1 Cash 100,000Notes Payable 100,000
This form is calledjournal formandusually is followed by an explanation.
Summary: Steps in Analyzing and
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y p y gProcessing Transactions (continued)
4.Post the entry.
Post the entry to the general ledgerby transferring the date and amountto the proper account.
5.Prepare the trial balance to confirm thebalance of the accounts.
Confirm that the accounts are still inbalance after recording and postingtransactions.
The Trial Balance
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The Trial Balance
What is a trial balance? It is an internal document.
It is a listing of all the accounts with theirrelated balances.
Before computers, it provided a check onaccuracy by showing whether total debitsequal total credits before continuing withthe recording process.
Used to establish a convenient summaryof balances in all accounts for thepreparation of formal financial statements
The Trial Balance
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Lists All Accounts and TheirBalances in Two-Column Format
Proves that Debits Equal Credits
Forces Accountant to Find ErrorsBefore Preparing Statements
Provides a Starting Point for
Adjustments, Statements andClosing Entries
The Trial Balance
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The total of debits and creditsin the accounts must be equal
A trial balance is preparedperiodically (usually on thelast day of the month) to testthis equality.
The Trial Balance
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Steps in preparing a trial balance:
1. List each ledger account thathas a balance, debit balances inthe right column, credit balancesin the left column.
2. Add (foot) each column.
3. Compare the totals of the two
columns.
P i th T i l B l
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Preparing the Trial Balance
The trial balance is usually prepared with thebalance sheet accounts first, followed by theincome statement accounts.
An example of a short trial balance:
AccountNumber Account Title Debit Credit
100 Cash $350,000130 Merchandise inventory 150,000
202 Note payable $100,000300 Paid-in capital 400,000
$500,000 $500,000==============
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The Trial Balance
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It does not prove that thetransactions were analyzedcorrectly or recorded for the
correct amounts or in theproper accounts.
Locating Trial Balance Errors
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DEBITS CREDITS
What if it doesnt balance ?
Is the addition correct?
Are all accounts listed?
Are the balances listedcorrectly?
Locating Trial Balance Errors
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Locating Trial Balance Errors
Divide the difference by two. Is there a debit/credit balance for
this amount posted in the wrong
column? Check journal postings.
Review accounts forreasonableness.
Computerized accounting programsusually prohibit out-of-balanceentries.
Common Trial Balance Errors
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Posting incorrectly Mathematical errors
Transposition means digits are
written in the wrong order. (Forexample, instead of $567, thenumber is written as $657.) Atransposition error is always
evenly divisible by 9 ($657 -$567 = $90, which is divisible by9).
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Summary: The RecordingProcess
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Process
The sequence of steps in recordingtransactions:
Transactions Documentation Journal
Financial
Statements
Trial
BalanceLedger
Summary: The Recording
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Process
1.Transaction
2.Analysis
3.Rules
4.Entry
Examples of Journalizing andP ti T ti
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Processing Accounting Information 124
Posting Transactions
1. Transaction: Air & Sea Travel, Inc.,received $50,000 cash from the businessand in turn issued common stock to them.
Journal Entry:Cash 50,000Common Stock 50,000
Issued common stock to owners.
Ledger Accounts:Cash Common Stock
50,000 50,000
Examples of Journalizing and PostingTransactions (contd )
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Processing Accounting Information 125
Transactions (contd.)
2. Transaction:The business paid $40,000cash for land as a future office location.
Journal Entry:Land 40,000
Cash 40,000
Paid cash for land.
Ledger Accounts:
Cash Land50,000 40,000 40,000
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 126
Transactions(contd.)
3. Transaction:The business purchased $500office supplies on account.
Journal Entry:
Office Supplies 500Accounts Payable 500
Credit purchase of office supplies
Ledger Accounts:Office Supplies Accounts Payable
500 500
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 127
Transactions(contd.)
4. Transaction:The business performed travelservice for clients and received cash of$5,500.
Journal Entry:
Cash 5,500
Service Revenue 5,500
Cash received for services performed
Ledger Accounts:
Cash Service Revenue
50,000 40,000 5,5005,500
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 128
Transactions(contd.)
5. Transaction:The business performed servicefor clients who did not pay immediately. Air &Sea Travel billed the clients for $3,000 onaccount.
Journal Entry:Accounts Receivable 3,000Service Revenue 3,000
Services rendered on account
Ledger Accounts:Accounts Receivable Service Revenue3,000 5,500
3,000
8,500
Examples of Journalizing and PostingTransactions(contd )
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Transactions(contd.)
6. Transaction:The business paid $2,700 forthe following expenses: office rent, $1,100;employee salary; $1,200; and utilities,$400.
Journal Entry:Rent Expense 1,100Salary Expense 1,200Utilities Expense 400
Cash 2,700Being expenses paid
Ledger Accounts:Cash Rent Expense
50,000 40,000 1,100
5,500 2,700
Salary Expense Utilities Expense
1,200 400
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 130
Transactions(contd.)
7. Transaction:The business paid $400 on theaccount payable created in Transaction 3.
Journal Entry:Accounts Payable 400
Cash 400Paid creditors on account
Ledger Accounts:Cash Accounts Payable
50,000 40,000 400 5005,500 2,700
400 100
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 131
Transactions(contd.)
8. Transaction:The Lyons remodeledtheir personal residence. This is not atransaction of the travel agency, sono journal entry is made.
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 132
Transactions(contd.)
9. Transaction:The business collected$1,000 cash on account from theclients in transaction 5.
Journal Entry:
Cash 1,000Accounts Receivable 1,000
Received cash on account
Ledger Accounts:
Cash Accounts Receivable50,000 40,000 3,000 1,0005,500 2,7001,000 400
2,000
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Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 134
Transactions(contd.)
11.Transaction:Air & Sea Travel, Inc.,paid the Lyons cash dividends of$2,100.
Journal Entry:Dividends 2,100
Cash 2,100Paid dividends to shareholder
Ledger Accounts:
Cash Dividends50,000 40,000 2,1005,500 2,7001,000 400
22,000 2,10033,300
Examples of Journalizing and PostingTransactions(contd )
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Processing Accounting Information 135
Transactions(contd.)
The followings are examples of T-accounts, trial balance and financialstatements of the above
transactions.
Examples of Journalizing and PostingTransactions(contd.)
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Processing Accounting Information 136
ASSETS = LIABILITIES + STOCKHOLDERS EQUITY
Cash(1) 50,000 (2)40,000(4) 5,500 (6) 2,700(9) 1,000 (7) 400
(10) 22,000 (11) 2,100Bal. 33,300
A/P(7) 400 (3) 500
Bal. 100
Comm Stock(1) 50,000
Bal. 50,000
EXPENSESRent Exp.
(6) 1,100Bal. 1,100
A/R(5) 3,000 (9) 1,000
Bal. 2,000
Office Supplies(3) 500
Bal. 500
Land(2) 40,000 (10)22,000
Bal. 18,000
Dividends
(11) 2,100Bal.2,100
REVENUEService Rev.
(4) 5,500(5) 3,000
Bal. 8,500
Salary Exp.(6) 1,200Bal. 1,200
Utilities Exp.
(6) 400Bal. 400
136
AIR & SEA TRAVEL INC
TRIAL BALANCE
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Processing Accounting Information 137
BalanceAccount Title Debit Credit
Cash $33,300Accounts receivable 2,000
Office supplies 500Land 18,000Accounts payable $ 100Common Stock 50,000Dividends 2,100
Service revenue 8,500Rent expense 1,100Salary expense 1,200Utilities expense 400Total $58,600 $58,600
AIR & SEA TRAVEL, INC.Trial Balance
4/30/19x1
137
FINANCIAL STATEMENTS
AIR & SEA TRAVEL, INC.
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Processing Accounting Information 138
Revenue:Service revenue ($5,500+$3,000) ... $ 8,500
Expenses:Salary expense $1,200Rent expense .. 1,100Utilities expense .. 400
Total expenses 2,700Net income .. $5,800
,Income Statement
Month Ended April 30, 20xx
Retained earnings, April 1, 19x1 ... $ 0Add: Net income for the month .. 5,800
5,800Less: Dividends . 2,100Retained earnings, April 30, 19x1 $3,700
AIR & SEA TRAVEL, INC.Statement of Retained Earnings
Month Ended April 30, 20xx
138
FINANCIAL STATEMENTS(contd.)
Statement of Retained EarningsMonth Ended April 30 20xx
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Processing Accounting Information 139
Retained earnings, April 1, 19x1 ... $ 0Add: Net income for the month .. 5,800
5,800Less: Dividends . 2,100Retained earnings, April 30, 19x1 $3,700
Month Ended April 30, 20xx
Assets LiabilitiesCash ... $33,300 Accounts payable ... $ 100
A/R .. 2,000Office supplies .. 500 Stockholders Equity
Land ... 18,000 Common stock . 50,000Retained earnings ... 3,700Total stockholders
equity .. 53,700Total liabilities and
Total assets .$53,800 stockholders equity... $53,800
AIR & SEA TRAVEL, INC.
Balance SheetApril 30, 20xx
139
FINANCIAL STATEMENTS(contd.)
Balance Sheet, April 30, 20xx
Assets Liabilities
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Processing Accounting Information 140
Statement of Cash Flows, Month Ended April 30, 20xx
Cash flows from operating activities:Receipts:Collections fm customers ($5,500+1,000) .. $ 6,500
Payments:To suppliers and employees ($2700+400) . (3,100)
Net cash inflow fm operating activities ... 3,400Cash flows from investing activities:
Acquisition of land ..$(40,000)Sale of land .. 22,000
Net cash outflow from investing activities... (18,000)Cash flows from financing activities:Issuance (sale) of stock to owners .. $50,000Dividends . (2,100)
Net cash inflow from financing activities. 47,900Net increase in cash .. $33,300Cash balance, April 1, 19x1 . 0Cash balance, April 30, 19x1 ... $33,300
Assets LiabilitiesCash . $33,300 Accounts payable ... $ 100A/R ... 2,000Office supplies ... 500 Stockholders Equity
Land . 18,000 Commonstock .... 50,000Retained earnings .. 3,700Total stockholders equity .. 53,700
Total liabilities andTotal assets . $53,800 stockholders equity.. $53,800
140
The Flows of Accounting Data
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Processing Accounting Information 141
Transaction
Occurs
Source
Documents
Prepared
Transaction
Analysis
TakesPlace
Transaction
Entered in
Journal
Amounts
Posted to
Ledger
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During the Accounting Period
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During the Accounting Period
1 Identify transactions & events torecord
2 Journalize transactions & events
3 Post from journals to ledgers
At the end of the accounting period
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At the end of the accounting period
4 Prepare Unadjusted Trial Balance
5 Journalize & Post adjusting entries
6 Prepare Adjusted Trial Balance
7 Prepare Financial Statements
8 Journalize & Post closing entries
9 Prepare Post Closing Trial Balance
At beginning of next accountingperiod
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period
10 Journalize & Post reversing entries