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1、Recording Business TransactionsLearning Objectives :Understand the dual-entry recording framework and Discuss the accrual basis of accountingDiscussion Section # 2Financial Reporting EWMBA-202Lopo Martinez 1ACCOUNTING PROCESSEVENTSTRANSACTIONSFINANCIALSTATEMENTSJOURNALLEDGERDOCUMENTATIONJournalizing
2、PostingFINANCIALSTATEMENTS The AccuracySummaryTRIAL BALANCE1. Journalizing2. Posting3. Preparing a trial balance4. Recording adjusting entries5. Preparing financial statements2Debits and CreditsAccount TitleDebitCredit(Dr.)(Cr.)Left SideRight SideDebit (dr.) - an entry or balance on the left side of
3、 an accountCredit (cr.) - an entry or balance on the right side of an accountDRDRCRCR3Debits and Credits in the AccountsRevenuesDr.Cr.()(+)ExpensesDr.Cr.(+)()AssetsDr.Cr.(+)()LiabilitiesDr.Cr.()(+)O. EquityDr.Cr.()(+)=+=Net Income4Mechanics of Double Entry AccountingMechanics of Double Entry Account
4、ingCan you identify the type of transaction below ?+-+-+-1 12 23 34 4Notice that in each of the transactions, the equation balances (+ and -)Notice that in each of the transactions, the equation balances (+ and -)Notice also that the debits and credits are equal in each transactionNotice also that t
5、he debits and credits are equal in each transaction=+AssetsAssetsLiabilitiesLiabilitiesOwners EquityOwners EquityDebit forDebit forIncreasesIncreasesCredit forCredit forDecreasesDecreasesDebit forDebit fordecreasesdecreasesDebit forDebit fordecreasesdecreasesCredit forCredit forIncreasesIncreasesCre
6、dit forCredit forIncreasesIncreases5 5+-5Journal EntriesAccountants record a transaction by making a journal entry.A journal entry shows both sides of the transaction with the name of the ACCOUNTS and their respective debit or credit.On Jan 2, the firm issues 10,000 shares of common stock for $100,0
7、00 cashOn Jan 5, it pays $60,000 cash to purchase equipment6Toy ExampleToys transactions for January 2002 are as follows:1) Jan 2 - The firm issues 10,000 shares of common stocks for $100,000 cash. 2) Jan 5 - Pays $60,000 cash to purchase equipment.3) Jan 15 - Purchases merchandise inventory costing
8、 $15,000 from supplier on account.4) Jan 21 - Pays supplier in (3) $8,000 of the amount due.5) Jan 28 - The firm borrows $30,000 from a bank.6) Jan 31 - The firms receives $3,000 from a customer for a good to be delivered in March.7100,000 (1) CASH (A) (1) 100,000 COMMON STOCK (OE)Transaction 1Asset
9、s = Liabs. + OE+100,000 (cash)= +100,000 (common stock)Ledger Posting Procedure - Using T-AccountsJournal EntriesT-Accounts8 (2) 60,000 CASH (A) (1) 100,000 60,000 (2) EQUIPMENT (A)Transaction 2Assets = Liabs. + OE- 60,000 (cash) + 60,000 (equipment) = Ledger Posting Procedure - Using T-AccountsJour
10、nal EntriesT-Accounts915,000 (3) INVENTORY (A) (3) 15,000 ACC. PAYABLE (L)Transaction 3Assets = Liabs. + OE+15,000 (inventory) = +15,000 (acc.payable)Ledger Posting Procedure - Using T-AccountsJournal EntriesT-Accounts10 (4) 8,00015,000 (3) CASH (A) (1) 100,000 60,000 (2) 8,000 (4) ACC. PAYABLE (L)T
11、ransaction 4Assets = Liabs. + OE- 8,000 (cash) = -8,000 (acc.payable)Ledger Posting Procedure - Using T-AccountsJournal EntriesT-Accounts11 30,000 (5) CASH (A) (1) 100,000 60,000 (2) (5) 30,000 8,000 (4) LOAN PAYABLE (L)Transaction 5Assets = Liabs. + OE+30,000 (cash)= +30,000 (loan payable)Ledger Po
12、sting Procedure - Using T-AccountsJournal EntriesT-Accounts12 3,000 (6) CASH (A) (1) 100,000 60,000 (2) (5) 30,000 8,000 (4) (6) 3,000 ADV. CUSTOMERS (L)Transaction 6Assets = Liabs. + OE+3,000 (cash) = +3,000 (adv. customers)Ledger Posting Procedure - Using T-AccountsJournal EntriesT-Accounts13T-Acc
13、ounts and Balance Sheet as at Jan 31, 2002 (1) 100,000 60,000 (2) (5) 30,000 8,000 (4) (6) 3,000Bal. 65,000 CASH (A) ADV. CUSTOMERS (L) LOAN PAYABLE (L) 3,000 (6) 3,000 Bal. 30,000 (5) 30,000 Bal. EQUIPMENT (A) INVENTORY (A) (3) 15,000 Bal. 15,000 (2) 60,000 Bal. 60,000 COMMON STOCK (OE)100,000 (1)1
14、00,000 Bal. ACC. PAYABLE (L) (4) 8,00015,000 (3) 7,000 Bal. Balance Sheet Balance Sheet ASSETSCurrents AssetsCash 65,000Inventory 15,000PPEEquipment 60,000 Total Assets 140,000LIABILITIES AND OECurrent LiabilitiesAccounts Payable 7,000Adv from Customers 3,000Long-term LiabilitiesLoan Payable 30,000
15、Total Liabilities 40,000OWNERS EQUITYCommon Stock 100,000 Total Liabilities and OE 140,00014THE TRIAL BALANCEA listing of all accounts with their related balances. It tests whether debits and credits are equal. CASH (A) 65,000INVENTORY (A) 15,000 EQUIPMENT (A) 60,000 ACCOUNTS PAYABLE (L) 7,000 ADVAN
16、CES FROM CUSTOMERS (L) 3,000 LOAN PAYABLE (L) 30,000 COMMON STOCK (OE) 100,000 TOTAL 140,000 140,000 BALANCE ACCOUNT TITLES DEBIT CREDITTRIAL BALANCE TOY CORPORATION AS AT JAN 31, 200215Accrual Basis Vs. Cash BasisAccrual BasisRevenues are recognized when earned and expenses are recognized when incu
17、rred.Cash BasisRevenues are recognized when cash is received and expenses recorded when cash is paid.Intuitive and easy.Provides information on the liquiditySubject to manipulation, for example, the firm can delay having to recognize an expense by postponing cash payment. More difficult conceptually
18、.Provides information on long-term profitability.Subject to manipulation by the choice of recognition rules16RealizationPrincipleMatchingPrincipleFundamental Principles for Income Measurement Tells us when to recognize Revenues Tells us when to recognize ExpensesDifference is net incomeIncomeMeasure
19、mentRevenues are recognized in the period when they are realized.Expenses incurred to gain revenues are matched against revenues in the same period that revenues are recognized17Revenues Recognition When does the accountant recognize revenue?Revenues are recognized when some critical event occurs.Te
20、xtbook (SW) - When both of the following are met:1. The firm has performed all or most of the services or it has delivered the goods, that is, it has earned the revenue.2. The firm has received a good, service or right in exchange and can reasonably measure the value of the good, service or right. A
21、 promise to pay (such as a receivable) is a right.Purchase ofMerchandiseCollection ofCashDelivery ofMerchandiseSale ofMerchandiseOperating Process for a Firms Acquisition and Sale of Merchandise18MatchingPrincipleMatching Costs (Expenses) Against RevenueFundamental Principles for Income MeasurementR
22、ational and SystematicDepreciationAmortization of goodwillCause and EffectCost of goods soldInsuranceInterest Expense Immediate RecognitionResearch &developmentAdvertisingLosses19 An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.Transactions where ca
23、sh is paid orreceived before a related expenseor revenue is recognized.Adjusting Accounts at the end of the Accounting PeriodTransactions where cash is paid orreceived after a related expenseor revenue is recognized.20Adjusting - Prepaid ExpensesResources paid for prior to receiving the actual benef
24、its.UnadjustedBalanceCreditAdjustmentDebitAdjustmentASSETEXPENSEPrepaid Insurance Bal. $400 (8) $ 50$ 50 (8)Insurance Expense21Adjusting - Accrued Expenses and PayablesServices received but not paidUnadjustedBalanceCreditAdjustmentDebitAdjustmentLIABILITIEEXPENSESalaries Payable (10) $1,600$ 1,600 (10)Salaries Expense22Adjusting - Accrued Revenues and ReceivablesRevenues earned in a period that are both unrecorded and not yet received.AssetRevenueCreditAdjustmentDebitAdjustmentExamplesRent as a tenant uses its rental propertyInterest as a borrower uses its funds23
