1、1Recording Business TransactionsLearning Objectives:Understand the dual-entry recording framework and Discuss the accrual basis of accountingDiscussion Section#2Financial Reporting EWMBA-202Lopo Martinez 2ACCOUNTING PROCESSEVENTSTRANSACTIONSFINANCIALSTATEMENTSJOURNALLEDGERDOCUMENTATIONJournalizingPo
2、stingFINANCIALSTATEMENTS The AccuracySummaryTRIAL BALANCE1.Journalizing2.Posting3.Preparing a trial balance4.Recording adjusting entries5.Preparing financial statements3Debits and CreditsAccount TitleDebitCredit(Dr.)(Cr.)Left SideRight SideDebit(dr.)-an entry or balance on the left side of an accoun
3、tCredit(cr.)-an entry or balance on the right side of an accountOne debitOne creditEach transaction is recorded with at least:Total debits must equal total credits.and4Debits and Credits in the AccountsRevenuesDr.Cr.()(+)ExpensesDr.Cr.(+)()AssetsDr.Cr.(+)()LiabilitiesDr.Cr.()(+)O.EquityDr.Cr.()(+)=+
4、=Net Income5Mechanics of Double Entry AccountingCan you identify the type of transaction below?6Journal Entries Accountants 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,t
5、he firm issues 10,000 shares of common stock for$100,000 cashOn Jan 5,it pays$60,000 cash to purchase equipmentGENERAL JOURNALToy Corp.Page 01DateDescriptionPost.Ref.DebitCreditJan.2 Cash100,000Common Stocks100,000Jan.5 Equipment60,000Cash60,0007Toy ExampleToys transactions for January 2002 are as f
6、ollows: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$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
7、 bank.6)Jan 31-The firms receives$3,000 from a customer for a good to be delivered in March.8100,000(1)CASH (A)(1)100,000 COMMON STOCK(OE)Transaction 1Assets =Liabs.+OE+100,000(cash)=+100,000(common stock)Ledger Posting Procedure-Using T-AccountsDateDescriptionPost.Ref.DebitCreditJan.2 Cash100,000Co
8、mmon Stocks100,000Journal EntriesT-Accounts9 (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-AccountsDateDescriptionPost.Ref.DebitCreditJan.5 Equipment60,000Cash60,000Journal EntriesT-Accounts1015,000 (
9、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-AccountsDateDescriptionPost.Ref.DebitCreditJan.15 Inventory15,000Accounts Payable15,000Journal EntriesT-Accounts11(4)8,00015,000(3)CASH (A)(1)100,000 60,000(2)
10、8,000 (4)ACC.PAYABLE(L)Transaction 4Assets =Liabs.+OE-8,000(cash)=-8,000(acc.payable)Ledger Posting Procedure-Using T-AccountsDateDescriptionPost.Ref.DebitCreditJan.21 Accounts Payable8,000Cash8,000Journal EntriesT-Accounts12 30,000(5)CASH (A)(1)100,000 60,000(2)(5)30,000 8,000(4)LOAN PAYABLE(L)Tran
11、saction 5Assets =Liabs.+OE+30,000(cash)=+30,000 (loan payable)Ledger Posting Procedure-Using T-AccountsDateDescriptionPost.Ref.DebitCreditJan.28 Cash30,000Loan Payable30,000Journal EntriesT-Accounts13 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
12、=Liabs.+OE+3,000(cash)=+3,000 (adv.customers)Ledger Posting Procedure-Using T-AccountsDateDescriptionPost.Ref.DebitCreditJan.28 Cash3,000Adv.from Customers3,000Journal EntriesT-Accounts14T-Accounts 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)A
13、DV.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)100,000 Bal.ACC.PAYABLE(L)(4)8,00015,000(3)7,000 Bal.ASSETSCurrents AssetsCash 65,000Inventory 15,000PPEEquipment 60,000 Total Assets 140,0
14、00LIABILITIES AND OECurrent LiabilitiesAccounts Payable 7,000Adv from Customers 3,000Long-term LiabilitiesLoan Payable 30,000 Total Liabilities 40,000OWNERS EQUITYCommon Stock 100,000 Total Liabilities and OE 140,00015THE TRIAL BALANCE A listing of all accounts with their related balances.It tests w
15、hether debits and credits are equal.CASH (A)65,000INVENTORY(A)15,000 EQUIPMENT(A)60,000 ACCOUNTS PAYABLE(L)7,000 ADVANCES 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 31,200216Acc
16、rual Basis Vs.Cash BasisAccrual BasisRevenues are recognized when earned and expenses are recognized when incurred.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 examp
17、le,the firm can delay having to recognize an expense by postponing cash payment.More difficult conceptually.Provides information on long-term profitability.Subject to manipulation by the choice of recognition rules17RealizationPrincipleMatchingPrincipleFundamental Principles for Income Measurement T
18、ells us when to recognize Revenues Tells us when to recognize ExpensesDifference is net incomeIncomeMeasurementRevenues 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 recognized18Revenues Recogn
19、ition When does the accountant recognize revenue?Revenues are recognized when some critical event occurs.Textbook(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
20、,service or right in exchange and can reasonably measure the value of the good,service or right.A promise to pay(such as a receivable)is a right.Purchase ofMerchandiseCollection ofCashDelivery ofMerchandiseSale ofMerchandiseOperating Process for a Firms Acquisition and Sale of Merchandise19MatchingP
21、rincipleMatching Costs(Expenses)Against RevenueFundamental Principles for Income MeasurementRational and SystematicDepreciationAmortization of goodwillCause and EffectCost of goods soldInsuranceInterest Expense Immediate RecognitionResearch&developmentAdvertisingLosses20Framework for AdjustmentsPrep
22、aidExpensesDepreciationUnearnedRevenuesAccruedExpensesAccruedRevenuesAdjustments An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.Transactions where cash is paid orreceived before a related expenseor revenue is recognized.Adjusting Accounts at the en
23、d of the Accounting PeriodTransactions where cash is paid orreceived after a related expenseor revenue is recognized.21Adjusting -Prepaid ExpensesResources paid for prior to receiving the actual benefits.UnadjustedBalanceCreditAdjustmentDebitAdjustmentASSETEXPENSEPrepaid Insurance Bal.$400 (8)$50$50
24、 (8)Insurance Expense22Adjusting -Accrued Expenses and PayablesServices received but not paidUnadjustedBalanceCreditAdjustmentDebitAdjustmentLIABILITIEEXPENSESalaries Payable (10)$1,600$1,600 (10)Salaries Expense23Adjusting-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 funds
