1、1,Recording Business Transactions,Learning Objectives :Understand the dual-entry recording framework and Discuss the accrual basis of accounting,Discussion Section # 2 Financial Reporting EWMBA-202 Lopo Martinez,2,ACCOUNTING PROCESS,EVENTS,TRANSACTIONS,FINANCIAL STATEMENTS,JOURNAL,LEDGER,DOCUMENTATI
2、ON,Journalizing,Posting,FINANCIAL STATEMENTS,The Accuracy Summary,TRIAL BALANCE,1. Journalizing 2. Posting 3. Preparing a trial balance 4. Recording adjusting entries 5. Preparing financial statements,3,Debits and Credits,Account Title,Debit,Credit,(Dr.),(Cr.),Left Side,Right Side,Debit (dr.) - an e
3、ntry or balance on the left side of an account Credit (cr.) - an entry or balance on the right side of an account,One debit,One credit,Each transaction is recorded with at least:,Total debits must equal total credits.,and,DR,CR,4,Debits and Credits in the Accounts,=,Net Income,5,Mechanics of Double
4、Entry Accounting,Can you identify the type of transaction below ?,+,-,+,+,+,-,+,-,1,2,3,4,Notice that in each of the transactions, the equation balances (+ and -) Notice also that the debits and credits are equal in each transaction,=,+,Assets,Liabilities,Owners Equity,Debit for Increases,Credit for
5、 Decreases,Debit for decreases,Debit for decreases,Credit for Increases,Credit for Increases,5,+,-,6,Journal 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
6、Jan 2, the firm issues 10,000 shares of common stock for $100,000 cash On Jan 5, it pays $60,000 cash to purchase equipment,7,Toy Example,Toys 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 pur
7、chase 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 bank. 6) Jan 31 - The firms receives $3,000 from a customer for a good to be delivered in Marc
8、h.,8,100,000 (1),(1) 100,000,Transaction 1 Assets = Liabs. + OE +100,000 (cash) = +100,000 (common stock),Ledger Posting Procedure - Using T-Accounts,Journal Entries,T-Accounts,9,(2) 60,000,(1) 100,000 60,000 (2),Transaction 2 Assets = Liabs. + OE - 60,000 (cash) + 60,000 (equipment) =,Ledger Postin
9、g Procedure - Using T-Accounts,Journal Entries,T-Accounts,10,15,000 (3),(3) 15,000,Transaction 3 Assets = Liabs. + OE +15,000 (inventory) = +15,000 (acc.payable),Ledger Posting Procedure - Using T-Accounts,Journal Entries,T-Accounts,11,(4) 8,000 15,000 (3),(1) 100,000 60,000 (2)8,000 (4),Transaction
10、 4 Assets = Liabs. + OE - 8,000 (cash) = -8,000 (acc.payable),Ledger Posting Procedure - Using T-Accounts,Journal Entries,T-Accounts,12,30,000 (5),(1) 100,000 60,000 (2)(5) 30,000 8,000 (4),Transaction 5 Assets = Liabs. + OE +30,000 (cash) = +30,000 (loan payable),Ledger Posting Procedure - Using T-
11、Accounts,Journal Entries,T-Accounts,13,3,000 (6),(1) 100,000 60,000 (2)(5) 30,000 8,000 (4)(6) 3,000,Transaction 6 Assets = Liabs. + OE +3,000 (cash) = +3,000 (adv. customers),Ledger Posting Procedure - Using T-Accounts,Journal Entries,T-Accounts,14,T-Accounts and Balance Sheet as at Jan 31, 2002,(1
12、) 100,000 60,000 (2)(5) 30,000 8,000 (4)(6) 3,000 Bal. 65,000,3,000 (6)3,000 Bal.,30,000 (5)30,000 Bal.,(3) 15,000Bal. 15,000,(2) 60,000Bal. 60,000,100,000 (1)100,000 Bal.,(4) 8,000 15,000 (3)7,000 Bal.,Balance Sheet ASSETS Currents Assets Cash 65,000 Inventory 15,000 PPE Equipment 60,000Total Asset
13、s 140,000LIABILITIES AND OE Current Liabilities Accounts Payable 7,000 Adv from Customers 3,000 Long-term Liabilities Loan Payable 30,000Total Liabilities 40,000OWNERS EQUITY Common Stock 100,000Total Liabilities and OE 140,000,15,THE TRIAL BALANCE,A listing of all accounts with their related balanc
14、es. It tests whether debits and credits are equal.,CASH (A) 65,000INVENTORY (A) 15,000EQUIPMENT (A) 60,000 ACCOUNTS PAYABLE (L) 7,000ADVANCES FROM CUSTOMERS (L) 3,000LOAN PAYABLE (L) 30,000 COMMON STOCK (OE) 100,000TOTAL 140,000 140,000,BALANCEACCOUNT TITLES DEBIT CREDIT,TRIAL BALANCE TOY CORPORATIO
15、N AS AT JAN 31, 2002,16,Accrual Basis Vs. Cash Basis,Accrual Basis Revenues are recognized when earned and expenses are recognized when incurred.,Cash Basis Revenues are recognized when cash is received and expenses recorded when cash is paid.,Intuitive and easy. Provides information on the liquidit
16、y Subject to manipulation, for example, 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 rules,17,Realization Principle,Matching Principle,F
17、undamental Principles for Income Measurement,Tells us when to recognize Revenues,Tells us when to recognize Expenses,Difference is net income,Income Measurement,Revenues are recognized in the period when they are realized.,Expenses incurred to gain revenues are matched against revenues in the same p
18、eriod that revenues are recognized,18,Revenues Recognition,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, tha
19、t 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 promise to pay (such as a receivable) is a right.,Purchase of Merchandise,Collection of Cash,Delivery of Merchandise,Sale of Merchandis
20、e,Operating Process for a Firms Acquisition and Sale of Merchandise,19,Matching Principle,Matching Costs (Expenses) Against Revenue,Fundamental Principles for Income Measurement,Rational and SystematicDepreciation Amortization of goodwill,Cause andEffectCost of goods sold Insurance Interest Expense,
21、ImmediateRecognitionResearch & development Advertising Losses,20,An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.,Transactions where cash is paid or received before a related expense or revenue is recognized.,Adjusting Accounts at the end of the Acc
22、ounting Period,Transactions where cash is paid or received after a related expense or revenue is recognized.,21,Adjusting - Prepaid Expenses,Resources paid for prior to receiving the actual benefits.,ASSET,EXPENSE,Insurance Expense,22,Adjusting - Accrued Expenses and Payables,Services received but not paid,LIABILITIE,EXPENSE,Salaries Expense,23,Adjusting - Accrued Revenues and Receivables,Revenues earned in a period that are both unrecorded and not yet received.,Examples Rent as a tenant uses its rental property Interest as a borrower uses its funds,
