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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 accountOne debitOne creditEach transaction is recorded with at least:Total debits must equal total credits.and3Debits and Credits in the AccountsRevenuesDr.Cr.()(+)ExpensesDr.Cr.(+)()AssetsDr.Cr.(+)()LiabilitiesDr.Cr.()(+)O. Equit
4、yDr.Cr.()(+)=+=Net Income4Mechanics of Double Entry AccountingCan you identify the type of transaction below ?5Journal 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 c
5、redit.On Jan 2, the 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 Equipment60,000Cash60,0006Toy ExampleToys transactions for
6、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 $15,000 from supplier on account.4) Jan 21 - Pays supplier in (3) $8,000 of the amount due.5
7、) 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 1Assets = Liabs. + OE+100,000 (cash)= +100,000 (common stock)Ledger Posting Procedure - Using T-Acc
8、ountsDateDescriptionPost. Ref.DebitCreditJan.2 Cash100,000Common Stocks100,000Journal 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-AccountsDateDescriptionPost. Ref
9、.DebitCreditJan.5 Equipment60,000Cash60,000Journal 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-AccountsDateDescriptionPost. Ref.DebitCreditJan. 15 Inventory15,000A
10、ccounts Payable15,000Journal EntriesT-Accounts10 (4) 8,00015,000 (3) CASH (A) (1) 100,000 60,000 (2) 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 Payable
11、8,000Cash8,000Journal 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 Posting Procedure - Using T-AccountsDateDescriptionPost. Ref.DebitCreditJan. 28 Cash30,000Loan Payab
12、le30,000Journal 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-AccountsDateDescriptionPost. Ref.DebitCreditJan. 28 Cash3,000Adv.
13、from Customers3,000Journal EntriesT-Accounts13T-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) 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 (
14、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 140,000LIABILITIES AND OECurrent LiabilitiesAccounts Payable 7,000Adv from Customers 3,000Long-term Liabilit
15、iesLoan Payable 30,000 Total Liabilities 40,000OWNERS EQUITYCommon Stock 100,000 Total Liabilities and OE 140,00014THE TRIAL BALANCE A 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
16、 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, 200215Accrual Basis Vs. Cash BasisAccrual BasisRevenues are recognized when earned and expenses
17、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 example, the firm can delay having to recognize an expense by postponing cash payment. Mor
18、e difficult conceptually.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
19、 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 recognized17Revenues Recognition When does the accountant recognize revenue? Revenues are recognized when some
20、 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, service or right in exchange and can reasonably measure the value of the
21、 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 Merchandise18MatchingPrincipleMatching Costs (Expenses) Against RevenueFundamental Principl
22、es for Income MeasurementRational and SystematicDepreciationAmortization of goodwillCause and EffectCost of goods soldInsuranceInterest Expense Immediate RecognitionResearch &developmentAdvertisingLosses19Framework for AdjustmentsPrepaidExpensesDepreciationUnearnedRevenuesAccruedExpensesAccruedReven
23、uesAdjustments 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 end of the Accounting PeriodTransactions where cash is paid orreceiv
24、ed after a related expenseor revenue is recognized.20Adjusting - Prepaid ExpensesResources paid for prior to receiving the actual benefits.UnadjustedBalanceCreditAdjustmentDebitAdjustmentASSETEXPENSEPrepaid Insurance Bal. $400 (8) $ 50$ 50 (8)Insurance Expense21Adjusting - Accrued Expenses and Payab
25、lesServices 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