Chapter 2-1 Financial Accounting & Information System (2) Session Objectives: Last Session Recap...

Chapter 2-1

Financial Accounting & Information Financial Accounting & Information System (2)System (2)

Session Objectives: Session Objectives: •Last Session RecapLast Session Recap•Debits and Credits in AccountingDebits and Credits in Accounting•Ledger AccountsLedger Accounts•General Journal & General LedgerGeneral Journal & General Ledger•Case Study: C2_Managing Books for your businessCase Study: C2_Managing Books for your business

Session Objectives: Session Objectives: •Last Session RecapLast Session Recap•Debits and Credits in AccountingDebits and Credits in Accounting•Ledger AccountsLedger Accounts•General Journal & General LedgerGeneral Journal & General Ledger•Case Study: C2_Managing Books for your businessCase Study: C2_Managing Books for your business

1

Accounting Information System with SAP: By M Asif JafferAccounting Information System with SAP: By M Asif Jaffer

Chapter 2-2

Financial Accounting & Information Financial Accounting & Information SystemSystem

Recap (Session-1): Recap (Session-1): • Why Accounting: Why Accounting: Gradually more negative motivations Gradually more negative motivations • Introduction: Introduction: New comers please introduceNew comers please introduce• Course Objective & Conduct : Course Objective & Conduct : To apply accounting concepts in To apply accounting concepts in decision making; to be able to study and understand decision making; to be able to study and understand corporate annual reportscorporate annual reports•Course Outline: Course Outline: New participants please collect from meNew participants please collect from me• What’s Accounting, What’s Accounting, What it isn’t: Identifying, Recording, What it isn’t: Identifying, Recording, Communicating of economic events of an organizationCommunicating of economic events of an organization•Accounting Foundations (Chapter_1): Accounting Foundations (Chapter_1):

Resources = SourcesResources = SourcesAssets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity

Assets = Liabilities + Capital – Drawings + Revenue - ExpensesAssets = Liabilities + Capital – Drawings + Revenue - Expenses

Recap (Session-1): Recap (Session-1): • Why Accounting: Why Accounting: Gradually more negative motivations Gradually more negative motivations • Introduction: Introduction: New comers please introduceNew comers please introduce• Course Objective & Conduct : Course Objective & Conduct : To apply accounting concepts in To apply accounting concepts in decision making; to be able to study and understand decision making; to be able to study and understand corporate annual reportscorporate annual reports•Course Outline: Course Outline: New participants please collect from meNew participants please collect from me• What’s Accounting, What’s Accounting, What it isn’t: Identifying, Recording, What it isn’t: Identifying, Recording, Communicating of economic events of an organizationCommunicating of economic events of an organization•Accounting Foundations (Chapter_1): Accounting Foundations (Chapter_1):

Resources = SourcesResources = SourcesAssets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity

Assets = Liabilities + Capital – Drawings + Revenue - ExpensesAssets = Liabilities + Capital – Drawings + Revenue - Expenses

2By M Asif JafferBy M Asif Jaffer

Chapter 2-3

The rest of the slides are taken from the following accounting resource

Chapter 2-4

Chapter 2

The Recording Process

Accounting Principles, Ninth Edition

Chapter 2-5

1. Explain what an account is and how it helps in the recording process.

2. Define debits and credits and explain their use in recording business transactions.

3. Identify the basic steps in the recording process.

4. Explain what a journal is and how it helps in the recording process.

5. Explain what a ledger is and how it helps in the recording process.

6. Explain what posting is and how it helps in the recording process.

7. Prepare a trial balance and explain its purposes.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 2-6

The AccountThe AccountThe AccountThe Account

Debits and Debits and creditscredits

Expansion of Expansion of basic equationbasic equation

Limitations of a Limitations of a trial balancetrial balance

Locating errorsLocating errors

Use of dollar Use of dollar signssigns

Summary Summary illustration of illustration of journalizing and journalizing and postingposting

JournalJournal

LedgerLedger

Steps in the Steps in the Recording Recording ProcessProcess

Steps in the Steps in the Recording Recording ProcessProcess

The Recording The Recording Process Process

IllustratedIllustrated

The Recording The Recording Process Process

IllustratedIllustratedThe Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

The Recording ProcessThe Recording ProcessThe Recording ProcessThe Recording Process

Chapter 2-7

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccounAccountt

An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

SO 1 Explain what an account is and how it helps in the recording SO 1 Explain what an account is and how it helps in the recording process.process.

The AccountThe AccountThe AccountThe Account

Chapter 2-8

Double-entry Double-entry accounting system

Each transaction must affect two or more accounts to keep the basic accounting equation in balance.

Recording done by debiting at least one account and crediting another.

DEBITS must equalmust equal CREDITS.

SO 2 Define debits and credits and explain SO 2 Define debits and credits and explain their use in recording business their use in recording business transactions.transactions.

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

Chapter 2-9

Assets = Liabilities + Capital – Drawings + Revenue - Expenses Assets = Liabilities + Capital – Drawings + Revenue - Expenses

++

+/- Capital – Drawings Profit / Loss

+(updated) Owners’

EquityAssets = Liabilities

Balance Sheet (Statement of Financial Position

Statement of Owners’ Equity Revenue –

Expenses

Income Statemen

t

Chapter 2-10

=Asset + Expenses+ Drawings

Debit

Credit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary


Liability + Capital + Revenue

Chapter 2-11

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review QuestionReview Question



Chapter 2-12

Discussion Question

Q2-4: Maria Alvarez, a beginning accounting

student, believes debit balances are

favorable and credit balances are

unfavorable. Is Maria correct? Discuss.

See notes page for discussion



Chapter 2-13

Expansion of the Basic EquationExpansion of the Basic EquationExpansion of the Basic EquationExpansion of the Basic Equation

Relationship among the assets, liabilities and Relationship among the assets, liabilities and owner’s equity of a business: owner’s equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Assets Liabilities= Owner’s EquityBasic Equation

Expanded Basic Equation


+Illustration 2-11

Chapter 2-14

Transaction (1). Investment By Owner.Transaction (1). Investment By Owner. Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2010, he invests $15,000 cash in the. The effect of this transaction on the basic equation is:

Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis

SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.

15000 15000Cash Capital

Chapter 2-15

Transaction (2). Purchase of Equipment for Cash.Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.



Chapter 2-16



Transaction (3). Purchase of Supplies on Credit.Transaction (3). Purchase of Supplies on Credit. Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.

Chapter 2-17



Transaction (4). Services Provided for Cash.Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.

Chapter 2-18



Transaction (5). Purchase of Advertising on Credit.Transaction (5). Purchase of Advertising on Credit. Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

Chapter 2-19



Transaction (6). Services Provided for Cash and Transaction (6). Services Provided for Cash and Credit.Credit. Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

Chapter 2-20



Transaction (7). Payment of Expenses.Transaction (7). Payment of Expenses. Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

Chapter 2-21



Transaction (8). Payment of Accounts Payable.Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.

Chapter 2-22



Transaction (9). Receipt of Cash on Account.Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].

Chapter 2-23



Transaction (10). Withdrawal of Cash by Owner.Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.

Chapter 2-24



Summary of TransactionsSummary of TransactionsIllustration 1-8Tabular summary ofSoftbyte transactions

Chapter 2-25

Accounts Dr. Cr.

Cash

Accounts Receivables

Supplies

Equipment

Accounts Payable

Capital

Drawings

Service Revenue

Advertising Expense

Rent Expense

Salary Expense

Utility Expense

Totals

Paula KingTrial Balance

As on 28th Feb 2010Complete

it!

Chapter 2-26

Account Name


If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1



Chapter 2-27

Account Name


If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1



$1,000$1,000

8,000 Transaction #3

Chapter 2-28

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



Owner’s EquityOwner’s Equity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits Debits and Credits SummarySummaryDebits and Credits Debits and Credits SummarySummary

SO 2 SO 2

Chapter 2-29

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.


Assets and LiabilitiesAssets and LiabilitiesAssets and LiabilitiesAssets and Liabilities

Chapter 3-23

AssetsAssets



Chapter 3-24

LiabilitiesLiabilities



Chapter 2-30

Owner’s investments and revenues increase owner’s equity (credit).

Owner’s drawings and expenses decrease owner’s equity (debit).


Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity

Chapter 3-25



Owner’s CapitalOwner’s Capital

Chapter 3-23

Owner’s DrawingOwner’s Drawing



Chapter 3-25



Owner’s EquityOwner’s Equity

Chapter 2-31

The purpose of earning revenues is to benefit the owner(s).

The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital.

Expenses have the opposite effect: expenses decrease owner’s equity.


Revenue and ExpenseRevenue and ExpenseRevenue and ExpenseRevenue and Expense

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue

Chapter 2-32

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and owner’s capital.

c. assets, liabilities, and owner’s drawings.

d. assets, owner’s drawings, and expenses.




Chapter 2-33

Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger

accounts

Illustration 2-12

Chapter 2-34

Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

The JournalThe JournalThe JournalThe Journal

SO 4 Explain what a journal is and how it helps in the recording SO 4 Explain what a journal is and how it helps in the recording process.process.

Chapter 2-35

Journalizing - Entering transaction data in the journal.

JournalizingJournalizingJournalizingJournalizing


Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash.

Account Title Ref. Debit CreditDate

Cash

R. Neal, Capital

Sept. 1 15,000

15,000

General Journal

Computer equipmentCash

7,000

7,000

Illustration 2-13

Chapter 2-36

Simple and Compound Entries

JournalizingJournalizingJournalizingJournalizing


Illustration: Assume that on July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account.

Account Title Ref. Debit CreditDate

Delivery equipment

Cash

Sept. 1 14,000

8,000

General Journal

6,000Accounts payable

Illustration 2-14

Chapter 2-37

A General Ledger contains the entire group of accounts maintained by a company.

The General Ledger includes all the asset, liability, owner’s equity, revenue and expense accounts.

The LedgerThe LedgerThe LedgerThe Ledger

SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording process.process.

Illustration 2-15

Chapter 2-38 SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording

process.process.

Chapter 2-39

T-account form used in accounting textbooks.

In practice, the account forms used in ledgers aremuch more structured.

Standard Form of AccountStandard Form of AccountStandard Form of AccountStandard Form of Account

SO 5 Explain what a ledger is and how it helps in the recording SO 5 Explain what a ledger is and how it helps in the recording process.process.

Illustration 2-16

Chapter 2-40

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

PostingPostingPostingPosting

Illustration 2-17

SO 6 Explain what posting is and how it helps in the recording SO 6 Explain what posting is and how it helps in the recording process.process.

Chapter 2-41

Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.


PostingPostingPostingPosting


Chapter 2-42

Accounts and account numbers arranged in sequence in which they are presented in the financial statements.

Chart of AccountsChart of AccountsChart of AccountsChart of Accounts


Illustration 2-18

Chapter 2-43

The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated

LO 6 Explain what posting is and how it helps in the recording LO 6 Explain what posting is and how it helps in the recording process.process.

Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 2-19

Chapter 2-44


LO 6 Explain what posting is and how it helps in the recording LO 6 Explain what posting is and how it helps in the recording process.process.

Illustration 2-20

Chapter 2-45


Illustration 2-21

Chapter 2-46


Illustration 2-22

Chapter 2-47


Illustration 2-23

Chapter 2-48


Illustration 2-24

Chapter 2-49


Illustration 2-25

Chapter 2-50


Illustration 2-26

Chapter 2-51


Illustration 2-27

Chapter 2-52


Illustration 2-28

Chapter 2-53

A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Illustration 2-31

Chapter 2-54

The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a transaction.



Limitations of a Trial Balance

Chapter 2-55

A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to Supplies and credited to Cash.

c. a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.




Chapter 2-56

Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.

a. 3 Debits and credits posted to the ledger.b. 1 Business transaction occurs. c. 2 Information entered in the journal.d. 5 Financial statements are prepared.e. 4 Trial balance is prepared.

Is Jim correct? If not, indicate to Jim the proper flow of the information.

See notes page for discussion

Recording ProcessRecording ProcessRecording ProcessRecording Process

Discussion QuestionDiscussion Question


Chapter 2-57 LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Case Study

Chapter 2-58

Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

CopyrightCopyrightCopyrightCopyright

Chapter 2-1 Financial Accounting & Information System (2) Session Objectives: Last Session Recap...

Documents

Transcript of Chapter 2-1 Financial Accounting & Information System (2) Session Objectives: Last Session Recap...