Kế toán, kiểm toán - Chapter 2: Analyzing transactions

1 Chapter 2 Analyzing transactions 2 1. Explain the steps in the accounting cycle and each step’s supporting documentation 2. Explain the purpose of source documents 3. Describe an account and its purpose 4. Describe a chart of accounts 5. Define debits, credits and account balance 6. Explain the rules of debits and credits in double- entry accounting and the normal balance of an account Learning objectives 3 7. Transaction analysis – debits and credits 8. Prepare a trial balance and explain its purpose in the accounting cycle 9. Prepare financial statements from the trial balance Learning objectives 4 Explain the steps in the accounting cycle and each step’s supporting documentation Learning objective 1 5 ▪Steps and procedures that accountants follow when recording accounting information ▪Performing the same steps each cycle helps minimize errors when recording transactions The accounting cycle 6 Step in the accounting cycle Documentation 1. Analyze transactions Source documents 2. Journalize transactions General journal 3. Post transactions from the journal to the ledger General ledger 4. Prepare a trial balance Trial balance 5. Prepare the financial statements Financial statements Explain the purpose of source documents Learning objective 2 7 Source documents – Invoice – Purchase order – Checks – Bank statement – Cash register tape – Employee records ▪Step one in the accounting cycle is to analyze transactions from source documents ▪A source document is a record that provides written evidence that a transaction has occurred ▪Used to record the transaction Examples: 8 Describe an account and its purpose Learning objective 3 9 ▪After analyzing the transaction from the source document we record it in the accounting records ▪But what are these accounting records? ▪Accounts! The account 10 ▪An account is a record that documents increases and decreases in specific items ▪These items are classified as: – Assets – Liabilities – Equity – Revenues – Expenses ▪Accounts are used because they are an efficient way to record information The account 11 The account – Cash – Accounts Receivable – Accounts Payable – Capital ▪Chapter 1 introduced us to some specific accounts: 12 ▪New accounts introduced in this chapter: – Prepaid Expenses (Asset account) – Unearned Revenue (Liability account) Describe a chart of accounts Learning objective 4 13 ▪How do we know what accounts are used by a business? Chart of accounts: – List of all of the accounts used by the business – Displays account name and account number for each account – Used to keep track of the accounts held by the business ▪What does a chart of accounts look like? Chart of accounts 14 Chart of accounts - example 15 Account No. Account Name 100 Cash 110 Accounts Receivable 130 Supplies 160 Equipment 210 Accounts Payable 230 Unearned Revenue 250 Loan Payable 300 Capital 350 Withdrawals 400 Revenues 541 Advertising Expense Define debits, credits and account balance Learning objective 5 16 ▪We know that transactions are recorded in accounts ▪But how they are recorded in the accounts? ▪Transactions are recorded using debits and credits ▪But what does debit and credit mean? Debits and credits 17 Debit = Left Credit = Right ▪Debits and credits do not mean: – Good or bad – Favorable or unfavorable – Increase or decrease • Whether debits or credits refer to an increase or decrease depends on the classification of each account Debits and credits 18 ▪We can see debits and credits using the T-account: ▪ To debit an account is to record an entry on the left ▪ To credit an account is to record an entry on the right T-account 19 Account Title Debit Credit Dr Cr Left side Right side ▪As well as a debit and a credit side, an account has an account balance ▪An account balance is the difference between total debits and total credits recorded in that account – Debit balance: Dr > Cr – Credit balance: Dr < Cr ▪How do we calculate the account balance? Account balance 20 Example using a simple T-account: ▪The Cash account has a debit balance of $7,000 ▪There are other formats an account may take Calculating an account balance 21 Cash No. 100 (debits) 3,000 (credits) 1,000 5,000 Balance 7,000 An example of a more detailed T-account: Account formats: T-account 22 Cash No.100 Dec. 1 Capital 2,000 Dec. 2 Supplies 700 5 Loan Payable 5,000 4 Accounts Payable 600 6 Revenues 3,300 9 Expenses 150 8 Accounts Receivable 800 10 Withdrawals 250 Balance 9,400 The same account - running balance format: Account formats: Running balance format 23 Cash No. 100 Date Description Ref. Debit Credit Balance 2011 Dec. 1 Balance 0 1 Cash investment by owner 2,000 2,000 Dr 2 Purchase stationery with cash 700 1,300 Dr 4 Partial payment for credit purchase 600 700 Dr 5 Received bank loan 5,000 5,700 Dr 6 Performed services for cash 3,300 9,000 Dr 8 Received cash from Accounts Receivable 800 9,800 Dr 9 Paid expense with cash 150 9,650 Dr 10 Owner withdrawal of cash 250 9,400 Dr Explain the rules of debits and credits in double-entry accounting and the normal balance of an account Learning objective 6 24 ▪We use debits and credits in double-entry accounting to record transactions ▪The rules of double-entry accounting are: – Each transaction affects at least two accounts – Each transaction has at least one debit and one credit – Total debits must equal total credits – The accounting equation must always remain in balance Assets = Liabilities + Equity Double-entry accounting 25 ▪This leads us to the general rules of debits and credits used in double-entry accounting – Assets are increased by debits (decreased by credits) – Liabilities and equity are increased by credits (decreased by debits) Rules of debits and credits 26 ▪These general rules are extended to the components of the expanded accounting equation: – Capital is increased by credits (decreased by debits) – Withdrawals is increased by debits (decreased by credits) – Revenues are increased by credits (decreased by debits) – Expenses are increased by debits (decreased by credits) Rules of debits and credits 27 ▪To help us remember the rules of debits and credits, we can think of the normal balance of an account: – the debit or credit side of the account to which increases are recorded Normal balance of an account 28 Account classification: Normal balance: Asset Debit Liabilities Credit Capital Credit Withdrawals Debit Revenues Credit Expenses Debit Transaction analysis – debits and credits Learning objective 7 29 ▪Recall the first step in the accounting cycle was to analyze transactions from source documents ▪We can now use debits and credits to perform the second step, journalize transactions ▪But what does journalize transactions mean? Transaction analysis - debits and credits 30 Step in the accounting cycle Documentation 1. Analyze transactions Source documents 2. Journalize transactions General journal Journalizing: ▪ the process of recording a transaction in a journal Journal: ▪A record in which the transactions of the business are entered (or journalized) – Like a diary that records the transactions in chronological order ▪Once a transaction has been journalized, the individual transaction is known as a journal entry Journalizing transactions 31 ▪Transactions are recorded in the general journal: ▪For each transaction, we record the: – Date – Accounts debited and credited – Value of the transaction – Short explanation of the transaction General journal General journal GJ-1 Date Account and explanation PostRef. Debit Credit 2011 Dec. 1 Cash 2,000 Capital 2,000 (Cash investment by owner.) ▪Once transactions have been journalized, the next step in the accounting cycle is to post them to the general ledger Posting to the ledger 33 Step in the accounting cycle Documentation 1. Analyze transactions Source documents 2. Journalize transactions General journal 3. Post transactions from the journal to the ledger General ledger General ledger: ▪A record that contains all accounts of the business Posting: ▪The process of transferring information from journals to ledger accounts ▪Let’s look at an illustration of how this is done Posting to the ledger 34 Posting from the journal to the ledger 35 ▪Now we know how to journalize transactions in the general journal and post them to the ledger, we can look at how to record specific transactions ▪The general steps for recording all transactions are: – Recognize the transaction to be recorded – Analyze the transaction using the accounting equation – Determine which accounts are to be debited and credited – Journalize the transaction – Post the transaction to the ledger Illustration of transaction analysis A. Owner invests $2,000 cash into the business Journal entry: Ledger posting (T-accounts): A. Cash investment by owner Cash No. 100 (A) 2,000 Capital No. 300 (A) 2,000 Date Account and explanation PostRef. Debit Credit 2011 Dec. 1 Cash 100 2,000 Capital 300 2,000 (Cash investment by owner.) B. Purchased supplies for $700 cash Journal entry: Ledger posting (T-accounts): B. Purchased an asset with cash Cash No. 100 (B) 700 Supplies No. 130 (B) 700 Date Account and explanation PostRef. Debit Credit 2011 Dec. 2 Supplies 130 700 Cash 100 700 (Purchased supplies with cash.) C. Purchased a laptop computer on credit for $2,400 Journal entry: Ledger posting (T-accounts): C. Purchased an asset on credit Equipment No. 160 (C) 2,400 Accounts Payable No. 210 (C) 2,400 Date Account and explanation PostRef. Debit Credit 2011 Dec. 3 Equipment 160 2,400 Accounts Payable 210 2,400 (Purchased computer on credit.) D. Paid $600 cash toward previous credit purchase Journal entry: Ledger posting (T-accounts): D. Paid for an asset purchased on credit Cash No. 100 (D) 600 Accounts Payable No. 210 (D) 600 Date Account and explanation PostRef. Debit Credit 2011 Dec. 4 Accounts Payable 210 600 Cash 100 600 (Partial payment for asset purchased on credit.) E. Received a loan of $5,000 from the bank Journal entry: Ledger posting (T-accounts): E. Received loan Cash No. 100 (E) 5,000 Loan Payable No. 250 (E) 5,000 Date Account and explanation PostRef. Debit Credit 2011 Dec. 5 Cash 100 5,000 Loan Payable 250 5,000 (Received cash loan from bank.) F. Performed tutoring services for $3,300 cash Journal entry: Ledger posting (T-accounts): F. Performed services for cash Cash No. 100 (F) 3,300 Revenues No. 400 (F) 3,300 Date Account and explanation PostRef. Debit Credit 2011 Dec. 6 Cash 100 3,300 Revenues 400 3,300 (Received cash for services performed.) G. Performed $4,400 worth of services on credit Journal entry: Ledger posting (T-accounts): G. Performed services on credit Accounts Receivable No. 110 (G) 4,400 Revenues No. 400 (G) 4,400 Date Account and explanation PostRef. Debit Credit 2011 Dec. 7 Accounts Receivable 110 4,400 Revenues 400 4,400 (Performed services on credit.) H. Received $800 cash from credit customers Journal entry: Ledger posting (T-accounts): H. Received cash from Accounts Receivable Cash No. 100 (H) 800 Accounts Receivable No. 110 (H) 800 Date Account and explanation PostRef. Debit Credit 2011 Dec. 8 Cash 100 800 Accounts Receivable 110 800 (Received cash from credit customers.) I. Paid $150 cash for advertising campaign Journal entry: Ledger posting (T-accounts): I. Paid expense with cash Cash No. 100 (I) 150 Advertising Expense No. 541 (I) 150 Date Account and explanation PostRef. Debit Credit 2011 Dec. 9 Advertising Expense 541 150 Cash 100 150 (Paid cash for advertising expense.) J. Owner withdraws $250 cash from the business Journal entry: Ledger posting (T-accounts): J. Owner withdraws cash from business Cash No. 100 (J) 250 Withdrawals No. 350 (J) 250 Date Account and explanation PostRef. Debit Credit 2011 Dec. 10 Withdrawals 350 250 Cash 100 250 (Cash withdrawal by owner.) K. Signing an employment agreement Journal entry: ▪ No journal entry required because there is no change to the value of the assets, liabilities, equity, revenues or expenses of the business K. Non business transaction L. Paid $360 for a 3 year insurance premium Journal entry: Ledger posting (T-accounts): L. Prepaid expense Cash No. 100 (L) 360 Prepaid Insurance No. 142 (L) 360 Date Account and explanation PostRef. Debit Credit 2011 Dec. 12 Prepaid Insurance 142 360 Cash 100 360 (Paid for 36 month insurance policy for the computer.) M. Made a loan repayment of $500 Journal entry: Ledger posting (T-accounts): M. Repayment of loan Cash No. 100 (M) 500 Loan Payable No. 250 (M) 500 Date Account and explanation PostRef. Debit Credit 2011 Dec. 13 Loan Payable 250 500 Cash 100 500 (Repaid part of the principal of the bank loan.) N. Received $900 cash in advance for tutoring Journal entry: Ledger posting (T-accounts): N. Unearned revenue Cash No. 100 (N) 900 Unearned Revenue No. 230 (N) 900 Date Account and explanation PostRef. Debit Credit 2011 Dec. 14 Cash 100 900 Unearned Revenue 230 900 (Received revenue in advance.) O. Performed $2,000 worth of tutoring services. $450 was received in cash with the remaining $1,550 to be received on credit Journal entry: ▪Post to each of the 3 accounts in this journal entry O. Compound journal entry Date Account and explanation PostRef. Debit Credit 2011 Dec. 15 Cash 100 450 Accounts Receivable 110 1,550 Revenues 400 2,000 (Performed services for cash and credit.) Prepare a trial balance and explain its purpose in the accounting cycle Learning objective 8 52 ▪After journalizing transactions and posting them to the ledger, the next stage in the accounting cycle is to prepare a trial balance Trial balance 53 Step in the accounting cycle Documentation 1. Analyze transactions Source documents 2. Journalize transactions General journal 3. Post transactions from the journal to the ledger General ledger 4. Prepare a trial balance Trial balance ▪The trial balance is a list of all general ledger accounts held by the business and their balances at a specific point in time ▪Purpose is to verify that total debits equals total credits in the accounts Trial balance 54 Trial balance - example 55 Running Latte Trial Balance December 31, 2011 No. Account Debit$ Credit $ 100 Cash 9,890 110 Accounts Receivable 5,150 130 Supplies 700 142 Prepaid Insurance 360 160 Equipment 2,400 210 Accounts Payable 1,800 230 Unearned Revenue 900 250 Loan Payable 4,500 300 Capital 2,000 350 Withdrawals 250 400 Revenues 9,700 541 Advertising Expense 150 Totals 18,900 18,900 ▪Use the general ledger to construct the trial balance – List account numbers and account names – Transfer debit and credit balances into corresponding column – Calculate total debits and credits – Verify total debits equals total credits ▪The trial balance is said to be balanced when total debits equals total credits ▪But what if the trial balance does not balance? Preparing a trial balance 56 ▪Add up the columns again and check: ▪ Is an account missing? – Look for difference between debits and credits in the ledger ▪Debits or credits recorded in wrong column? – Difference ÷ 2 ▪Transposition or slide error? – Difference ÷ 9 Trial balance errors 57 ▪There are 2 main ways to correct an error in the accounts ▪Rule a line through the entry and enter the correct information for: – Incorrect journal entry that has not been posted – Posting an incorrect amount to the correct ledger account ▪ Journalize a correcting entry for: – Incorrect journal entry that has been posted – Journal entry posted to the wrong account Correcting errors in the accounts 58 ▪A balanced trial balance can not guarantee the accounts are free from errors ▪The following errors may still exist in the accounts: – Missing transactions that were not journalized or posted – Duplicate transactions where journal entries were recorded or posted more than once – Incorrect accounts that have been used in journalizing or posting – Incorrect dollar amounts that have been journalized or posted to the correct account Limitations of the trial balance 59 Prepare financial statements from the trial balance Learning objective 9 60 ▪Once the trial balance is balanced, we can use it to help prepare the financial statements Financial statements 61 Step in the accounting cycle Documentation 1. Analyze transactions Source documents 2. Journalize transactions General journal 3. Post transactions from the journal to the ledger General ledger 4. Prepare a trial balance Trial balance 5. Prepare the financial statements Financial statements ▪The trial balance can be used to help construct the financial statements ▪The order of the accounts in the trial balance is generally the order in which they appear in the financial statements – balance sheet accounts are at the top of the trial balance – income statement accounts are at the bottom of the trial balance Financial statements 62