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RecordingBusinessTransactionsLearningObjectives:Understandthedual-entryrecordingframeworkandDiscusstheaccrualbasisofaccountingDiscussionSection#2FinancialReportingEWMBA-202LopoMartinez1RecordingBusinessTransactionACCOUNTINGPROCESSEVENTSTRANSACTIONSFINANCIALSTATEMENTSJOURNALLEDGERDOCUMENTATIONJournalizingPostingFINANCIALSTATEMENTSTheAccuracySummaryTRIALBALANCE1.Journalizing2.Posting3.Preparingatrialbalance4.Recordingadjustingentries5.Preparingfinancialstatements2ACCOUNTINGPROCESSEVENTSTRANSADebitsandCreditsAccountTitleDebitCredit(Dr.)(Cr.)LeftSideRightSideDebit(dr.)-anentryorbalanceontheleftsideofanaccountCredit(cr.)-anentryorbalanceontherightsideofanaccountOnedebitOnecreditEachtransactionisrecordedwithatleast:Totaldebitsmustequaltotalcredits.andDRCR3DebitsandCreditsAccountTitlDebitsandCreditsintheAccountsRevenuesDr.Cr.(–)(+)ExpensesDr.Cr.(+)(–)–AssetsDr.Cr.(+)(–)LiabilitiesDr.Cr.(–)(+)O.EquityDr.Cr.(–)(+)=+=NetIncome4DebitsandCreditsintheAccoMechanicsofDoubleEntryAccountingCanyouidentifythetypeoftransactionbelow?+-+++-+-1234Noticethatineachofthetransactions,theequationbalances(+and-)Noticealsothatthedebitsandcreditsareequalineachtransaction=+AssetsLiabilitiesOwner’sEquityDebitforIncreasesCreditforDecreasesDebitfordecreasesDebitfordecreasesCreditforIncreasesCreditforIncreases5+-5MechanicsofDoubleEntryAccoJournalEntriesAccountantsrecordatransactionbymakingajournalentry.AjournalentryshowsbothsidesofthetransactionwiththenameoftheACCOUNTSandtheirrespectivedebitorcredit.OnJan2,thefirmissues10,000sharesofcommonstockfor$100,000cashOnJan5,itpays$60,000cashtopurchaseequipment6JournalEntriesAccountantsrecToyExampleToy’stransactionsforJanuary2002areasfollows:1)Jan2-Thefirmissues10,000sharesofcommonstocksfor$100,000cash.2)Jan5-Pays$60,000cashtopurchaseequipment.3)Jan15-Purchasesmerchandiseinventorycosting$15,000fromsupplieronaccount.4)Jan21-Payssupplierin(3)$8,000oftheamountdue.5)Jan28-Thefirmborrows$30,000fromabank.6)Jan31-Thefirmsreceives$3,000fromacustomerforagoodtobedeliveredinMarch.7ToyExampleToy’stransactions 100,000(1)CASH(A)
(1)100,000
COMMONSTOCK(OE)Transaction1Assets =Liabs.+OE+100,000(cash) = +100,000(commonstock)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts8 100,000(1)CASH(A)(2)60,000CASH(A)
(1)100,00060,000(2)
EQUIPMENT(A)Transaction2Assets =Liabs.+OE-60,000(cash)+60,000(equipment)=
LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts9(2)60,000CASH(A) 15,000(3)INVENTORY(A)
(3)15,000
ACC.PAYABLE(L)Transaction3Assets =Liabs.+OE+15,000(inventory) =+15,000(acc.payable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts10 15,000(3)INVENTORY(4)8,000 15,000(3)CASH(A)
(1)100,00060,000(2)8,000(4)
ACC.PAYABLE(L)Transaction4Assets =Liabs.+OE-8,000(cash) =-8,000(acc.payable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts11(4)8,000 15,000(3)CAS 30,000(5)CASH(A)
(1)100,00060,000(2)(5)30,0008,000(4)
LOANPAYABLE(L)Transaction5Assets =Liabs.+OE+30,000(cash) =+30,000(loanpayable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts12 30,000(5)3,000(6)CASH(A)
(1)100,00060,000(2)(5)30,0008,000(4)(6)3,000
ADV.CUSTOMERS(L)Transaction6Assets =Liabs.+OE+3,000(cash) =+3,000(adv.customers)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts13
T-AccountsandBalanceSheetasatJan31,2002(1)100,00060,000(2)(5)30,0008,000(4)(6)3,000Bal.65,000CASH(A)
ADV.CUSTOMERS(L)
LOANPAYABLE(L)3,000(6)3,000Bal. 30,000(5) 30,000Bal.
EQUIPMENT(A)INVENTORY(A)
(3)15,000Bal.15,000(2)60,000Bal.60,000
COMMONSTOCK(OE) 100,000(1) 100,000Bal.
ACC.PAYABLE(L)(4)8,000 15,000(3)7,000Bal.
BalanceSheetASSETSCurrentsAssetsCash 65,000Inventory 15,000PPEEquipment 60,000
TotalAssets140,000LIABILITIESANDOECurrentLiabilitiesAccountsPayable7,000AdvfromCustomers3,000Long-termLiabilitiesLoanPayable30,000
TotalLiabilities40,000OWNERS’EQUITYCommonStock100,000
TotalLiabilitiesandOE140,00014T-AccountsandBalanceSheetaTHETRIALBALANCEAlistingofallaccountswiththeirrelatedbalances.
Ittestswhetherdebitsandcreditsareequal. CASH(A)65,000 INVENTORY(A) 15,000 EQUIPMENT(A)60,000 ACCOUNTSPAYABLE(L) 7,000 ADVANCESFROMCUSTOMERS(L)3,000 LOANPAYABLE(L)30,000 COMMONSTOCK(OE) 100,000 TOTAL 140,000140,000BALANCEACCOUNTTITLESDEBITCREDIT
TRIALBALANCE
TOYCORPORATIONASATJAN31,200215THETRIALBALANCEAlistingofAccrualBasisVs.CashBasisAccrualBasisRevenuesarerecognizedwhenearnedandexpensesarerecognizedwhenincurred.CashBasisRevenuesarerecognizedwhencashisreceivedandexpensesrecordedwhencashispaid.Intuitiveandeasy.ProvidesinformationontheliquiditySubjecttomanipulation,forexample,thefirmcandelayhavingtorecognizeanexpensebypostponingcashpayment.Moredifficultconceptually.Providesinformationonlong-termprofitability.Subjecttomanipulationbythechoiceofrecognitionrules16AccrualBasisVs.CashBasisAcRealizationPrincipleMatchingPrincipleFundamentalPrinciplesforIncomeMeasurementTellsuswhentorecognizeRevenuesTellsuswhentorecognizeExpensesDifferenceisnetincomeIncomeMeasurementRevenuesarerecognizedintheperiodwhentheyarerealized.Expensesincurredtogainrevenuesarematchedagainstrevenuesinthesameperiodthatrevenuesarerecognized17RealizationMatchingFundamentalRevenuesRecognition
Whendoestheaccountantrecognizerevenue?Revenuesarerecognizedwhensomecriticaleventoccurs.Textbook(SW)-Whenbothofthefollowingaremet:1.Thefirmhasperformedallormostoftheservicesorithasdeliveredthegoods,thatis,ithasearnedtherevenue.2.Thefirmhasreceivedagood,serviceorrightinexchangeandcanreasonablymeasurethevalueofthegood,serviceorright.Apromisetopay(suchasareceivable)isaright.PurchaseofMerchandiseCollectionofCashDeliveryofMerchandiseSaleofMerchandiseOperatingProcessforaFirm’sAcquisitionandSaleofMerchandise18RevenuesRecognitionWhendoesMatchingPrincipleMatchingCosts(Expenses)AgainstRevenueFundamentalPrinciplesforIncomeMeasurementRationalandSystematicDepreciationAmortizationofgoodwillCauseandEffectCostofgoodssoldInsuranceInterestExpenseImmediateRecognitionResearch&developmentAdvertisingLosses19MatchingMatchingCosts(Expens
Anadjustingentryisrecordedtobringanassetorliabilityaccountbalancetoitsproperamount.Transactionswherecashispaidorreceivedbefore
arelatedexpenseorrevenueisrecognized.AdjustingAccountsattheendoftheAccountingPeriodTransactionswherecashispaidorreceivedafterarelatedexpenseorrevenueisrecognized.20AnadjustingentryisrecordeAdjusting-PrepaidExpensesResourcespaidforpriortoreceivingtheactualbenefits.UnadjustedBalanceCreditAdjustmentDebitAdjustmentASSETEXPENSEPrepaidInsuranceBal.$400(8)$50$50(8)InsuranceExpense21Adjusting-PrepaidExpensesRAdjusting-AccruedExpensesandPayablesServicesreceivedbutnotpaidUnadjustedBalanceCreditAdjustmentDebitAdjustmentLIABILITIEEXPENSESalariesPayable
(10)$1,600$1,600(10)SalariesExpense22Adjusting-AccruedExpensesAdjusting-AccruedRevenuesandReceivablesRevenuesearnedinaperiodthatarebothunrecordedandnotyetreceived.AssetRevenueCreditAdjustmentDebitAdjustmentExamplesRentasatenantusesitsrentalpropertyInterestasaborrowerusesitsfunds23Adjusting-AccruedRevenuesaRecordingBusinessTransactionsLearningObjectives:Understandthedual-entryrecordingframeworkandDiscusstheaccrualbasisofaccountingDiscussionSection#2FinancialReportingEWMBA-202LopoMartinez24RecordingBusinessTransactionACCOUNTINGPROCESSEVENTSTRANSACTIONSFINANCIALSTATEMENTSJOURNALLEDGERDOCUMENTATIONJournalizingPostingFINANCIALSTATEMENTSTheAccuracySummaryTRIALBALANCE1.Journalizing2.Posting3.Preparingatrialbalance4.Recordingadjustingentries5.Preparingfinancialstatements25ACCOUNTINGPROCESSEVENTSTRANSADebitsandCreditsAccountTitleDebitCredit(Dr.)(Cr.)LeftSideRightSideDebit(dr.)-anentryorbalanceontheleftsideofanaccountCredit(cr.)-anentryorbalanceontherightsideofanaccountOnedebitOnecreditEachtransactionisrecordedwithatleast:Totaldebitsmustequaltotalcredits.andDRCR26DebitsandCreditsAccountTitlDebitsandCreditsintheAccountsRevenuesDr.Cr.(–)(+)ExpensesDr.Cr.(+)(–)–AssetsDr.Cr.(+)(–)LiabilitiesDr.Cr.(–)(+)O.EquityDr.Cr.(–)(+)=+=NetIncome27DebitsandCreditsintheAccoMechanicsofDoubleEntryAccountingCanyouidentifythetypeoftransactionbelow?+-+++-+-1234Noticethatineachofthetransactions,theequationbalances(+and-)Noticealsothatthedebitsandcreditsareequalineachtransaction=+AssetsLiabilitiesOwner’sEquityDebitforIncreasesCreditforDecreasesDebitfordecreasesDebitfordecreasesCreditforIncreasesCreditforIncreases5+-28MechanicsofDoubleEntryAccoJournalEntriesAccountantsrecordatransactionbymakingajournalentry.AjournalentryshowsbothsidesofthetransactionwiththenameoftheACCOUNTSandtheirrespectivedebitorcredit.OnJan2,thefirmissues10,000sharesofcommonstockfor$100,000cashOnJan5,itpays$60,000cashtopurchaseequipment29JournalEntriesAccountantsrecToyExampleToy’stransactionsforJanuary2002areasfollows:1)Jan2-Thefirmissues10,000sharesofcommonstocksfor$100,000cash.2)Jan5-Pays$60,000cashtopurchaseequipment.3)Jan15-Purchasesmerchandiseinventorycosting$15,000fromsupplieronaccount.4)Jan21-Payssupplierin(3)$8,000oftheamountdue.5)Jan28-Thefirmborrows$30,000fromabank.6)Jan31-Thefirmsreceives$3,000fromacustomerforagoodtobedeliveredinMarch.30ToyExampleToy’stransactions 100,000(1)CASH(A)
(1)100,000
COMMONSTOCK(OE)Transaction1Assets =Liabs.+OE+100,000(cash) = +100,000(commonstock)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts31 100,000(1)CASH(A)(2)60,000CASH(A)
(1)100,00060,000(2)
EQUIPMENT(A)Transaction2Assets =Liabs.+OE-60,000(cash)+60,000(equipment)=
LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts32(2)60,000CASH(A) 15,000(3)INVENTORY(A)
(3)15,000
ACC.PAYABLE(L)Transaction3Assets =Liabs.+OE+15,000(inventory) =+15,000(acc.payable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts33 15,000(3)INVENTORY(4)8,000 15,000(3)CASH(A)
(1)100,00060,000(2)8,000(4)
ACC.PAYABLE(L)Transaction4Assets =Liabs.+OE-8,000(cash) =-8,000(acc.payable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts34(4)8,000 15,000(3)CAS 30,000(5)CASH(A)
(1)100,00060,000(2)(5)30,0008,000(4)
LOANPAYABLE(L)Transaction5Assets =Liabs.+OE+30,000(cash) =+30,000(loanpayable)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts35 30,000(5)3,000(6)CASH(A)
(1)100,00060,000(2)(5)30,0008,000(4)(6)3,000
ADV.CUSTOMERS(L)Transaction6Assets =Liabs.+OE+3,000(cash) =+3,000(adv.customers)LedgerPostingProcedure-UsingT-AccountsJournalEntriesT-Accounts36
T-AccountsandBalanceSheetasatJan31,2002(1)100,00060,000(2)(5)30,0008,000(4)(6)3,000Bal.65,000CASH(A)
ADV.CUSTOMERS(L)
LOANPAYABLE(L)3,000(6)3,000Bal. 30,000(5) 30,000Bal.
EQUIPMENT(A)INVENTORY(A)
(3)15,000Bal.15,000(2)60,000Bal.60,000
COMMONSTOCK(OE) 100,000(1) 100,000Bal.
ACC.PAYABLE(L)(4)8,000 15,000(3)7,000Bal.
BalanceSheetASSETSCurrentsAssetsCash 65,000Inventory 15,000PPEEquipment 60,000
TotalAssets140,000LIABILITIESANDOECurrentLiabilitiesAccountsPayable7,000AdvfromCustomers3,000Long-termLiabilitiesLoanPayable30,000
TotalLiabilities40,000OWNERS’EQUITYCommonStock100,000
TotalLiabilitiesandOE140,00037T-AccountsandBalanceSheetaTHETRIALBALANCEAlistingofallaccountswiththeirrelatedbalances.
Ittestswhetherdebitsandcreditsareequal. CASH(A)65,000 INVENTORY(A) 15,000 EQUIPMENT(A)60,000 ACCOUNTSPAYABLE(L) 7,000 ADVANCESFROMCUSTOMERS(L)3,000 LOANPAYABLE(L)30,000 COMMONSTOCK(OE) 100,000 TOTAL 140,000140,000BALANCEACCOUNTTITLESDEBITCREDIT
TRIALBALANCE
TOYCORPORATIONASATJAN31,200238THETRIALBALANCEAlistingofAccrualBasisVs.CashBasisAccrualBasisRevenuesarerecognizedwhenearnedandexpensesarerecognizedwhenincurred.CashBasisRevenuesarerecognizedwhencashisreceivedandexpensesrecordedwhencashispaid.Intuitiveandeasy.ProvidesinformationontheliquiditySubjecttomanipulation,forexample,thefirmcandelayhavingtorecognizeanexpensebypostponingcashpayment.Moredifficultconceptually.Providesinformationonlong-termprofitability.Subjecttomanipulationbythechoiceofrecognitionrules39AccrualBasisVs.CashBasisAcRealizationPrincipleMatchingPrincipleFundamentalPrinciplesforIncomeMeasurementTellsuswhentorecognizeRevenuesTellsuswhentorecognizeExpensesDifferenceisnetincomeIncomeMeasurementRevenuesarerecognizedintheperiodwhentheyarerealized.Expensesincurredtogainrevenuesarematchedagainstrevenuesinthesameperiodthatrevenuesarerecognized40RealizationMatchingFundamentalRevenuesRecognition
Whendoestheaccountantrecognizerevenue?Revenuesarerecognizedwhensomecriticaleventoccurs.Textbook(SW)-Whenbothofthefollowingaremet:1.Thefirmhasperformedallormostoftheservicesorithasdeliveredthegoods,thatis,ithas
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