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Power Notes. Chapter F2. Analyzing Transactions. 1. Usefulness of an Account 2. Characteristics of an Account 3. Analyzing and Summarizing Transactions 4. Illustration of Analyzing and Summarizing 5. Trial Balance 6. Discovery and Correction of Errors

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slide1

Power Notes

Chapter F2

Analyzing Transactions

1. Usefulness of an Account

2. Characteristics of an Account

3. Analyzing and Summarizing Transactions

4. Illustration of Analyzing and Summarizing

5. Trial Balance

6. Discovery and Correction of Errors

7. Financial Analysis and Interpretation

Learning Objectives

C2

slide2

Note: To select a topic, type the slide # and press Enter.

Power Notes

ChapterF2

Analyzing Transactions

Slide # Power Note Topics

  • 3
  • 11
  • 36
  • 40
  • 43
  • 50
  • 57
  • Double-Entry Accounting
  • Analyzing and Recording Transactions
  • Chart of Accounts, Trial Balance
  • Journal, Ledger, and Trial Balance
  • Recording and Posting an Entry
  • Correcting Errors
  • Horizontal Analysis
slide3

Double-Entry Accounting

“ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance.”

Scale or Balance

T account

Right Side

Give

CREDIT

Left Side

Receive

DEBIT

Luca Pacioli

Developer of

Double-Entry

Accounting

Give

CREDIT

Receive

DEBIT

slide4

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

slide5

receive

Debit

Business Transactions

Land Owner (seller)

Entry B.

NetSolutions buys land for $20,000.

Land

Cash

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/5 Land 20,000

Cash 20,000

slide6

receive

Debit

Business Transactions

Supplier (seller)

Entry C.

NetSolutions buys supplies for $1,350, agreeing to pay in the near future.

Supplies

A promise

to pay later

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/10 Supplies 1,350

Accounts Payable 1,350

slide7

receive

Debit

Business Transactions

Customer (buyer)

Entry D.

NetSolutions earns fees of $7,500, receiving cash.

Cash

Services

give

Credit

NetSolutions

(seller)

give

Credit

General Journal

Date Description Debit Credit

11/18 Cash 7,500

Fees Earned 7,500

slide8

receive

Debit

Business Transactions

Various suppliers

Entry E.

NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Services,

benefits

Cash

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/18 Wages Expense 2,125

Rent Expense 800

Utilities Expense 450

Misc. Expense 275

Cash 3,650

slide9

receive

Debit

Business Transactions

Supplier (payee)

Entry F.

NetSolutions pays $950 to creditors on account.

Reduction in obligation

Cash

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30 Accounts Payable 950

Cash 950

slide10

receive

Debit

Balance of Supplies account $1,350 less $550 on hand = $800 used

Business Transactions

Entry G.

Internal Transaction

(no external entity)

At the end of the month, the cost of supplies on hand is $550.

Use of supplies

Supplies

give

Credit

NetSolutions

(user)

give

Credit

General Journal

Date Description Debit Credit

11/30 Supplies Expense 800

Supplies 800

slide11

receive

Debit

Business Transactions

Entry H.

Chris Clark (stockholder)

NetSolutions paid dividends of $2,000.

Reduction in obligation

Cash

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30 Dividends 2,000

Cash 2,000

slide12

NetSolutions

Chart of Accounts

Balance Sheet

Income Statement

1. Assets

11 Cash

12 Accounts Receivable

14 Supplies

15 Prepaid Insurance

17 Land

18 Office Equipment

2. Liabilities

21 Accounts Payable

23 Unearned Rent

3. Owner’s Equity

31 Capital Stock

32 Retained Earnings

33 Dividends

4. Revenue

41 Fees Earned

5. Expenses

51 Wages Expense

52 Rent Expense

54 Utilities Expense

55 Supplies Expense

59 Miscellaneous Expense

slide13

NetSolutions

Trial Balance

November 30, 2002

11 Cash 5,900

14 Supplies 550

17 Land 20,000

21 Accounts Payable 400

31 Capital Stock 25,000

33 Dividends 2,000

41 Fees Earned 7,500

51 Wages Expense 2,125

52 Rent Expense 800

54 Utilities Expense 450

55 Supplies Expense 800

59 Miscellaneous Expense 275

32,900 32,900

slide14

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Assets

slide15

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Assets

Expenses

slide16

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Liabilities

Assets

Expenses

slide17

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Liabilities

Assets

Owner’s Equity

Expenses

slide18

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Liabilities

Assets

Owner’s Equity

Revenues

Expenses

comparative balance sheet december 31 2003 and 2002

Financial Analysis and Interpretation

Comparative Balance SheetDecember 31, 2003 and 2002

Objective:Use horizontal analysis to compare financial statements from different periods.

Assets

Current assets $ 550,000 $ 533,000 $ 17,000 3.2%

Long-term investments 95,000 177,500 (82,500) (46.5%)

Plant assets (net) 444,500 470,000 (25,500) (5.4%)

Intangible assets 50,000 50,000 —

$1,139,500 $1,230,500 $ (91,000) (7.4%)

Increase (Decrease)

2003 2002 Amount Percent

Horizontal Analysis:

Current year (2003) $550,000

Base year (1999) $533,000

= 103.2%

Increase amount $17,000

Base year (2002) $533,000

= 3.2%

comparative income statement december 31 2003 and 2002

Financial Analysis and Interpretation

Comparative Income StatementDecember 31, 2003 and 2002

Objective:Use horizontal analysis to compare financial statements from different periods.

Sales $1,530,500 $1,234,000 $296,500 24.0%

Sales returns 32,500 34,000 (1,500) (4.4%)

Net sales $1,498,000 $1,200,000 $298,000) 24.8%

Cost of goods sold 1,043,000 820,000 223,000 27.2%

Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%

Increase (Decrease)

2003 2002 Amount Percent

Horizontal Analysis:

Current year (2003) $1,498,000

Base year (2002) $1,200,000

= 124.8%

Increase amount $298,000

Base year (2002) $1,200,000

= 24.8%

slide21

Expanded Accounting Equation

“ The basic accounting equation can be expanded to include all five financial categories indicating what has been received and given.”

DEBITS

received

CREDITS

given

=

Liabilities

Assets

Owner’s Equity

Net

Income

Revenues

Expenses

slide22

NetSolutions

“ On November 1, 2002, I started a business called NetSolutions. I plan to use my knowledge of microcomputers and offer computer consulting services for a fee. The following double-entry transactions show how amounts received (debits) always equal amounts given (credits).”

Chris Clark, Owner

slide23

receive

Debit

Business Transactions

Chris Clark (investor)

Entry A.

Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock.

give

Credit

NetSolutions

(investee)

give

Credit

General Journal

Date Description Debit Credit

11/1

slide24

receive

Debit

Business Transactions

Chris Clark (investor)

Entry A.

Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock.

Cash

give

Credit

NetSolutions

(investee)

give

Credit

General Journal

Date Description Debit Credit

11/1 Cash 25,000

slide25

receive

Debit

Business Transactions

Chris Clark (investor)

Entry A.

Chris Clark deposits $25,000 in a bank account for NetSolutions in exchange for capital stock.

Capital

Stock

Cash

give

Credit

NetSolutions

(investee)

give

Credit

General Journal

Date Description Debit Credit

11/1 Cash 25,000

Capital Stock 25,000

slide26

receive

Debit

Business Transactions

Land Owner (seller)

Entry B.

NetSolutions buys land for $20,000.

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/5

slide27

receive

Debit

Business Transactions

Land Owner (seller)

Entry B.

NetSolutions buys land for $20,000.

Land

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/5 Land 20,000

slide28

receive

Debit

Business Transactions

Supplier (seller)

Entry C.

NetSolutions buys supplies for $1,350, agreeing to pay in the near future.

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/10

slide29

receive

Debit

Business Transactions

Supplier (seller)

Entry C.

NetSolutions buys supplies for $1,350, agreeing to pay in the near future.

Supplies

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/10 Supplies 1,350

slide30

receive

Debit

Business Transactions

Customer (buyer)

Entry D.

NetSolutions earns fees of $7,500, receiving cash.

give

Credit

NetSolutions

(seller)

give

Credit

General Journal

Date Description Debit Credit

11/18

slide31

receive

Debit

Business Transactions

Customer (buyer)

Entry D.

NetSolutions earns fees of $7,500, receiving cash.

Cash

give

Credit

NetSolutions

(seller)

give

Credit

General Journal

Date Description Debit Credit

11/18 Cash 7,500

slide32

receive

Debit

Business Transactions

Various suppliers

Entry E.

NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

slide33

receive

Debit

Business Transactions

Various suppliers

Entry E.

NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

Services,

benefits

give

Credit

NetSolutions

(buyer)

give

Credit

General Journal

Date Description Debit Credit

11/18 Wages Expense 2,125

Rent Expense 800

Utilities Expense 450

Misc. Expense 275

slide34

receive

Debit

Business Transactions

Supplier (payee)

Entry F.

NetSolutions pays $950 to creditors on account.

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30

slide35

receive

Debit

Business Transactions

Supplier (payee)

Entry F.

NetSolutions pays $950 to creditors on account.

Reduction in obligation

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30 Accounts Payable 950

slide36

receive

Debit

Business Transactions

Entry G.

Internal Transaction

(no external entity)

At the end of the month, the cost of supplies on hand is $550.

give

Credit

NetSolutions

(user)

give

Credit

General Journal

Date Description Debit Credit

11/30

slide37

receive

Debit

Balance of Supplies account $1,350 less $550 on hand = $800 used

Business Transactions

Entry G.

Internal Transaction

(no external entity)

At the end of the month, the cost of supplies on hand is $550.

Use of supplies

give

Credit

NetSolutions

(user)

give

Credit

General Journal

Date Description Debit Credit

11/30 Supplies Expense 800

slide38

receive

Debit

Business Transactions

Entry H.

Chris Clark (stockholder)

NetSolutions paid dividends of $2,000.

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30

slide39

receive

Debit

Business Transactions

Entry H.

Chris Clark (stockholder)

NetSolutions paid dividends of $2,000.

Reduction in equity

give

Credit

NetSolutions

(payor)

give

Credit

General Journal

Date Description Debit Credit

11/30 Dividends 2,000

slide40

NetSolutions

Trial Balance

November 30, 2002

11 Cash 5,900

14 Supplies 550

17 Land 20,000

21 Accounts Payable 400

31 Capital Stock 25,000

33 Dividends 2,000

41 Fees Earned 7,500

51 Wages Expense 2,125

52 Rent Expense 800

54 Utilities Expense 450

55 Supplies Expense 800

59 Miscellaneous Expense 275

32,900 32,900

Balance

Sheet

slide41

NetSolutions

Trial Balance

November 30, 2002

11 Cash 5,900

14 Supplies 550

17 Land 20,000

21 Accounts Payable 400

31 Capital Stock 25,000

33 Dividends 2,000

41 Fees Earned 7,500

51 Wages Expense 2,125

52 Rent Expense 800

54 Utilities Expense 450

55 Supplies Expense 800

59 Miscellaneous Expense 275

32,900 32,900

Income

Statement

slide42

Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.

Documents

Journal

slide43

Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.

Documents

Journal

2. Transactions are posted

from journal to ledger.

Journal

Ledger

slide44

Trial Balance

Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.

Documents

Journal

2. Transactions are posted

from journal to ledger.

Journal

Ledger

3. Trial balance is prepared.

slide45

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400

Cash 2,400

1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.

3. Post the credit side of the transaction.

slide46

1

1

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400

Cash 2,400

GeneralLedger

Account: Prepaid InsuranceAccount No. 15

Post. Balance

Date Item Ref. Debit Credit Debit Credit

12/1

Enter the transaction date in the ledger account.

slide47

2

2

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400

Cash 2,400

GeneralLedger

Account: Prepaid Insurance Account No. 15

Post. Balance

Date Item Ref. Debit Credit Debit Credit

12/1 1 2,400

Enter the debit amount in the ledger debit column.

slide48

3

3

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400

Cash 2,400

GeneralLedger

Account: Prepaid InsuranceAccount No. 15

Post. Balance

Date Item Ref. Debit Credit Debit Credit

12/1 1 2,400 2,400

Update the ledger account balance.

slide49

4

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 2,400

Cash 2,400

4

GeneralLedger

Account: Prepaid InsuranceAccount No. 15

Post. Balance

Date Item Ref. Debit Credit Debit Credit

12/1 1

Enter the journal page in the ledger account.

slide50

5

5

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 15 2,400

Cash 2,400

GeneralLedger

Account: Prepaid InsuranceAccount No. 15

Post. Balance

Date Item Ref. Debit Credit Debit Credit

12/1 1 2,400 2,400

Enter the ledger account number in the journal.

slide51

2

1

5

4

3

Recording and Posting an Entry

General Journal

Page 1

Post.

Date Description Ref. Debit Credit

12/1 Prepaid Insurance 15 2,400

Cash 11 2,400

GeneralLedger

Account: CashAccount No. 11

Post. Balance

Date Item Ref. Debit Credit Debit Credit

11/30 Balance 5,900

12/1 1 2,400 3,500

All five parts of the credit posting are shown.

slide52

Correcting Errors

Three Types of Errors

Journal Entry

Ledger Posting

Correction Procedure

1. incorrect not posted correct Journal

slide53

Correcting Errors

Three Types of Errors

Journal Entry

Ledger Posting

Correction Procedure

1. incorrect not posted correct Journal

2. correct incorrectly posted correct Ledger

slide54

Correcting Errors

Three Types of Errors

Journal Entry

Ledger Posting

Correction Procedure

1. incorrect not posted correct Journal

2. correct incorrectly posted correct Ledger

3. incorrect already posted record and post

a correcting entry

Error 3 requires a correcting journal entry.

slide55

Correcting Errors – An Example

On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

What part of this entry is incorrect?

What correcting entry would you make?

slide56

Correcting Errors – An Example

On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5

slide57

Correcting Errors – An Example

On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5 Office Equipment 12,500

slide58

Correcting Errors – An Example

On May 5 a purchase of office equipment on account was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5 Office Equipment 12,500

Supplies 12,500

comparative balance sheet december 31 2003 and 20021

Financial Analysis and Interpretation

Comparative Balance SheetDecember 31, 2003 and 2002

Objective:Use horizontal analysis to compare financial statements from different periods.

Assets

Current assets $ 550,000 $ 533,000

Long-term investments 95,000 177,500

Plant assets (net) 444,500 470,000

Intangible assets 50,000 50,000

$1,139,500 $1,230,500

Increase (Decrease)

2003 2002 Amount Percent

comparative income statement december 31 2003 and 20021

Financial Analysis and Interpretation

Comparative Income StatementDecember 31, 2003 and 2002

Objective:Use horizontal analysis to compare financial statements from different periods.

Sales $1,530,500 $1,234,000

Sales returns 32,500 34,000

Net sales $1,498,000 $1,200,000

Cost of goods sold 1,043,000 820,000

Gross profit $ 455,000 $ 380,000

Increase (Decrease)

2003 2002 Amount Percent

slide61

Note: To see the topic slide, type 2 and press Enter.

Power Notes

ChapterF2

Analyzing Transactions

This is the last slide in Chapter F2.

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