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Lecture Financial and managerial accounting (4/e): Chapter 2 - Wild, Shaw, Chiappetta

Chapter 2 - Analyzing and recording transactions. After you have read this chapter you should be able to: Explain the steps in processing transactions, describe an account and its use in recording transactions, describe a ledger and a chart of accounts, define debits and credits and explain double-entry accounting,. | Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Analyzing and Recording Transactions Conceptual Learning Objectives C1: Explain the steps in processing transactions. C2: Describe an account and its use in recording transactions. C3: Describe a ledger and a chart of accounts. C4: Define debits and credits and explain double-entry accounting. 2- Analytical Learning Objectives A1: Analyze the impact of transactions on accounts and financial statements. A2: Compute the debt ratio and describe its use in analyzing financial condition. 2- Procedural Learning Objectives P1: Record transactions in a journal and post entries to a ledger. P2: Prepare and explain the use of a trial balance. P3: Prepare financial statements from business transactions. 2- Analyze each transaction and event from source documents Analyzing and Recording Process Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze the trial balance C 1 2- Ledger and Chart of Accounts The ledger is a collection of all accounts for an information system. A company’s size and diversity of operations affect the number of accounts needed. The chart of accounts is a list of all accounts and includes an identifying number for each account. C 3 2- A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions. Debits and Credits C4 2- Liabilities Equity Assets = + Double-Entry Accounting Debit Credit Debit Credit Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + C4 2- Revenues Expenses Common Stock Dividends _ + _ Debit Credit Stock - + Debit Credit Dividends + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting Equity C 4 2- Journalizing and Posting Transactions Step 1: Analyze transactions and source documents. Liabilities Equity Assets = + Step 2: Apply double-entry accounting Step 4: Post entry to ledger Step 3: Record journal entry P1 2- After processing its remaining transactions for December, FastForward’s trial balance is prepared. Debits Credits Cash 4,350 $ Accounts receivable - Supplies 9,720 Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200 $ Unearned consulting revenue 3,000 Common stock 30,000 Dividends 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300 $ 45,300 $ FastForward December 31, 2011 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. P2 2- Trial Balance Trial Balance Six Steps for Searching for and Correcting Errors If the trial balance does not balance, the error(s) must be found and corrected. Verify that the trial balance columns are correctly added. Verify that account balances are correctly entered from the ledger. See whether a debit (or credit) balance is mistakenly listed as a credit (or debit). Recompute each account balance in the ledger. Verify that each journal entry is properly posted. Verify that each original journal entry has equal debits and credits. P2 2- Using a Trial Balance to Prepare Financial Statements Statement of Cash Flows Income Statement Statement of Retained Earnings Beginning Balance Sheet Ending Balance Sheet Period of Time Point in Time Point in Time P3 2- End of Chapter 2 2-