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Learning Objectives (LO)

After studying this chapter, you should be able to

Recording Transactions

CHAPTER

1. Use double-entry accounting 2. Describe the five steps in the recording process 3. Analyze and journalize transactions and post journal entries to the ledgers 4. Prepare and use a trial balance 5. Close revenue and expense accounts and update retained earnings 6. Correct erroneous journal entries and describe how errors affect accounts 7. Explain how computers have transformed the processing of accounting data
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Introduction to Financial Accounting, 10/e

2010 Pearson Education Inc. Publishing as Prentice Hall

Introduction to Financial Accounting, 10/e

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LO 1 Double-Entry System
Method for recording transactions, whereby every transaction affects at least two accounts. Transaction analysis process:
Which accounts are affected? Do they increase or decrease? How much do they change?

LO 1 Double-Entry System
T-account = simplified version of a ledger account
ACCOUNT NAME Left side Right side

DEBIT (Dr.) CREDIT (Cr.)


Assets = Liabilities + Paid in Capital Owners Equity Retained Earnings Revenue (Expense) (Dividend)

D C

D C

D
+
2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial Accounting, 10/e

C +

D C D C D C

+
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2010 Pearson Education Inc. Publishing as Prentice Hall

Introduction to Financial Accounting, 10/e

LO 2 Recording Process
Transactions Documentation Journal Ledger Trial Balance Financial Statements

LO 3 Posting to Ledger Accounts


Journal Entry an analysis of the effects of a single transaction on various accounts, usually accompanied by an explanation Posting the process of transferring of amounts from the general journal to the appropriate accounts Cross-referencing - using numbering, dating, and/or some other identification in the ledger to trace it back to the appropriate journal entry or vice versa
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Source Documents - original records supporting any transaction (kept in hard copy files) General Journal chronological listing of all transactions (diary of events) Ledger Account listing of all the increases and decreases in a particular account General Ledger collection of all ledger accounts Trial Balance list of all ledger account balances that should collectively be in balance
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Introduction to Financial Accounting, 10/e

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LO 3 Journal Ledger Examples


Sale of merchandise on credit (Part 1)
Transaction: Sold merchandize on credit for $180,000 Analysis : Accounts Receivable increases, Stockholders equity increases because Revenue was earned at the time of sale Journal Entry:

LO 3 Journal Ledger Examples


Sale of merchandise on credit (Part 2)
Transaction: Cost of merchandise sold, $100,000 Analysis : Merchandise Inventory decreases Stockholders equity decreases because an expense account Cost of Goods Sold (a negative stockholders account) increases Journal Entry:

Accounts Receivable Revenue Accounts Receivable 180,000

180,000 180,000 Revenue 180,000

Cost of Goods Sold 100,000 Merchandise Inventory 100,000 Cost of Goods Sold 100,000
Introduction to Financial Accounting, 10/e

Posting:

Posting:

Merchandise Inventory 100,000


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Introduction to Financial Accounting, 10/e

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LO 3 Journal Ledger Examples


Sale of merchandise on credit (Part 3)
Transaction: Customer pays for the open account purchase $180,000 Analysis : Accounts Receivable decreases and Cash increases Journal Entry :

LO 3 Journal Ledger Examples


Cash is received before it is earned
Transaction: Customer paid $5,000 in advance, service later performed Analysis : Cash increases Unearned Revenue (liability) increases then decreases Stockholders equity increases when Revenue is earned Journal Entry: Cash 5,000

Cash Accounts Receivable

180,000 180,000

Unearned Revenue 5,000 Unearned Revenue 5,000 Revenue 5,000


Posting:

Posting:

Cash 180,000

Accounts Receivable Revenue 180,000 180,000 180,000


Introduction to Financial Accounting, 10/e

Cash 5,000

Unearned Revenue Revenue 5,000 5,000 5,000


Introduction to Financial Accounting, 10/e

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LO 3 Journal/Ledger Examples
Purchased an asset before consuming 1/3 of it
Transaction: Paid rent for 3 months in advance $6,000 Analysis : Cash decreases Prepaid Rent increases then decreases when consumed Stockholders equity decreases because an expense account Rent Expense (a negative stockholders account) increases
Journal Entry:

LO 3 Journal/Ledger Examples
Purchase an asset and depreciate it (Part 1)
Transaction: Buy equipment $10,000; 10 year life; zero salvage value Analysis : Cash decrease, Equipment increases then decreases Stockholders equity decreases because an expense account Depreciation Expense (a negative stockholders account) increases
Journal Entry:

Prepaid Rent 6,000 Cash 6,000 Rent Expense 2,000 Prepaid Rent 2,000 Cash 6,000 Prepaid Rent Rent Expense 6,000 2,000 2,000
Introduction to Financial Accounting, 10/e

Posting:

Posting:

Equipment 10,000 Cash 10,000 Depreciation Expense * 1,000 Equipment 1,000 * {10,000 0) / 10 year life = 1,000 / year} Cash Equipment Depreciation Exp. 10,000 10,000 1,000 1,000
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LO 3 Journal/Ledger Examples
Purchase an asset and depreciate it (Part 2)
Transaction: Buy equipment $10,000; 10 year life; zero salvage value Analysis : If reduce Equipment account directly, lose track of initial Cost. Better to split amounts into two accounts 1) original cost, and 2) amount of cost allocated Accumulated Depreciation (contra asset account)
Journal Entry:

LO 4 Trial Balance
Trial Balance list of all general ledger accounts and their balances to check accuracy of postings; total debits should equal total credits to establish a convenient summary of the balance of all accounts lists balance sheet accounts first, followed by the income statement accounts

Depreciation Expense * 1,000 Accumulated Depreciation 1,000

* {10,000 0) / 10 year life = 1,000 / year}


Posting:

Equipment 10,000

Accumulated Depreciation Depreciation Expense 1,000 1,000


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Introduction to Financial Accounting, 10/e

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Introduction to Financial Accounting, 10/e

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LO 5 Closing Accounts
Closing the accounts transfer the balance in all revenue and expense accounts to Retained Earnings
Transfer all income statement account balances to a collecting account called Income Summary Transfer the Income Summary balance and Dividends balance to Retained Earnings

LO 6 - Errors
Immediately discovered errors erased or crossed out Error is detected after posting to ledger accounts correcting entry Offsetting errors in the ordinary bookkeeping process in the next period. Such errors misstate net income in both periods; they also affect the balance sheet of the first period but not the second.
2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial Accounting, 10/e

Balance remaining in temporary accounts should equal zero and thus be ready for the next accounting periods transactions
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LO 7 Computers effect on Accounting


Increase
Speed of processing data Accuracy of data/reports

Reduce
Processing costs (perhaps) Errors

Specific to accounting, computers


Capture cost of goods sold and inventory changes Activate an order to a supplier Check credit limits and update accounts receivable Prepare invoices/statements to buyers Process journal entries and post to ledger accounts Prepare trial balances and financial statements
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