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Lecture

Week3_LectureNotes_2013.pdf

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Department
Commerce
Course
COMMERCE 1BA3
Professor
Teal Mc Ateer
Semester
Summer

Description
Learning Objectives 1. Discuss the components of the accounting cycle. 2. Analyze transactions. 3. Journalize transactions. 4. Post journal entries. 5. Prepare a trial balance. 6. Identify and correct errors in the accounting records. 7. Income statement 8. Accrual vs. Cash accounting 9. Revenue and matching principles 10. Income statement formats 1 THE ACCOUNTING CYCLE Daily Activities End of Period Activities B USINESSACTIVITIES PREPARING Buying, Selling, Borrowing, Hiring, AT RIALBALANCE Firing, Advertising, Renting, ….etc. TRANSACTIONS ? - Has the financial position changed? PERFORMING ADJUSTING ENTRIES - Can we measured the effects in $? Stop YES PREPARING ANALYZING T RANSACTIONS - Identify the accounts involved FINANCIAL STATEMENTS - Determine $$ and direction (+ , -) JOURNALIZING CLOSING THE (Apply the double entry rules) ACCOUNTING BOOKS - Assets, Expenses, Dividends: (+ Debit, - Credit) - Liabilities, Revenues, Equity: (+ Credit, - Debit) POSTING TO THELEDGER Enter the amount of each account of the Journal entry on theide of the corresponding T account in the Ledger. 2 T RANSACTION ANALYSIS AND JOURNALIZING  A business transaction is any transaction conducted in the course of business.  An accounting transaction is an event that affects the financial position of an entity. The set of accounting transactions is a subset of business transactions. That is, all accounting transactions are business transactions, but not all business transactions are accounting transactions. You can identify a business transaction as an accounting transaction by identifying at least one affected element of financial statements.  Transactions are recorded first in the journal in a chronological order.  Each transaction affects at least two accounts (double entry).  Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity. That is, the accounting equation must be balanced after recording each transaction.  Transaction analysis involves these steps: For each transaction determine:  specific accounts are affected,  the amount of the change in each account, and  whether the account balances are increased or decreased  Apply the rules of debit and credit (See Figure 1)  the rules of debit and credit keep the accounting equation in balance  Debit and credit signify directions -- debit for left and credit for right.  The type of account determines the side on which increases and decreases are recorded.  Some transactions may require only increases or only decreases.  Write the transaction in the journal  Listing first the debit accounts in the upper left corner and then the credit accounts in the lower right corner.  Notice that the total amounts of debits should equal the total amounts of credits. An example of a journal entry: Dr. Cash 10,000 Cr. Accounts Receivable 10,000 The following observations follow from the above entry: 1. We do not state which account increased or decreased. Rather, using the debit and credit rules we know that the above journal entry is to record a transaction where cash increased and accounts receivable decreased. 2. We do not put the dollar sign before the amounts, because all amounts reported in journal entries are in dollars. 3 Figure 1 The Double-Entry Bookkeeping rules I. ALANCE SHEET ITEMS :  If an ASSET account Increaseditke Debit, and if Decreased make it Credit.  If a LIABILITY account Increaseditke Credit, and if Decreased make it Debit.  If a CAPITAL account Increaseditke Credit, and if Decreased make it Debit. II.INCOME S TATEMENT ITEMS :  If anEXPENSE account Increasmditke Debit, and if Decreased make it Credit.  If aREVENUE account Increasmditke Credit, and if Decreaseditke Debit. III.DIVE DENS D ECLARED :  If a company declared DIVIDENDS make it Debit (Regardless of whether they are paid or not) 4 P OSTING JOURNAL E NTRIES TO THE L EDGER The Ledger  The ledger is an accounting book (a set of notebook pages) in which each account is listed separately (in a separate page). Posting  Posting is the process of copying (transferring) journal entries to Ledger accounts.  In this phase of the recording process, the accountant accumulates the effects of journalized transactions in the individual accounts.  Debits in the journal are posted as debits to the appropriate accounts; credits in the journal are posted as credits to the appropriate accounts.  The following figure illustrates how ledger accounts would appear. Debit Account Name Credit Debit entries Credit entries  The balance of an account is the difference between total debit entries and total credit entries.  The normal balance of an account is the side used to record increases.  Often, a shift of a balance amount away from its normal column indicates there has been an accounting error made. Every account balance is derived from four components: 1. Beginning balance Inc+ase.s 3. - Decreases 4. = Ending balance For example, if cash at the beginning of the period is $2,000, cash receipts during the period total $26,000, and cash disbursements are $25,000, then ending cash is $3,000. If you know any three of the four components, you can calculate the fourth. You can also see these relationships by recording this information in a T-account for Cash. 5 Below are examples of the above equation for few accounts Ending Accounts Receivable = Beginning Accounts Receivable + Credit Sales (or services) – Collections from customers Ending Accounts Payable = Beginning Accounts Payable + Purchases on account – Payments to suppliers Ending office supplies = Beginning Office Supplies + Purchases of Office Supplies – Office Supplies Expense Ending Retained Earnings = Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends 6 P REPARING THE TRIAL BALANCE  The trial balance is a list of all accounts and their balances at a given time (typically at the end of the accounting period).  The trial balance is not one of the four financial statements, but merely a tool to aid the accountant in the preparation of the financial statements. Effects of Errors  Unequal column totals indicate at least one error. Some common errors are: Pois.ngrectly. Ma 2t.heariorl. 3. Omitting or entering account balances in the wrong column of the trial balance.  Equal trial balance totals prove only that debits posted to accounts equal credits posted to accounts; equal totals prove whether debit balances in the accounts equal credit balances.  Errors in transactions that have equal debits and credits will not be revealed by unequal totals.  Errors that are not counterbalanced will keep the balance sheet incorrect until correcting entries are made.  When a journal entry contains an error, it cannot be erased or crossed out; particularly if the error is detected after the entry is posted to the ledgers.  If the error is detected, a correcting entry must be made, which counteracts the incorrect entry to correct the account.  The following tips can be helpful to detect simple mistakes. Do the following if the total debits does not equal the total credits (all these tips assume that the balances in the trial balance are integers): o Divide the difference between the debits and credits by 2. If the difference is an integer, then possible error is posting a debit as a credit or vice versa. Look for the difference divided by two in the trial balance. o Divide the difference between debits and credits by 9. If the difference is an integer, there are two possibilities. The first possibility is either too few or too many zeros. For example, if the correct amount is 250 and it was posted at 25, the differe
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