Financial Accounting and Accounting Standards

Chapter2-1

Financial Accounting & InformationSystem (2)Financial Accounting & InformationSystem (2)

Session Objectives:Session Objectives:

•Last Session Recap•Last Session Recap

•Debits and Credits in Accounting•Debits and Credits in Accounting

•Ledger Accounts•Ledger Accounts

•General Journal & General Ledger•General Journal & General Ledger

•Case Study: C2_Managing Books for your business•Case Study: C2_Managing Books for your business

Session Objectives:Session Objectives:

•Last Session Recap•Last Session Recap

•Debits and Credits in Accounting•Debits and Credits in Accounting

•Ledger Accounts•Ledger Accounts

•General Journal & General Ledger•General Journal & General Ledger

•Case Study: C2_Managing Books for your business•Case Study: C2_Managing Books for your business

Accounting Information System with SAP:

By M Asif Jaffer

Accounting Information System with SAP:

By M Asif Jaffer

Chapter2-2

Financial Accounting & InformationSystemFinancial Accounting & InformationSystem

Recap (Session-1):Recap (Session-1):

• Why Accounting: Gradually more negative motivations• Why Accounting: Gradually more negative motivations

• Introduction: New comers please introduce• Introduction: New comers please introduce

• Course Objective & Conduct : To apply accounting concepts indecision making; to be able to study and understandcorporate annual reports• Course Objective & Conduct : To apply accounting concepts indecision making; to be able to study and understandcorporate annual reports

•Course Outline: New participants please collect from me•Course Outline: New participants please collect from me

• What’s Accounting, What it isn’t: Identifying, Recording,Communicating of economic events of an organization• What’s Accounting, What it isn’t: Identifying, Recording,Communicating of economic events of an organization

•Accounting Foundations (Chapter_1):•Accounting Foundations (Chapter_1):

Resources = SourcesAssets = Liabilities + Owners’ EquityResources = SourcesAssets = Liabilities + Owners’ Equity

Assets = Liabilities + Capital – Drawings + Revenue - ExpensesAssets = Liabilities + Capital – Drawings + Revenue - Expenses

Recap (Session-1):Recap (Session-1):

• Why Accounting: Gradually more negative motivations• Why Accounting: Gradually more negative motivations

• Introduction: New comers please introduce• Introduction: New comers please introduce

•Course Outline: New participants please collect from me•Course Outline: New participants please collect from me

•Accounting Foundations (Chapter_1):•Accounting Foundations (Chapter_1):

Resources = SourcesAssets = Liabilities + Owners’ EquityResources = SourcesAssets = Liabilities + Owners’ Equity

Assets = Liabilities + Capital – Drawings + Revenue - ExpensesAssets = Liabilities + Capital – Drawings + Revenue - Expenses

By M Asif Jaffer

Chapter2-3

The rest of the slides are taken fromthe following accounting resource

Chapter2-4

Chapter 2

The RecordingProcess

Accounting Principles, Ninth Edition

Chapter2-5

1.1.Explain what an account is and how it helps in therecording process.

2.2.Define debits and credits and explain their use inrecording business transactions.

3.3.Identify the basic steps in the recording process.

4.4.Explain what a journal is and how it helps in therecording process.

5.5.Explain what a ledger is and how it helps in the recordingprocess.

6.6.Explain what posting is and how it helps in the recordingprocess.

7.7.Prepare a trial balance and explain its purposes.

Study ObjectivesStudy Objectives

Chapter2-6

The AccountThe Account

Debits andcreditsDebits andcredits

Expansion ofbasic equationExpansion ofbasic equation

Limitations of atrial balanceLimitations of atrial balance

Locating errorsLocating errors

Use of dollarsignsUse of dollarsigns

Summaryillustration ofjournalizing andpostingSummaryillustration ofjournalizing andposting

JournalJournal

LedgerLedger

Steps in theRecordingProcessSteps in theRecordingProcess

The RecordingProcessIllustratedThe RecordingProcessIllustrated

The Trial BalanceThe Trial Balance

The Recording ProcessThe Recording Process

Chapter2-7

Record of increases and decreasesin a specific asset, liability, equity,revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccountAccount

An Account canbe illustrated in aT-Account form.An Account canbe illustrated in aT-Account form.

SO 1 Explain what an account is and how it helps in the recording process.SO 1 Explain what an account is and how it helps in the recording process.

The AccountThe Account

Chapter2-8

Double-entry Double-entry accounting system

Each transaction must affect two or moreaccounts to keep the basic accounting equationin balance.

Recording done by debiting at least one accountand crediting another.

must equalDEBITS must equal CREDITS.

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Debits and CreditsDebits and Credits

Chapter2-9

Assets = Liabilities + Capital – Drawings + Revenue - ExpensesAssets = Liabilities + Capital – Drawings + Revenue - Expenses

+/-

Capital – Drawings

Profit / Loss

(updated) Owners’Equity

Assets = Liabilities

Balance Sheet (Statement of Financial Position

Statement ofOwners’Equity

Revenue – Expenses

IncomeStatement

Chapter2-10

Asset + Expenses+ Drawings

Debit

Credit

Debits and Credits SummaryDebits and Credits Summary

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Liability + Capital + Revenue

Chapter2-11

Debits:

a.increase both assets and liabilities.

b.decrease both assets and liabilities.

c.increase assets and decrease liabilities.

d.decrease assets and increase liabilities.

Review QuestionReview Question

Debits and Credits SummaryDebits and Credits Summary

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Chapter2-12

Discussion Question

Q2-4: Maria Alvarez, a beginning accountingstudent, believes debit balances are favorableand credit balances are unfavorable. Is Mariacorrect? Discuss.

See notes page for discussion

Debits and Credits SummaryDebits and Credits Summary

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Chapter2-13

Expansion of the Basic EquationExpansion of the Basic Equation

Relationship among the assets, liabilities andowner’s equity of a business:Relationship among the assets, liabilities andowner’s equity of a business:

The equation must be in balance after everytransaction. For every Debit there must be a Credit.The equation must be in balance after everytransaction. For every Debit there must be a Credit.

Assets

Liabilities

Owner’s Equity

BasicEquation

ExpandedBasicEquation

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Illustration 2-11

Chapter2-14

Transaction (1). Investment By Owner.Transaction (1). Investment By Owner. Ray Neal decidesto open a computer programming service which he namesSoftbyte. On September 1, 2010, he invests $15,000 cash inthe. The effect of this transaction on the basic equation is:

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Chapter2-15

Transaction (2). Purchase of Equipment for Cash.Transaction (2). Purchase of Equipment for Cash.Softbyte purchases computer equipment for $7,000 cash.

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Chapter2-16

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (3). Purchase of Supplies on Credit.Transaction (3). Purchase of Supplies on Credit. Softbytepurchases for $1,600 from Acme Supply Company computerpaper and other supplies expected to last several months.

Chapter2-17

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (4). Services Provided for Cash.Transaction (4). Services Provided for Cash. Softbytereceives $1,200 cash from customers for programmingservices it has provided.

Chapter2-18

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (5). Purchase of Advertising on Credit.Transaction (5). Purchase of Advertising on Credit.Softbyte receives a bill for $250 from the Daily News foradvertising but postpones payment until a later date.

Chapter2-19

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (6). Services Provided for Cash and Credit.Transaction (6). Services Provided for Cash and Credit.Softbyte provides $3,500 of programming services forcustomers. The company receives cash of $1,500 fromcustomers, and it bills the balance of $2,000 on account.

Chapter2-20

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (7). Payment of Expenses.Transaction (7). Payment of Expenses. Softbyte pays thefollowing Expenses in cash for September: store rent $600,salaries of employees $900, and utilities $200.

Chapter2-21

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (8). Payment of Accounts Payable.Transaction (8). Payment of Accounts Payable. Softbytepays its $250 Daily News bill in cash.

Chapter2-22

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (9). Receipt of Cash on Account.Transaction (9). Receipt of Cash on Account. Softbytereceives $600 in cash from customers who had been billedfor services [in Transaction (6)].

Chapter2-23

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Transaction (10). Withdrawal of Cash by Owner.Transaction (10). Withdrawal of Cash by Owner. Ray Nealwithdraws $1,300 in cash from the business for his personaluse.

Chapter2-24

Transactions AnalysisTransactions Analysis

SO 7 Analyze the effects of business transactionson the accounting equation.SO 7 Analyze the effects of business transactionson the accounting equation.

Summary of TransactionsSummary of Transactions

Illustration 1-8

Tabular summary of

Softbyte transactions

Chapter2-25

Accounts

Dr.

Cr.

Cash

Accounts Receivables

Supplies

Equipment

Accounts Payable

Capital

Drawings

Service Revenue

Advertising Expense

Rent Expense

Salary Expense

Utility Expense

Totals

Paula King

Trial Balance

As on 28th Feb 2010

Complete it!

Chapter2-26

greater thanIf Debits are greater than Credits, the accountwill have a debit balance.

$10,000

Transaction #2

$3,000

$15,000$15,000

8,000

Transaction #3

Balance

Transaction #1

Debits and CreditsDebits and Credits

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Chapter2-27

greater thanIf Credits are greater than Debits, the accountwill have a credit balance.

$10,000

Transaction #2

$3,000

Balance

Transaction #1

Debits and CreditsDebits and Credits

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

$1,000$1,000

8,000

Transaction #3

Chapter2-28

NormalBalanceCredit

NormalBalanceDebit

Debits and Credits SummaryDebits and Credits Summary

SO 2SO 2

Chapter2-29

Assets - Debits shouldexceed credits.

Liabilities – Creditsshould exceed debits.

The normal balance is onthe increase side.

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Assets and LiabilitiesAssets and Liabilities

Chapter2-30

Owner’s investments andrevenues increase owner’sequity (credit).

Owner’s drawings and expensesdecrease owner’s equity (debit).

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Owners’ EquityOwners’ Equity

Chapter2-31

The purpose of earningrevenues is to benefit theowner(s).

The effect of debits andcredits on revenue accountsis the same as their effecton Owner’s Capital.

Expenses have the oppositeeffect: expenses decreaseowner’s equity.

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Revenue and ExpenseRevenue and Expense

Chapter2-32

Accounts that normally have debit balances are:

a.assets, expenses, and revenues.

b.assets, expenses, and owner’s capital.

c.assets, liabilities, and owner’s drawings.

d.assets, owner’s drawings, and expenses.

Review QuestionReview Question

Debits and Credits SummaryDebits and Credits Summary

SO 2 Define debits and credits and explain theiruse in recording business transactions.SO 2 Define debits and credits and explain theiruse in recording business transactions.

Chapter2-33

Business documents, such as a sales slip, a check, abill, or a cash register tape, provide evidence of thetransaction.

Steps in the Recording ProcessSteps in the Recording Process

SO 3 Identify the basic steps in the recording process.SO 3 Identify the basic steps in the recording process.

Analyze each transaction

Enter transaction in a journal

Transfer journal informationto ledger accounts

Illustration 2-12

Chapter2-34

Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1.Discloses the complete effects of a transaction.

2.Provides a chronological record of transactions.

3.Helps to prevent or locate errors because thedebit and credit amounts can be easily compared.

The JournalThe Journal

SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.

Chapter2-35

Journalizing - Entering transaction data in the journal.

JournalizingJournalizing

SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.

Illustration: On September 1, Ray Neal invested $15,000cash in the business, and Softbyte purchased computerequipment for $7,000 cash.

Cash

R. Neal, Capital

Sept. 1

15,000

General Journal

Computer equipment

Cash

7,000

Illustration 2-13

Chapter2-36

Simple and Compound Entries

JournalizingJournalizing

SO 4 Explain what a journal is and how it helps in the recording process.SO 4 Explain what a journal is and how it helps in the recording process.

Illustration: Assume that on July 1, Butler Companypurchases a delivery truck costing $14,000. It pays $8,000cash now and agrees to pay the remaining $6,000 on account.

Delivery equipment

Cash

Sept. 1

14,000

8,000

General Journal

6,000

Accounts payable

Illustration 2-14

Chapter2-37

A General Ledger contains the entire group of accountsmaintained by a company.

The General Ledger includes all the asset, liability,owner’s equity, revenue and expense accounts.

The LedgerThe Ledger

SO 5 Explain what a ledger is and how it helps in the recording process.SO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-15

Chapter2-38

SO 5 Explain what a ledger is and how it helps in the recording process.SO 5 Explain what a ledger is and how it helps in the recording process.

Chapter2-39

T-account form used in accounting textbooks.

In practice, the account forms used in ledgers are

much more structured.

Standard Form of AccountStandard Form of Account

SO 5 Explain what a ledger is and how it helps in the recording process.SO 5 Explain what a ledger is and how it helps in the recording process.

Illustration 2-16

Chapter2-40

Posting Posting – theprocess oftransferringamounts fromthe journal tothe ledgeraccounts.

PostingPosting

Illustration 2-17

SO 6 Explain what posting is and how it helps in the recording process.SO 6 Explain what posting is and how it helps in the recording process.

Chapter2-41

Posting:

a.normally occurs before journalizing.

b.transfers ledger transaction data to thejournal.

c.is an optional step in the recording process.

d.transfers journal entries to ledger accounts.

Review QuestionReview Question

PostingPosting

SO 6 Explain what posting is and how it helps in the recording process.SO 6 Explain what posting is and how it helps in the recording process.

Chapter2-42

Accounts and account numbers arranged in sequence inwhich they are presented in the financial statements.

Chart of AccountsChart of Accounts

SO 6 Explain what posting is and how it helps in the recording process.SO 6 Explain what posting is and how it helps in the recording process.

Illustration 2-18

Chapter2-43

The Recording Process IllustratedThe Recording Process Illustrated

LO 6 Explain what posting is and how it helps in the recording process.LO 6 Explain what posting is and how it helps in the recording process.

Follow these steps:

1. Determine whattype of accountis involved.

2. Determine whatitems increasedor decreasedand by howmuch.

3. Translate theincreases anddecreases intodebits andcredits.

Illustration 2-19

Chapter2-44

The Recording Process IllustratedThe Recording Process Illustrated

LO 6 Explain what posting is and how it helps in the recording process.LO 6 Explain what posting is and how it helps in the recording process.

Illustration 2-20

Chapter2-45

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-21

Chapter2-46

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-22

Chapter2-47

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-23

Chapter2-48

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-24

Chapter2-49

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-25

Chapter2-50

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-26

Chapter2-51

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-27

Chapter2-52

The Recording Process IllustratedThe Recording Process Illustrated

Illustration 2-28

Chapter2-53

A list of accountsand theirbalances at agiven time.

Purpose is toprove that debitsequal credits.

The Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Illustration 2-31

Chapter2-54

The trial balance may balance even when

1.a transaction is not journalized,

2.a correct journal entry is not posted,

3.a journal entry is posted twice,

4.incorrect accounts are used in journalizing orposting, or

5.offsetting errors are made in recording the amountof a transaction.

The Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Limitations of a Trial Balance

Chapter2-55

A trial balance will not balance if:

a.a correct journal entry is posted twice.

b.the purchase of supplies on account is debited toSupplies and credited to Cash.

c.a $100 cash drawing by the owner is debited toOwner’s Drawing for $1,000 and credited to Cashfor $100.

d.a $450 payment on account is debited to AccountsPayable for $45 and credited to Cash for $45.

Review QuestionReview Question

The Trial BalanceThe Trial Balance

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Chapter2-56

Q2-19. Jim Benes is confused about how accountinginformation flows through the accounting system. He believesthe flow of information is as follows.

a.3 Debits and credits posted to the ledger.

b.1 Business transaction occurs.

c.2 Information entered in the journal.

d.5 Financial statements are prepared.

e.4 Trial balance is prepared.

Is Jim correct? If not, indicate to Jim the proper flow of theinformation.

See notes page for discussion

Recording ProcessRecording Process

Discussion QuestionDiscussion Question

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Chapter2-57

LO 7 Prepare a trial balance and explain its purposes.LO 7 Prepare a trial balance and explain its purposes.

Case Study

Chapter2-58

Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe express written permission of the copyright owner isunlawful. Request for further information should be addressedto the Permissions Department, John Wiley & Sons, Inc. Thepurchaser may make back-up copies for his/her own use onlyand not for distribution or resale. The Publisher assumes noresponsibility for errors, omissions, or damages, caused by theuse of these programs or from the use of the informationcontained herein.

CopyrightCopyright