Chapter 2_Financial__ Accounting

Chapter 2
Analyzing Transactions
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting Pepperdine University
1 350 00
1 350 00
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15 16
(C) On November 10, NetSolutions purchased supplies on account for $1,350.
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Major Account Classifications
Assets are resources owned by the business. Cash Supplies Building Accounts receivable Liabilities are debts owed to outsiders (creditors). Accounts payable Notes payable Wages payable
Major Account Classifications
Owner’s equity is the owner’s right to the assets of the business. Chris Clark, Capital Chris Clark, Drawing Revenues are increases in owner’s equity as a result of selling services or products. Fees Earned Fares Earned Commission Revenue Expenses are the using up of assets or consuming of services to generate revenue. Rent Expense Salary Expense Utilities Expense
Passive account
Passive account
Yes
No
Active account
No
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Functioning rule of accounts
D
Active accounts
C
D
Passive accounts
C
Opening balance
Opening balance
Increases in the resource Closing balance
– Assets (chairs and tables) will increase by 1.000 € – Assets (money) will decrease by 1.000 €
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Balance sheet 1
Owners’ equity Assets Chairs/tables+ 1.000 Cash – 1.000 Liabilities
Effects of this entry in the Ledger
Cash
Nov. 1 25,000
Chris Clark, Capital
Nov. 1 25,000
(B) On November 5, NetSolutions bought land for $20,000, paying cash.
Let’s remember that…
Accounting equation Assets = Liabilities and Owners’s equity
Owners’ equity
Assets
Liabilities
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Example 1
• We purchase chairs and tables for 1.000 € and we pay the equivalent in cash.
4 5
5 Land
Cash Purchased land for building site.
20 000 00
20 000 00
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7 8
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(B) On November 5, NetSolutions bought land for $20,000, paying cash.
Effects of this entry in the Ledger
Major Account Classifications
Liabilities are often identified Assets are on the balance sheetare debts Liabilities by titles resources owned that include payable. owed to outsiders by the business. (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable
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Balance sheet 3
Owners’ equity Investment - 10.000 Assets Cash - 10.000 Liabilities
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What about accounts?
• How does accounting process the transactions?
An account that reflects…. Resources (assets) Acts like an…. Can have a balance at the beg./end of the period Yes
Active account
Sources (liabilities, owners’ equity) Revenues Expenses
System to Analyze Transactions
1. Determine whether an asset, a liability, owner’s equity, revenue, or expense account is affected by the transaction. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be recorded as a debit or a credit.
An account can be drawn to resemble the letter T.
The T-Account
Cash
The T-account has a title.
The T-Account
Cash
Left side debit
The left side of the account is the debit side.
• It uses an instrument called ACCOUNT. – For each type of Asset, Liability, Owner’s equity, Revenue and Expense an account will set up. – So accounting records each transaction into accounts. – A group of accounts are called a LEDGER. – A list of accounts is called CHART OF ACCOUNTS.
Decreases in the resource
Decreases in the resource
Increases in the resource
Closing balance
Opening BS
Financial year
Closing BS
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Transactions and Balance Sheet Accounts
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The T-Account
Cash
Left side debit Right side credit
The right side of the account is the credit side.
The T-Account
Cash
3,750 4,300 2,900 850 1,400 700 2,900
Typical entries
Balancing a T-Account
First, foot the debit side.
Cash
3,750 4,300 2,900 10,950 850 1,400 700 2,900
Cash
3,750 4,300 Next, foot the 2,900 side. credit 10,950 850 1,400 700 2,900 5,850
1 Nov. 1 Cash
25 000 00