Kế toán, kiểm toán - Chapter 4: The bookkeeping process and transaction analysis

CHAPTER 4THE BOOKKEEPING PROCESS ANDTRANSACTION ANALYSISMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow can the basic accounting equation be expanded to include revenues and expenses?How does the expanded accounting equation stay in balance after every transaction?How is the income statement linked to the balance sheet through owners’ equity?What are the meanings of the terms journal, ledger, T-account, account balance, debit, credit, and closing the books?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow is the bookkeeping system a mechanical adaptation of the expanded accounting equation?How is a transaction analyzed, how is a journal entry prepared, and how is the effect of a transaction on working capital determined?What are the five questions of transaction analysis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1How can the basic accounting equation be expanded to include revenues and expenses?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bookkeeping/Accounting ProcessThe process begins with transactionsThe transactions are reflected in the financial statementsOne must know the mechanical process to understand the effects of transactions on the financial statementsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The Balance Sheet EquationsThe basic equation is: Assets = Liabilities + Owners’ EquitySince Owners’ Equity consists of Paid-In Capital and Retained Earnings, the equation can be restated as:Assets = Liabilities + (Paid-In Capital + Retained Earnings)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The Balance Sheet EquationsSince Retained Earnings is computed as Beginning Retained Earnings plus Revenues and less Expenses, the basic equation can be restated as: Assets = Liabilities + (Paid-In Capital + Beginning Retained Earnings + Revenues – Expenses)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2How does the expanded accounting equation stay in balance after every transaction?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002EXHIBIT 4-1Transaction SummaryMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3How is the income statement linked to the balance sheet through owners’ equity?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Linking the Income Statement and the Balance SheetThe Net Income on the Income Statement gets into the Balance Sheet through the Retained Earnings section of Owners’ EquitySee the previous slide for an exampleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4What are the meanings of the terms journal, ledger, T-account, account balance, debit, credit, and closing the books?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bookkeeping Jargon and ProceduresJournal – where transactions are initially recordedPost – to recordLedger – a set of accounts for each category of asset, liability, and owners’ equityChart of accounts – an index to the ledgerT-Account – an account format that looks like a “T.” One side indicates an addition; the other a subtraction from the accountDebit – the left sideCredit – the right sideMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5How is the bookkeeping system a mechanical adaptation of the expanded accounting equation?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The Bookkeeping SystemDebits must always equal creditsAsset accounts will normally havedebit balancesIncreases in assets are entered as debits; decreases are entered as creditsLiabilities and Owners’ Equity are the opposite of Assets. Debits are decreases and credits are increasesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Journal EntriesThe journal is the book of original entryThe format for a journal entry is as follows:Date Dr. Account name Amount Cr. Account name AmountNote the date is entered for referenceDr. and Cr. are used for debit and creditA journal entry may have more than one debit and more than one creditMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6How is a transaction analyzed, how is a journal entry prepared, and how is the effect of a transaction on the financial statements determined?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Transaction Effects - Balance SheetThe horizontal model is an alternative to using T-accounts and journal entriesThe model is as follows: Balance Sheet Income Statement Assets = Liabilities + Owners’ Equity Net Income = Revenues – Expenses (Accounts and amounts affected by transactions are entered under the appropriate categories) McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Adjusting EntriesMade to reflect accrual accounting in the financial statementsResults in revenues and expenses being reported in the appropriate fiscal periodTwo types of adjusting entriesAccrualsReclassificationsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Accruals and ReclassificationsAccruals- transactions for which cash has not yet been received or paid, but revenues and expenses need to be matchedReclassifications – the initial recording of a transaction must be reclassified to reflect when revenues were earned or when expenses were incurredMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002AccrualsExample: Work performed by employees in March, but paid in AprilAt the end of March debit Wages Expense and credit Wages PayableExample: Interest earned in March, but not receivedAt the end of March debit Interest Receivable and credit Interest RevenueMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002ReclassificationsExample: Supplies are purchased in February and are recorded as an asset. Then the supplies are used.The expense Supplies Expense should be debited and the asset Supplies should be credited for the amount of supplies usedIf the purchased supplies were debited to Supplies Expense when purchased, the unused supplies should be debited to the asset account and the Supplies Expense account should be creditedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Adjusting Entries RevisitedGenerally, every adjusting entry affects both the Balance Sheet and the Income StatementAfter the adjusting entries have been made, the account balances are determined, and the financial statements are preparedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What are the five questions of transaction analysis?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Five Transaction Analysis QuestionsWhat’s going on?What accounts are affected?How are they affected?Does the Balance Sheet balance? (Do the debits equal the credits?)Does my analysis makesense?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002What’s Going On?To analyze a transaction, the transaction must be understoodIt is necessary to understand the entity for which accounting is being done and standard business practicesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002What Accounts Are Affected?Often the accounts affected are explained by understanding what is going onCan also be answered by the process of eliminationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002How Are They Affected?Answer this by using “increasing” or “decreasing”Then relate the increases and decreases to debits and credits to the appropriate accountsIf using the horizontal model, debits and credits are avoidedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Does the Balance Sheet Balance?If using the horizontal model, the answer is found easilyRemember that debits must equal credits and assets must equal liabilities plus owners’ equityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Does My Analysis Make Sense?Think about the effect of the transaction on the financial statementsDo the effects that you have recorded reflect what happened?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002