Measuring Business Transactions

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Chapter 2

• Measuring Business Transactions
• By Judith Paquette

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OBJECTIVES

• Understand recognition, valuation, classification
• Understand the Chart of Accounts
• Use the Double-Entry Method
• Prepare a Trial Balance
• Post transactions

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Recognition

• When is it a business transaction?
• Purchase requisition?
• Purchase order?
• Upon shipment?
• Upon receipt?
• Upon receipt of a bill?
• When you pay the bill?

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Valuation

• Assets are recorded at their historic cost, not
  at their replacement cost.

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Classification

• What account should it go to????
• Is it a Sale? Or isnt it???

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The Chart of Accounts

• Go to page 95

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Accounting Transactions

• Assets Liabilities Stockholders Equity

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Accounting Transactions

• Assets Liab. StK Equity Revenue Expense -
  Dividends

DR
DR
DR
CR
CR
CR
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The T Account

• Left side debit
• Right side credit
• Supply/demand. . .
• An audit trail. . . .

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What is a T Account?????

• Account Name
• ASSET LIAB or STK. EQ.

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• A title, a left side, and a right side. . . .

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Analyzing/processing

• Analyze the transaction (what is it?)
• Apply rules of double-entry
• Record the entry
• Post the entry
• Prepare a Trial Balance

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The Journal Entry

• Shows ALL the debit and credit effects of a
  specific transaction
• Start with a transaction
• Records ALL the debits/credits in one place. . .
  .The General Journal
• Bye bye worksheet. . . .

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1 You start a company

• Open a Bank Account with 10,000, owner
  investment (owners money

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2 You pay some bills
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3 You order supplies

• Art supplies 1,800, Office supplies 800

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4 You buy art equipment 4,200
Purchase Art Equipment
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4 You buy art equipment 4,200

• Purchase Art Equipment
• DR. _____________
• CR. _____________

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5 You buy office equipment 3,000, pay 1,500 in
cash

• Agree to pay the balance in 1 month
• DR. _____________
• CR. _____________
• CR. _____________

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6 You buy supplies on credit

• Art (1,800), Office (800)
• DR. _____________
• DR. _____________
• CR. _____________

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8 You buy insurance

• You buy Insurance (1 year in advance) for 480
• DR. _____________
• CR. _____________

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9 You pay some bills

• You pay 1,000 on bill from 6
• DR. _____________
• CR. _____________

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10 You make a saleyou sell something!!!

• You get paid for Services performed, 1,400
• DR. _____________
• CR. _____________

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12 You pay your employee

• Payday! You pay your employees! 600
• DR. _____________
• CR. _____________

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15 You make a saleyou sell something!!!

• You get a Cash Advance for future services,
  1,000
• DR. _____________
• CR. _____________

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19 You make a saleyou sell something!!!

• You bill for Services performed, 2,800, will be
  collected next month
• DR. _____________
• CR. _____________

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26 You pay your employee

• Payday! You pay your employees! 600
• DR. _____________
• CR. _____________

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29 You pay utility bill

• For 100
• DR. _____________
• CR. _____________

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30 You receive phone bill

• For 70
• DR. _____________
• CR. _____________

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31 You declare pay a dividend

• Of 1,400
• DR. _____________
• CR. _____________

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You hire somebody

• You hire 4 new employees
• DR. _____________
• CR. _____________

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• STOP HERE!

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The Basic Steps in Recording

• Analyze a transaction (sales slip, check, bill,
  cash register tape)
• Enter into JOURNAL
• Transfer to general ledger (T-accts)

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What is the Trial Balance???

• A list of your accounts with their balance at a
  point in time
• E.g., What the textbook has been giving you when
  it gives you a list of accounts and their
  balances.
• The TB is used to create
• IS, RE, BS, Cash Flow Reports
• And many more. . . .

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What does a JOURNAL tell us?

• Chronological record of activity - date
• Names of accounts debited and
• Names of accounts credited and
• Description of transaction (journal entry)
• Easy to catch errors (all in one place)
• Types of journals Cash, Inventory, Accounts
  Payable, General Journal

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What is the General Ledger?

• A Database of your Accounts, their activity,
  their balances
• All of your accounts are in one place here
• The GL is the source of data for the Trial
  Balance Report

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So what is the Sequence?

• Journal (General Journal, Sales Journal, etc.)
• Post to Ledger (the T Accounts)
• Create a Trial Balance from ledger
• Create Financial Statements from Trial Balance

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• STOP HERE!