Lesson 3 Analyzing and Recording Transactions

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Lesson 3Analyzing and Recording Transactions

• Task team of
• Fundamental Accounting
• School of Business, Sun Yat-sen University

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Outline

• Accounts
• Detailed Description of Various
• Accounts
• T-Accounts
• Rules of Debits and Credits
• Double-entry Accounting
• Illustrated Application of Rules

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Opening Story

• Do you have any idea about how your parents keep
  an account of how much the family spends?
• What a good family accountant!

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Opening Story

• A global demand for accountants where can the
  Big Four find accountants with talent and
  virtues?
• Mr.Land, EY British president (indirect quote)
• In the recent 18 months, the shortage of
  accounting talents has been scarcely satisfied.
  The most valuable in the 21st century is
  accountants to special accounting firms like us.
  (2005-7-21)

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The Account
Accountings main summary device is the account,
the record of changes.
Accounts are grouped in 3 broad
categories, according to the accounting equation
Assets Liabilities Stockholders' Equity
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The Assets Account
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The Liabilities Account
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The Equity Account
Stockholders (owners) equity is the owners
claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for
each owners capital balance and withdrawals.
A corporation uses separate capital accounts for
each source of capital.
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Details of Equity Account
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The T-Account
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Increases and Decreasesin the Accounts
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Rules of Debit and Credit
Air Sea received 50,000 and issued stock.
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Rules of Debit and Credit
Air Sea purchased land for 40,000 cash.
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Expansion of theAccounting Equation
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Recording Transactions

• Record transactions first in the journal
  (analyses)
• Ledger
• Posting
• Trial balance

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Analysis of each transaction

• Identify the transaction from the source
  document, such as a sales invoice or check stub
• Determine which accounts increase and which
  decrease
• Apply the rules of debit and credit
• Enter the transaction in the journal, listing
  first the debit and then the credit
• Verify that total debits equal total credits

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A journal entry

•  A journal entry would appear as follows
  Account Name XX (debit amount)
• Account Name XX (credit amount)
• Brief explanation of the transaction.

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Ledger

• A group of accounts.
• All the accounts of a business grouped together
  form a book called the ledger (or general
  ledger).

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Posting

• The process of copying (transferring) data from
  the journal to accounts in the ledger.
• Debits in the journal are posted as debits to the
  appropriate accounts credits in the journal are
  posted as credits to the appropriate accounts.
• All transactions must be keyed by date or number
  to provide a link between the journal and the
  ledger.
• Ledger accounts appear after a series of
  transactions have been posted and account
  balances calculated.

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Trial balance

• The trial balance is a listing, in general ledger
  order (assets, liabilities, then stockholders
  equity), of the debit or credit balance in each
  account

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Transactions, Accounts and Rules of Debits
Credits

1. Owners investment of cash increases both assets
   and stockholders equity.
2. Purchase of an asset for cash increases assets
   and decreases assets (no effect on total assets).
3. Purchase of an asset on credit (on account)
   increases both assets and liabilities.
4. Receipt of cash for service revenue increases
   both assets and stockholders equity.
5. Performance of services on account increases both
   assets and stockholders equity.
6. Cash payment of expenses decreases both assets
   and stockholders equity.

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Transactions, Accounts and Rules of Debits
Credits (cont)

1. Payment on account decreases both assets and
   liabilities.
2. Personal transactions of the owner do not affect
   the business, per the entity concept.
3. Collection of cash on account increases assets
   and decreases assets.
4. Sale of an asset at a price equal to its cost
   increases assets and decreases assets.
5. Declaration and payment of cash dividends
   decreases both assets and stockholders equity.

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An Practical Illustration

• Do you still remember the example of Beauty Photo
  Store? We are using it again here!
• Remember alwaysThe accounting equation must
  remain in balance after each transaction has been
  recorded.

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An Practical Illustration (cont)

• Wang Fang invests 30,000 cash to start her
  business of Beauty Photo Store.The accounts
  involved are(1)Cash (asset) (2)Owners Equity
  (equity)

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An Practical Illustration (cont)
Wang Fang invests 30,000 cash to start her
business.
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An Practical Illustration (cont)

• Purchased supplies paying 2,500 cash.
• The accounts involved are
• (1) Cash (asset)
• (2) Supplies (asset)

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An Practical Illustration (cont)

• Purchased supplies paying 2,500 cash.

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An Practical Illustration (cont)

• Purchased camera and producing equipment for the
  store for 20,000 cash.
• The accounts involved are
• (1) Cash (asset)
• (2) equipment (asset)

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An Practical Illustration (cont)

• Purchased equipment for the store for 20,000
  cash.

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An Practical Illustration (cont)

• Purchased supplies of 1,100 on account and
  equipment of 6,000 by signing a note. The
  accounts involved are
• (1) Supplies (asset)
• (2) Equipment (asset)
• (3) Accounts payable (liability)
• (4) Notes payable (liability)

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An Practical Illustration (cont)

• Purchased supplies of 1,100 on account and
  equipment of 6,000 by signing a note.

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An Practical Illustration (cont)

• Now lets look at transactions involvingrevenues
  and expenses.

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An Practical Illustration (cont)

• Performed wedding-photo and graduation ceremony
  photo-taking services, receiving 2,200 cash.The
  accounts involved are
• (1) Cash (asset)
• (2) Owners capital (equity)

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An Practical Illustration (cont)

• Performed wedding photo-taking services,
  receiving 2,200 cash.

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An Practical Illustration (cont)

• Paid rent for January, 1,000 and salaries to the
  stores employees, 700 cash.The accounts
  involved are
• (1) Cash (asset)
• (2) Owners capital (equity) (Rent expense)
• (3) Owners capital (equity) (Salaries
  expense )

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An Practical Illustration (cont)

• Paid rent for the month, 1,000 and salary to
  employees, 700 cash.

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An Practical Illustration (cont)

• Provided wedding photo services of 1,600 and
  rented equipment for 300 to another store. The
  accounts involved are
• (1) Cash (asset)
• (2) Owners capital (equity) (Sales revenue)
• (3) Owners capital (equity) (Rental revenue)

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An Practical Illustration (cont)

• Provided photo-taking services of 1,600 and
  rented equipment for 300 to another store.

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An Practical Illustration (cont)

• Received 1,900 cash on account.
• The accounts involved are
• (1) Cash (asset)
• (2) Account receivable (asset)

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An Practical Illustration (cont)

• Received cash of 1,900 on account.

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An Practical Illustration (cont)

• Paid 900 on account. The accounts involved are
• (1) Cash (asset)
• (2) Account payable (liability)

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An Practical Illustration (cont)

• Paid 900 cash on account.

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An Practical Illustration (cont)

• Wang Fang withdrew 600 cash for personal living
  expenses. The accounts involved are
• (1) Cash (asset)
• (2) Owners capital (equity) Withdrawals

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An Practical Illustration (cont)

• Wang Fang withdrew 600 for personal living
  expenses.

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Summary

• Accounts are used to appropriately categorize
  transactions.
• T-accounts are a simplified version used in
  practice.
• The type of account determines the side on which
  increases and decreases are recorded the rules
  of debit and credit keep the accounting equation
  in balance
• In the double-entry accounting system, at least
  two accounts are always affected by a
  transaction. After a transaction is recorded, the
  accounting equation must remain in balance.
• Economic transactions of a business will impact
  various asset, liability, and/or equity accounts
  but, they will not disturb the equality of the
  accounting equation. 

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Case for Discussion

• In order for all accounts to look the same, and
  to simultaneously make sure that the accounting
  equation stays in balance with double-entry
  bookkeeping, the debit and credit system was
  devised. Luca Pacioli first described it in
  1494, and the basic system is so sound and
  efficient, we still use it today. Tradition
  aside, we would not still be using this ancient
  system if it did not work extremely well and
  efficiently. One could set up a system with
  pluses and minuses, but it would not be as
  efficient at generating the data needed for
  financial statements while making sure that the
  accounting equation was still in balance. One is
  more likely to make mistakes in entering data
  with plus and minus signs, although this is a
  secondary concern to theissues of uniformity and
  efficiency.
• Why use debits and credits rather than pluses
  andminuses?

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The End of Lesson 3