FAP 3e 2021 PPT CH 2 Analyzing and Recording Transactions

Analyzing and Recording
Transactions
Chapter 2
Wild, Kwok, Venkatesh and Shaw

Fundamental Accounting Principles
3rd Edition
Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
Chapter 2 Learning Objectives
CONCEPTUAL
C1 Explain the steps in processing transactions and the role of source documents.
C2 Describe an account and its use in recording transactions.
C3 Describe a ledger and a chart of accounts.
C4 Define debits and credits and explain double-entry accounting.
ANALYTICAL
A1 Analyze the impact of transactions on accounts and financial statements.
A2 Compute the debt ratio and describe its use in analyzing financial condition.
PROCEDURAL
P1 Record transactions in a journal and post entries to a ledger.
P2 Prepare and explain the use of a trial balance.
P3 Prepare financial statements from business transactions.
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© McGraw-Hill Education.
Learning Objective C1
Explain the steps in processing

transactions and the role of
source documents.
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Basics of Financial Statements
Business transactions and events are the starting points of
financial statements. Process from transactions to financial
statements is as follows:
• Identify each transaction and event from source documents.

• Analyze each transaction and event using the accounting
equation.
• Record relevant transactions and events in a journal.
• Post journal information to ledger accounts.
• Prepare and analyze the trial balance and financial
statements.
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Learning Objective C1: Explain the steps in processing transactions and the role of source documents.
Source Documents
Source documents identify and describe
transactions and events entering the accounting
system.
Examples:
• Bills from suppliers
• Sales receipts
• Checks
• Purchase orders
• Payroll records
• Bank statements
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction © McGraw Hill or further distribution
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Learning Objective -C1:permitted
Explain thewithout
steps in processing transactions and the role of source documents.
the prior written consent of McGraw-Hill Education.
Describe an account and its use in recording transactions.
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The Account Underlying
Financial Statements
An account is a
record of
The general
increases and
ledger is a record
decreases in a
of all accounts
specific asset,
used by the
liability, equity,
company.
revenue, or
expense.
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction
© McGraw Hill or further distribution
7
Learning Objective C2: Describe an account and its use in recording transactions.
permitted without the prior written consent of McGraw-Hill Education.
The Account and Its Analysis
Exhibit
2.1
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction
© McGraw Hill or further distribution
8
permitted without the prior written consent of McGraw-Hill Education.
Asset Accounts
Cash
Accounts
Land
Receivable
Buildings
Asset
Asset Note
Receivable
Accounts
Accounts
Prepaid
Equipment
Accounts
Supplies
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Learning Objective C2: Describe an account and its use in©recording
McGraw-Hill Education.
transactions.
Liability Accounts
Accounts Note
Payable Payable
Liability
Accounts
Accrued
Accrued Unearned
Liabilities
Liabilities Revenue
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Equity Accounts
+ –
Owner’s Owner’s
capital withdrawals
Equity
Accounts
+ –
Revenues Expenses
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Expanded Accounting Equation
Revenues and Owner capital increases equity.
Expenses and Owner withdrawals decrease equity.
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Describe a ledger and chart of

accounts.
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Ledger and Chart of Accounts
The ledger is a collection of all accounts and their
balances for an accounting system. A company’s
size and diversity of operations affect the number
of accounts needed.
The chart of accounts is a list of all
accounts and includes an
Exhibit
identifying number for each account. 2.4
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Learning Objective C3: Describe a ledger and chart of accounts.
Define debits and credits and

explain double-entry
accounting.
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Debits and Credits
A T-account represents a ledger account
and is used to show the effects of
transactions.
Exhibit
2.5
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Learning Objective C4: Define debits and credits and explain double-entry accounting.
Double-Entry Accounting
Assets = Liabilities + Equity

Exhibit
2.6
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Double-Entry Accounting:
Expanded Accounting Equation
Here is the expanded accounting equation
showing the equity section. Exhibit
2.7
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Double-Entry Accounting:
Account Balance
An account balance is the difference between the increases and decreases in
an account. Notice the T-Account of Cash
has an account balance of $4,800.
Exhibit
2.8
Learning Objective C4: Define debits and credits and explain double-entry accounting. © McGraw Hill 19
Learning Objective P1
Record transactions in a
journal and post entries to a
ledger.
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Journalizing and Posting
Transactions Exhibit
2.9
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Learning Objective P1: Record transactions in a journal and post entries to a ledger.
Journalizing Transactions
a. Transaction b. Titles of Affected
Date Accounts
Exhibit
2.10
d. Transaction c. Dollar amount of debits

explanation and credits
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Balance Account Column Exhibit
2.11
T-accounts are useful illustrations, but balance

column ledger accounts are used in practice.
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Posting Journal Entries
Exhibit
2.12
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Learning Objective A1
Analyze the impact of

transactions on accounts and
financial statements.
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Processing Transactions
Double-entry accounting is useful in analyzing and
processing transactions. Analysis of each transaction
follows these four steps.
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Learning Objective A1: Analyze the impact of transactions on accounts and financial statements.
Processing Transactions #1
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Summarizing Transactions in a Ledger
Exhibit
2.13
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Prepare and explain the

use of a trial balance.
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Preparing a Trial Balance
Preparing a trial balance has three steps:
1. List each account title and its amount (from ledger) in
the trial balance. If an account has a zero balance, list it
with a zero in the normal balance column (or omit it
entirely).
2. Compute the total of debit balances and the total of
credit balances.
3. Verify (prove) total debit balances equal total credit
balances.
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Learning Objective P2: Prepare and explain the use of a trial balance.
FastForward’s Trial Balance
Exhibit The trial
2.14
balance lists
all ledger
accounts and
their balances
at a point in
time. If the
books are in
balance, the
total debits
will equal the
total credits.
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Searching for Errors
If the trial balance does not balance, the error(s)
must be found and corrected.
 Make sure the trial  Recompute each
balance columns are account balance in the
correctly added. ledger.
 Make sure account  Verify that each journal

balances are correctly entry is posted correctly.
entered from the ledger.
 See if debit or credit  Verify that each
accounts are mistakenly original journal entry has
placed on the trial balance. equal debits and credits.
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Prepare financial statements

from business transactions.
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Prepared from Trial Balance
Exhibit
2.15
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Learning Objective P3: Prepare financial statements from business transactions.
The four financial statements and their purposes are:
1. Income statement — reports revenues less expenses incurred by a business
over a period of time.
2. Statement of Changes in Equity — reports how equity changes over the
reporting period.
3. Balance Sheet — reports the financial position at a point in time.
4. Statement of Cash Flows — The statement of cash flows lists the cash
inflows and cash outflows for the period.
**For simplicity, we do not show the statement of cash flows for FastForward in this chapter,
but we do return to this statement in the next chapter.**
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Income Statement
Exhibit
2.16
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Statement of Changes in Equity
Exhibit
2.16
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Balance Sheet From Income
Statement
Exhibit
2.16
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Presentation Issues
Dollar signs are not used in journals and ledgers.
They do appear in financial statements and other
reports such as trial balances. Companies
commonly round amounts in reports to the nearest
dollar, or even to a higher level. Apple, like many
large companies, rounds its financial statement
amounts to the nearest million. This decision is
based on the impact of rounding for users’
decisions.
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Learning Objective A2
Compute the debt ratio and

describe its use in analyzing
financial condition.
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Debt Ratio - Equation
Exhibit
2.17
Total Liabilities
Debt Ratio =
Total Assets
Evaluates the level of debt risk.
A higher ratio indicates greater risk

because liabilities must be repaid and
often require regular interest payments.
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Learning Objective A2: Compute the debt ratio and describe its use in analyzing financial condition.
Debt Ratio - Computation
Total Liabilities
Debt Ratio =
Total Assets
Exhibit
2.18
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Learning Objective A2: Compute the debt ratio and describe its use in analyzing financial condition.
End of Chapter 2
© McGraw Hill 58

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Analyzing and Recording

Wild, Kwok, Venkatesh and Shaw

Explain the steps in processing

• Identify each transaction and event from source documents.

Describe an account and its use in recording transactions.

Describe a ledger and chart of

Define debits and credits and

Assets = Liabilities + Equity

d. Transaction c. Dollar amount of debits

T-accounts are useful illustrations, but balance

Analyze the impact of

Prepare and explain the

 Make sure account  Verify that each journal

Prepare financial statements

Compute the debt ratio and

Evaluates the level of debt risk.

A higher ratio indicates greater risk

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