chapter 2 accounts receivable 101

8/10/2019 Chapter 2 accounts receivable 101

1/41

Financial and ManagerialAccounting

Wild, Shaw, and Chiappetta

Fifth Edition

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.


2/41

Chapter 2

Analyzing and RecordingTransactions


3/41

Conceptual Learning Objectives

C1:Explain the steps in processingtransactions and the role of source

documents.C2:Describe an account and its use in

recording transactions.

C3:Describe a ledger and a chart ofaccounts.

C4:Define debits and credits and explaindouble-entry accounting.

2-3


4/41

Analytical Learning Objectives

A1:Analyze the impact of transactionson accounts and financial statements.

A2: Compute the debt ratio and describeits use in analyzing financialcondition.

2-4


5/41

Procedural Learning Objectives

P1:Record transactions in a journal andpost entries to a ledger.

P2:Prepare and explain the use of a trialbalance.

P3:Prepare financial statements from

business transactions.

2-5


6/41

External Transactionsoccur between the

organization and anoutside party.

Internal Transactionsoccur within the

organization.

Analyzing and RecordingProcess

Exchanges of economic considerationbetween two parties.

C 1

2-6


7/41

Analyze each transaction andevent from source documents

Analyzing and RecordingProcess

Record relevant transactionsand events in ajournal

Post journalinformation

to ledgeraccountsPrepare and analyze

the trial balance

C 1

2-7


8/41

Sales

Tickets

Bank

Statements

Purchase

Orders

Checks

Source Documents

Bills fromSuppliers

Employee

EarningsRecords

C 1

2-8


9/41

An accountis arecord of

increases anddecreases in aspecific asset,

liability, equity,revenue, orexpense item.

The Accountand Its Analysis

The generalledgeris a record

containing allaccounts used by

the company.

C 2

2-9


10/41

AssetsAccountsAssets

AccountsAsset

Accounts =

The Accountand Its Analysis

+Liability

AccountsLiability

AccountsLiability

Accounts

EquityAccountsEquity

AccountsEquity

Accounts

C2

2-10


11/41

Land

Equipment

Buildings

Cash

NotesReceivable

Supplies

PrepaidAccounts

AccountsReceivable

AssetAccounts

Asset AccountsC 2

2-11


12/41

AccruedLiabilities

UnearnedRevenue

NotesPayable

AccountsPayable

LiabilityAccounts

Liability AccountsC 2

2-12


13/41


14/41

Liabilities EquityAssets = +

The Account and Its Analysis

Common

Stock Dividends Revenues Expenses

+ +

C 2

2-14


15/41

Ledger and Chart of Accounts

The ledgeris a collection of all accounts foran information system. A companys size anddiversity of operations affect the numberof accounts needed.

The chart of accoun ts is a list of all accounts andincludes an identifying number for each account.

Acct # Acct # Account Name

101 Cash 319 Dividends

106 Accounts receivable 403 Consulting revenue

126 Supplies 406 Rental revenue

128 Prepaid insurance 622 Salaries expense167 Equipment 637 Insurance expense201 Accounts payable 640 Rent expense

236 Unearned consulting revenue 652 Supplies expense

307 Common stock 690 Utilities expense

Account Name

C 3

2-15


16/41

A T-account represents a ledger accountand is a tool used to understand the effectsof one or more transactions.

Debits andCredits

(Left side) (Right side)

Debit Credit

T- Account

C4

2-16


17/41


Double-Entry Accounting

Debit Credit Debit Credit Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITY

- +

C4

2-17


18/41

Revenues Expenses

Common

StockDividends

_+

_

Debit Credit

Stock

- +Debit Credit

Dividends

+ -Debit Credit

Expenses

+ -Debit Credit

Revenues

- +


Equity

C 4

2-18


19/41

Investment by owner for stock 30,000 Purchase of supplies 2,500

Consulting services revenue earned 4,200 Purchase of equipment 26,000

Collection of account receivable 1,900 Payment of rent 1,000

Payment of salary 700

Payment of account payable 900

Payment of cash dividend 200

Total increases 36,100 Total decreases 31,300

Balance 4,800

Cash


An account balance is the difference between theincreases and decreases in an account.

Notice the T-Accoun t

C4

2-19


20/41

Journalizing and

Posting Transactions

Step 1: Analyzetransactions and source

documents.


Step 2: Apply double-

entry accounting

(Left side) (Right side)

Debit Credit

T- Account

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger

GENERAL JOURNAL Page 123

Date Description

Post.

Ref. Debit Credit

Step 3: Record journal entry

P1

2-20


21/41

GENERAL JOURNAL Page 1Date Account Titles and Explanation PR Debit Credit

2013

Dec. 1 Cash 30,000

Common Stock 30,000Investment by shareholder

Dollar Amount of Debitsand Credits

Journalizing Transactions

TransactionDate

TransactionExplanation

Titles of AffectedAccounts

P1

2-21


22/41

CASH ACCOUNT No. 101

Date Explanation PR Debit Credit Balance

2013

Dec. 1 Initial investment 30,000 30,000

Dec. 2 Purchased supplies 2,500 27,500

Dec. 3 Purchased equipment 26,000 1,500

Dec. 10 Collection from customer 4,200 5,700

T-accounts are useful illustrations, butbalance column accounts are used inpractice.

Balance Column AccountP1

2-22


23/41


2013

Dec. 1 Cash 30,000

Common Stock 30,000

Investment by shareholder



2013

1 Identify the debit account in ledger.

Posting Journal EntriesP1

2-23


24/41


2013

Dec. 1 Cash 30,000




2013

Dec. 1

2 Enter the date in the ledger.


2-24


25/41

GENERAL JOURNAL Page 1Date Account Titles & Explanation PR Debit Credit

2013

Dec. 1 Cash 30,000

Common Stock 30,000




2013

Dec. 1 30,000

3 Enter the amount and description.


2-25


26/41


2013

Dec. 1 Cash 30,000




2013

Dec. 1 G1 30,000

4 Enter the journal reference.


2-26


27/41



2013

Dec. 1 G1 30,000 30,000

5 Compute the balance.

GENERAL JOURNAL Page 1Date Account Titles & Explanation PR Debit Credit

2013

Dec. 1 Cash 30,000

Common Stock 30,000



2-27


28/41


2013

Dec. 1 Cash 101 30,000

Common Stock 30,000




2013

Dec. 1 G1 30,000 30,000

Enter the ledger reference into the general journal.6


2-28


29/41

Analyzing Transactions

Assets = + Equity

Cash CommonStock

30,000 30,000

LiabilitiesAnalysis:

(1) Cash 101 30,000

Common Stock 307 30,000

Double entry:

(1) 30,000

Cash 101 307

Posting:

A1

2-29

Transaction: Shareholder invested $30,000 in FastForward on Dec. 1

(1) 30,000

Common Stock


30/41


Assets = + EquityCash Supplies

2 500 2 500

Liabilities

Analysis:

(2) Supplies 126 2,500Cash 101 2,500

Double entry:

(2) 2,500

Supplies 126

(1) 30,000 (2) 2,500

Cash 101

Posting:

A1

2-30

Transaction: FastForward purchases supplies by paying$2,500 in cash


31/41


Assets = + Equity

Cash Equipment

(26,000) 26,000

Liabilities

(3) Equipment 167 26,000

Cash 101 26,000

Double entry:

(1) 30,000 (2) 2,500

(3) 26,000

Cash

(3) 26,000

Equipment 167 101

Posting:

A1

Analysis:

2-31

Transaction: FastForward purchases equipment by paying $26,000cash.


32/41

Transaction: FastForward purchases $7,100 of supplies on credit.


Assets = + Equity

Supplies Accounts Payable7,100 7,100

Liabilities

Analysis:

(4) Supplies 126 7,100

Accounts Payable 201 7,100

Double entry:

(2) 2,500

(4) 7,100

Supplies 126

(4) 7,100

Accounts Payable 201

Posting:

A1

2-32


33/41


Transaction:FastForward provides consulting services andimmediately collects $4,200 cash.

Assets = + Equity

Cash Revenue4,200 4,200

Liabilities

Analysis:

(5) Cash 101 4,200

Consulting Revenue 403 4,200

Double entry:

403 101

Posting:

A1

2-33

(3) 4,200

Consulting Revenue

(1) 30,000 (2) 2,500

(5) 4,200 (3) 26,000

Cash


34/41

After processing itsremaining transactions

for December,FastForwards trial

balance is prepared.Debits Credits

Cash 4,350$

Accounts receivable -Supplies 9,720Prepaid insurance 2,400Equipment 26,000Accounts payable 6,200$Unearned consulting revenue 3,000Common stock 30,000Dividends 200Consulting revenue 5,800Rental revenue 300Salaries expense 1,400Rent expense 1,000Utilities expense 230Totals 45,300$

45,300$

FASTFORWARD

December 31, 2013

The trial balance listsall account balancesin the general ledger.

If the books are in

balance, the totaldebits will equal the

total credits.

P2

2-34

Trial Balance

Trial Balance


35/41

Six Steps for Searching forand Correcting Errors

If the trial balance does not balance, theerror(s) must be found and corrected.

Verify that the trial balance

columns are correctly added.

Verify that account balancesare correctly entered from theledger.

See whether a debit (orcredit) balance is mistakenlylisted as a credit (or debit).

Recompute each account

balance in the ledger.

Verify that each journalentry is properly posted.

Verify that each originaljournal entry has equaldebits and credits.

P2

2-35


36/41

Using a Trial Balance toPrepare Financial Statements

Statement of CashFlows

Income Statement

Statement of Retained Earnings

BeginningBalanceSheet

EndingBalanceSheet

Period of TimePoint in

TimePoint in

Time

P3

2-36


37/41

Income Statement

Revenues:

Consulting revenue 5,800$Rental revenue 300

Total revenues 6,100$

Expenses:

Rent expense 1,000

Salaries expense 1,400Utilities expense 230

Total expenses 2,630

Net income 3,470$

FASTFORWARD

Income Statement

For the Month Ended December 31, 2013

P3

2-37


38/41


Retained earnings 12/1/13 -$

Net income for December 3,470

3,470

Less: Cash Dividends (200)

Retained earnings 12/31/13 3,270$

FASTFORWARDStatement of Retained Earnings


Revenues:

Consulting revenue 5,800$

Rental revenue 300Total revenues 6,100$

Expenses:

Rent expense 1,000

Salaries expense 1,400

Utilities expense 230

Total expenses 2,630

Net income 3,470$

FASTFORWARD

Income Statement


P3

2-38


39/41

Balance Sheet

Assets

Cash 4,350$

Supplies 9,720

Prepaid insurance 2,400

Equipment 26,000

Total assets 42,470$

Liabilities

Accounts payable 6,200$

Unearned revenue 3,000

Total liabilities 9,200

Equity

Common stock 30,000

Retained earnings 3,270

Total equity 33,270

Total liabilities and equity 42,470$

FASTFORWARD

Balance Sheet

December 31, 2013

Retained earnings 12/1/13 -$

Net income for December 3,470

3,470

Less: Cash dividends 200Retained earnings 12/31/13 3,270$

FASTFORWARD



P3

2-39


40/41

o Describes the relationship between theamounts of the companys liabilities

and assets.

o Helps to assess the risk that acompany will fail to pay its debts.

Debt Ratio =Total Liabilities

Total Assets

Debt RatioA2

2-40


41/41

End of Chapter 2