2-1 Copyright Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Chapter 2 Measuring...

2-2-11Copyright Gayle M. Richardson, CPA. All rights reserved.Sept. 2000.

Chapter 2Chapter 2Measuring Business TransactionsMeasuring Business Transactions

OverviewGayle M. Richardson,Gayle M. Richardson,

CPA, ProfessorCPA, Professor


Concepts DiscussedConcepts Discussed

What is the generally accepted ways of solving measurement issues of recognition, valuation, and classification?

What is a Chart of Accounts and how to recognize commonly used accounts?

What is the double-entry system and what are the rules?.


What are steps for transaction analysis and processing to simple transactions.

How to record transactions in the general journal

How to post transactions from the general journal to the ledger.

7. How to prepare a trial balance and describe its value and limitations.


Measurement IssuesMeasurement Issues

Explain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification.


Measurement IssuesMeasurement Issues Business transactions are economic

events that affect the financial position of a business entity.

To measure a transaction an accountant must decide:1. When did the transaction occur?2. What value should be placed on the transaction?3. How should the components of the transaction be categorized?

Even though GAAP are followed, controversy does exist regarding these questions.


The Recognition IssueThe Recognition Issue Recognition refers to the difficulty of

deciding when a business transaction should be recorded.

The is the time determined for recording a transaction.EXAMPLE: A company orders, receives, and pays for an office desk. The transaction is recorded when the

title transfers--when ownership changes from one business to another.

The recognition issue is not always solved easily.


The Valuation IssueThe Valuation Issue Perhaps the most controversial issue in

accounting. Valuation focuses on assigning a monetary

value to a business transaction. GAAP requires the use of historical cost.

Cost is defined as the exchange price associated with a business transaction at the point of recognition.

Purpose of accounting is to account for value in terms of cost, not in terms of value, which can change over time.

Value means the cost at the time of the transaction.


The Cost PrincipleThe Cost Principle The cost principle is the practice of

recording transactions at cost. The market value of an asset may

change over the years, but its recorded cost remains in the accounting records.

The market value is the result of the actions of independent buyers and sellers who agree on a price.

The cost principle is used because the cost is verifiable.


The Classification IssueThe Classification Issue Classification is assigning all the

transactions in which a business engages to appropriate categories or accounts.

Proper classification depends on:1. Correctly analyzing the effect of

each transaction on the business, and2. Maintaining a system of accounts

that reflects that effect.


DiscussionDiscussion

Q. What three issues underlie most accounting measurement decisions?

A. The three issues that underlie most accounting decisions are recognition (when a transaction should be recorded), valuation (what value should be placed on the transaction), and classification (how the components should be categorized).


Accounts and the Chart of Accounts and the Chart of AccountsAccounts

Describe the chart of accounts and recognize commonly used accounts.


AccountsAccounts Business people need to be able to

retrieve transaction data quickly and in usable form.

A filing system consisting of accounts is used to sort out or classify all the transactions that occur in a business.

Accounts are the basic storage unit for accounting data and are used to accumulate amounts from similar transactions.


An accounting system has a separate account for each asset, liability, and each component of owner’s equity, including revenues and expenses.



A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts.




The group of company accounts is known as the general ledger or simply ledger.




The group of company accounts is known as the general ledger or simply ledger.

The general ledger may be manual or computer-based.


The Chart of AccountsThe Chart of Accounts Accounts are numbered to make them

easy to find. The list of all account numbers and

names is known as the chart of accounts. Accounts are numbered for processing

and reference purposes. The account number may be coded to provide

information about the account. An asset account typically starts with 1. A liability account typically starts with 2.


Management needs a detailed breakdown of revenues and expenses for budgeting and operating purposes.


Management needs a detailed breakdown of revenues and expenses for budgeting and operating purposes.

Accounting gives management information about whether it has achieved its primary goal of earning a net income.


Account TitlesAccount Titles The title should describe what is

recorded in the account. If an account title is not

recognizable, examine the context of the name. Determine if it is an asset, liability,

owner’s investment, owner’s withdrawal, revenue, or expense.

Look for the kind of transaction that gave rise to the account.


Typical Asset AccountsTypical Asset Accounts

Cash Accounts Receivable Supplies Inventory Office Equipment Buildings Land Prepaid Rent, Prepaid Insurance


Typical Liability AccountsTypical Liability Accounts

Accounts Payable Notes or Loans Payable Salaries Payable Income Taxes Payable


Not-so-typical liability accountNot-so-typical liability account

Unearned Revenue



Q. What is an account, and how is it related to the ledger?

A. An account is the means by which management accumulates the effects of transactions; it is the basic storage unit for accounting data. The ledger is the file or book in which the company’s accounts are kept.


Identify each account as an Asset, Identify each account as an Asset, Liability, Revenue or ExpenseLiability, Revenue or Expense

Accounts Payable



Accounts Payable Liability




Supplies




Supplies Asset




Supplies Asset

Withdrawals


Identify each account as an Asset, Identify each account as an Asset, Liability, Revenue or ExpenseLiability, Revenue or Expense Short Short


Supplies Asset

Withdrawals None of these




Supplies Asset


Fees Earned




Supplies Asset


Fees Earned Revenue




Supplies Expense

Supplies Asset


Fees Earned Revenue




Supplies Expense Expense

Supplies Asset


Fees Earned Revenue





Supplies Asset

Accounts Receivable


Fees Earned Revenue





Supplies Asset

Accounts Receivable Asset


Fees Earned Revenue





Supplies Asset



Unearned Revenue

Fees Earned Revenue





Supplies Asset



Unearned Revenue Liability

Fees Earned Revenue





Supplies Asset




Fees Earned Revenue

Equipment





Supplies Asset




Fees Earned Revenue

Equipment Asset


The Double-Entry System: The Double-Entry System: The Basic Method of The Basic Method of

AccountingAccounting

The double-entry system and

rules for double entry.


The Double-Entry SystemThe Double-Entry System Evolved during the

Renaissance. Described by

Luca Pacioli, Italy, 1494.


Features of the Features of the Double-Entry SystemDouble-Entry System

Principle of duality. Each transaction must be recorded

with at least one debit and one credit so that monetary value of debits and credits are equal.

The whole system is always in balance.

All accounting systems are based on the principle of duality.


The T AccountThe T AccountTitle of Account

Debit

(left) side

Credit

(right) side


The T Account IllustratedThe T Account IllustratedCash

(1) 50,000 (2) 35,000(5) 1,500 (4) 200(7) 1,000 (8) 1,000

(9) 400 (11) 600

52,500 37,200Bal. 15,300

- Footings, the total of each side are computed. The difference between the debit side and the credit side is the account’s balance, either debit or credit.


Analyzing and Processing Analyzing and Processing TransactionsTransactions

Every transaction affects at least two accounts.

Total debits must equal total credits. Assets = Liabilities + Owner’s Equity.

Assets = Liabilities + O/E

Debitfor

increases(+)

Creditfordecreases(-)

Debitfor

decreases(-)

Creditforincreases(+)

Debitfor

decreases(-)

Creditforincreases(+)


Application of Debit/Credit Application of Debit/Credit Rules to O/ERules to O/E

• Debit is commonly abbreviated Dr.Dr.• Credit is commonly abbreviated Cr.Cr.

+ Owner’s Investment- Owner’s Withdrawal+ Revenues- Expenses

Assets = Liabilities


Mrs. Richardson’s AWE/CLRMrs. Richardson’s AWE/CLR Increased with a

DEBIT

Assets Withdrawals Expenses

Increased with a CREDIT

Contributions Liabilities Revenue


Are we having fun yet?????Are we having fun yet?????


Steps in Analyzing and Steps in Analyzing and Processing TransactionsProcessing Transactions1. Analyze the transaction to

determine its effect on assets, liabilities, and O/E.- Supported by a source document.

2. Apply the rules of double entry.- Dr. increases an asset.- Cr. Increases a liability.


Steps in Analyzing and Steps in Analyzing and Processing Transactions Processing Transactions (continued)(continued)

3. Record the entry. Enter in chronological order in a journal. Enter the date/debit account/debit

amount on one line. Enter the credit account/credit amount

indented on the next line.

Dr.Dr. Cr.Cr.

June 1 Cash 100,000

Notes Payable 100,000

This form is called journal form and usually is followed by an explanation. The explanation must pass the bus test.


Steps in Analyzing and Steps in Analyzing and Processing Transactions Processing Transactions (continued)(continued)

4. Post the entry. Post the entry to the general ledger by

transferring the date and amount to the proper account.

5. Prepare the trial balance to confirm the balance of the accounts. Confirm that the accounts are still in

balance after recording and posting transactions.


Transaction Analysis Transaction Analysis IllustratedIllustrated

Apply the steps for transactionanalysis and processing to

simpletransactions.


Exercise Exercise Michelle Donato Begins Michelle Donato Begins

Business.Business.


Michelle begins business.Michelle begins business.

Dr. Cr.Jan. 1 Cash 4,300

Equipment 1,600 Michelle, Capital 5,900

Cash

Jan. 1 Jan. 1 4,3004,300

Michelle, Capital

Jan. 1 Jan. 1 5,9005,900

Equipment

Jan. 1 Jan. 1 1,6001,600


Rents an office, pays $400 rent for Rents an office, pays $400 rent for the current month.the current month.


Rents an office, pays $400 rent for Rents an office, pays $400 rent for the current month. the current month.

•Transaction

•Analysis

•Rules

•Entry

Dr. Cr.Jan. 2 Rent Expense 400 Cash 400

Cash

Jan. 1 4,300

Rent Expense

Jan 2. 400Jan 2. 400

Jan. 2 400Jan. 2 400


Purchased repair supplies on Purchased repair supplies on credit $500credit $500


Purchased repair supplies on Purchased repair supplies on credit $500credit $500

Dr. Cr.Jan. 4 Repair Supplies 500 Accounts Payable 500

Repair Supplies

Jan. 4 500Jan. 4 500•Transaction

•Analysis

•Rules

•Entry4 5004 500

Accounts Payable


Purchased additional repair Purchased additional repair equipment for cash $300equipment for cash $300


Purchased additional repair Purchased additional repair equipment for cash $300equipment for cash $300

Dr. Cr.Jan. 4 Repair Equipment 300 Cash 300

Repair Equipment

Jan 1 1,6004 3004 300

•Transaction

•Analysis

•Rules

•EntryJan 2. 400Jan 2. 4004 3004 300

Cash

Jan. 1 4,300


Paid salary to a helper $450.Paid salary to a helper $450.


Dr. Cr.Jan. 6 Salaries Expense 450 Cash 450

Salaries Expenses

Jan. 6 450Jan. 6 450•Transaction

•Analysis

•Rules

•Entry

Cash

Jan. 1 4,300 Jan 2. 400Jan 2. 4004 3004 30066 450 450

Paid salary to a helper $450. Paid salary to a helper $450.


Paid $200 of amount Paid $200 of amount purchased on credit in purchased on credit in

transaction c.transaction c.


Paid $200 of amount Paid $200 of amount purchased on credit in purchased on credit in

transaction c. transaction c. Dr. Cr.Jan. 8 Accounts Payable 200 Cash 200

Cash

Jan. 1 4,300

Accounts Payable

•Transaction

•Analysis

•Rules

•Entry

Jan 2. 400Jan 2. 4004 3004 300

66 450 450 8 2008 200

Jan. 8 200Jan. 8 200 4 5004 500


Withdrew $600 from the Withdrew $600 from the business for living expensesbusiness for living expenses


Withdrew $600 from the Withdrew $600 from the business for living expensesbusiness for living expenses

Dr. Cr. Jan. 30 Owner’s Withdrawal 600 Cash 600

Cash

Michelle, Withdrawals

•Transaction

•Analysis

•Rules

•Entry

Jan. 31 600Jan. 31 600

Jan. 1 4,300 Jan 2. 400Jan 2. 4004 3004 30066 450 4508 2008 20030 60030 600


Collects a fee of $860 for Collects a fee of $860 for repairs completed.repairs completed.


Collects a fee of $860 for Collects a fee of $860 for repairs completed. repairs completed.

Dr. Cr.Jan. 31 Cash 860 Repair Fees Earned 860

Cash

Advertising Fees Earned

•Transaction

•Analysis

•Rules

•Entry

Jan. 31 860Jan. 31 860

Jan. 1 4,300 3131 860 860

Jan 2. 400Jan 2. 4004 3004 30066 450 4508 2008 20030 60030 600


Still having fun?Still having fun?


Record transactions in the general journal.

The General JournalThe General Journal


The General JournalThe General Journal A journal is a record of all transactions A separate journal entry is used to

record each transaction


The General JournalThe General Journal Entries include the following: The date Names of the accounts debited and the

dollar amounts Names of the accounts credited and the

dollar amounts An explanation of the transaction


PostingPosting Post transactions from the

journal to the ledger


The Trial BalanceThe Trial Balance The total of debits and credits in the accounts

must be equal. A trial balance is prepared periodically (usually

on the last day of the month) to test this equality.

Steps in preparing a trial balance:1. List each ledger account that has a balance, debit balances in the right column, credit balances in the left column.2. Add (foot) each column.3. Compare the totals of the two columns.


The trial balance proves whether or not the total of all debits recorded equals the total of all credits recorded.


An account may have a balance other than its normal balance. An asset account may have a credit

balance. A liability account may have a debit

balance. The trial balance proves whether or

not the total of all debits recorded equals the total of all credits recorded.

It does not prove that the transactions were analyzed correctly or recorded for the correct amounts or in the proper accounts.


Trial BalanceTrial Balance

Cash 5,380$ Accounts Receivable 660 Supplies 330 Computers 4,780 Office Equipment 3,950 Accounts Payable 860$ Pat McNally, Capital 13,600 Pat McNally, Withdrawals 300 Tuition Revenue 1,990 Salaries Expense 440 Utilities Expense 90 Rent Expense 260 Repair Expense 40 Advertising Expense 190

16,420$ 16,450$

VIP Secretarial TrainingTrial Balance

7/31/98

Is there something wrong??


Q. Arrange the following six items in sequence to show the flow of events through the accounting system: a. Analysis of the transaction b. Debits and credits posted from the journal to the ledger

c. Occurrence of a business transactiond. Preparation of the financial statements

e. Entry made in the journal

f. Preparation of the trial balance

A. c, a, e, b, f, d



1. Explain, in simple terms, the generally accepted ways of solving the measurement issues of recognition, valuation, and classification.

2. Describe the chart of accounts and recognize commonly used accounts.

OK, LET’S REVIEW . . .


3. Define double-entry system and state the rules for double entry.

4. Apply the steps for transaction analysis and processing to simple transactions.

5. Prepare a trial balance and describe its value and limitations.

CONTINUING OUR REVIEW . . .


Congratulations! The End!

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2-1 Copyright Gayle M. Richardson, CPA. All rights reserved.Sept. 2000. Chapter 2 Measuring...

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