Download Accounting: What the Numbers Mean

Accounting: What the
Numbers Mean
Study Outlines and
Overhead Masters
Chapter 4
TRANSACTIONS AND THE FINANCIAL
STATEMENTS
KEY IDEAS
•
TRANSACTIONS AFFECT THE BALANCE SHEET AND/OR
THE INCOME STATEMENT.
•
THE BALANCE SHEET MUST BE IN BALANCE AFTER EVERY
TRANSACTION.
•
THE RETAINED EARNINGS ACCOUNT ON THE BALANCE
SHEET INCLUDES NET INCOME FROM THE INCOME
STATEMENT.
•
BALANCE SHEET ACCOUNTS MAY HAVE BALANCES AT
THE END OF A FISCAL PERIOD, AND BEFORE
TRANSACTIONS OF THE SUBSEQUENT PERIOD ARE
RECORDED.
KEY TERMINOLOGY
•
EACH INDIVIDUAL ASSET, LIABILITY, OWNERS' EQUITY,
REVENUE, OR EXPENSE “ACCOUNT” MAY ADDITIONALLY
BE DESCRIBED WITH ITS CATEGORY TITLE. EXAMPLES:
“CASH ASSET ACCOUNT”
“ACCOUNTS PAYABLE LIABILITY ACCOUNT”
“COMMON STOCK OWNERS' EQUITY ACCOUNT”
“SALES REVENUE ACCOUNT”
“WAGES EXPENSE ACCOUNT”
KEY RELATIONSHIP
•
TRANSACTIONS DURING A FISCAL PERIOD CAUSE THE
BALANCE OF THE AFFECTED ACCOUNT(S) TO INCREASE
OR DECREASE. BOOKKEEPING IS THE PROCESS OF
KEEPING TRACK OF THESE CHANGES.
BOOKKEEPING PROCEDURES
WHAT THE BOOKS ARE CALLED
•
THE JOURNAL IS A CHRONOLOGICAL RECORD
OF EACH TRANSACTION.
•
THE LEDGER IS A BOOK OF ALL OF THE
ACCOUNTS; ACCOUNTS ARE USUALLY
ARRANGED IN THE SEQUENCE FOUND ON THE
BALANCE SHEET AND INCOME STATEMENT,
RESPECTIVELY.
HOW TRANSACTIONS ARE RECORDED
•
ACCOUNTS ARE FREQUENTLY IN THE SHAPE
OF A
T.
•
THE LEFT-HAND SIDE OF THE “T ACCOUNT” IS
CALLED THE DEBIT SIDE.
•
THE RIGHT-HAND SIDE OF THE “T ACCOUNT” IS
CALLED THE CREDIT SIDE.
•
AN INCREASE IN AN ASSET OR AN EXPENSE
ACCOUNT IS RECORDED AS A DEBIT; A
DECREASE IN EITHER AN ASSET OR AN
EXPENSE ACCOUNT IS RECORDED AS A
CREDIT.
•
AN INCREASE IN A LIABILITY, OWNERS' EQUITY
OR REVENUE ACCOUNT IS RECORDED AS A
CREDIT; A DECREASE IN EITHER A LIABILITY,
OWNERS' EQUITY, OR REVENUE ACCOUNT IS
RECORDED AS A DEBIT.
BOOKKEEPING PROCEDURES
•
A TRANSACTION IS INITIALLY RECORDED IN A
JOURNAL ENTRY.
•
THE JOURNAL ENTRY IS THEN POSTED TO THE
LEDGER ACCOUNTS THAT HAVE BEEN AFFECTED BY
THE TRANSACTION.
KEY IDEAS
•
A TRANSACTION WILL AFFECT AT LEAST TWO
ACCOUNTS, AND CAN AFFECT MANY ACCOUNTS.
•
BECAUSE THE BALANCE SHEET MUST BALANCE
AFTER EVERY TRANSACTION, THE DEBIT(S) AND
CREDIT(S) AMOUNTS OF EACH JOURNAL ENTRY
MUST BE EQUAL.
DEBITS = CREDITS
KEY OBSERVATION
•
EACH ACCOUNT HAS A "NORMAL BALANCE" SIDE DEBIT OR CREDIT - THAT IS CONSISTENT WITH THE
KIND OF ENTRY THAT CAUSES THE ACCOUNT
BALANCE TO INCREASE.
DEBIT
ASSETS
EXPENSES
CREDIT
LIABILITIES
OWNERS’ EQUITY
REVENUES
TRANSACTION ANALYSIS
METHODOLOGY
FIVE QUESTIONS OF TRANSACTION ANALYSIS
KEY IDEA
•
TO UNDERSTAND EITHER THE BOOKKEEPING
PROCEDURE FOR A TRANSACTION, OR THE EFFECT
OF A TRANSACTION ON THE FINANCIAL STATEMENTS,
THE FOLLOWING QUESTIONS MUST BE ANSWERED:
1. WHAT'S GOING ON?
(WHAT IS THE NATURE OF THE TRANSACTION?)
2. WHAT ACCOUNTS ARE AFFECTED?
(WHAT IS THE FINANCIAL STATEMENT CATEGORY OF
EACH ACCOUNT - ASSET, LIABILITY, OWNERS'
EQUITY, REVENUE OR EXPENSE?)
3. HOW IS EACH ACCOUNT AFFECTED?
(IS THE BALANCE INCREASING OR DECREASING?)
4. DOES THE BALANCE SHEET BALANCE? (DO THE
DEBITS EQUAL THE CREDITS? IS THE BALANCE
SHEET EQUATION STILL IN BALANCE AFTER
RECORDING THE TRANSACTION?)
DEBITS = CREDITS?
ASSETS = LIABILITIES + OWNERS’ EQUITY?
5. DOES MY ANALYSIS MAKE SENSE?
(DO THE ACCOUNT BALANCES OR THE FINANCIAL
STATEMENTS REFLECT THE EFFECT OF THE
TRANSACTION?)
ADJUSTING ENTRIES
WHAT ARE THEY? WHY DO THEM?
•
ADJUSTING ENTRIES, OR ADJUSTMENTS, ARE
“UPDATES” AND "CORRECTIONS" MADE TO INCREASE
THE ACCURACY OF THE INFORMATION IN THE
FINANCIAL STATEMENTS.
•
RECLASSIFICATIONS:
THE BOOKKEEPING FOR THE ORIGINAL TRANSACTION
WAS APPROPRIATE WHEN IT WAS RECORDED, BUT
THE PASSAGE OF TIME REQUIRES A
RECLASSIFICATION OF THE ORIGINAL BOOKKEEPING
TO REFLECT CORRECT ACCOUNT BALANCES AS OF
THE DATE OF THE FINANCIAL STATEMENTS.
•
ACCRUALS:
REVENUES WERE EARNED OR EXPENSES WERE
INCURRED DURING THE PERIOD, BUT NO
TRANSACTION WAS RECORDED, (BECAUSE NO CASH
WAS RECEIVED OR PAID). THEREFORE, IT IS
NECESSARY TO ACCRUE THE EFFECT OF THE
TRANSACTION AS OF THE DATE OF THE FINANCIAL
STATEMENTS.
KEY IDEAS
•
ACCRUAL ACCOUNTING MEANS THAT REVENUES ARE
RECOGNIZED WHEN EARNED (NOT WHEN CASH IS
RECEIVED) AND THAT EXPENSES ARE REFLECTED IN
THE PERIOD IN WHICH THEY ARE INCURRED (NOT
WHEN CASH IS PAID).
•
ADJUSTING ENTRIES RESULT IN MATCHING REVENUES
AND EXPENSES, WHICH IS THE OBJECTIVE OF
ACCRUAL ACCOUNTING.