accounting transactions process
DESCRIPTION
oracle accounting transactionsTRANSCRIPT
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Accounting Transactions Process
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The Bookkeeping/Accounting Process
Transactions are economic interchanges between entities that are accounted for and reflected in financial
statements.
Borrow cash
from the bank
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AA = = LL + + OEOEThe Balance Sheet Equation—A
Mechanical Key
AA = = LL + + PIC PIC ++ RE REBEGBEG ++ R R -- E E
The basic accounting equation can be expanded to include revenues and
expenses.
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= Liabilities +
Transaction Cash + Accounts
Receivable + Equipment = Notes
Payable + Paid-in Capital +
Retained Earnings + Revenues - Expenses
abcdef
Total
Assets Owners' Equity
Let’s see how some
transactions effect the
operation of this equation.
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Transactions
a. The owners invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days.
e. The company provided services for $8,000 and received cash.
f. Wages of $2,000 were paid in cash.
= Liabilities +
Transaction Cash + Accounts
Receivable + Equipment = Notes
Payable + Paid-in Capital +
Retained Earnings + Revenues - Expenses
a 2,000 2,000 b 6,000 6,000 c (2,000) 10,000 8,000 d 3,000 (3,000)e 8,000 8,000 f (2,000) 2,000
Total 12,000 + 3,000 + 7,000 = 14,000 + 2,000 + 0 + 8,000 - 2,000 6,000
Assets Owners' Equity
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Revenues 8,000$ Expenses 2,000 Net Income 6,000$
Income Statement
= Liabilities +
Transaction Cash + Accounts
Receivable + Equipment = Notes
Payable + Paid-in Capital +
Retained Earnings + Revenues - Expenses
a 2,000 2,000 b 6,000 6,000 c (2,000) 10,000 8,000 d 3,000 (3,000)e 8,000 8,000 f (2,000) 2,000
Total 12,000 + 3,000 + 7,000 = 14,000 + 2,000 + 0 + 8,000 - 2,000 6,000
Assets Owners' Equity
Beginning Balance -$ Add: Net Income 6,000 Less: Dividends - Ending Balance 6,000$
Statement of Changes in Retained Earnings
Cash 12,000$ Notes Payable 14,000$ Accounts Receivable 3,000 Equipment 7,000 Paid-in Capital 2,000
Retained Earnings 6,000
Total Assets 22,000$ Total Liabilities & Owners' Equity 22,000$
Owners' Equity
Balance SheetAssets Liabilities
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Bookkeeping Jargon
Transactions are initially recorded in a journal.
Cash Equipment
InventoryNotes
Payable
Transactions are then recorded—posted to—individual accounts in
the ledger.
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A A T-accountT-account is a tool used to represent is a tool used to represent an account.an account.
Account NameLeft Right
T-Account
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T-Account
The left side of the T-account is always the
debit side.
Account NameLeft Right
Debit
The right side of the T-account is always the
credit side.
Credit
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Debits and Credits
ASSETSASSETS
Debit for
Increase
Credit for
Decrease
EQUITIESEQUITIES
Debit for
Decrease
Credit for
Increase
LIABILITIESLIABILITIES
Debit for
Decrease
Credit for
Increase
Debits and credits affect the accounting equation as follows:
AA = = LL + + OEOE
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Debits and Credits
ASSETSASSETS
Debit for
Increase
Credit for
Decrease
EQUITIESEQUITIES
Debit for
Decrease
Credit for
Increase
LIABILITIESLIABILITIES
Debit for
Decrease
Credit for
Increase
AA = = LL + + OEOE
Paid-in Capital
Retained Earnings
Remember that Owners’ Equity includes Paid-in Capital and
Retained Earnings.
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Revenue and Expenses
Increases in owners’ equity.
Increases with a credit.
Decreases in owners’ equity.
Increases with a debit.
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Debits and Credits
AA = = LL + + OEOENormal balance for: Normal balance for:
Assets LiabilitiesExpenses Owners' equity
RevenuesDebit entries increase: Credit entries increase:
Assets LiabilitiesExpenses Owners' equity
RevenuesDebit entries decrease: Credit entries decrease:
Liabilities AssetsOwners' equity ExpensesRevenues
Account NameDebit side Credit side
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Journal Entry Format
Date Debit Credit6/30 Cash 2,000
Paid-in Capital 2,000 To record an investmentby the owners.
Description
A typical journal entry might look like this.
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Journal Entry Format
Date Debit Credit6/30 Cash 2,000
Paid-in Capital 2,000 To record an investmentby the owners.
Description
Provide a referencedate for each transaction.
Debits are written first.
Credits are indented andwritten after debits.
Total debits must equaltotal credits.
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The Bookkeeping Process
Date Debit Credit6/30 Cash 2,000
Paid-in Capital 2,000 To record an investmentby the owners.
Description
Recorded in the Journal
Account NameDebit Credit
Posted to the Ledger
Transactions
Source Documents
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Transaction Analysis Illustrated
Let’s prepare some journal entries for Let’s prepare some journal entries for and post them to the ledger.and post them to the ledger.
Transactions
a. The owners invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days.
e. The company provided services for $8,000 and received cash.
f. Wages of $2,000 were paid in cash.
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The owners invested $2,000.
(a) 2,000
2,000
Cash2,000 (a)
2,000
Paid-in Capital
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6,000 (b)
6,000
Notes Payable
The company borrowed $6,000 from a bank.
(a) 2,000 (b) 6,000
8,000
Cash
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Let’s see how to post this entry . . .
Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable
for $8,000.
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(c) 10,000
10,000
Equipment
6,000 (b)8,000 (c)
14,000
Notes Payable(a) 2,000 2,000 (c)(b) 6,000
6,000
Cash
Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable
for $8,000.
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Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30
days.
(d) 3,000
3,000
Accounts Receivable(c) 10,000 3,000 (d)
7,000
Equipment
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The company provided services for $8,000 and received cash.
8,000 (e)
8,000
Revenue(a) 2,000 2,000 (c)(b) 6,000 (e) 8,000
14,000
Cash
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Wages of $2,000 were paid in cash.
(f) 2,000
2,000
Wages Expense(a) 2,000 2,000 (c)(b) 6,000 2,000 (f)(e) 8,000
12,000
Cash
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At the end of the period, we need to
make adjusting entries to get the accounts up to date for the financial
statements.
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Adjusting entries are
needed whenever revenue or expenses affect more than one
accounting period.
Every adjusting
entry involves a change in either a
revenue or expense and an asset
or liability.
Adjustments/Adjusting Entries
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Types of Adjusting Entries
The initial recording of a transaction does not result in assigning
revenues to the period in which they were earned
or expenses to the period in which they
were incurred..
Reclassifications
Transactions for which cash has NOT yet been
received or paid, but the effect of which must be
recorded in the accounts in order to accomplish a
matching of revenues and expenses.
Accruals
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Examples Include:
Interest
Wages and Salaries
Property Taxes
Hey, when do we get
paid?
Accruing Expenses
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Monday,May 29
Friday, June 2
$3,000 Wages Expense
On May 31, Webb Co. owes wages of $3,000. Pay day is Friday, June 2.
Wednesday,May 31
Accruing Expenses
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
May 31 Wages Expense 3,000Wages Payable 3,000
To accrue wages owed to employees.
Initially, an expense and a liability are recorded.
Accruing Expenses
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Wages Expense5/31 3,000
Wages Payable5/31 3,000
Income Statement
Cost incurred this period to generate
revenue.
Balance Sheet
Liability to be paid in a future
period.
Accruing Unpaid Expenses
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Monday,May 29
Friday, June 2
$5,000 Weekly Wages
Let’s look at the entry for June 2.
Wednesday,May 31
$2,000 Wages Expense
$3,000 Wages Expense
Accruing Expenses
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The liability is extinguished when the debt is paid.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
June 2 Wages Expense (for June) 2,000Wages Payable (accrued in May) 3,000
Cash 5,000Weekly payroll for May 29-June 2.
Accruing Expenses
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Examples Include:
Interest Earned
Work Completed But Not Yet Billed to Customer
Accruing Revenues
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Saturday,Jan. 15
Tuesday, Feb. 15
$170 Interest Revenue
On Jan. 31, the bank owes Webb Co. interest of $170. Interest is paid on the 15th
day of each month.
Monday,Jan. 31
Accruing Revenues
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Jan. 31 Interest Receivable 170Interest Revenue 170
To recognize interest revenue.
Initially, the revenue is recognized and a receivable is created.
Accruing Revenues
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Interest Revenue1/31 170
Interest Receivable1/31 170
Income Statement
Revenue earned this period.
Balance Sheet
Receivable to be collected in a
future period.
Accruing Revenues
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Saturday,Jan. 15
Tuesday, Feb. 15
$320 Monthly Interest
$170 Interest Revenue
Let’s look at the entry for February 15.
Monday,Jan. 31
$150 Interest Revenue
Accruing Revenues
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The receivable is collected in a future period.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Feb. 15 Cash 320Interest Revenue (for February) 150Interest Receivable (accrued Jan. 31) 170
To record interest received.
Accruing Revenues
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Examples Include:
Supplies
Expiring Insurance Policies
Reclassifying Assets to Expenses
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Jan. 1 Dec. 31
$2,400 Insurance Policy Coverage for 12 Months
$200 Monthly Insurance Expense
On January 1, Webb Co. purchased a one-year insurance policy for $2,400.
Reclassifying Assets to Expenses
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Jan. 1 Unexpired Insurance 2,400Cash 2,400
Purchase a one-year insurance policy.
Initially, costs that benefit more than one accounting period are recorded as assets.
Reclassifying Assets to Expenses
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The costs are expensed as they are used to generate revenue.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for InsuranceJan. 31 Insurance Expense 200
Unexpired Insurance 200Insurance expense for January.
Reclassifying Assets to Expenses
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Insurance Expense1/31 200
Unexpired Insurance1/1 2,400 1/31 200
Bal. 2,200
Income Statement
Cost of assets used this period to generate revenue.
Balance Sheet
Cost of assets that benefit
future periods.
Reclassifying Assets to Expenses
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Examples Include:
Airline Ticket Sales
Sports Teams’ Sales of Season Tickets
Reclassifying Liabilities to Revenues
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Jan. 1 Dec. 31
$6,000 Rental Contract Coverage for 12 Months
$500 Monthly Rental Revenue
On January 1, Webb Co. received $6,000 in advance for a one-year rental contract.
Reclassifying Liabilities to Revenues
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Jan. 1 Cash 6,000Unearned Rental Revenue 6,000
Collected $6,000 in advance for rent.
Initially, revenues that benefit more than one accounting period are recorded as liabilities.
Reclassifying Liabilities to Revenues
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Over time, the revenue is recognized as it is earned.
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Monthly Adjusting Entry for Rent RevenueJan. 31 Unearned Rental Revenue 500
Rental Revenue 500Rental revenue for January.
Reclassifying Liabilities to Revenues
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Rental Revenue1/31 500
Unearned Rental Revenue1/31 500 1/1 6,000
Bal. 5,500
Income Statement
Revenue earned this period.
Balance Sheet
Liability for future periods.
Reclassifying Liabilities to Revenues
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Closing the Books
The closing process simply transfers the year-end balances of all income statement accounts (e.g.,
revenues, expenses, gains and losses) to the retained earnings account.
In addition, the dividends account is also closed to retained earnings.
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Transaction Analysis Methodology
Answer Five Questions:
1. What’s going on?
2. What accounts are affected?
3. How are they affected?
4. Does the balance sheet balance? (Do the debits equal the credits?)
5. Does my analysis make sense?
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Questions ?