Module 1 - Recording Business Transaction 1e5f4s

CAT Level 1 Module 1 – Recording Business Transactions 

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ing: How to Record Business Transactions : basic summary device of ing. An is the detailed record of all the changes that occurred in an individual asset, liability or equity during a time period Journal: chronological record of transactions. Where transactions are first recorded Ledger: book of s. Where transactions from a journal are posted/copied Trial Balance: List of all ledger s and their balances Record Transactions in journal –à copy to ledger -à prepare trial balance s are grouped in 3 categories: 

Assets- something a business owns that has value  Cash  s Receivable  Notes Receivable  Prepaid expenses- rent and insurance  Land  Building  Equipment, Furniture and Fixtures  Liabilities- something owed  s Payable  Notes Payable  Accrued Liabilities- taxes, interest, salary  Stockholder’s equity- owner’s claim to assets of business  Common stock  Retained Earnings- net income  Dividends  Revenues  Expenses

Chart of s: contains a list of names you might use to record a transaction to (pg66) Ledger contains s grouped under:  Assets, liabilities, equity  Revenues and Expenses Assets usually are numbered beginning with 1 Liabilities numbered beginning with 2 1

CAT Level 1 Module 1 – Recording Business Transactions Equity beginning with 3 Revenues 4 Expenses 5 Debits, Credits and Double-Entry ing: Receiving side and giving side Example: Business received cash of 10,000 dollars. Business issues 10,000 dollars of stock Double Entry System: Dual effects of each transaction are recorded. Every transaction has at least 2 s T : shortened form of general ledger   

Takes shape of T Left side is debit Right side is credit HOW TO RECORD BUSINESS TRANSACTIONS

Increases and Decreases in s: Assets: Debits = increase to assets, credits = decrease to assets Liabilities and Equity: Debits = decrease to liabilities, credits = increase to liabilities Balance: amount remaining in an Steps in Recording Process: Step 1: Transactions recorded in the journal 1. Identify each affected and its type 2. Determine whether each increased or decreased (credit/debit) 3. Record each transaction in journa, including brief explanation, credit indented 4. Date and Explanation Debit Credit Debit listed first Credit indented Brief explanation Step 2: Posting from Journal to Ledger Take info from debit and credit columns of journal and make T s Revenues are increasing in equity that result from providing goods and services 2

CAT Level 1 Module 1 – Recording Business Transactions Expenses are decreases in equity

Assets = liabilities + equity (revenues and expenses) Normal Balance: appears on the side where recorded increases occur Assets: Debit-balance s Liabilities and equity: Credit-Balance s (usually… equity varies) If items that should have a debit balance has a credit balance, that means there is a negative amount 

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ing Tutorials and Notes Financial ing – external Managerial ing – internal Private vs. public Public ing : A for public, public company (stocks) Private ing: working for a company, private company(no public stocks) ing Rules: GAAP (General Accepted ing Principals) –Written by FASB- Financial ing Standards Board IFRS (International Financial Reporting Standards) –Written by IASB- International ing Standards Board Sasanes Oxley – created PCAOB – Public Companies ing Oversight Board Sole proprietorship – 1 person owning business. Person liable Partnership- 2 people operating business: They have liability Corporation: business is liable. Separate entity

Assets = Liabilities + Equity Assets: owned, can derive future benefits - Most assets are held on books at historical costs (what the original price was) Liabilities: Obligations Equity: Ownership of company - contributed capital (owners gave) (stock) - retained earnings- earnings kept from net income. Net income minus dividends

4 Basic Financial Statements:

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CAT Level 1 Module 1 – Recording Business Transactions   



Balance sheet: Assets, liabilities and equity and a point in time Income Statement: results of operations – revenue minus expenses = net income Equity Statement: Contributed capital – selling stock Retained earnings: beginning balance+ net income – dividends = ending balance -changes in equity during a period Cash Flow Statement: Shows sources and uses of cash - operating: operations -investing: investing in the future, buying/selling assets -financing: borrowing money / pay back/ equity transactions total change in cash

HOW TO READ A BALANCE SHEET

All statements interrelated s: Basic Summary Device Transactions: Events requiring ing recognition Journal: Chronological list of transactions Ledger: ledger of s Listing of all the s, shows transactions on Chart of s: List of s used o Double Entry Bookkeeping Left Right Debit Credit o Prepare tax return – Deliver return to customer, get check for $1000 Debit Credit cash 1000 Revenue: 1000 o Records transaction in journal Pay employee $200 debit credit Payroll expense 200 Cash Assets = liability + equity Debit balance : + debit : – credit |

200 | Credit balance: : – debit

+ credit

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CAT Level 1 Module 1 – Recording Business Transactions

Revenues are credits, expenses are debits o Purchase computer equipment for $1,000 Debit credit Computer Equipment 1,000 Cash 1,000 o Purchase equipment for $2,000. Pay $500 cash. Sign note for the rest of it Debit Equipment Cash Note Payable

credit 2000 500 1500

Payable – liability s Payable – vendors that are owed money Receivable- Asset – s Receivable Accrual ing(use this) vs. Cash ing Record when events occur vs. Record events when cash moves o Perform service for $2,000 on (no cash received yet) Debit Credit s Receivable 2000 Revenue o Sell stock to owners for $5,000 Debit Cash Stock

2000

Credit 5,000 $5,000

Ledger example: Name Date Description

Debit

Credit

Total

T s – Ledger Make one for each --- receivable, cash, stock, revenue, computer equipment, note payable, equipment Assets- liabilities- common stock = retained Trial Balance- list of s at a point in time

Revenues are credits, expenses are debits Debit Credit s Receivable

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CAT Level 1 Module 1 – Recording Business Transactions Cash 3500 Computer equipment 1000 Equipment 2000 Note payable Stock Revenue 8500 8500

1500 5000 2000

3 Types of Financial Statements in ing ing – information system that measures business activity , processes the data into reports, communicates the results to decision makers Financial Statements- report on a business in monetary ing can be divided into 2 fields: Financial and Managerial  Financial ing-provides information for external decision makers  Managerial ing– provides information for internal decision makers

Governing Organizations: 

FASB– Financial ing Standards Board  PCAOB– Public Companies ing Oversight Board  AIA– American Institute of Certified Public ants  GAAP– Generally Accepted ing Principals Sarbanes Oxley Act - in response to Enron, it made it a criminal offense to falsify financial statements. It also created PCAOB Types of Business Organizations:     

Proprietorship- single owner Partnership- 2 owners Corporation- legal entity Limited Liability Partnership- each member is responsible for own actions Not for profit – approved by IRS

Fiduciary Responsibility– legal responsibility to perform duties in a trustworthy manner o 

Corporations:

Separate Legal Entity  Business entity formed under state law  Granted charter which acts as articles of incorporation  Authorization is granted by state to form a corporation  Charter specifies how much stock can be sold

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CAT Level 1 Module 1 – Recording Business Transactions     

Continuous Life No Mutual Agency Limited Liability of Stockholders Separation of Ownership and Management Corporate Taxation  Annual Franchise Tax  Income taxes  Government Regulation  Organization  Stockholders  Board of directors  Chairperson of the board  President  VP’s and Secretary

ing Concepts and Principals     

Entity Concept- refers to one business separate from the owners Faithful Representation- data is correctly represented Cost Principals- Historical Cost Going Concern Concept- Entity will remain in operation in future Stable Monetary Unit Concept- stable currency buying power is assumed

ing Equation: 

Assets- something the business owns that has value  Assets = Liabilities + equity  Liabilities- something a business owes  Liabilities = Assets – equity  Equity- The owner’s claims to assets of a business  Equity = assets – liabilities Equity: Equity of a corporation is called shareholder’s equity ; Equity consists of paid in capital and retained earnings  

Paid in Capital (contributed capital)- stock Retained Earnings- Revenues and expenses

Net income– retained earnings before dividends are paid out

Review: Assets (what is owned) = liabilities (what you owe) + equity (net worth)

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CAT Level 1 Module 1 – Recording Business Transactions Types of Financial Statements:    

Income statement- net income reported Statement of Retained Earnings- what was done with retained earnings (dividends?) Balance Sheet- shows assets and what is owed Statement of Cash Flows- shows whether cash receipts increased or decreased

Financial Statement Headings: Name of Business Name of Type of Financial Statement Date reported Statement Preparation 1. 2. 3. 4.

Income Statement Retained Earnings Balance Sheet Cash Flow

4 The ing Cycle: 9-Step ing Process The ing cycle, also commonly referred to as ing process, is a series of procedures in the collection, processing, and communication of financial information. As defined in earlier lessons, ing involves recording, classifying, summarizing, and interpreting financial information. Financial information is presented in reports called financial statements. But before they can be prepared, ants need to gather information about business transactions, record and collate them to come up with the values to be presented in the reports. The cycle does not end with the presentation of financial statements. Several steps are needed to be done to prepare the ing system for the next cycle. ing Cycle Diagram ing Cycle Steps 1. Identifying and Analyzing Business Transactions The ing process starts with identifying and analyzing business transactions and events. Not all transactions and events are entered into the ing system. Only those that pertain to the business entity are included in the process. 8

CAT Level 1 Module 1 – Recording Business Transactions For example, a personal loan made by the owner that does not have anything to do with the business entity is not ed for. The transactions identified are then analyzed to determine the s affected and the amounts to be recorded. The first step includes the preparation of business documents, or source documents. A business document serves as basis for recording a transaction. 2. Recording in the Journals A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two s (one debited and one credited). To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books. Transactions are recorded in chronological order and as they occur. Journals are also known as Books of Original Entry. 3. Posting to the Ledger Also known as Books of Final Entry, the ledger is a collection of s that shows the changes made to each as a result of past transactions, and their current balances. After the posting all transactions to the ledger, the balances of each can now be determined. For example, all journal entry debits and credits made to Cash would be transferred into the Cash in the ledger. We will be able to calculate the increases and decreases in cash; thus, the ending balance of Cash can be determined. 4. Unadjusted Trial Balance A trial balance is prepared to test the equality of the debits and credits. All balances are extracted from the ledger and arranged in one report. Afterwards, all debit balances are added. All credit balances are also added. Total debits should be equal to total credits. When errors are discovered, correcting entries are made to rectify them or reverse their effect. Take note however that the purpose of a trial balance is only test the equality of total debits and total credits and not to determine the correctness of ing records. 9

CAT Level 1 Module 1 – Recording Business Transactions Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction. 5. Adjusting Entries Adjusting entries are prepared as an application of the accrual basis of ing. At the end of the ing period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books. Adjusting entries are prepared to update the s before they are summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances. 6. Adjusted Trial Balance An adjusted trial balance may be prepared after adjusting entries are made and before the financial statements are prepared. This is to test if the debits are equal to credits after adjusting entries are made. 7. Financial Statements When the s are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared. The financial statements are the end-products of an ing system. A complete set of financial statements is made up of: (1) Statement of Comprehensive Income (Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3) Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to Financial Statements. 8. Closing Entries Temporary or nominal s, i.e. income statement s, are closed to prepare the system for the next ing period. Temporary s include income, expense, and withdrawal s. These items are measured periodically. The s are closed to a summary (usually, Income Summary) and then closed further to the appropriate capital . Take note that closing entries are made only for temporary s. Real or permanent s, i.e. balance sheet s, are not closed. 9. Post-Closing Trial Balance In the ing cycle, the last step is to prepare a post-closing trial balance. It is prepared to test the equality of debits and credits after closing entries are made. 10

CAT Level 1 Module 1 – Recording Business Transactions Since temporary s are already closed at this point, the post-closing trial balance contains real s only. *10. Reversing Entries: Optional step at the beginning of the new ing period Reversing entries are optional. They are prepared at the beginning of the new ing period to facilitate a smoother and more consistent recording process. In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals under the income method, and prepayments under the expense method are simply reversed. Author's Notes: So there you have the nine steps in the ing cycle. This is just an overview of the ing process. Each step will be illustrated one by one in later chapters.

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