Financial ing - Ifrs Chapter 2 144528

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Chapter

2

The Recording Process Financial ing, IFRS Edition Weygandt Kimmel Kieso Slide 2-2

Study Study Objectives Objectives

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1.

Explain what an is and how it helps in the recording process.

2.

Define debits and credits and explain their use in recording business transactions.

3.

Identify the basic steps in the recording process.

4.

Explain what a journal is and how it helps in the recording process.

5.

Explain what a ledger is and how it helps in the recording process.

6.

Explain what posting is and how it helps in the recording process.

7.

Prepare a trial balance and explain its purposes.

The The Recording Recording Process Process

The

Debits and credits Debit and credit procedure Equity relationships Summary of debit/credit rules

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Steps in the Recording Process Journal Ledger Posting

The Recording Process Illustrated Summary illustration of journalizing and posting

The Trial Balance

Limitations of a trial balance Locating errors Use of currency signs

The The

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right”

An can be illustrated in a T- form.

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Name Debit / Dr.

Credit / Cr.

SO 1 Explain what an is and how it helps in the recording process.

The The Debits and Credits Double-entry ing system Each transaction must affect two or more s to keep the basic ing equation in balance. Recording done by debiting at least one and crediting another. DEBITS must equal CREDITS.

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits Debits and and Credits Credits If Debits are greater than Credits, the will have a debit balance. Name Debit / Dr.

Credit / Cr.

Transaction #1

$10,000

$3,000

Transaction #3

8,000

Balance

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Transaction #2

$15,000

SO 2 Define debits and credits and explain their use in recording business transactions.

Debits Debits and and Credits Credits If Credits are greater than Debits, the will have a credit balance. Name Transaction #1

Balance

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Debit / Dr.

Credit / Cr.

$10,000

$3,000

Transaction #2

8,000

Transaction #3

$1,000

SO 2 Define debits and credits and explain their use in recording business transactions.

Debits Debits and and Credits Credits Summary Summary Normal Normal Balance Balance Debit Debit

Normal Normal Balance Balance Credit Credit Equity Debit / Dr.

Credit / Cr.

Normal Balance

Chapter 3-25

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SO 2

Debits Debits and and Credits Credits Summary Summary Balance Sheet Asset

= Liability + Equity

Income Statement Revenue - Expense

Debit

Credit

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SO 2 Define debits and credits and explain their use in recording business transactions.

Debits Debits and and Credits Credits Summary Summary

Review Question Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.

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Solution notes page

SO 2 Define debits and credits and explain their use in recording business transactions.

Assets Assets and and Liabilities Liabilities Assets Debit / Dr.

Credit / Cr.

Normal Balance

Liabilities – Credits should exceed debits.

Chapter 3-23

Liabilities Debit / Dr.

Assets - Debits should exceed credits.

Credit / Cr.

The normal balance is on the increase side.

Normal Balance

Chapter 3-24

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SO 2 Define debits and credits and explain their use in recording business transactions.

Equity Equity Relationships Relationships Issuance of share capital and revenues increase equity (credit). Dividends and expenses decrease equity (debit).

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SO 2 Define debits and credits and explain their use in recording business transactions.

Revenue Revenue and and Expense Expense The purpose of earning revenues is to benefit the shareholders. The effect of debits and credits on revenue s is the same as their effect on equity. Expenses have the opposite effect: expenses decrease equity.

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SO 2 Define debits and credits and explain their use in recording business transactions.

Summary Summary of of Debit/Credit Debit/Credit Rules Rules Relationship among the assets, liabilities and equity of a business: Illustration 2-12

The equation must be in balance after every transaction. For every Debit there must be a Credit. Slide 2-15

SO 2 Define debits and credits and explain their use in recording business transactions.

Summary Summary of of Debit/Credit Debit/Credit Rules Rules

Review Question s that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and retained earnings. c. assets, liabilities, and dividends. d. assets, dividends, and expenses.

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Solution notes page

SO 2 Define debits and credits and explain their use in recording business transactions.

Summary Summary of of Debit/Credit Debit/Credit Rules Rules Kathy Renee Browne, president of Hair It Is Company has just rented space in a shopping mall in which she will open and operate a beauty salon. A friend has advised Kathy to set up a double-entry set of ing records in which to record all of her business transactions. Following are the s that Hair It Is Company, will likely need to record the transactions. Indicate whether the normal balance of each is a debit or a credit.

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Cash

Debit

Equipment

Debit

Supplies

Debit

s payable

Credit

Notes payable

Credit

Share capital

Credit

Solution on notes page

SO 2 Define debits and credits and explain their use in recording business transactions.

Steps Steps in in the the Recording Recording Process Process Illustration 2-13

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger s

Business documents, such as a sales slip, a check, a bill, or a cash tape, provide evidence of the transaction.

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SO 3 Identify the basic steps in the recording process.

Steps Steps in in the the Recording Recording Process Process Journalizing Book of original entry. Transactions recorded in chronological order. Contributions to the recording process: 1. Discloses the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. Slide 2-19

SO 4 Explain what a journal is and how it helps in the recording process.

Steps Steps in in the the Recording Recording Process Process Journalizing - Entering transaction data in the journal. Illustration: On September 1, stockholders invested $15,000 cash in exchange for ordinary shares, and Softbyte purchased computer equipment for $7,000 cash. Illustration 2-14

General Journal

Sept. 1

Cash

15,000

Share capital Computer equipment Cash Slide 2-20

Solution on notes page

15,000 7,000 7,000 SO 4

Steps Steps in in the the Recording Recording Process Process Simple and Compound Entries Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on . Illustration 2-15

General Journal

Sept. 1

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Solution on notes page

Delivery equipment

14,000

Cash

8,000

s payable

6,000

SO 4

Steps Steps in in the the Recording Recording Process Process The Ledger General Ledger  All s maintained by a company.  All asset, liability, equity, revenue and expense s.

Illustration 2-16 Slide 2-22

SO 5 Explain what a ledger is and how it helps in the recording process.

Answer on notes page Slide 2-23

SO 5 Explain what a ledger is and how it helps in the recording process.

The The Ledger Ledger Standard Form of  T- form used in ing textbooks.  Ledger form used in practice. Illustration 2-17

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SO 5 Explain what a ledger is and how it helps in the recording process.

The The Ledger Ledger Chart of s

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Illustration 2-18

SO 5 Explain what a ledger is and how it helps in the recording process.

Posting Posting Posting – the process of transferring amounts from the journal to the ledger s.

Illustration 2-19

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SO 6 Explain what posting is and how it helps in the recording process.

The The Recording Recording Process Process Illustrated Illustrated Follow these steps: 1. Determine what type of is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. Illustration 2-20 Slide 2-27

SO 6 Explain what posting is and how it helps in the recording process.

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-21

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SO 6 Explain what posting is and how it helps in the recording process.

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-22

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-23

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-24

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-25

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-26

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SO 6 Explain what posting is and how it helps in the recording process.

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-27

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-28

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SO 6

The The Recording Recording Process Process Illustrated Illustrated Illustration 2-29

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SO 6

Posting Posting

Review Question Posting: a. normally occurs before journalizing. b. transfers ledger transaction data to the journal. c. is an optional step in the recording process. d. transfers journal entries to ledger s.

Solution on notes page Slide 2-37

SO 6 Explain what posting is and how it helps in the recording process.

The The Recording Recording Process Process Illustrated Illustrated Katherine Turner recorded the following transactions during the month of March.

Post these entries to the Cash .

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Solution on notes page

SO 6

The The Trial Trial Balance Balance Illustration 2-32

A list of s and their balances at a given time. Purpose is to prove that debits equal credits.

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SO 7 Prepare a trial balance and explain its purposes.

The The Trial Trial Balance Balance Limitations of a Trial Balance The trial balance may balance even when 1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect s are used in journalizing or posting, or 5. offsetting errors are made in recording the amount of a transaction.

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SO 7 Prepare a trial balance and explain its purposes.

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Answer on notes page

SO 7 Prepare a trial balance and explain its purposes.

The The Trial Trial Balance Balance

The s come from the ledger of Christel Corporation at December 31, 2011.

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Solution on notes page

Christel Corporation Trial Balance (in thousands) December 31, 2011

SO 7

Understanding Understanding U.S. U.S. GAAP GAAP Key Differences

The Recording Process

Rules for ing for specific events sometimes differ across countries. For example, IFRS companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry ing system is the basis of ing systems worldwide. Both the IASB and FASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses. The more substantive definitions, using the FASB definitional structure, are provided in the Chapter 1 “Understanding U.S. GAAP” section. Slide 2-43

Understanding Understanding U.S. U.S. GAAP GAAP Key Differences

The Recording Process

A trial balance under GAAP follows the same format as shown in the textbook. In the United States, equity is often referred to as either shareholders’ equity or stockholders’ equity, and Share Capital —Ordinary is referred to as Common Stock. The statement of financial position is often called the balance sheet in the United States.

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Understanding Understanding U.S. U.S. GAAP GAAP Looking to the Future

The Recording Process

The basic recording process shown in this textbook is followed by companies across the globe. It is unlikely to change in the future. The definitional structure of assets, liabilities, equity, revenues, and expenses may change over time as the IASB and FASB evaluate their overall conceptual framework for establishing ing standards.

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