251Ch2and3NotesSend

251Ch2and3NotesSend - Bus 251 D1 & E1 (12-1) Lecture...

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Unformatted text preview: Bus 251 D1 & E1 (12-1) Lecture Notes Anne Macdonald Chapters 2 & 3 Transaction Analysis, and Double-Entry Accounting Systems RECORDING ACCOUNTING TRANSACTIONS Assets (A) = Liabilities (L) + Shareholders Equity (SE) Bus 251 Chapters 2 & 3 2 Because a balance sheet must always balance, an accounting event must maintain the relationship: [NOTE: Chapter 2 uses only the distinctions of A, L and SE accounts in its analysis of transactions. In Chapter 3, we expand the SE accounts, to include Revenue, Expense, SE and Dividends. In the course notes below, I will use the more expanded analysis from Chapter 3.] RECORDING ACCOUNTING TRANSACTIONS Assets (A) = Liabilities (L) + Shareholders Equity (SE) Bus 251 Chapters 2 & 3 3 Consists of: Common shares + Retained Earnings Retained Earnings Increases with net income = Revenue - Expense Decreases with Dividends Declared RECORDING ACCOUNTING TRANSACTIONS Double Entry System The recording of each transaction must change (at least) 2 elements in the equation in order to keep in balance. Assets (A) = Liabilities (L) + Shareholders Equity (SE) Bus 251 Chapters 2 & 3 4 Purchase of inventory: Increase inventory (A) Decrease cash (A) Borrow from the bank: Increase cash (A) Increase bank loan payable (L) RECORDING ACCOUNTING TRANSACTIONS T h e a n a l y s is a b o v e in v o lv e s 2 id e a s . F i r s t , t h e r e c o g n i t io n t h a t w e o w e e m p lo y e e s t h e i r w a g e s , a n d s e c o n d , t h e s u b s e q u e n t p a y m e n t . C o u ld t h is a n a ly s i s b e c o m b in e d ? Bus 251 Chapters 2 & 3 5 ASSETS = LIABILITIES + SHAREHOLDERS EQUITY Employees earn wages, but have not yet been paid: Increase wages expenses (SE) Increase wages payable (L) Employees are paid the wages they are owed, from above: Decrease wages payable (L) Decrease cash (A) RECORDING ACCOUNTING TRANSACTIONS This is the NET effect of the two entries on the prior slide. The increase to wages payable (L) and the subsequent decrease to wages payable (L) cancels out, net effect = 0 (once the wages have been paid). Transactions are cumulative. Sometimes when recording a transaction you need to consider WHAT (if anything) has ALREADY been recorded. Bus 251 Chapters 2 & 3 6 Employees earn wages and are paid: Increase wages expenses (SE) Decrease cash (A) Accrual Accounting In the wages example, there was a transaction recognized when employees EARNED the wages, even if they were not yet paid. This is an example of: Accrual Accounting Bus 251 Chapters 2 & 3 7 Financial statements prepared under accrual accounting include: 1. All cash receipts and payments that have already occurred. 2. An estimate of future cash receipts and payments that should be expected based on present transactions....
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This note was uploaded on 02/18/2012 for the course BUSE 237 taught by Professor Sf during the Spring '12 term at Simon Fraser.

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251Ch2and3NotesSend - Bus 251 D1 & E1 (12-1) Lecture...

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