TRANSACTION ANAYLSIS 1 Cash v Accrual Accounting a Accrual Accounting based on GAAP Generally Accepted Accounting Principals REQIRED FOR PUBLIC COMPANIES i Realization Principle Record Revenue When 1 The earning process is complete or virtually complete 2 There is reasonable certainty as to the collectability of 3 the asset we re going to get It is not necessary to receive cash in order to record revenue sell goods to customer who agrees to pay in a month 4 The receipt of cash does not always indicate that a revenue has been earned customer pays in advance for a service that will be performed later 5 Recording revenue is independent of the exchange of cash 6 It is required that the receipt of c ash be relatively assured in order to record revenue ii Matching Concept Record Expenses When 1 During the same accounting period that they help in the generation of revenue Based on generation of revenue 2 Difficult to tell when expenses actually generate revenue so in those cases we record expenses when they are incurred 3 TYPESE a Costs of Goods Sold i Cost of inventory sold to customers b Cash Accounting Does NOT follow GAAP USED BY PRIVATE COMPANIES UNLESS THEY USE A BANK LOAN THEN REALIZATION PRINCIPLE IS REQUIRED i Record revenues when cash is received ii Record expenses when cash is paid 2 Account Place where all increases and decreases in financial statement items are recorded Analyzed using T Accounts a T Accounts Has three distinct parts i Top heading Account names goes here ii Left Side iii Right Side iv Debit Left hand side of the T account v Credit Right hand side of the T account Account Type Asset Liability Equity Revenue Expense Increase Debit Credit Credit Credit Debit Decrease Credit Debit Debit Debit Credit Normal Balance Debit Credit Credit Credit Debit 3 Accounting Transactions Economic event that require recording in the financial statement a Recorded in the financial statements because they result in a change to assets liabilities and or equity accounts b Not all activities represent transactions however c Double Entry Accounting i Each transaction must affect two or more accounts to keep the basic accounting equation in balance ii Recording is done by debiting at least on account and crediting another iii DEBITES must equal CREDITS d Ledger All accounts of the company taken together think of the ledger as all the T accounts of the company All T Accounts Journal The place where all accounting transactions are initially recorded e i Total dollar amount of debits must total dollar amount of credits f Journal Entry The means used to record transactions in the journal i Double Entry Accounting Every transaction must be recorded with at least on debit and at least one credit with the total dollar amounts always equaling the total dollar credits ii Cash 10 iii Accounts Recieveable 90 1 Sales Revenues 100 g Posting The process of transferring debit and credit amounts from the journal to the ledger amounts in journal entries to T Accounts i Allows us to determine the ending balance in each account h Gain Recorded when you sell an asset other than inventory for more than its cost You are not in the business of selling these assets they are not your inventory i Classified as a revenue account i Losses Recorded when you sell an asset other than inventory for less than its cost You are not in the business of selling these assets they are not inventory i Classified as an expense account 4 Dividends NOT an EXPENSE No effect on the company s income statement a Classified as a contra equity account because it reduces equity i Reduces Retained Earnings ii RULES OPPOSITE FROM EQUITY ACCOUNTS b 5 Financial Statements a Use the past performance of a company to predict future results b Evaluate the performance of a company with an eye toward identifying problem areas c Financial Ratios Relationships between financial statement amounts i Benchmarks for Comparison 1 Other companies that operate in the same industry competitors Industry Averages 2 3 Past Years trend analysis ii Liquidity Ratios Measure the short term ability of the company to pay its debt as they come due bankers and suppliers care 1 Working Capital Ratio Dollar amount a Current Assets Current Liabilities 2 Current Ratio Amount of times a Current Assets Current Liabilities
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