Post on 03-Jan-2016
ENGG 401 X2ENGG 401 X2Fundamentals of Engineering ManagementFundamentals of Engineering Management
Spring 2008Spring 2008
Chapter 2:Chapter 2:
SupplementSupplement
Journal Entries and T-accountsJournal Entries and T-accounts
Dave LudwickDave Ludwick
Dept. of Mechanical EngineeringDept. of Mechanical Engineering
University of AlbertaUniversity of Albertahttp://members.shaw.ca/dave_ludwick/
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20082
ENGG 401 X2 – Fundamentals of Engineering Management
Financial StatementsFinancial Statements
• Financial statements: “Show me the money!”“Show me the money!”
• Financial statements apply to all sizes of business, from a single proprietor corner store to a multinational company.
• Many financial statements are public information and available through the web
• Types of financial statements:– Income statements– Balance sheets– Cash flow statements (aka, Statement of Changes in Financial
Position)– Statement of Retained Earnings– Statement of Owner’s Equity
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20083
ENGG 401 X2 – Fundamentals of Engineering Management
AccountsAccounts
• An account is a detailed record of increases and decreases in a specific asset, liability, equity, revenue or expense item
• Separate accounts are kept for each type of asset, liability, equity, revenue or expense item.
• Balance Sheet accounts (like cash, AR, AP, etc) are “As at” accounts, showing the status of these items at the end of a period
• Income Statement accounts are “flow through” accounts, measuring the amount of revenue and expense occurring through a period
• A Chart of Accounts or Ledger is a list of all the accounts used by a company, often showing an account number
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20084
ENGG 401 X2 – Fundamentals of Engineering Management
AssetsAssets
• Assets are resources available and controlled by the organization for current or future benefit
• Assets– Cash, the most liquid of all assets– Accounts Receivable: amounts owed to the company for goods or
services provided through operations– Prepaid Expenses, advanced payments made for expenses.
Prepaid expenses are assets until the asset is consumed (insurance, rent)
– Equipment, are assets not sold in the course of operations, but used to deliver products or services (computers, desks, machinery) over the course of several accounting periods
– Buildings and Land are assets because they provide a location in which to operate the business
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20085
ENGG 401 X2 – Fundamentals of Engineering Management
LiabilitiesLiabilities
• Liabilities are obligations to transfer assets or provide services to other entities.
• Liabilities– Accounts Payable: Money owed to suppliers for products or
services bought on credit– Unearned Revenue, when customers pay in advance for products or
services.– Wages, amounts owed to employees for services provided, but for
which they have not yet been paid– Taxes payable, amounts owed to governments for sales tax or
income taxes accumulated but not yet paid.– Mortgages or loans, money owed to lending institutions or
individuals for money they have loaned to the organization
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20086
ENGG 401 X2 – Fundamentals of Engineering Management
Equity AccountsEquity Accounts
• There are 4 types of accounts affecting Owner’s Equity:– Owner Capital: records owner investment– Owner Withdrawals: records their withdrawals from investment– Revenues and Expenses
• Incurred over a defined period of time
• The difference between revenue and expenses defines net income which is either paid out as dividends (after taxes are applied) or rolled back into the organization (often called Retained Earnings)
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20087
ENGG 401 X2 – Fundamentals of Engineering Management
A sample Income StatementA sample Income Statement
Income Statement
Sales Revenue
Cost of Goods Sold
Gross Profit
Expenses
Interest Expense
Depreciation Expense
Utilities Expense
Wages Expense
Total Expenses
Net Income
20000
14000
6000
500
600
100
1200
2400
3600
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20088
ENGG 401 X2 – Fundamentals of Engineering Management
A sample Statement of Owner’s EquityA sample Statement of Owner’s Equity
Statement of Owner’s Equity
Opening Balance (from previous period)
Add: Net Profit
Less: Withdrawals
Closing Balance
44400
3600
0
48000
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 20089
ENGG 401 X2 – Fundamentals of Engineering Management
A sample Balance SheetA sample Balance Sheet
Balance Sheet
Current Assets
Cash 10000
Current Liabilities
Accounts Payable 5000
Accounts Receivable 20000 Wages Payable 25000
Notes Receivable 15000 Utilities Payable 2000
Marketable Securities 25000 Long-Term Debt
Inventory 120000 Notes Payable 20000
Capital Assets Bonds Payable 600000
Equipment 250000 Owner’s Equity
Buildings 500000 Common Stock 300000
Goodwill 60000 Retained Earnings 48000
Total Assets 1000000
Total Liabilities + OE 1000000
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200810
ENGG 401 X2 – Fundamentals of Engineering Management
T-AccountT-Account
• We have been using these in our sample problems so far• It is a helpful tool to help illustrate how the various business
transactions affect the various accounts and how they relate to each other
• The left side is always labeled debit and the right, credit• Depending on which side of the balance sheet the account
in question is on, entries on either the right or left could be increases or decreases for that account.
Account Title
Debit side Credit Side
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200811
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Double Entry AccountingDouble Entry Accounting
• The most common way to keep accounting records• Means that for every business transaction, there is an affect and a
record written into at least 2 accounts to always ensure that the accounting equation is in balance
• Rules to remember:– Increases to assets are debited (entered on left side) of asset accounts.
Decreases are credited (entered on right side)
– Increases in liabilities are credited (entered on right side) to liability accounts. Decreases are debited (entered on left)
– Increases in owner’s equity are credited (right side) and decreases are debited left side)
– Revenues (or increases in revenues) are credited to revenue accounts, expenses (or increases) are debited to expense accounts
• Illustrate: A sale is made for cash, hydro expense paid, cash is used to buy inventory
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200812
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Organizing AccountsOrganizing Accounts
• A ledger is a collection of all accounts on the books• A Chart of Accounts is a numeric list of accounts• Some accounting systems and accountants are familiar with
an account numbering system• In general the first digit provides a clue to the type of
account with subsequent digits providing further detail
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200813
ENGG 401 X2 – Fundamentals of Engineering Management
Analyzing TransactionsAnalyzing Transactions
• Analyzing Transactions is Step 1 in the Accounting Cycle
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200814
ENGG 401 X2 – Fundamentals of Engineering Management
Journal EntriesJournal Entries
• We have already been doing these, this is Step 2 in the Accounting Cycle
• Consists the following info:– Date of transaction– Titles of the affected accounts– Dollar amount of each debit or credit– Transaction explanation for future reference
• Double entry accounting requires that every transaction will affect at least 2 accounts.– Those that affect 3 or more accounts are called Compound
Journal Entries
• Note that the accounts involved do not need to be on opposite sides of the balance sheet– Ex: A cash purchase of furniture vs. purchase of furniture on
credit
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200815
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Journal EntriesJournal Entries
Date Account Titles and explanation PR Debit Credit
Jan 1
Cash 101 10000
D. Ludwick, Capital 600 10000
Jan 3
Furniture 150 1200
Cash 101 1200
Jan 7
Accounts Receivable 125 2000
Cash 101 1000
Revenue 500 3000
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200816
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Journal EntriesJournal Entries
• Date column: the transaction date• Account title and explanation: the names of the accounts
affected by the transaction. Some journal entries place a short, plain-english, description of the transaction so the record keeper remembers the event
• PR: Posting Reference column: a place to enter the account number if accounting number is being applied to the books
• Debit and Credit columns: Places to enter the amounts affecting the specific account for the transaction
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200817
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Posting Journal EntriesPosting Journal Entries
• Step 3 in the Accounting Cycle• The process of posting or transferring entries from the
journal to the ledger
Dave Ludwick, Dept. of Mech. Eng.Introduction to Financial Statements
Summer 200818
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An example – Jim the LawyerAn example – Jim the Lawyer
Sept 1 Began his public legal practice by investing $4200 in cash and $3000 in office equipment
1 Prepaid 3 months’ rent in advance on suitable office space, $3000
2 Purchased office equipment for $420 on credit, and purchased $50 worth of office supplies on credit
4 Completed legal work for a client and immediately received payment of $400 cash
8 Completed legal work on credit for Forty Third and a Half Bank, $1000
10 Paid for the items purchased on credit on Sept 2
14 Paid the annual $1200 premium on an insurance policy
15 Paid $300 to attend an all-day seminar on Sept 20 regarding ethical legal practices
18 Received payment in full from Forty Third and a Half Bank for services provided on Sept 8
20 Attended the seminar paid for on Sept 15
24 Completed legal work on credit for Great West Realty, $500
28 Jim withdrew $150 cash from the practice to pay for personal expenses
29 Purchased additional office supplies on credit for $45
30 Paid the September utility bill of $175