Business & NonBusiness Transactions.pptx

Fundamentals of Accounting

1. Fundamentals of Accountancy, business and Management I

2. Difference Between Business and Non-Business Transaction Categories Fundamentals of Accountancy, Business and Management I

3. What is a Business Transaction? Business transactions refer to activities and events that affect the financial position of a business and are capable of being assigned monetary values. Business transactions are recorded in the books of the business and summarized in financial reports.

4. Characteristics of Business Transactions A business transaction must have the following characteristics : It must be for a sum certain in money (i.e., of a financial value ) It must be supported by a source document (e.g. sales invoice, official receipt, disbursement voucher, remittance advice, etc .) It must have a two-fold effect in the elements of accounting.

5. A business transaction can either be an  exchange transaction  (involves physical exchange of values such as sale, purchase, payment, etc.) or a  non-exchange transaction  (does not involve physical exchange (e.g. loss from flood, fire loss, internal production, depreciation, etc.)

6. 1. Investment of cash or other assets by the owners 2. Withdrawal of cash or other assets by the owners, and distribution of dividends 3. Borrowing of cash from other entities for business use 4. Payment of borrowings 5. Sale of goods or services (either for cash or on credit/account ) Examples of Business Transactions

7. 6. Collection of receivables from customers and other entities 7. Acquisition of assets or services (either for cash or on credit/account) 8. Payment of payables to suppliers or other entities 9. Consumption or expiration of assets (such as use of office supplies and expiration of insurance, expiration of rent, depreciation of equipment, etc.)

8. (Same with No. 7) Purchasing goods and materials. Purchases can be for cash or credit. Cash purchases are paid for immediately and are fairly rare in most businesses. Credit purchases are paid for after some time, typically a month or so. (Same with No. 7) Purchasing services, for example, repair s to equipment, advertising, printing costs. (Same with No. 5 ) Sales . Cash sales, for example in shops, are paid for immediately. Credit sales are paid for after some time . (Same with No. 8 ) Paying wages and salaries. (Same with No. 1&7 ) Purchase of non-current assets . ( noncurrent assets  include investments in other companies, intangible  assets  such as goodwill, brand recognition and intellectual property, and property, plant and equipment .) (Same with No. 1 ) Raising finance and paying rewards to the suppliers of finance. For example, owners putting in capital or loans being raised from banks. Owners of the business expect rewards based on a share of the profit; banks usually expect interest to be paid. (Same with No. 8) Accounting for and paying tax. Movements of cash and money in the bank account. These movements usually arise from the transactions above .

9. Two-Fold Effect on the Elements of Accounting Every business transaction has a two-fold effect in the elements of accounting. The elements of accounting are assets, liabilities, and capital. The two fold-effect means that for every value received, there is an equal value given.

10. Business Transactions and the Accounting Equation The two-fold effect of business transactions keeps the accounting equation in balance. Assets should always be equal to liabilities plus capital. To illustrate, here are some examples.

11. In each of the transactions above, the accounting equation stays in balance. Expenses and withdrawals made by owners decrease capital, hence they are shown as deductions from capital. Investments of owners and revenues, on the other hand, increase capital.

12. Non-business Transactions Non-business transaction is an activity or event that may or may not involve money or financial matters for as long it does not affects the financial position or operations of the business. Non-business transactions are usually personal in nature like ‘personal income’ or ‘personal expense’ incurred personally by the individuals in the organization.

13. 1. Purchasing goods & services for personal use either on cash or credit. Samples of Non-business Transactions

14. General Ledger A general ledger is a book or file that bookkeepers use to record all relevant accounts. The general ledger tracks five prominent accounting items: assets, liabilities, owner’s capital, revenues and expenses. Each account is a two-columned T-shaped table. The bookkeeper typically places the account title at the top of the" T" and records debit entries on the left side and credit entries on the right. The general ledger sometimes displays additional columns for particulars such as transaction description, date and serial number. Transactions from the general journal post in general ledger accounts, and then balances are calculated and transferred from the general ledger to a trial balance.

15. A general ledger is the master set of accounts that summarize all  transactions  occurring within an entity. There may be a subsidiary set of ledgers that summarize into the general ledger. The general ledger, in turn, is used to aggregate information into the  financial statements  of a business; this can be done automatically with accounting software, or by manually compiling financial statements from the information in a  trial balance  report (which is a summarization of the ending balances in the general ledger).

16. The general ledger contains a  debit and credit  entry for every transaction recorded within it, so that the total of all debit balances in the general ledger should always match the total of all credit balances. If they do not match, the general ledger is said to be  out of balance , and must be corrected before reliable financial statements can be compiled from it.

17. The general ledger is comprised of all the individual accounts needed to record the assets, liabilities, equity, revenue, expense, gain, and loss transactions of a business. In most cases, detailed transactions are recorded directly in these general ledger accounts. In some cases where the volume of transactions would overwhelm the record keeping in the general ledger, transactions are shunted off to a  subsidiary ledger , from which just the account totals are recorded in a  control account  in the general ledger. In the latter case, a person researching an issue in the financial statements must refer back to the subsidiary ledger to find information about the original transaction. The general ledger is usually printed and stored in an organization's year-end book, which serves as the annual archive of its business transactions.

18. General ledger accounts are assigned unique identifying account numbers. These numbers may range from a simple  three-digit code  to a more complex version that identifies individual departments and subsidiaries . The general ledger is also known as the book of final entry.

19. General Ledger Account A general ledger account is a record in which is recorded a specific type of transaction. These transactions can relate to assets, liabilities, equity, sales, expenses, gains, or losses - in essence, all of the transactions that are aggergated into the balance sheet and income statement . A separate general ledger account is set aside for each specific type of transaction. For example, within the general area of inventory assets, there may be separate general ledger accounts for raw materials inventory, work-in-process inventory, finished goods inventory, and merchandise (purchased) inventory.

20. Examples of other general ledger accounts that are commonly used are: Balance Sheet Accounts Cash Accounts receivable Marketable securities Fixed assets Accumulated depreciation Accounts payable Accrued liabilities Sales taxes payable Debt Common stock Retained earnings

21. Income Statement Accounts Sales Cost of goods sold Compensation expense Payroll tax expense Fringe benefits expense Rent expense Utilities expense Advertising expense Travel and entertainment expense Business insurance expense Office supplies expense Interest expense Gain/loss on sale of assets

22. A complete list of all general ledger accounts that a company uses is contained within the chart of accounts, which is a simple listing of account numbers and account descriptions . A few general ledger accounts are designated as control accounts. These accounts only contain summary balances that have been posted from subsidiary ledgers. This is done in order to minimize the transaction volume cluttering the general ledger. The accounts receivable and accounts payable accounts are the most likely to be control accounts.

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