Guest Author - Consuelo Herrera, CAMS, CFE
Understanding how the accounting system works is key for forensic accountants. For example, a position advertising an Accounting Fraud Examiner, states its requirement of knowledge described as follows:
1. forensic accounting techniques.
2. third party financial records maintained in the normal course of business.
3. standard business practices.
4. generally accepted accounting practices and procedures.
5. differences between fraudulent and legitimate financial transactions.
6. computers and their relationship to automated accounting systems.
7. laws and regulations affecting financial records at the local, state and federal level.
Although identifying the nature of transactions is simple for seasoned accountants it could be difficult for those starting in the accounting field.
The following list of transactions helps explains how to record transactions into the general journal and their impact on the elements of the accounting equation:
Transaction 1: Two partners, Samuel and Gus, began a business by each depositing $1,200 of their personal resources in the business bank account in exchange for common stock of the formed corporation. This corporation was created to provide consulting services.
Because it increased cash, the debit is to cash. It increased Common Stock, thus, the credit is to Common Stock.
Cash (dr) $2,400
Common Stock (cr) $2,400
Transaction 2: Samuel rented an office in a business center, paying the first month rent with a check issued against the business bank account for $650.
It reflects an increase in the rent expense and a decrease in cash.
Rent Expense (dr) $650
Cash (cr) $650
Transaction 3: Gus signed a contract for advertising in the local Flyer, paying $350 for this add.
This caused an increase in Advertising Expense and a decrease in Cash.
Advertising Expense (dr) $350
Cash (cr) $350
Transaction 4: The Corporation provided consulting services on personnel management matters to a credit union. The credit union paid $3,500 for the services rendered.
This transaction increased THE Cash and Service Revenue accounts.
Cash (dr) $3,500
Service Revenue (cr) $3,500
Transaction 4: The corporation purchased office supplies for $1,100 for which it paid $350 cash and charged the rest on account.
The effects of this transaction were: an increase in Supplies on Hand and a decrease in Cash and an increase in Accounts Payable.
Supplies on Hand (dr) $1,100
Cash (cr) $350.00
Accounts Payable (cr) $750
Transaction 5: The Corporation was granted another consulting contract for $5,000 of which it collected $1,000 and put the rest on account.
There was an increase in Cash, an increase in Accounts Receivable, and an increase in Service Revenue.
Cash (dr) $1,000
Accounts Receivable (dr) $4,000
Service Revenue (cr) $5,000
Transaction 6: As per the Board of Directors' approval, the corporation declared and paid a dividend of $ 500 in cash to its stockholders.
This transaction caused a decrease in Retained Earnings and a decrease in Cash.
Retained Earnings (dr) $500
Cash (cr) $500
To properly record journal entries it is necessary to know these transactions it is important to identify the classification of accounts as asset, liability, owners' equity, revenue, or expense and when they are debited or credited (Debit and Credit Rules). Key words are helpful in determining the classification of an account. For example, Receivable, Prepaid or Deferred Expense refer to Assets accounts. Payable, Unearned Revenue or Deferred Revenue refer to Liability accounts. Revenue, Earned, or Income refer to Revenue accounts. Expense, Incurred, or Expired often refer to Expense accounts.