The Accounting Cycle: During the Period
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Spiceland | Thomas | Herrmann
Financial Accounting
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Accounting
Cycle: During the
PeriodChapter 2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-2
Learning Objectives• Identify the basic steps in measuring external
transactions• Analyze the impact of external transactions on the
accounting equation• Assess whether the impact of external transactions
results in a debit or credit to an account balance• Record transactions using debits and credits• Post transactions to T-accounts in the general ledger• Prepare a trial balance
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-3
Functions of Financial Accounting
• Measure business activities of the company• Communicate measurements to external parties
for decision making
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Part A
Measuring Business Activities
2-4
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Identify the Basic Steps in Measuring External Transactions.
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External Transactions
• Transactions conducted with a separate economic entity
• Internal transaction: events that affect the financial position of the company but do not include an exchange with a separate economic entity
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Capturing Transactions in Accounts
• Account: Summary of all transactions related to a particular item over a period of time.• Asset accounts: Cash, Supplies, and Equipment• Liability accounts: Accounts Payable, Salaries
Payable, Utilities Payable, and Taxes Payable• Stockholders’ equity accounts: Common Stock
and Retained Earnings• Chart of accounts: A list of all account names
used to record transactions
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Measuring External Transactions2-8
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Learning Objective 2
Analyze the impact of external transactions on the accounting equation.
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2-10
Effects on the Basic Accounting Equation
• Each transaction will have a dual effect• An increase on one side will increase the other
side
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Understanding Effects of Transaction
• Ask these questions:• What is one account affected by the transaction?
• Does it increase or decrease?• What is a second account affected by the
transaction? • Does it increase or decrease?
• Do assets still equal liabilities plus stockholders’ equity?
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The Expanded Accounting Equation2-12
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Part B
Debits and Credits
2-13
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Learning Objective 3
Assess Whether the Impact of External Transactions Results in a Debit or Credit to an
Account Balance.
2-14
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Effects on Account Balances2-15
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Debit and Credit Effects on Accounts in the Expanded Accounting Equation
2-16
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Debit and Credit Effects on Each Account Type
• A simpler memory way
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Learning Objective 4
Record transactions using debits and credits.
2-18
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2-19
Recording Transactions
• Journal: provides a chronological record of all transactions
• Journal entry: format used for recording transactions
• Debits in a transaction must equal its credits
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Learning Objective 5
Post transactions to T-accounts in the general ledger.
2-20
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Posting
• Posting: process of transferring the debit and credit information from the journal to individual accounts in the general ledger
• General ledger: includes all accounts used to record the company’s transactions
• Useful to calculate the account balances• T-account: a simplified form of a general ledger
account
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 3
Prepare a Trial Balance.
2-22
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Trial Balance
• A list of all accounts and their balances at a particular date• Shows that total debits equal total credits• Assists in preparing adjusting entries
• Used for internal purposes only• Not published to external parties• Not required to follow an order of listing
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
End of Chapter 2
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