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 Educa The Accounting Cycle: During the Period Chapter 2
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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.
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
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Functions of Financial Accounting
• Measure business activities of the company• Communicate measurements to external parties
for decision making
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Measuring Business Activities
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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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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
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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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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transactions of Eagle Golf Academy Date External Transactions in January
(1) Dec. 1 Sell shares of common stock for $25,000 to obtain the funds necessary to start the business
(2) Dec. 1 Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years
(3) Dec. 1 Purchase equipment necessary for giving golf training, $24,000
(4) Dec. 1 Pay one year of rent in advance, $6,000 ($500 per month)(5) Dec. 6 Purchase supplies on account, $2,300(6) Dec. 12 Provide golf training to customers for cash, $4,300(7) Dec. 17 Provide golf training to customers on account, $2,000(8) Dec. 23 Receive cash in advance for 12 golf training sessions to be
given in the future, $600(9) Dec. 28 Pay salaries to employees, $2,800
(10) Dec. 30 Pay cash dividends of $200 to shareholders
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Transaction 1—Issue Common Stock
Eagle sells shares of common stock for $25,000
• What is one account affected by the transaction? • Cash
• Does that account increase or decrease?• Increase by $25,000
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Transaction 1—Issue Common Stock
Eagle sells shares of common stock for $25,000
• What is a second account affected by the transaction? • Common Stock
• Does that account increase or decrease?• Increase by $25,000
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 1—Issue Common Stock
Eagle sells shares of common stock for $25,000
• Do assets equal liabilities plus stockholders’ equity?• Yes, assets increase by $25,000 and stockholders’ equity increase
by $25,000
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Transaction 2—Borrow from the Bank
Eagle borrows $10,000 from the bank and signs a note for it
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Transaction 3—Purchase Equipment
Purchase equipment with cash, $24,000
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Transaction 4—Incur Costs for Rent
Pay one year of rent in advance, $6,000
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Transaction 5—Incur Costs for Supplies
Purchase of supplies on account, $2,300
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The Expanded Accounting Equation
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Transaction 6—Provide Services for Cash
Provide service to customers for cash, $4,300
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Transaction 7—Provide Services on Account
Provide service to customers on account, $2,000
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Transaction 8—Receive Cash in Advance of Providing Services
Receive cash in advance from customers, $600
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Transaction 9—Incur Cost for Salaries
Pay salaries to workers, $2,800
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Transaction 10—Pay Dividends
Pay dividends to stockholders, $200
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Part B
Debits and Credits
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Learning Objective 3
Assess Whether the Impact of External Transactions Results in a Debit or Credit to an
Account Balance.
2-27
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Effects on Account Balances2-28
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Debit and Credit Effects on Accounts in the Expanded Accounting Equation
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Debit and Credit Effects on Each Account Type
• A simple memory aid
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Learning Objective 4
Record transactions using debits and credits.
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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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Recording Transactions—Example
• On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25,000.• Cash debited for $25,000• Common Stock credited for $25,000
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Learning Objective 5
Post transactions to T-accounts in the general ledger.
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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
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Posting—Example
• On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25,000.• Debit to Cash is transferred to the Cash account• Credit to Common Stock is transferred to the
Common Stock account
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Summary of External Transactions Recorded for Eagle Golf Academy
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Summary of External Transactions Recorded for Eagle Golf Academy
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Summary of External Transactions Recorded for Eagle Golf Academy
2-39
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Learning Objective 6
Prepare a Trial Balance.
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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
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Trial Balance—Example2-42
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End of Chapter 2
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