Principles of Accounting-wk2&3-Business Transaction (2)

8/10/2019 Principles of Accounting-wk2&3-Business Transaction (2)

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Principles of AccountingBPA 11403

Prepared by:Nur Aniza Quantaniah binti Jusoh

Fakulti Pengurusan Teknologi dan Perniagaan

Universiti Tun Hussein Onn Malaysia

Room:J-701-13

Tel : 07-4533930

E-mail: [email protected]


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OBJECTIVES

Define and use key accounting

terms.Define doub le-entry system and

state the rules for double entry.

Apply the rules of debit andcredit.

Record transactions in the

journal.

RECORDING BUSINESSTRANSACTION


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OBJECTIVES

Post from the journal to the

ledger.Set up a chart of accounts for a

business.

Analyze transactions without ajournal.

Prepare and use a trial balance.

RECORDING BUSINESSTRANSACTION


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ACCOUNTING TERMS

Account

Journal

Double-entryaccounting

T-account Ledger

Trial Balance


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ACCOUNTING TERMS

Accountdetailed record of thechangesin a particular asset,liability or owners equity

Ledgerthe recordholding allaccounts

Journalthe chronological recordof transactions

Trial Balancethe list of allaccountswith their balances


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Accounting process-set of activitiesinvolved in converting information about

transactions

into financial statements.

The Accounting Cycle


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1. Examining source documents

2. Recording transactions

3. Posting transactions4. Preparing financial statements

The end results of the accountingprocess are a series of financialstatements.


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1. Transaction or event occurs

Could simply be the passage of time.

2. Recorded in the Journal using a Journal

Entry. event is translated into accounting

language.

3. Journal is posted to Ledger

the information from all the journalentries in the period is aggregated.

4. Ledger accounts are totalled.

5. Financial statements are prepared.


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Accounting Process and Preparation ofFinancial Statements (Cont.)

a.Using the accounting equation.

Accounting Equation:

Assets = Liabilities + Stockholders Equityb. Using the double-entry system

-the process includes the recording of

Journal entries, posting Journal entries

to ledger accounts, work sheet (including

adjustments), prepare financial

statements and closing entries)


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Accounting Process andPreparation of Financial Statements

How do accountants preparefinancial statements?

Identify,measureand recordbusiness transactions for businessentities

Using the accounting equation

Using the double-entry


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The basic elements

The two basic elements of any organisation are whatit owns and what it owes.

What it owns are the organisationseconomic resources. Theseeconomic resources are used to help the organisation generate

revenues. In accounting, these economic resources are calledASSETS.

What it owes are the organisationssources of financing for theeconomic resources.

The main source of financing usually comes from EQUITY.

Equity indicates the amount of financing provided by owners ofthe organisation.

The next source of financing comes from debt. Debt is theresult of the organisation purchasing goods, services or assetson credit. Debt also results from loan borrowings. Debt is given

the term LIABILITIES.


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The Framework

The accounting equation can be said to be theframework for the entire accounting process.

The accounting equation is an essential building block of

accounting.

The accounting equation is the basis of all accounting

systems.

The accounting equation can be used to illustrate simply

the double entry system of accounting.

The two sides of the equation must be equal.

The accounting equation is also called the balance sheetequation.


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The accounting equation

what it owns = what it owesThe equation shows the relationship among items

of value a business has and the financial rightsto the item.

Assets = Liabilities + Equity

A Balance Sheet (Statement of Financial Position) shows thatthe assets of an organisation should equal to its liabilities plusequity.

This is why the accounting equation is also called a balance

sheet equation.


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The Accounting Equation

The relationship between assets,liabilities, and owners equity

Assets

Things ofvalue thata firmowns

Liabilities

A firmsdebts and

obligations

Owners Equity

The differencebetween a firms

assets anditsliabilities

= +


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THE ACCOUNTINGEQUATION

A L + O.E

Assets Liabilities +Owners

Equity=


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Basic Accounting Equation

Always maintained in doubleentry accounting

Assets will always equal liabilitiesplus equity


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Different versions of theaccounting equation

The accounting equation can be expressedin a number of different ways:

Asset emphasis:

Assets = Liabilities + EquityLiability emphasis:

Liabilities = Assets Equity

Equity emphasis:

Equity = Assets - Liabilities


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Expanded accounting equation

The accounting equation can be expanded to

include Revenue and Expenses.We begin with:

Assets = Liabilities + Equity

We bring in the profit element:

Assets = Liabilities + Equity+ Profit

Note: Profit= Revenue (Income)Expenses

Expanded we have:

Assets = Liabilities + Equity+ Revenue(Income) ExpensesWhich can also be written as:

Assets+ Expenses= Liabilities + Equity+ Revenue (Income)


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Accounting Equation Example

Assets = Liabilities + Owners Equity

(a) $50,000 $20,000

(b) $30,000 $10,000

(c) $40,000 $15,000

$70,000

$20,000

$25,000


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The Account

Account - A group of items havingcommon characteristicsA separate record used to summarize

changes in each asset, liability, andowners equity of a businessTypes of Accounts

Asset

LiabilityIncomeExpenseEquity


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Definitions of Accounts on FinancialStatements

Assets: economic resources owned by thebusiness that benefit the business in thefuture

Must be owned not rented Doesnt have to be paid off, could still be

making payments on it.

Characterized as current and non-current-

(fixed, tangible and intangible)


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Definitions of Accounts on FinancialStatements -Classification of Assets

Current assetshave less thantwelve months of future use

Fixed assetshave over twelve

months of future use Tangible assetsare physical such

as land, buildings and equipment

Intangible assetsare non physicaland examples include goodwill,brands, patents and copyrights


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Element structures

Assets

Current assets

Cash

Cash on hand

Bank accounts

Accounts receivable

Accounts receivable customer 1

Accounts receivable customer 2

Inventory

Raw materials

Work in process

Finished goods


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Element structures

Assets

Long-term assets

Buildings

VehiclesCars

Trucks

Equipments

Fixture & FittingsFurniture


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Processing Accounting Information 26

Definitions of Accounts onFinancial Statements

Assets includes:

Cash: in all forms: (coins, currency, checkingaccounts,)

Account receivable: an oral promise for future cashreceipt as a result of sales. The amount of money owedto the business by its customers as a result of makingsales on account or on credit. Simply, customerswho have promised to pay sometime in the future

Inventory (or merchandise): goods for sale.

Note receivable: a written promissory note that thecustomer will pay a fixed amount by a certain date.


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Definitions of Accounts onFinancial Statements (contd.)

Assets includes: Prepaid expenses: expenses paid in

advance.

Land: recorded at cost of land. Buildings: record at cost, subject todepreciation.

Motor vehicle,equipment, furniture andfixture: record at cost, subject to

depreciation.


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Definitions of Accounts on FinancialStatements (contd.)

Liabilitiesotherwise known as claims thatothers have against the assets, normallyarise on behalf of suppliers of goods,

services and loans, (debts and accruals) butthey may include an obligation to provide aservice that has been paid for in advance(deferral)

Probable future outflow of Assets as a resultof a past transaction or event -debts/obligations of the business that can bepaid with cash,goods or services

Also current and non current


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Element structures

Liabilities

Current liabilities

Accounts payable

Accrued liabilities

Long-term liabilities

Bank loans

Loan from RBC

Loan from Scotiabank

Notes payable

Bonds payable


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Liabilities: legal obligations.

Note Payable: a written promissory notethat the business promises to pay.

Account payable: an oral promise to pay,arising from credit purchases of inventory

and other goods. Referred to as making apurchase on account or on credit

Accrued liabilities: liabilities that haveoccurred but have not been paid. Forexample: salary payable, interest payable,etc.


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Definitions of Accounts on FinancialStatements (contd.)

Equityis the ownership interest, theclaims that the owner has against theassets.This is normally in the form of

investment in shares of a business Equity is the difference between value of

assets and liabilities

Equity is also called Net Worthor Capital

The Accounting concept of entitystipulates that the owners of thebusiness are a separate legal entity fromthe business itself


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Element structures

Owners equity

Capital stock (direct investment)

Retained earnings (indirect investment)

Revenue

Expenses Although revenue and expenses are not sub-

pieces of Retained earnings the way Current

assets are a sub-piece of Total assets, for thepurposes of understanding how they fit in to theequation, this representation is helpful.

Dividends


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Equity/Capital:the owners claims tothe assets of a corporation including:

Common stock: represents the owners

investment. Retained earnings: the cumulative net

income earned by the corporation over itslifetime , minus cumulative losses anddividends.

Dividends: distribution of earnings tostockholders.


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Shareholders Equity

Paid-in capital

Amounts invested by stockholders

Common stock

Drawings

Withdrawal is an asset taken out of a

business for owners personal use.

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Shareholders Equity

Retained Earnings Amounts earned and kept for use in the company

Increased by Revenues

Decreased by Expenses

Revenues Earned by delivering goods or services

increase or inflow of assets; will eventuallyincrease stockholders equity (i.e., sales revenue)

Expenses

Costs of doing business Rent, utilities, insurance

decrease or outflow of assets; will eventuallydecrease stockholders equity.

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REVENUE AND EXPENSE


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REVENUE AND EXPENSEACCOUNTS

Revenues minus expenses equal netincome

If expense are greater then revenues, a netloss occurs

Revenue and expense accounts are notconsidered owners equity accounts--even though they effectively increase ordecrease equity!

They are calledincome statementaccounts,often called temporary ornominal accounts.


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Dividends

Distributions of assets (usuallycash) to shareholders

Decrease Retained Earnings Do NOT impact net income

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CLASSIFICATION OF ASSET, LIABILITY,EQUITY, REVENUE, EXPENSES

Next to each item, indicate whether it is anAsset, Liability, Equity, Revenue or Expense.

_____ Cash

_____ Common Stock ($1 par)

_____ Depreciation Expense

_____ Insurance Expense

_____ Interest Receivable

_____ Interest Earned

_____ Investment in Govt. Bonds

Asset

Equity

Expense

Expense

Asset

Revenue

Asset


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CLASSIFICATION OF ASSET, LIABILITY,EQUITY, REVENUE, EXPENSES

_____ Miscellaneous Expense

_____ Prepaid Insurance

_____ Rent Revenue

_____ Retained Earnings

_____ Salaries Expense

_____ Salaries Payable

_____ Service Revenue

_____ Supplies Used

_____ Unearned Rent

Expenses

Asset

Revenue

Equity

Expense

Liability

Revenue

Expenses

Liability


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Business Transactions

Business activities that change the accountingequation are called transactions.

An economic event that has a direct impacton the business

Usually requires an exchange with an outsideentity

Must be able to measurethis exchange indollars

All transactions affect the accounting equationthrough specific accounts

After each transaction the accounting equationmust remain in balance.


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Business Transactions

Transactions dont always affect both sides ofthe equation

The increases and decreases caused bybusiness transactions are recorded in specificaccounts.

Accounts may be classified as either assets,liabilities, or owners equity

When analyzing transactions, always

Read the transaction Identify the accounts

Classify the accounts (Asset, Liability orOwners Equity


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EXAMPLES OF TRANSACTIONS

Exchanging Asset for Asset

Purchasing Equipment, Supplies orInventory for Cash

Exchanging Asset for Liability Purchasing Equipment, Supplies or

Inventory for Credit

Using Cash to Repay Creditors


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EXAMPLES OF TRANSACTIONS

Exchanging Asset for Equity

Receiving Cash fromOwner/Investors

Extending Credit to Customers whopurchase Goods or Services

Exchanging Liability for Equity

Incurring Expenses on Account


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Effects of Business Transactionson the Accounting Equation

Analyzing business transactions:

ANALYSIS Ident i fy

Classify

+ / -

Balance

1. Identify the accounts affected.2. Classify the accounts affected.

3. Determine the amount of increaseor decrease for each account.

4. Make sure the accounting

equation remains in balance.

Business Transaction


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Analyzing Business Transactions

THREE QUESTIONS:


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Questions to ask

Questions #1

WHAT HAPPENED?

Make certain you understand the event thathas taken place.

Questions #2

WHICH ACCOUNTS ARE AFFECTED?Identify the accounts that are affected.Classify these accounts as assets, liabilities, orowners equity.


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Questions to ask

Questions #3

HOW IS THE ACCOUNTING

EQUATION AFFECTED?Determine which accounts have increased ordecreased.Make certain that the accounting equation

remains in balance after the transaction hasbeen entered.


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Lets analyze the effect of transactions on theaccounting equation for Mary Adams Consulting

EXAMPLE


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EXAMPLE:

MARY ADAMS, THE OWNER, INVESTED$25,000 IN THE BUSINESS


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QUESTION #1

What happened?

Mary took $25,000 from herpersonal bank account and deposited itin a new account in the business name


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QUESTION #2a

Identify accounts that areaffected

CASH M. A.

CAPITAL


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QUESTION #2b

Classify these accounts

CASH M. A.CAPITAL

ASSET OWNERSEQUITY


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QUESTION #3a

Determine whether the accountshave increased or decreased

CASH M. A.CAPITAL

INCREASED INCREASED


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QUESTION #3b

Does accounting equation balance?

ASSETS= LIABILITIES + OWNERS EQUITY

+$25,000

CASH M. A.,CAPITAL=+$25,000=

It Balances!Assets of $25,000 = Liab. of $0plus Owners Equity of $25,000


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QUESTION #3a

Increase or Decrease?

OFFICESUPPLIES CASH

ASSET ASSET

INCREASED DECREASED


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QUESTION #3b

Lets look at the accounting equation

ASSETS = LIAB. O. E.

-$800CASH =

=

+ OFF. SUPPLIES+$800

Right hand sideof equation isnot affected

+

+


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QUESTION #3b

Does transaction balance?

ASSETS = LIAB. O. E.

-$800CASH =

=

Yes!Total Assets stayed the same.

One Asset increased, the otherdecreased. No change in

Liabilities or Owners Equity

OFF. SUPPLIES+$800

+++


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DRAWING EXAMPLE:

MARY WITHDREW $1,500 FORPERSONAL EXPENSES


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QUESTIONS #1 & #2

Understand the transaction,Identify and Classify the

affected accounts

Mary is withdrawing some of herequity in the business by taking home an

asset (Cash). This will reduce the Assets &reduce her Owners Equity.


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QUESTIONS #1 & #2

Understand the transaction,Identify and Classify the

affected accountsM. A.,

DRAWINGCASH

O.E.DRAWING

ASSET


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QUESTION #3a


M. A.,DRAWING CASH

INCREASE DECREASE


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QUESTION #3a


M. A.,DRAWING CASH

BE CAREFUL! Just like Expenses,Drawing account will increase in this situation,

but it will cause an overallDECREASE IN OWNERS EQUITY.


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QUESTION #3b

Does transaction balance?

ASSETS = LIAB. OWNERS EQUITY

-$1,500

CASH =

=It Balances!

Assets decreased by $1,500 =Owners Eq. decreased by $1,500

M.A.,DRAWING

+$1,500

+

Introduction of the Double Entry


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Introduction of the Double-EntrySystem and Journal Entries

A. Double-entry system

B. The T- accounts

C. Increases and decreases in theaccounts

D.Examples of journalizing and postingtransactions

Double vs Single Entry


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Double vs Single EntryAccounting

Single One account entry for eachtransaction

Double Two account entries foreach transaction

One debit and one credit

THE DOUBLE ENTRY SYSTEM: THE BASIC


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THE DOUBLE-ENTRY SYSTEM: THE BASICMETHOD OF ACCOUNTING

Evolved during the

Renaissance.

Described by Fra Luca Pacioli,

Italy, 1494.

THE DOUBLE ENTRY


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One debit One credit

Each transaction is recorded with at least:

Total debits must equal total credits.

THE DOUBLE ENTRYSYSTEM

FEATURES OF THE DOUBLE


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FEATURES OF THE DOUBLEENTRY SYSTEM

Principle ofduality.

Each transaction must berecorded with at least onedebit

and onecreditso thatmonetaryvalueof debits and credits areequal.

The whole system isalways in

balance. All accounting systems are based

on the principle of duality.

HOW DOES THIS DEBIT/CREDIT


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HOW DOES THIS DEBIT/CREDITSTUFF WORKS

We can represent an account with a T, whereone side is the place where we put the increasesand the other side is for decreases.

Theleftside is always called the debitside.

When we put something on the left side of an account,we are debiting the account.The rightside is always called the creditside.When we put something on the right side of an account,we are crediting the account.

DEBITmeansLEFTsideCREDITmeansRIGHT side


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A. Double-Entry System (contd.)

ASSET = LIABILITY + EQUITY REVENUE EXPENSES

1 + -

2 + +

3 + +

4 - -

5 - -

6 + +

7 - -

RULES OF DEBIT AND CREDIT


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Owners EquityAssets Liabilities

Debit+ DebitCredit Debit Credit+ Credit+

= +

RULES OF DEBIT AND CREDIT

Revenue

Debit

Credit+

Expenses

Debit+

Credit-


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THE CHEAT SHEET

AccountType

Increase Decrease

Asset Debit Credit

Liability Credit Debit

OwnerEquity

Credit Debit

Revenue Credit Debit

Expense Debit Credit

SUMMARY:


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SUMMARY:DOUBLE-ENTRY ACCOUNTING

Each account can be increased ordecreased.

Debit means left side

Credit means right side Asset, drawings and expense accounts

are increased with debits anddecreased with credits.

Liability, equity-capital, and revenueaccounts are increased with creditsand decreased with debits.


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Record transactions

in the journal.

Th R di P


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The Recording Process

The sequence of steps inrecording transactions:

Transactions Documentation Journal

Financial

Statements

Trial

BalanceLedger


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Journals

Journals- Books of Original Entry Record transactions or events

i.e, Journal entries

In chronological order A diary of all events (transactions) in an

entitys life. Only basic information is contained in the

journal.

Complete record of effects of transactionon accounts

Accounts and amounts debited /credited


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Journal Entries

All journal entries have two sides: Debit and Credit

For every journal entry, the total debitsmust equal the total credits -equal

dollar amounts of debits and creditsThis ensures that the fundamental

accounting equation (A = L + OE) isalways in balance.

The basic journal entry:

DebitAccount name1 $amount

Credit Account name2 $amount

To record


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Recording transaction in


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Recording transaction injournal

What does a journal entry include?

date of the transaction

title of the account debited

title of the account credited

amount of the debit and credit

description of the transaction

dollar signs are omitted


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Sample Transaction

Paid $1,000 on Account to XYZSupplies on 3rdJuly 2012

Journal Entry

3/7 Dr. Accounts Payable 1,000

Cr. Cash 1,000

Paid accounts payable

Introduction of the T-


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Introduction of the Taccount

Title of Account

Debit

(left) side

Credit

(right) side

I d i f h T


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Introduction of the T- account

Assets

Liabilities

Owners Equity

Expenses

Revenue

Debit(+) Credit(-)

Debit(-) Credit(+)

Debit(-) Credit(+)

Debit(+) Credit(-)

Debit(-) Credit(+)

Increases and Decreases in the


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Increases and Decreases in theAccounts

Debit

Credit

Debit

Credit

DebitCredit

Debit

Credit

Debit

Credit

Revenue

Expenses

Asset

Liabilities

O.Equity


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Journal Entries

To increase an Asset or Expense: Debit To increase a Liability, Revenue, or

Owners Equity: Credit To decrease an Asset or Expense: Credit

To decrease a Liability, Revenue, orOwners Equity: Debit


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Journal Entries

BalanceSheet

IncomeStatement

Balance Sheet/

Stmt of RetainedEarnings

Debit Asset Expense

Credit Liability RevenueOwnersEquity

The Basic Accounting Elements:


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Journal Entries

Going back to the FundamentalAccounting Equation:

Assets = Liabilities + Owners Equity

Debit Credit Credit


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Post from the journal

to the ledger.


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Ledgers

Ledgers - Contain Accounts

General Ledger

Contains accounts for financialstatement elements


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An Example of the Journal and A


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Journal Page 1

Date Accounts andExplanation..

Debit Credit

Apr 2 Cash.Common stock..

Issued common stock toowners

50,00050,000

Apr 3. Land ..Cash ..

Paid Cash for Land

40,00040,000

pLedger Account (cash):

An Example of the Journal and A


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pLedger Account (cash): (contd.)

Account:Cash

Date Item Jrnl.Ref.

Debit Credit Debit Credit

20xx J.2 50.000 50.000

Apr: 2 J.1 40.000 10.000

3

Balance

Account No. 101

The Ledger: all individual accounts (assets, liability, andstockholders equity accounts) combined make up the ledger.


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P ti


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Posting

What is posting?

It is the transfer of information

from the journal to theappropriate accounts in theledger.

Details of Journals andL d


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Ledgers

Date Accounts and Explanation Debit Credit

April 2 Cash 30,000

Gay Gillen, Capital 30,000Received initialinvestment from owner

Journal Page 1

Details of Journals and Ledgers


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Journal Page 1

Date Account and

Explanation Post Ref. Debit CreditApril 2 Cash 101 30,000

Gay Gillen, Capital 301 30,000

Initial investmentfrom owner

Insert the ledger account in the journal.



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Balance

Date Ref. Debit Credit Debit CreditApril 2 jrl 30,000 30,000

Account: Cash Account: 101

Insert the number of thejournal page.

Posting to the ledger


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The Four-Column Account Format


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Balance

Account: Cash Account No. 101

Date Item Ref. Debit Credit Debit Credit

April 2 01 30,000 30,000

5 02 20,000 10,000

18 04 300 9,700

26 06 2,100 7,600


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The Normal Balance of an Account


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The Normal Balance of an Account

Assets DebitLiabilities CreditStockholders Equity Credit(overall)Common Stock CreditRetained Earnings CreditDividends Debit

Revenues CreditExpenses Debit

Summary: Steps in Analyzing


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and Processing Transactions

1. Analyze the transaction todetermine its effect on assets,liabilities, and S/E.

- Supported by a sourcedocument.

2. Apply the rules of double entry.

- Dr. increases an asset.- Cr. Increases a liability.

Summary: Steps in Analyzing andi i ( i d)


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Processing Transactions (continued)

3. Record the entry. Enter in chronological order in a journal.

Enter the date/debit account/debitamount on one line.

Enter the credit account/credit amountindented on the next line.

Dr. Cr.

June 1 Cash 100,000Notes Payable 100,000

This form is calledjournal formandusually is followed by an explanation.

Summary: Steps in Analyzing and


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y p y gProcessing Transactions (continued)

4.Post the entry.

Post the entry to the general ledgerby transferring the date and amountto the proper account.

5.Prepare the trial balance to confirm thebalance of the accounts.

Confirm that the accounts are still inbalance after recording and postingtransactions.

The Trial Balance


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The Trial Balance

What is a trial balance? It is an internal document.

It is a listing of all the accounts with theirrelated balances.

Before computers, it provided a check onaccuracy by showing whether total debitsequal total credits before continuing withthe recording process.

Used to establish a convenient summaryof balances in all accounts for thepreparation of formal financial statements

The Trial Balance


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Lists All Accounts and TheirBalances in Two-Column Format

Proves that Debits Equal Credits

Forces Accountant to Find ErrorsBefore Preparing Statements

Provides a Starting Point for

Adjustments, Statements andClosing Entries

The Trial Balance


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The total of debits and creditsin the accounts must be equal

A trial balance is preparedperiodically (usually on thelast day of the month) to testthis equality.

The Trial Balance


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Steps in preparing a trial balance:

1. List each ledger account thathas a balance, debit balances inthe right column, credit balancesin the left column.

2. Add (foot) each column.

3. Compare the totals of the two

columns.

P i th T i l B l


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Preparing the Trial Balance

The trial balance is usually prepared with thebalance sheet accounts first, followed by theincome statement accounts.

An example of a short trial balance:

AccountNumber Account Title Debit Credit

100 Cash $350,000130 Merchandise inventory 150,000

202 Note payable $100,000300 Paid-in capital 400,000

$500,000 $500,000==============


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The Trial Balance


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It does not prove that thetransactions were analyzedcorrectly or recorded for the

correct amounts or in theproper accounts.

Locating Trial Balance Errors


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DEBITS CREDITS

What if it doesnt balance ?

Is the addition correct?

Are all accounts listed?

Are the balances listedcorrectly?



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Divide the difference by two. Is there a debit/credit balance for

this amount posted in the wrong

column? Check journal postings.

Review accounts forreasonableness.

Computerized accounting programsusually prohibit out-of-balanceentries.

Common Trial Balance Errors


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Posting incorrectly Mathematical errors

Transposition means digits are

written in the wrong order. (Forexample, instead of $567, thenumber is written as $657.) Atransposition error is always

evenly divisible by 9 ($657 -$567 = $90, which is divisible by9).


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Summary: The RecordingProcess


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Process

The sequence of steps in recordingtransactions:

Transactions Documentation Journal

Financial

Statements

Trial

BalanceLedger

Summary: The Recording


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Process

1.Transaction

2.Analysis

3.Rules

4.Entry

Examples of Journalizing andP ti T ti


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Posting Transactions

1. Transaction: Air & Sea Travel, Inc.,received $50,000 cash from the businessand in turn issued common stock to them.

Journal Entry:Cash 50,000Common Stock 50,000

Issued common stock to owners.

Ledger Accounts:Cash Common Stock

50,000 50,000

Examples of Journalizing and PostingTransactions (contd )


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Transactions (contd.)

2. Transaction:The business paid $40,000cash for land as a future office location.

Journal Entry:Land 40,000

Cash 40,000

Paid cash for land.

Ledger Accounts:

Cash Land50,000 40,000 40,000

Examples of Journalizing and PostingTransactions(contd )


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Transactions(contd.)

3. Transaction:The business purchased $500office supplies on account.

Journal Entry:

Office Supplies 500Accounts Payable 500

Credit purchase of office supplies

Ledger Accounts:Office Supplies Accounts Payable

500 500



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4. Transaction:The business performed travelservice for clients and received cash of$5,500.

Journal Entry:

Cash 5,500

Service Revenue 5,500

Cash received for services performed

Ledger Accounts:

Cash Service Revenue

50,000 40,000 5,5005,500



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5. Transaction:The business performed servicefor clients who did not pay immediately. Air &Sea Travel billed the clients for $3,000 onaccount.

Journal Entry:Accounts Receivable 3,000Service Revenue 3,000

Services rendered on account

Ledger Accounts:Accounts Receivable Service Revenue3,000 5,500

3,000

8,500



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6. Transaction:The business paid $2,700 forthe following expenses: office rent, $1,100;employee salary; $1,200; and utilities,$400.

Journal Entry:Rent Expense 1,100Salary Expense 1,200Utilities Expense 400

Cash 2,700Being expenses paid

Ledger Accounts:Cash Rent Expense

50,000 40,000 1,100

5,500 2,700

Salary Expense Utilities Expense

1,200 400



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7. Transaction:The business paid $400 on theaccount payable created in Transaction 3.

Journal Entry:Accounts Payable 400

Cash 400Paid creditors on account

Ledger Accounts:Cash Accounts Payable

50,000 40,000 400 5005,500 2,700

400 100



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8. Transaction:The Lyons remodeledtheir personal residence. This is not atransaction of the travel agency, sono journal entry is made.



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9. Transaction:The business collected$1,000 cash on account from theclients in transaction 5.

Journal Entry:

Cash 1,000Accounts Receivable 1,000

Received cash on account

Ledger Accounts:

Cash Accounts Receivable50,000 40,000 3,000 1,0005,500 2,7001,000 400

2,000


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11.Transaction:Air & Sea Travel, Inc.,paid the Lyons cash dividends of$2,100.

Journal Entry:Dividends 2,100

Cash 2,100Paid dividends to shareholder

Ledger Accounts:

Cash Dividends50,000 40,000 2,1005,500 2,7001,000 400

22,000 2,10033,300



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The followings are examples of T-accounts, trial balance and financialstatements of the above

transactions.

Examples of Journalizing and PostingTransactions(contd.)


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ASSETS = LIABILITIES + STOCKHOLDERS EQUITY

Cash(1) 50,000 (2)40,000(4) 5,500 (6) 2,700(9) 1,000 (7) 400

(10) 22,000 (11) 2,100Bal. 33,300

A/P(7) 400 (3) 500

Bal. 100

Comm Stock(1) 50,000

Bal. 50,000

EXPENSESRent Exp.

(6) 1,100Bal. 1,100

A/R(5) 3,000 (9) 1,000

Bal. 2,000

Office Supplies(3) 500

Bal. 500

Land(2) 40,000 (10)22,000

Bal. 18,000

Dividends

(11) 2,100Bal.2,100

REVENUEService Rev.

(4) 5,500(5) 3,000

Bal. 8,500

Salary Exp.(6) 1,200Bal. 1,200

Utilities Exp.

(6) 400Bal. 400

136

AIR & SEA TRAVEL INC

TRIAL BALANCE


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BalanceAccount Title Debit Credit

Cash $33,300Accounts receivable 2,000

Office supplies 500Land 18,000Accounts payable $ 100Common Stock 50,000Dividends 2,100

Service revenue 8,500Rent expense 1,100Salary expense 1,200Utilities expense 400Total $58,600 $58,600

AIR & SEA TRAVEL, INC.Trial Balance

4/30/19x1

137

FINANCIAL STATEMENTS

AIR & SEA TRAVEL, INC.


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Revenue:Service revenue ($5,500+$3,000) ... $ 8,500

Expenses:Salary expense $1,200Rent expense .. 1,100Utilities expense .. 400

Total expenses 2,700Net income .. $5,800

,Income Statement

Month Ended April 30, 20xx

Retained earnings, April 1, 19x1 ... $ 0Add: Net income for the month .. 5,800

5,800Less: Dividends . 2,100Retained earnings, April 30, 19x1 $3,700

AIR & SEA TRAVEL, INC.Statement of Retained Earnings


138

FINANCIAL STATEMENTS(contd.)

Statement of Retained EarningsMonth Ended April 30 20xx


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Retained earnings, April 1, 19x1 ... $ 0Add: Net income for the month .. 5,800

5,800Less: Dividends . 2,100Retained earnings, April 30, 19x1 $3,700


Assets LiabilitiesCash ... $33,300 Accounts payable ... $ 100

A/R .. 2,000Office supplies .. 500 Stockholders Equity

Land ... 18,000 Common stock . 50,000Retained earnings ... 3,700Total stockholders

equity .. 53,700Total liabilities and

Total assets .$53,800 stockholders equity... $53,800

AIR & SEA TRAVEL, INC.

Balance SheetApril 30, 20xx

139

FINANCIAL STATEMENTS(contd.)

Balance Sheet, April 30, 20xx

Assets Liabilities


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Statement of Cash Flows, Month Ended April 30, 20xx

Cash flows from operating activities:Receipts:Collections fm customers ($5,500+1,000) .. $ 6,500

Payments:To suppliers and employees ($2700+400) . (3,100)

Net cash inflow fm operating activities ... 3,400Cash flows from investing activities:

Acquisition of land ..$(40,000)Sale of land .. 22,000

Net cash outflow from investing activities... (18,000)Cash flows from financing activities:Issuance (sale) of stock to owners .. $50,000Dividends . (2,100)

Net cash inflow from financing activities. 47,900Net increase in cash .. $33,300Cash balance, April 1, 19x1 . 0Cash balance, April 30, 19x1 ... $33,300

Assets LiabilitiesCash . $33,300 Accounts payable ... $ 100A/R ... 2,000Office supplies ... 500 Stockholders Equity

Land . 18,000 Commonstock .... 50,000Retained earnings .. 3,700Total stockholders equity .. 53,700

Total liabilities andTotal assets . $53,800 stockholders equity.. $53,800

140

The Flows of Accounting Data


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Transaction

Occurs

Source

Documents

Prepared

Transaction

Analysis

TakesPlace

Transaction

Entered in

Journal

Amounts

Posted to

Ledger


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During the Accounting Period


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During the Accounting Period

1 Identify transactions & events torecord

2 Journalize transactions & events

3 Post from journals to ledgers

At the end of the accounting period


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At the end of the accounting period

4 Prepare Unadjusted Trial Balance

5 Journalize & Post adjusting entries

6 Prepare Adjusted Trial Balance

7 Prepare Financial Statements

8 Journalize & Post closing entries

9 Prepare Post Closing Trial Balance

At beginning of next accountingperiod


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period

10 Journalize & Post reversing entries