Processing Accounting Information Chapter 2
Dec 15, 2015
Processing Accounting
Information
Chapter 2
Analyze business
transactions.
The Account
Assets are the economic resources that benefit the business now and in the future
CashAccounts receivableInventoryNotes receivablePrepaid expenses
LandBuildingsEquipment, furniture, and fixtures
The Account
Liabilities are the debts of the company.
Notes payableAccounts payableAccrued liabilities (for expenses incurred but not paid)Long-term liabilities (bonds)
The Account
Stockholders’ (owners’) equity is theowners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for eachowner’s capital balance and withdrawals.
A corporation uses separate capital accounts for each source of capital.
Accounting for Business Transactions
A transaction is any event that both affectsthe financial position of the business entity
and can be reliably recorded.
Accounting for Business Transactions
The Lyons invest $50,000 to beginthe business, and Air & Sea Travel
issues common stock.
Stockholders’ Assets = Liabilities + Equity
(1) Cash + 50,000 = + 50,000*
*Common stock
Accounting for Business Transactions
Air & Sea purchases land for anoffice location, paying $40,000 in cash.
Balance + 50,000 = + 50,000*
*Common stock
(2) Cash – 40,000 Land + 40,000
50,000 = + 50,000*
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
The business buys stationery and otheroffice supplies, agreeing to pay $500
to the office-supply store within 30 days.
*Common stock
Balance + 50,000 = + 50,000*
(3) Supplies + 500 = + 500 50,500 = 500 + 50,000
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel earns service revenueof $5,500 and collects this amount in cash.
*Common stock
Balance + 50,500 = 500 + 50,000*
(4) Cash + 5,500 = + 5,500 56,000 = 500 + 55,500
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel performs services forcustomers on account for $3,000.
Balance + 56,000 = 500 + 55,500
(5) Receivable + 3,000 = + 3,000 59,000 = 500 + 58,500
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel pays $2,700 for the followingcash expenses: office rent $1,100,
employee salary $1,200, and utilities $400.
Balance + 59,000 = 500 + 58,500
(6) Cash – 2,700 = – 2,700 56,300 = 500 + 55,800
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel pays $400 to the store fromwhich it purchased $500 worth of office
supplies in Transaction 3.
Balance + 56,300 = 500 + 55,800
(7) Cash – 400 = – 400 55,900 = 100 + 55,800
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
The owners remodel their home at a cost of $30,000, paying cash from personal funds.
This event is a transaction of thepersonal entity, not the business entity.
No transaction is recorded for Air & Sea Travel.
Accounting for Business Transactions
The business collects $1,000from a customer on account.
Balance + 55,900 = 100 + 55,800
(9) Cash + 1,000 Receivable – 1,000
55,900 = 100 + 55,800
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.
Balance + 55,900 = 100 + 55,800
(10) Cash + 22,000 Land – 22,000
55,900 = 100 + 55,800
Stockholders’ Assets = Liabilities + Equity
Accounting for Business Transactions
The corporation declares a dividend and pays $2,100 cash to the stockholders.
Balance + 55,900 = 100 + 55,800
(11) Cash – 2,100 = – 2,100 + 53,800 = 100 + 53,700
Stockholders’ Assets = Liabilities + Equity
Income Statement
Revenue:Service revenue $8,500
Expenses:Salary expense $1,200Rent expense 1,100Utilities expense 400Total expenses 2,700
Net income $5,800
Month Ended April 30, 20x3
Statement of Retained Earnings
Retained earnings, April 1, 20x3 $ 0Add: Net income for the month 5,800
$5,800Less: Dividends (2,100)Retained earnings, April 30, 20x3 $3,700
Month Ended April 30, 20x3
Balance Sheet
April 30, 20x3
AssetsCash $ 33,300Accounts receivable 2,000Office supplies 500Land 18,000
Total assets $ 53,800
LiabilitiesAccounts Payable $ 100
Stockholders’ EquityCommon stock $50,000Retained earnings 3,700Total stockholders’ equity $53,700Total liabilities and stockholders’ equity $53,800
Statement of Cash Flows
Cash flows from operating activities: Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees ($2,700 + $400) (3,100)Net cash inflow from from 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)
Month Ended April 30, 20x3
Statement of Cash Flows
Cash flows from operating activities: $ 3,400Cash flows from investing activities: (18,000)Cash flows from financing activities: Issuance (sale) of stock $50,000 Payment of dividends (2,100) Net cash inflows from financing activities $47,900Net increase (decrease) in cash $33,300Cash balance, April 1, 20x3 0Cash balance, April 30, 20x3 $33,300
Month Ended April 30, 20x3
Understand how
accounting works.
Double-Entry Accounting
Double-entry bookkeeping means to recordthe dual effects of each business transaction.
The T-Account
Account Title
Debit
LEFT SIDE RIGHT SIDE
Credit
Increase-Decrease-Decrease-Increase
AccountingEquation: Assets = Liabilities +
Stockholders’Equity
Rules ofDebit andCredit: Debit
+Debit
–Debit
–Credit
–Credit
+Credit
+
Normal Balances of the Accounts
Assets DebitLiabilities CreditStockholders’ Equity – overall Credit
Common stock CreditRetained earnings CreditDividends DebitRevenues CreditExpenses Debit
Rules of Debit and Credit
Air & Sea received $50,000 and issued stock.
Assets = Liabilities +Stockholders’
Equity
Debitfor
Increase,50,000
Creditfor
Increase,50,000
Cash Common Stock
Rules of Debit and Credit
Air & Sea purchased land for $40,000 cash.
Common Stock
Bal. 50,000
CashCredit
forDecrease,
40,000
Bal. 50,000
LandDebit
forIncrease,
40,000
Assets = Liabilities +Stockholders’
Equity
Record business
transactions.
Recording Transactionsin the Journal
Date Accounts and Explanation Debit CreditJournal Page 1
April 2 Cash 50,000Common Stock 50,000
Issued common stock
Posting from Journal to Ledger
The ledger is a grouping of all theaccounts; it shows their balances.
Data must be copied to the ledger –a process called posting.
The journal is a chronological recordof all transactions listed by date.
LedgerLedger
All individualaccountscombinedmake up
the ledger.
Individual stockholders’ equity accounts
CommonStock
CommonStock
CashCash Individual asset accounts
AccountsPayable
AccountsPayable
Individual liability accounts
Posting from Journal to Ledger
Posting from Journal to Ledger
Accounts and Explanation Debit CreditCash 50,000 Common Stock 50,000Issued common stock
Posting to the Ledger
Cash Common Stock50,000
Journal Entry
50,000
Accounts After Posting
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
Accounts Receivable (5) 3,000 (9) 1,000Bal. 2,000
Office Supplies (3) 500Bal. 500
Land (2) 40,000 (10) 22,000Bal. 18,000
ASSETS Accounts Payable
(7) 400 (3) 500Bal. 100
LIABILITIES=
Accounts After Posting
Common Stock (1) 50,000
Bal. 50,000
STOCKHOLDERS’ EQUITY Dividends
(11) 2,100Bal. 2,100
+
Service Revenue (4) 5,500
(5) 3,000 Bal. 8,500
REVENUE Rent Expense
(6) 1,100Bal. 1,100
Salary Expense (6) 1,200Bal. 1,200
Utilities Expense (6) 400Bal. 400
EXPENSES
Use a trial balance.
Trial Balance
A trial balance lists all accounts withtheir balances – assets first, followed byliabilities, and then stockholders’ equity.
DEBITS CREDITS
Chart of Accounts
It is a listing of all accounts andaccount numbers used by a business.
Air & Sea TravelChart of Accounts
Assets Liabilities Stockholders’ Equity101 Cash 201 Accounts Payable 301 Common Stock111 Accounts Receivable 231 Notes Payable 311 Dividends141 Office Supplies 312 Retained Earnings151 Office Furniture191 Land
BALANCE SHEET ACCOUNTS:
INCOME STATEMENT ACCOUNTS(PART OF STOCKHOLDERS’ EQUITY):
Revenues Expenses401 Service Revenue 501 Rent Expense
502 Salary Expense503 Utilities Expense
Account in Four-Column Format
BalanceDate Item Debit Credit Debit Credit
20x1April 2 50,000 50,000
3 40,000 10,000
Account: Cash Account No. 101