The Mechanics of Accounting The Mechanics of Accounting.

The Mechanics ofAccountingThe Mechanics ofAccounting

What Are the Different Exchange Transactions?

Distribute earnings to owners.

Buy and sell goods or services.

Borrow and invest money.

Pay wages to employees.

Purchase land, buildings, and equipment.

Pay taxes to the government.

ExchangeTransactions

Business Documents

Examples: Sales invoice, purchase order, check stub.

Business documents are used to confirm that an arm’s-length transaction

has occurred. to establish the amounts

to be recorded. to facilitate the analysis

of business events. These documents must be

analyzed.

What is the Sequence of the Accounting Cycle?

Step 1Record the effects of the transactions.Record the effects of the transactions.Step 2Summarize the effects of transactions.1. Posting journal entries.

2. Preparing a trial balance.

Summarize the effects of transactions.1. Posting journal entries.

2. Preparing a trial balance.

Step 3Prepare reports.1. Adjusting entries.2. Preparing financial statements.3. Closing the books.

Prepare reports.1. Adjusting entries.2. Preparing financial statements.3. Closing the books.

Step 4

Analyze transactions.Analyze transactions.

Step 1: Analyze Transactions

What accounts are involved?

Did each account increase or decrease?

By how much?

Transaction analysis framework

Transaction analysis: breaks down complex

transactions into manageable pieces.

provides a self-checking mechanism.

What Is the Accounting Equation?

Assets = Liabilities + Owners’ Equity

Resources Creditors’claimsagainst

resources

= + Owners’claimsagainst

resources

A = L + OE

Describe Effect of the Following Transactions on a Company.

Borrow money

Invest in company

Pay off a note

Purchase equipment

Borrow funds to settle a debt

What Is the Rule of Double-Entry Accounting?

The debits must always equal the credits.

Debits = Credits

Accounts provide an efficient method to categorize transactions.

A T-account is a simplified depiction of an account.

Using Accounts

Name of Account

Debit Credit

The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?

Using a T-Account

35 12

Cash

23

Debits and Credits

Debits are simply

entries on the left.

Credits are simply entries on the right.

Remember:

DR CR DR CR DR CR (+) (-) (-) (+) (-) (+)

Debits and Credits

Assets = Liabilities + Owners’ Equity

Asset accounts: Debit is an increase. Credit is a decrease.

Liabilities and owners’ equity accounts:

Debit is a decrease.Credit is an increase.

Revenues

Increases in a company’s resources from the sale of goods or the performance of services.

Expenses

Decreases in a company’s resources incurred in the normal course of business to generate revenues.

Dividends

Distributions to owners, which reduce Owners’ Equity.

Expanding the Equation

Expanded Accounting Equation

Assets

DR CR+ –

=Liabilities

DR CR– +

+Owners’ Equity

DR CR– +

Capital Stock

DR CR– +

Retained Earnings

DR CR– +

Expenses

DR CR+ –

Dividends

DR CR+ –

Revenues

DR CR– +

Step 2: Record Transactions Record the results of the transactions in

a journal. Journalizing provides a chronological

record of all business activities.

Journal -- book of original entry

What is another name for the journal?

Step 2: Record Transactions

Record the results of the transactions in a journal.

Journalizing provides a chronological record of all business activities.

General Journal Entry Format:

Date Debit Entry . . . . . . . . . . . . . . . xx

Credit Entry . . . . . . . . . . . . xx

Explanation.

Journal Entries

What is the three-step process?

1 Identify which accounts are involved.

2 For each account, determine if it is increased or decreased.

3 For each account, determine by how much it will change.

Supplies purchased for $25 are purchased “on account.”

Prepare the correct journal entry. What do we mean by purchased “on account”?

Example 1: Journal Entry

Jan. 1 Supplies . . . . . . . . . . . . . . . . . . 25

Accounts Payable . . . . . . . . 25

Purchased supplies on account.

We purchase on credit and use accounts payable.

Example 2: Journal Entry

Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100

Revenue . . . . . . . . . . . . . . . . 100

Received cash for services.

A check for $100 is received in payment for services rendered.

Make the correct journal entry.

Example 3: Journal Entry

Mar. 1 Accounts Receivable. . . . . . . . 75

Sales Revenue . . . . . . . . . . . 75

Sold merchandise on account.

Merchandise is sold to a customer on account for $75. The cost of the product was $60.

Make the journal entries.

Mar. 1 Cost of Goods Sold . . . . . . . . . 60

Inventory. . . . . . . . . . . . . . . . 60

To record cost and reduce inventory.

DateDate TransactionTransaction Ref.Ref. DebitsDebits CreditsCredits

Jan. 1 Supplies 25

Accounts Payable 25 Purchased supplies on account.

Feb. 1 Cash 101 100

Revenue 100 Received cash for services.

Mar. 1 Accounts Receivable 75

Sales Revenue 75 Sold merchandise on account.

Journal 1 Page 1

Entered when posted to ledger.

Step 3: Posting Journal Entries and Preparing a Trial Balance

Define the Following TermsPosting

transferring amounts from the journal to the ledger.

Ledger

a book of accounts where journal transactions are posted and thereby summarized.

Posting reference

a cross-reference number between the general journal and the accounts in the general ledger.

Chart of accounts

a systematic listing of all accounts used by a company.

General Ledger

Date Explanation Ref. Debits Credits Balance

Jan. 1 Balance 100

2 Issued 100 shares of capitalstock at $10 per share GJ1 1,000 1,100

3 Purchased equipment GJ1 300 800

4 Sold inventory GJ1 60 860

5 Monthly payment on loan GJ1 230 630

6 Revenue GJ1 2,500 3,130

ACCOUNT: Cash Account No. 101

ASSETS (100-199):Current Assets (100-150):101 Cash105 Accounts Receivable107 Inventory

Long-Term Assets (151-199):151 Land152 Buildings

LIABILITIES (200-299):Current Liabilities (200-219):201 Notes Payable202 Accounts Payable

Long-Term Liabilities (220-239):222 Mortgage Payable

OWNERS’ EQUITY (300-399):301 Capital Stock330 Retained Earnings

SALES (400-499):400 Sales Revenue

EXPENSES (500-599):500 Cost of Goods Sold501 Sales Salaries and

Commissions523 Rent Expense528 Advertising Expense573 Utilities Expense579 Accounting and Legal

Fees

Chart of Accounts

Determining Account Balances

Name of Account

Debit Credit

Accounts with typical debit

balances are?

Accounts with typical credit balances are?

ExpensesAssets

Dividends

Owners’ EquityRevenues or

IncomeLiabilities

An account’s

balance is usually

on the side that

increases the

account. It is

referred to as the

“Normal Balance.”

Do you see the mnemonic memory device, DEAD COIL?

A listing of all account balances; provides a means to assure that debits equal credits.

Define The Trial Balance

From the data in the trial balance, the balance sheet and income statement can be prepared.

What is the Trial Balance used for?

The Example Company Trial Balance December 31, 2003

Debits Credits Cash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses 15 ______

Total $ 1,123 $ 1,123

Sample Trial Balance

The trial balance shows that debits equal credits.