Ch03

Chapter 3-1

Chapter 3-2

The AccountingThe Accounting

Information SystemInformation System

Accounting, Third Edition

Chapter 3-3

1. Analyze the effect of business transactions on the basic accounting equation.

2. Explain what an account is and how it helps in the recording process.

3. Define debits and credits and explain how they are used to record business transactions.

4. Identify the basic steps in the recording process.

5. Explain what a journal is and how it helps in the recording process.

6. Explain what a ledger is and how it helps in the recording process.

7. Explain what posting is and how it helps in the recording process.

8. Explain the purposes of a trial balance.

9. Classify cash activities as operating, investing, or financing.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 3-4

Debits and Debits and creditscredits

Debit and Debit and credit credit proceduresprocedures

Stockholders’ Stockholders’ equity equity relationshipsrelationships

Summary of Summary of debit/credit debit/credit rulesrules

Accounting Accounting TransactionsTransactionsAccounting Accounting

TransactionsTransactions The AccountThe AccountThe AccountThe AccountSteps in the Steps in the Recording Recording ProcessProcess

Steps in the Steps in the Recording Recording ProcessProcess

The Recording The Recording Process Process

IllustratedIllustrated

The Recording The Recording Process Process

IllustratedIllustrated

The Trial The Trial BalanceBalanceThe Trial The Trial BalanceBalance

Analyzing Analyzing transactionstransactions

Summary of Summary of transactionstransactions

The journalThe journal

The ledgerThe ledger

Chart of Chart of accountsaccounts

PostingPosting

Summary Summary illustration of illustration of journalizing and journalizing and postingposting

Limitations of Limitations of a trial balancea trial balance

The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

Chapter 3-5

The Accounting Information SystemThe Accounting Information SystemThe Accounting Information SystemThe Accounting Information System

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

Chapter 3-6

Transactions are economic events that require recording in the financial statements.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on the accounting equation.

Accounting TransactionsAccounting TransactionsAccounting TransactionsAccounting Transactions

Chapter 3-7

Question:Question: Are the following events recorded in the accounting records?

Event

Purchased a

computer.

Criterion

Is the financial position (assets, liabilities, or stockholders’ equity) of the company

changed?

Pay rent.

Record/ Don’t Record


Discuss product

design with potential customer.

Chapter 3-8

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholdeStockholders’ Equityrs’ Equity

StockholdeStockholders’ Equityrs’ Equity

= +

Transaction Analysis

The process of identifying the specific effects of economic events on the accounting equation.

SO 1 SO 1 Analyze the effect of business transactions on the basic accounting equation.

Basic Accounting Equation


Chapter 3-9

Transaction Analysis



Illustration 3-2 Expanded accounting equation

Chapter 3-10

Illustration:Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock.


1.+10,000 +10,000


Chapter 3-11

2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable.


1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-12

3. On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co.


3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-13

4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client.


4.+1,200 +1,200

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-14

5. On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed.


4.+1,200 +1,200

5.+10,000 +10,000

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-15

6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900.


4.+1,200 +1,200

5.+10,000 +10,000

6. -900 -900

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-16

7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30.


4.+1,200 +1,200

5.+10,000 +10,000

6. -900 -900

7. -600 +600

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-17

8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500.


4.+1,200 +1,200

5.+10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-18

10. On October 20, Sierra paid a $500 dividend.


4.+1,200 +1,200

5.+10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000


Chapter 3-19

11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26.


4.+1,200 +1,200

5.+10,000 +10,000

6. -900 -900

7. -600 +600

8. +2,500 +2,500

10. -500 -500

11.-4,000 -4,000

3. -5,000 +5,000

1.+10,000 +10,000

2.+5,000 +5,000

Chapter 3-20

Chapter 3-21

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccounAccountt

An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

SO 2 Explain what an account is and how it helps in the recording process.SO 2 Explain what an account is and how it helps in the recording process.

The AccountThe AccountThe AccountThe Account

Chapter 3-22

Double-entry Double-entry accounting system

Each transaction must affect two or more accounts to keep the basic accounting equation in balance.

Recording done by debiting at least one account and crediting another.

DEBITS must equalmust equal CREDITS.

SO 3 Define debits and credits and explain their use in recording business SO 3 Define debits and credits and explain their use in recording business transactions.transactions.

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

Chapter 3-23

Account Name


If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1



Chapter 3-24

Account Name


If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3



Chapter 3-25

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.

Dr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and Liabilities

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities




Chapter 3-26

Owner’s investments and revenues increase stockholder’s equity (credit).

Dividends and expenses decrease stockholder’s equity (debit).

Dr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ Equity

Chapter 3-25



Common StockCommon Stock

Chapter 3-23

DividendsDividends



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-25



Retained EarningsRetained Earnings


Chapter 3-27

The purpose of earning revenues is to benefit the stockholders.

The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity.

Expenses have the opposite effect: expenses decrease stockholders’ equity.

Chapter 3-27



ExpenseExpense

Chapter 3-26



RevenueRevenue


Dr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and Expense

Chapter 3-28

Chapter 3-23

AssetsAssets



Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



StockholdersStockholders’’ EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary


Chapter 3-29

Balance Sheet Balance Sheet Income StatementIncome Statement

= + =-Asset Liability

Equity Revenue

Expense

Debit

Credit



Chapter 3-30

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review QuestionReview Question



Chapter 3-31

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.




Chapter 3-32

Chapter 3-33

Stockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity RelationshipsStockholders’ Equity Relationships

Illustration 3-15


Chapter 3-34

Summary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit RulesSummary of Debit/Credit Rules

Relationship among the assets, liabilities and Relationship among the assets, liabilities and stockholders’ equity of a business: stockholders’ equity of a business:

The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..

Illustration 3-16

Assets Liabilities= Stockholders’ EquityBasic Equation

Expanded Basic Equation

+


Chapter 3-35

Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.

Steps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording ProcessSteps in the Recording Process

SO 4 Identify the basic steps in the recording process.SO 4 Identify the basic steps in the recording process.

Illustration 3-17

Analyze each transaction

Enter transaction in a journal

Transfer journal information to ledger

accounts

Chapter 3-36

Book of original entry.

Transactions recorded in chronological order.

Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

The JournalThe JournalThe JournalThe Journal

SO 5 Explain what a journal is and how it helps in the recording SO 5 Explain what a journal is and how it helps in the recording process.process.

Chapter 3-37

Journalizing - Entering transaction data in the journal.Illustration: Presented below is information related to Sierra Corporation.


Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

Sierra borrowed $5,000 by signing a note.1

Sierra purchased office equipment for $5,000.2

Instructions - Journalize these transactions.

The JournalThe JournalThe JournalThe Journal

Chapter 3-38

Account Title Ref. Debit Credit

Oct. 1

Date

JournalizingJournalizingJournalizingJournalizing

General Journal


Sierra issued common stock in exchange for $10,000 cash.

Oct. 1

CashCommon stock

10,00010,000

Chapter 3-39


Oct. 1

Date


General Journal


Sierra borrowed $5,000 by signing a note.

Oct. 1

CashNotes payable

5,0005,000

Chapter 3-40


Oct. 2

Date


General Journal


Sierra purchased office equipment for $5,000.

Oct. 2

Office equipmentCash

5,0005,000

Chapter 3-41

Chapter 3-42

Ledger contains the entire group of accounts maintained by a company.

The LedgerThe LedgerThe LedgerThe Ledger

SO 6 Explain what a ledger is and how it helps in the recording SO 6 Explain what a ledger is and how it helps in the recording process.process.

Illustration 3-19

Chapter 3-43

Accounts arranged in sequence in which they are presented in the financial statements.

Chart of AccountsChart of AccountsChart of AccountsChart of Accounts

SO 6 Explain what a ledger is and how it helps in the recording SO 6 Explain what a ledger is and how it helps in the recording process.process.

Chapter 3-44

Posting Posting – the process of transferring amounts from the journal to the ledger accounts.

Cash Acct. No. 101

Date Explanation Ref. Debit Credit Balance

General Ledger

Date Account Title Ref. Debit Credit

Oct. 1 Cash 10,000

Common stock 10,000

General Journal

Oct. 1 Owner investment

J1 10,000 10,000

101

J1

PostingPostingPostingPosting

SO 7 Explain what posting is and how it helps in the recording SO 7 Explain what posting is and how it helps in the recording process.process.

Chapter 3-45

Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.


PostingPostingPostingPosting


Chapter 3-46

The Recording Process IllustratedThe Recording Process IllustratedThe Recording Process IllustratedThe Recording Process Illustrated


Follow these steps:

1. Determine what type of account is involved.

2. Determine what items increased or decreased and by how much.

3. Translate the increases and decreases into debits and credits.

Illustration 3-21

Chapter 3-47



Follow these steps:




Illustration 3-22

Chapter 3-48



Follow these steps:




Illustration 3-23

Chapter 3-49 SO 7 Explain what posting is and how it helps in the recording SO 7 Explain what posting is and how it helps in the recording

process.process.

Illustration 3-24

Additional Transactions

The The Recording Recording Process Process IllustratedIllustrated



process.process.

Illustration 3-25





process.process.

Illustration 3-26





process.process.

Illustration 3-27




,


process.process.

Illustration 3-28





process.process.


Additional Transactions Illustration 3-29


process.process.

Illustration 3-30





process.process.

Illustration 3-31




Chapter 3-57

Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing


Illustration 3-32

Chapter 3-58

Summary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of JournalizingSummary Illustration of Journalizing


Illustration 3-32

Chapter 3-59

Summary Summary Illustration Illustration of Postingof Posting

Summary Summary Illustration Illustration of Postingof Posting

Illustration 3-33

Chapter 3-60

A list of accounts and their balances at a given time.

Purpose is to prove that debits equal credits.

The Trial BalanceThe Trial BalanceThe Trial BalanceThe Trial Balance

Illustration 3-34

Chapter 3-61

The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a transaction.


SO 8 Explain the purposes of a trial balance.SO 8 Explain the purposes of a trial balance.

Limitations of a Trial Balance

Chapter 3-62

A trial balance will not balance if:

a. a correct journal entry is posted twice.

b. the purchase of supplies on account is debited to Supplies and credited to Cash.

c. a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100.

d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45.



SO 8 Explain the purposes of a trial balance.SO 8 Explain the purposes of a trial balance.

Chapter 3-63

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Ch03

Business

Transcript of Ch03