Chapter 2 ppt Price Haddock

8/11/2019 Chapter 2 ppt Price Haddock

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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

AccountingCycle:

During thePeriod

Chapter 2


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Learning Objectives

Identify the basic steps in measuring externaltransactions

Analyze the impact of external transactions on the

accounting equation Assess whether the impact of externaltransactions results in a debit or credit to anaccount balance

Record transactions using debits and credits Post transactions to T-accounts in the general

ledger

Prepare a trial balance

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Functions of Financial Accounting

Measure business activities of the company

Communicate measurements to external partiesfor decision making

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Part A

Measuring Business Activities

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Learning Objective 1

Identify the Basic Steps in Measuring ExternalTransactions.

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External Transactions

Transactions conducted with a separate economicentity

Internal transaction: events that affect the

financial position of the company but do notinclude an exchange with a separate economicentity

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7/43Copyright 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 toa particular item over a period of time.

Asset accounts: Cash, Supplies, and Equipment

Liability accounts: Accounts Payable, SalariesPayable, Utilities Payable, and Taxes Payable

Stockholders equity accounts: Common Stockand Retained Earnings

Chart of accounts: A list of all account namesused to record transactions

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Measuring External Transactions

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Analyze the impact of external transactions on theaccounting equation.

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Effects on the Basic AccountingEquation

Each transaction will have a dual effect

An increase on one side will increase the otherside

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Understanding Effects ofTransaction

Ask these questions:

What is one account affected by the transaction?

Does it increase or decrease?

What is a second account affected by thetransaction?

Does it increase or decrease?

Do assets still equal liabilities plus stockholdersequity?

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Transactions of Eagle Golf Academy

Date External Transactions in January(1) Dec. 1 Sell shares of common stock for $25,000 to obtain thefunds necessary to start the business

(2) Dec. 1 Borrow $10,000 from the local bank and sign a notepromising to repay the full amount of the debt in threeyears

(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 begiven 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 1Issue CommonStock

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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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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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 2Borrow from theBank

Eagle borrows $10,000 from the bank and signs a note for it

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Transaction 3PurchaseEquipment

Purchase equipment with cash, $24,000

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Transaction 4Incur Costs for Rent

Pay one year of rent in advance, $6,000

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Transaction 5Incur Costs forSupplies

Purchase of supplies on account, $2,300

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The Expanded Accounting Equation

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Transaction 6Provide Services forCash

Provide service to customers for cash, $4,300

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Transaction 7Provide Services onAccount

Provide service to customers on account, $2,000

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Transaction 8Receive Cash inAdvance of Providing Services

Receive cash in advance from customers, $600

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Transaction 9Incur Cost forSalaries

Pay salaries to workers, $2,800

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Transaction 10Pay Dividends

Pay dividends to stockholders, $200

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Part B

Debits and Credits

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Assess Whether the Impact of External TransactionsResults in a Debit or Credit to an Account Balance.

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Effects on Account Balances

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Debit and Credit Effects on Accounts inthe Expanded Accounting Equation

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Debit and Credit Effects on EachAccount Type

A simple memory aid

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Recording Transactions

Journal: provides a chronological record of alltransactions

Journal entry: format used for recording

transactions Debits in a transaction must equal its credits

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Recording TransactionsExample

On December 1, Eagle Golf Academy sells sharesof common stock to investors for cash of $25,000.

Cash debited for $25,000

Common Stock credited for $25,000

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Post transactions to T-accounts in the generalledger.

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Posting

Posting: process of transferring the debit andcredit information from the journal to individualaccounts in the general ledger

General ledger: includes all accounts used torecord the companys transactions

Useful to calculate the account balances

T-account: a simplified form of a general ledgeraccount

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PostingExample

On December 1, Eagle Golf Academy sells sharesof 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 theCommon Stock account

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Summary of External TransactionsRecorded for Eagle Golf Academy

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Prepare a Trial Balance.

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Trial Balance

A list of all accounts and their balances at aparticular 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 BalanceExample

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End of Chapter 2

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Chapter 2 ppt Price Haddock

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