Chapter 2 Accounting Lecture Outline

*The Accounting Cycle---During the Period* **PART A: Measuring Business Activities** **Business Transactions---Economic Events** Internal transactions External transactions **Accounting Transactions**: Examples: Some "events" are related to the business but have not yet given rise to a transa...

*The Accounting Cycle---During the Period* **PART A: Measuring Business Activities** **Business Transactions---Economic Events** Internal transactions External transactions **Accounting Transactions**: Examples: Some "events" are related to the business but have not yet given rise to a transaction and are not subject to recording. These situations involve future promises but neither assets nor liabilities have been established in their regard. Therefore, **they are not recorded** in the business' financial records. **Source Documents** **Accounts** An **account** is a standardized format used to accumulate the dollar effects of transactions on a specific financial statement item. (Examples, cash, accounts receivable (A/R), salaries payable, retained earnings). A **Chart of Accounts** (COA) is a listing of the accounts a company uses to record the transactions of its business operations. (See Table of Contents for information on the Chart of Accounts the textbook uses) **EFFECTS OF EXTERNAL TRANSACTIONS** 1. Duality of Effects---at least two accounts are affected 2. A = L + SE must always remain in balance **Measuring External Transactions** Step 1. Use source documents to identify accounts affected by external transactions Step 2. **Accounts and effects** a\. Identify the accounts (at least 2) affected and determine if they are A, L, SE, R or E b\. Determine the direction of the effect (increase or decrease) for each account c\. Make sure the accounting equation remains balanced (A = L + SE) **\ Practice:** *Using "transaction analysis" complete the following* a. Asset Liabilities Stockholders' Equity ---- ------- ------------- ---------------------- a. b\. Paid a cash dividend of \$1,600 to stockholders. Asset Liabilities Stockholders' Equity ---- ------- ------------- ---------------------- b. c\. The company issues \$1,000 of common stock. Asset Liabilities Stockholders' Equity ---- ------- ------------- ---------------------- c. **Revenues increase net income**, and net income increases retained earnings causing stockholders' equity to increase. (R+ SE+). Keep in mind; REVENUES are income statement accounts NOT Stockholders' Equity accounts. **Expenses decrease net income**, which cause retained earnings and stockholders' equity to decrease. (E+ SE-). EXPENSES are income statement accounts, NOT stockholders' equity accounts. d. Asset Liabilities Stockholders' Equity Revenues Expenses Net income ---- ------- ------------- ---------------------- ------------------- ---------- ------------ -- d. Common Stock Retained Earnings e. Asset Liabilities Stockholders' Equity Revenues Expenses Net income ---- ------- ------------- ---------------------- ------------------- ---------- ------------ -- e. Common Stock Retained Earnings **PART B: DEBITS AND CREDITS** +--------+--------+--------+--------+--------+--------+--------+--------+ | Assets | = | Liabil | \+ | Stockh | | | | | | | ities | | olders | | | | | | | | | ' | | | | | | | | | Equity | | | | +--------+--------+--------+--------+--------+--------+--------+--------+ | \+ | -Decre | | -Decre | \+ | | -Decre | \+ | | | ase | | ase | | | ase | | | Increa | | | | Increa | | | Increa | | se | Credit | | Debit | se | | Debit | se | | | | | | | | | | | Debit | | | | Credit | | | Credit | | | | | | | | | | | Beg. | | | | Beg. | | | Beg. | | Bal | | | | Bal | | | Bal | | | | | | | | | | | End. | | | | End. | | | End. | | Bal | | | | Bal | | | Bal | +--------+--------+--------+--------+--------+--------+--------+--------+ +-------------+-------------+-------------+-------------+-------------+ | Common | \+ | Retained | | | | Stock | | Earnings | | | +-------------+-------------+-------------+-------------+-------------+ | -Decrease | \+ | | -Decrease | \+ | | | | | | | | Debit | Increase | | Debit | Increase | | | | | | | | | Credit | | | Credit | | | | | | | | | Beg. Bal | | | Beg. Bal | | | | | | | | | End. Bal | | | End. Bal | +-------------+-------------+-------------+-------------+-------------+ **The following accounts flow through Retained Earnings in the Expanded Accounting Equation:** +--------+--------+--------+--------+--------+--------+--------+--------+ | Expens | | Divide | | Revenu | | | | | es | | nds | | e | | | | +--------+--------+--------+--------+--------+--------+--------+--------+ | \+ | \- | | \+ | \- | | \- | \+ | | | | | | | | | | | Increa | Decrea | | Increa | Decrea | | Decrea | Increa | | se | se | | se | se | | se | se | | | | | | | | | | | Debit | Credit | | Debit | Credit | | Debit | Credit | +--------+--------+--------+--------+--------+--------+--------+--------+ **Debit** means the **left** side of an account. **Credit** means the **right** side of an account. **T- account equation:** Beginning balance + additions = ending balance + subtractions OR Beginning balance + additions -- subtractions = ending balance OR Beginning balance + additions = total -- subtractions = ending balance OR Ending balance + subtractions = total -- additions = beginning balance RECORDING TRANSACTIONS **The Journal Entry** In a journal entry, **debited** accounts and amounts should be **listed first** followed by credits. **Credited** accounts and amounts **are indented** below the debit portion(s) of the journal entry. The following are the journal entries from transaction **a** and **b** from page 2-2. ----- ------------------- ------- ------- (a) Building (A+) 5,000 Note Payable (L+) 5,000 (b) Dividend (D+SE-) 1,600 Cash (A-) 1,600 ----- ------------------- ------- ------- POSTING All amounts recorded in the journal entry are then posted to the ledger account. The T-account is a representation of an account in the ledger. **Practice:** *The following activities occurred during The Company's **first month**.* a. Received \$60,000 cash from investors for 5,000 shares of common stock. b. Purchased equipment for use in the business at a cost of \$12,000; \$3,000 was paid in cash and the company signed a note for the balance (due in six months). c. Received a \$350 phone bill for usage for the month, it will be paid next month. d. Provided \$6,000 of services to customer Z, customer Z will pay within 30 days. e. Bought \$200 of office supplies on credit. f. Customer Z paid the amount owed from transaction d. g. Rent (\$1,000) and wages (\$2,300) were incurred and paid to Joe at the end of the month. h. Collected \$1,000 from Customer X for services to be rendered later. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- a. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- b. ------------------------------------------------------------------- *\ Asset Liabilities SE (CS+RE) Revenue Expense NI * ---- ------- ------------- ------------ -- --------- --------- ---- c. ------------------------------------------------------------------- Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- d. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- e. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- f. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- g. Asset Liabilities SE (CS+RE) Revenue Expense NI ---- ------- ------------- ------------ -- --------- --------- ---- h. **\ Record the transaction:** Journal Entries (a) ----- -- -- -- (b) (c) (d) (e) (f) (g) (h) **Assets** **Cash** **A/R** **Supplies** **Equipment** ---------- -- --------- -- -------------- -- --------------- -- -- -- -- **Liabilities** **A/P** **N/P** **Deferred Revenue** --------- -- --------- -- ---------------------- -- -- -- **Stockholders' Equity** **Common Stock** **Retained Earnings** ------------------ -- ----------------------- -- -- **Revenue Expenses** **Service Revenue** **Phone** **Rent** **Wages** --------------------- -- ----------- -- ---------- -- ----------- -- -- -- -- **\ Determine the following at the end of the month.** +-----------------------+-----------------------+-----------------------+ | **The Company** | | | | | | | | **Income Statement** | | | | | | | | **For the month | | | | ended** | | | +=======================+=======================+=======================+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ +-----------------+-----------------+-----------------+-----------------+ | The Company | | | | | | | | | | Statement of | | | | | Stockholders' | | | | | Equity | | | | | | | | | | For the month | | | | | ended | | | | +=================+=================+=================+=================+ | | **Common | **Retained | **Total | | | Stock** | Earnings** | Stockholders' | | | | | Equity** | +-----------------+-----------------+-----------------+-----------------+ | Beginning | \$ | \$ | \$ | | balance | | | | +-----------------+-----------------+-----------------+-----------------+ | +issuance of | | | | | common stock | | | | +-----------------+-----------------+-----------------+-----------------+ | \+ net income | | | | | (net loss) | | | | +-----------------+-----------------+-----------------+-----------------+ | \- dividends | | | | +-----------------+-----------------+-----------------+-----------------+ | Ending Balance | \$ | \$ | \$ | +-----------------+-----------------+-----------------+-----------------+ +-----------------+-----------------+-----------------+-----------------+ | The Company | | | | | | | | | | Balance Sheet | | | | | | | | | | At the end of | | | | | the month | | | | +=================+=================+=================+=================+ | **Assets** | | **Liabilities** | | +-----------------+-----------------+-----------------+-----------------+ | | \$ | | \$ | +-----------------+-----------------+-----------------+-----------------+ | | | | | +-----------------+-----------------+-----------------+-----------------+ | | | | | +-----------------+-----------------+-----------------+-----------------+ | | | Total | \$ | | | | liabilities | | +-----------------+-----------------+-----------------+-----------------+ | | | **Stockholders\ | | | | | ' | | | | | Equity** | | +-----------------+-----------------+-----------------+-----------------+ | | | | \$ | +-----------------+-----------------+-----------------+-----------------+ | | | | | +-----------------+-----------------+-----------------+-----------------+ | | | Total | | | | | stockholders' | | | | | equity | | +-----------------+-----------------+-----------------+-----------------+ | Total assets | \$ | Total | \$ | | | | liabilities and | | | | | stockholders\' | | | | | equity | | +-----------------+-----------------+-----------------+-----------------+ **TRIAL BALANCE** -Listing of all accounts...Normally listed by financial statement category: assets, liabilities, stockholders' equity (including dividends), revenue and expense accounts. -IMPORTANT: The sum of all debits has to equal the sum of all credits. **Seneca Company** **Trial Balance** **December 31, 20XX** -------------------------- --------- --------- Debit Credit Cash 1,800 Accounts receivable 9,000 Supplies 540 Prepaid insurance 5,000 Machinery 190,000 Accumulated depreciation 18,000 Accounts payable 1,500 Note payable 100,000 Common stock 22,900 Retained earnings 40,040 Dividends 500 Revenues 89,000 Cost of sales 35,000 Utilities expense 3,500 Wage expense 19,900 Income tax expense 6,200 Totals 271,440 271,440 -------------------------- --------- --------- The retained earnings amount shown above is special, it is the ONLY account that is showing the BEGINNING balance in the account. The ending balance is calculated by preparing the Statement of Stockholders' Equity. The other account balances shown are the ending balances of the account before adjustment.