Financial Accounting - Functions, Transactions & Equations

Functions of Financial Accounting (1) Measure business activities of the company. Record transactions (2) Communicate measurements to external parties for decision making. Prepare financial statements Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or dis...

Functions of Financial Accounting (1) Measure business activities of the company. Record transactions (2) Communicate measurements to external parties for decision making. Prepare financial statements Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-1 aw-Hill. Illustration 2-1 Six Steps in Measuring External Transactions Step 1 Use source documents to identify accounts affected by an external transaction. Step 2 Analyze the impact of the transaction on the accounting equation. Step 3 Assess whether the transaction results in a debit or credit to account balances. Step 4 Record the transaction in a journal using debits and credits. Step 5 Post the transaction to the general ledger. Step 6 Prepare a trial balance. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 2-2  Capturing Transactions in Accounts Account: Record of all transactions related to a particular item over a period of time.  Asset accounts: Examples: Cash, Supplies, and Equipment  Liability accounts: Examples: Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable  Stockholders’ equity accounts: Examples: Common Stock and Retained Earnings Chart of accounts: A list of all account names used to record transactions Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-3 aw-Hill. Key Point The six-step measurement process (Illustration 2–1) is the foundation of financial accounting. To understand this process, it is important to realize in Step 2 that we analyze the effects of business transactions on the accounting equation (Part A of this chapter). Then, in Step 3 we begin the process of translating those effects into the accounting records (Part B of this chapter). Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-4 aw-Hill. Effects of Transactions on the Basic Accounting Equation Each transaction will have a dual effect on the basic accounting equation Assets = Liabilities + (creditors’ Stockholders’ Equityclaims) (owners’ claims) Resources Claims to Resources If total assets increase, then liabilities or stockholders’ equity increases by the same amount. If total assets decrease, then liabilities or stockholders’ equity decreases by the same amount. 2-5 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. Understanding Effects of Transaction For each transaction, ask these three questions: 1. What is one account affected by the transaction? Does this account increase or decrease? 2. What is a second account affected by the transaction? Does this account increase or decrease? 3. Do assets equal liabilities plus stockholders’ equity? THEY MUST!! EVERY TIME!! Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-6 aw-Hill. Illustration 2-2 External Transactions of Eagle Soccer Academy Transaction Date Description (1) Dec. 1 Sell shares of common stock for $200,000 to obtain the funds necessary to start the business. (2) Dec. 1 Borrow $100,000 from the local bank and sign a note promising to repay the full amount of the debt in three years. (3) Dec. 1 Purchase equipment necessary for giving soccer training. $120,000 cash. (4) Dec. 1 Pay one year of rent in advance, $60,000 ($5,000 per month). (5) Dec. 6 Purchase supplies on account, $23,000. (6) Dec. 12 Provide soccer training to customers for cash, $43,000. (7) Dec. 17 Provide soccer training to customers on account, $20,000. (8) Dec. 23 Receive cash in advance for 12 soccer training sessions to be given in the future, $6,000. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 2-7 Transaction (1): Issue Common Stock (1 of Sell 3) of common stock for $200,000 to shares obtain the funds necessary to start the business. What is one account affected by the transaction?  Cash Does that account increase or decrease?  Increase by $200,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-8 aw-Hill. Transaction (1): Issue Common Stock (2 of Sell 3) of common stock for $200,000 to shares obtain the funds necessary to start the business. What is a second account affected by the transaction?  Common Stock Does that account increase or decrease?  Increase by $200,000 2-9 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. Transaction (1): Issue Common Stock (3 of Sell 3) of common stock for $200,000 to shares obtain the funds necessary to start the business. Assets = Liabilities + Stockholders’ Cash Equity Common Stock (1) +$200,000 = + $200,000 Do assets equal liabilities plus stockholders’ equity?  Yes, assets increase by $200,000 and stockholders’ equity increases by $200,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 2-10 Transaction (2): Borrow Cash from the Bank Borrow $100,000 from the local bank and sign a note promising to repay the full amount of the debt in three years. Assets = Liabilities + Stockholders’ Cash Equity Notes Payable Bal.Common Stock $200,000 $200,000 (2) +$100,000 +$100,000 Bal. $300,000 $100,000 $300,000 $200,000 = $300,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-11 aw-Hill. Key Point After each transaction, the accounting equation must always remain in balance. In other words, assets must always equal liabilities plus stockholders’ equity. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-12 aw-Hill. Transaction (3): Purchase Equipment Purchase equipment necessary for giving soccer training, $120,000 cash. Assets = Liabilities + Stockholders’ Cash Equity Equipment Notes Payable Bal.Common Stock $300,000 $100,000 $200,000 (3) –$120,000 +$120,000 Bal. $180,000 $120,000 $100,000 $200,000 $300,000 = $300,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-13 aw-Hill. Concept Check 2-1 What would be the effect on total assets if a company purchased land for $200,000 cash? a. Total assets would go up by $200,000. b. Total assets would go down by $200,000. c.There would be zero effect on total Oneassets. asset (land) would go up and another asset d. None(cash) would of the go down. There would be above zero effect on total assets. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-14 aw-Hill. Transaction (4): Pay for Rent in Advance Pay one year of rent in advance, $60,000 ($5,000 per month). Assets = Liabilities + Stockholders’ Prepai Equity Notes Cash d Equipment Payabl CommonRent Bal. $180,000 Stock e $120,000 $100,000 $200,000 (4) –$ 60,000 +$60,000 Bal. $120,000 $60,000 $120,000 $100,000 $300,000 = $300,000 $200,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-15 aw-Hill. Transaction (5): Purchase Supplies on Account Purchase supplies on account, $23,000. Assets = Liabilities Prepai Equity Accounts Notes + Stockholders’ Cash Supplies d Equipment Payable Payabl Bal. $120,000 Stock $60,000 $120,000 e Common Rent $100,000 $200,000 (5) +$23,000 +$23,000 Bal. $120,000 $23,000 $323,000$60,000 $120,000= $23,000 $100,000 $323,000 $200,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-16 aw-Hill. Illustration 2-3 Expanded Accounting Equation Basic Assets = Liabilities + Account Stockholders’ Equity ing Equatio n Common + Retained Stock Earnings Expand ed Account Revenues − Expenses − Dividends ing Equatio n Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 2-17 Key Point The expanded accounting equation demonstrates that revenues increase retained earnings while expenses and dividends decrease retained earnings. Retained earnings is a component of stockholders’ equity. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-18 aw-Hill.  Transaction (6): Provide Services for Cash Provide soccer training to customers for cash, $43,000. Assets = Liabilities + Stockholders’ Prepaid Equity Accounts Notes Commo Retaine Cash Supplies Rent Equipment Payable Payabl n d Bal. $120,000 $23,000 $60,000 $120,000 $23,000 e Stock $100,000 EarningService $200,000 s Revenue (6) +$43,000 +$43,000 $366,000 = $366,000 Bal. $163,000 $23,000 $60,000 $120,000 $23,000 $100,000 $200,000 Copyright $43,000 aw-Hill. ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-19  Transaction (7): Provide Services on Account Provide soccer training to customers on account, $20,000. Assets = Liabilities + Stockholders’ Accounts Prepai EquityAccounts Notes Common Retained CashReceivable Suppliesd Payable Equipment Payable Stock Earnings Bal. $163,000 $23,000 Rent $60,000 $120,000 $23,000 $100,000 Service $200,000 $43,000 Revenue (7) +$20,000 +$20,000 $386,000 = $386,000 Bal. $163,000 $20,000 $23,000 $60,000 $120,000 $23,000 $100,000 $200,000 $63000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-20 aw-Hill.  Transaction (8): Receive Cash in Advance from Customers Receive cash in advance for 12 soccer training sessions to be given in the future, $6,000. Assets = Liabilities Stockholders’ Accounts Equity Prepai AccountsDeferre Notes Common Retained Cash Receivable Supplies d Equipment Payable d Payable Stock Earnings Rent Bal. $163,000 $20,000 $23,000 $60,000 $120,000 $23,000 Revenu $100,000 $200,000 $63,000 e (8) +$ 6,000 $6,000 Bal. $169,000 $20,000 $23,000 $60,000 $120,000 $23,000 $6,000 $392,000 = $100,000 $200,000$392,000 $63,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-21 aw-Hill. Common Mistake Don’t let the account name fool you. Even though the term revenue appears in the account title for deferred revenue, this is NOT a revenue account. Deferred indicates that the company has yet to provide services even though it has collected the customer’s cash. The company owes the customer a service, which creates a liability. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-22 aw-Hill.  Transaction (9): Pay Salaries to Employees Pay salaries to employees, $28,000. Assets = Liabilities + Stockholders’ Accounts Prepai Equity Accounts Deferre Notes CommonRetained Cash Receivable d Supplies d Payable Equipment Payable Stock Earnings Rent Revenu Bal. $169,000 $20,000 $23,000 $60,000 $120,000 e $23,000 $6,000 $100,000 $200,000 $63,000 Salaries Expense (9) –$28,000 –$28,000 $364,00 = Bal. $141,000 $20,000 $23,000 $60,000 $120,000 $23,000 $6,000 $364,000 $100,000 $200,000 $35,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-23 aw-Hill.  Transaction (10): Pay Cash Dividends Pay cash dividends of $4,000 to stockholders. Assets = Liabilities + Stockholders’ Accounts Prepai EquityAccountsDeferre Notes Common Retained Cash Receivable Supplies d d Payable Equipment Payable Stock Earnings Rent Revenu Bal. $141,000 $20,000 $23,000 $60,000 $120,000 e $23,000 $6,000 $100,000 $200,000 $35,000 Dividends (10)–$ 4,000 –$ 4,000 $360,000 = $360,000 Bal. $137,000 $20,000 $23,000 $60,000 $120,000 $23,000 $6,000 $100,000 $200,000 $31,000 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-24 aw-Hill.  Illustration 2-4 Summary of All 10 External Transactions of Eagle Soccer Academy Liabilities Assets = + Stockholders' Equity Accounts Receivabl Supplie Prepaid Accounts Deferred Notes Common Retained Cash es s Rent Equipment Payable Revenue Payable Stock Earnings Dec. 1 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 +200,00 +200,00 (1) 0 0 +100,00 +100,000 (2) 0 - (3) 120,000 +120,000 - (4) 60,000 +60,000 +23,00 +23,000 (5) 0 Service (6) +43,000 +43,000 Revenue Service (7) +20,000 +20,000 Revenue (8) +6,000 +6,000 - -28,000 Salaries (9) 28,000 Expense - -4,000 (10) 4,000 Dividends Dec. $137,000 Copyright$20,000 $23,00. All ©2022 McGraw-Hill $60,000 $120,000 rights reserved. $23,000 No reproduction $6,000 or distribution $100,000 without $200,000 the prior written $31,000 consent of McGraw-Hill. 2-25 31 0 Concept Check 2-2 What effect does the payment of dividends have on the accounting equation? a. Assets decrease and equity increases b. Assets decrease and equity decreases Payment of dividends causes the cash account c. Assets (which decrease is an asset) andand to decrease liabilities also causes increase retained earnings (which is an equity account) to decrease. So the correct answer is the payment d.dividends of Assets decreases increase and both equity assets and equity. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-26 aw-Hill. Illustration 2-5 Debit and Credit Effects on Accounts in the Basic Accounting Equation 1. Left side—Assets increase with debits. 2. Right side—Liabilities and stockholders’ equity increase with credits. The opposite is true to decrease the balance of any of these accounts. 2-27 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. Common Mistake Some students think the term “debit” always means increase, and “credit” always means decrease. While this is true for assets, it is not true for liabilities and stockholders’ equity. Liabilities and stockholders’ equity increase with a credit and decrease with a debit. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-28 aw-Hill. Illustration 2- Debit 6 and Credit Effects on Accounts in the Expanded Accounting Equation Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-29 aw-Hill. Key Point The Retained Earnings account is a stockholders’ equity account that normally has a credit balance. The Retained Earnings account has three components—revenues, expenses, and dividends. The difference between revenues (increased by credits) and expenses (increased by debits) equals net income. Net income increases the balance of Retained Earnings. Dividends (increased by debits) decrease 2-30 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. Illustration 2-7 Debit and Credit Effects on Each Account Type A simple memory aid Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-31 aw-Hill. Concept Check 2-3 What does the word debit mean? a. Left side b. Right side c. Increase d. Decrease The word debit means left side and the word credit means right side. The effects of debits and credits on account balances are different depending on the type of account being used. Sometimes a debit increases an account balance and sometimes it decreases an account balance. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. 2-32 Illustration 2-8 Format for Recording a Business Transaction, or Journal Entry Date Debit Credit Account Name....................................... Amount Account Name.................................. Amount (Description of transaction) Prior to the widespread use of computers, companies recorded their transactions in paper- based journals. Thus, the term journal entry. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-33 aw-Hill.  Recording Transactions— Example On December 1, Eagle Soccer Academy sells shares of common stock to investors for cash of $200,000.  Debit to Cash for $200,000  Credit to Common Stock for $200,000 December 1 Debit Credit(+A).................................................. Cash 200,000 Common Stock (+SE).......................... 200,000 (Issue common stock for cash) Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-34 aw-Hill. Illustration 2- General Ledger 10 Account Posting is the process of transferring the debit and credit information from the journal to individual general ledger accounts. The general ledger provides, in a single collection, each account with its individual transactions and resulting account balance. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-35 aw-Hill.  Posting Transaction to Accounts (1 of 10) On December 1, Eagle Soccer Academy sells shares of common stock to investors for cash of $200,000. (1) December 1 Debit Credit Cash (+A)................................................................. 200,000 Common Stock (+SE)....................................... 200,000 (Issue common stock for cash) Account: Date CashDescriptions Debit Credit Balan Dec. Beginning Balance ce 0 1 Dec. Issue common stock for 200,0 200,00 1 cash 00 0 Account: Common Date StockDescriptions Debit Credit Balan Dec. Beginning Balance ce 0 Dec. 1 Issue common stock for 200,00 200,00 1 cash 0 0 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-36 nt of McGraw-Hill Education.  Posting Transaction to Accounts (2 of 10) On December 1, Eagle borrows cash from a bank, $100,000. (2) December 1 Debit Credit Cash (+A)................................................................. 100,000 Notes Payable (+L)…........................................ 100,000 (Borrow cash by signing three-year note) Account: Date CashDescriptions Debit Credit Balan Dec. Beginning balance ce 0 1 Dec. Issue common stock for 200,00 200,00 1 Dec. cash Borrow cash by signing 100,00 300,00 0 1 note 00 0 Account: Notes Date Payable Descriptions Debit Credit Balan Dec. Beginning balance ce 0 Dec. 1 Borrow cash by signing 100,00 100,0 1 note 0 00 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-37 nt of McGraw-Hill Education. T-account A T-account includes the account title at the top, one side for recording debits, and one side for recording credits. The left side of the T-account is the debit column. The right side is the credit column. Here are the T-accounts for Cash and Notes Payable after posting transaction (2). Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-38 aw-Hill.  Posting Transaction to Accounts (3 of 10) On December 1, Eagle purchases equipment with cash, $120,000. (3) December 1 Debit Credit Equipment (+A)....................................................... 120,000 Post to accounts Cash (−A)…………………....................................... 120,000 T-account: Simplified (Purchase equipment version of general with cash) ledger account Includes the account title at the top, left side for recording debits, and right side for Equipment Cash recording (3)120,000 credits (1)200,000 (3) (2) 100,000120,000 Bal. 120,000 Bal. 180,000 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-39 nt of McGraw-Hill Education.  Posting Transaction to Accounts (4 of 10) On December 1, Eagle pays one year of rent in advance, $60,000 ($5,000 per month). (4) December 1 Debit CashRent Prepaid Credit (−A) (+A) ………………………………. …. ……………………… ……………………………………………… 60,000 60,000 (Prepay one year of rent with cash) Prepaid Rent Cash (4)60,000 (1)200,000 (3) 120,000 (2) 100,000 (4) 60,000 Bal. 60,000 Bal. 120,000 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-40 nt of McGraw-Hill Education.  Posting Transaction to Accounts (5 of 10) On December 6, Eagle purchases supplies on account, $23,000. (5) December 6 Debit Accounts Supplies Credit (+A) Payable (+L).…………………………………..………………………………………………. ………. 23,000 23,000 (Purchase supplies on account) Supplies Accounts Payable (5)23,000 (5) 23,000 Bal. 23,000 Bal. 23,000 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-41 nt of McGraw-Hill Education.  Posting Transaction to Accounts (6 of 10) On December 12, Eagle provides soccer training to customers for cash, $43,000. (6) December 12 Debit Cash Credit Service Revenue (+R, +SE) (+A)……..………………………………………………. …………………………….. ……….. 43,000 43,000 (Provide training to customers for cash) Cash Service Revenue (1)200,000 (3) 120,000 (6) (2) 100,000 (4) 43,000 60,000 (6) 43,000 Bal. 43,000 Bal. 163,000 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-42 nt of McGraw-Hill Education.  Posting Transaction to Accounts (7 of 10) On December 17, Eagle provides soccer training to customers on account, $20,000. (7) December 17 Debit Service Accounts Credit Revenue (+R, Receivable (+A) +SE) ……………………………. …………………………….. ……….. 20,000 20,000 (Provide training to customers on account) Accounts Receivable Service Revenue (7) 20,000 (6) 43,000 (7) 20,000 Bal. 20,000 Bal. 63,000 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-43 nt of McGraw-Hill Education.  Posting Transaction to Accounts (8 of 10) On December 23, Eagle receives cash in advance for 12 soccer training sessions to be given in the future, $6,000. (8) December 23 Debit Cash Credit Deferred Revenue (+L) ………..………………………… (+A) ………………………………………………….…….… …… 6,000 6,000 (Receive cash in advance from customers) Cash Deferred Revenue (1) 200,000 (3) 120,000 (8) (2) 100,000 (4) 6,000 60,000 (6) 43,000 (8) 6,000 Bal. 6,000 Bal. 169,000 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-44 nt of McGraw-Hill Education.  Posting Transaction to Accounts (9 of 10) On December 28, Eagle pays salaries to employees, $28,000. Cash (−A) (9) December 28 Debit Credit ……………………………………………………….. Salaries Expense (+E, −SE) 28,000 ……………………………………… 28,000 (Pay salaries to employees) Salaries Expense Cash (9) 28,000 (1) 200,000 (3) 120,000 (2) 100,000 (4) 60,000 (6) 43,000 (9) 28,000 Bal. 28,000 (8) 6,000 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conse 2-45 nt of McGraw-Hill Education.  Posting Transaction to Accounts (10 of 10) On December 30, Eagle pays cash dividends to shareholders, $4,000. Cash (−A) (10) December 30 Debit Credit ………………………………………………………. Dividends (+D, −SE) ………..…………………………..…….. … 4,000 4,000 (Pay cash dividends) Dividends Cash (10) 4,000 (1)200,000 (3) 120,000 (2) 100,000 (4) 60,000 (6) 43,000 (9) 28,000 Bal. 4,000 (8) 6,000 (10) 4,000 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction nt of McGraw-Hill Education. or distribution without the prior written conse 2-46 Illustration 2-11 (1 of 3) Summary of Journal Entries Recorded for Transactions of Eagle Soccer Academy (1) December 1 Debit Cash Credit Common (+A) ……..Stock (+SE) ……………………………………. 200,000 ……………………………………………………….. 200,000 (Issue common stock for cash) (2) December 1 Debit Cash Credit Notes Payable (+L) (+A) …….. ………………………………………… ……………………………………………………….. 100,000 100,000 (Borrow cash by signing three- year note1) (3) December Debit Credit Cash (−A) Equipment ………………………………. (+A)..….. ……………………… ………………………………………………. 120,000 120,000 (Purchase equipment with cash) (4) December 1 Debit CashRent Prepaid Credit (−A) (+A) ………………………………. ….……………………………………. ……………………….. …………. 60,000 60,000 (Prepay rent with cash) Continued Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 2-47 McGraw-Hill Education. Illustration 2-11 (2 of 3) Summary of Journal Entries Recorded for Transactions of Eagle Soccer Academy (5) December 6 Debit Accounts Supplies Credit (+A) Payable (+L).………………………………….………………………………………………. ……… 23,000 23,000 (Purchase supplies on account) 12 (6) December Debit Cash Credit Service Revenue (+R, +SE) …………………………… (+A)……..………………………………………………. ……… 43,000 43,000 (Provide training to customers for cash) 17 (7) December Debit Service Accounts Credit Revenue (+R, Receivable +SE) ………………………….… (+A)……..………….……….….………. 20,000 20,000 (Provide training to customers on account) 23 (8) December Debit Cash Credit Deferred Revenue (+L) …………………..……………. (+A) ……………………………..………….……….…. ………. 6,000 6,000 (Receive cash in advance from customers) Continued Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 2-48 McGraw-Hill Education. Illustration 2-11 (3 of 3) Summary of Journal Entries Recorded for Transactions of Eagle Soccer Academy (9) December 28 Debit CashExpense Salaries Credit (−A) …..………………………….. (+E, −SE)..…..……………………….… …… ……………………… 28,000 28,000 (Pay salaries to employees) (10) December 30 Debit Dividends Credit Cash (−A)(+D, −SE) ……………..………….……….…. …..………………………….. ……...... 4,000 …………………….... 4,000 (Pay cash dividends) Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 2-49 McGraw-Hill Education.  Illustration 2-12 Posting of External Transactions of Eagle Soccer Academy from Journal Entries to General Ledger Accounts Assets = Liabilities + Stockholders’ Equity Accounts Accounts Common Retained Cash Receivabl Payable Stock Earnings (1) 200,00 (3) 120,0 (7) e (5) (1) 0 0 00 20,000 23,000 200,000 (6) (9) 43,000 (2) 100,00 (4) Bal. Bal. Bal. 0 (8) 0 28,000 60,00 20,000 23,000 200,000 6,000 Bal. (10) 0 137,000 4,000 Prepaid Deferred Service Salaries Supplies Rent Revenue Revenue Expense (5) (4) z (8) (6) (9) 23,000 60,000 6,000 43,000 28,000 Bal. Bal. Bal. Bal. (7) Bal. 23,000 60,000 6,000 20,000 28,000 63,000 Notes Equipme Payable Dividend (3) nt (2) (10) s 120,000 100,000 4,000 Bal. Bal. Bal. 120,000 100,000 4,000 Transaction numbers are shown in parentheses. Account balances are in bold. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 2-50 McGraw-Hill Education. Concept Check 2-4 Which of the following is used to provide a chronological record of all transactions affecting a firm? a. The general ledger b. The journal c. The trial balance d. The income statement The journal is a chronological record of the economic events that have taken place. (The general ledger is used to accumulate the balances of the accounts, and the trial balance is a summarized listing of all the debit and credit accounts. The income statement is a financial statement used to determine whether the business was profitable.) Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. 2-51 Concept Check 2-5 Which of the following accounts would be debited when a company pays $12,000 in advance for one year of rent? a. Cash b. Rent Expense c. Prepaid Rent d. Rental Income This transaction creates a prepaid account— specifically prepaid rent. Prepaid rent is an asset account. In order to increase an asset account you would debit it. The correct answer is the prepaid rent account would be debited for $12,000 when the rent was paid in advance. (Cash would be 2-52 credited.) Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr aw-Hill. Trial Balance A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits. Another purpose of the trial balance is to assist us in preparing adjusting entries for internal transactions (Chapter 3). Used for internal purposes only  Not published to external parties  Not required to follow an order of listing Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-53 aw-Hill. Illustration 2-13 Trial Balance of Eagle Soccer AcademyEAGLE SOCCER ACADEMY Trial Balance December 31, 2024 Accounts Debit Credit Cash $ Accounts 137,000 Receivable Supplies 20,000 Prepaid Rent Equipment 23,000 $ Accounts Payable 23,000 Deferred 60,000 Revenue 6,000 Notes Payable 120,000 Common Stock 100,000 Mu s t Retained E qual Earnings 200,000 Dividends Service Revenue 0 Salaries Copyright ©2019 McGraw-HillExpense Education. All rights reserved. No reproduction or distribution without the prior written consent of 2-54 McGraw-Hill Education. Concept Check 2-6 Which of the following accounts would appear in the credit column of a trial balance? a. Prepaid Rent b. Dividends c. Common Stock d. Salaries Expense The trial balance is a listing of all accounts and their balances at a given date. The only account listed above that would have a credit balance and therefore appear in the credit column of the trial balance is the common stock account. This is an equity account and equity accounts are increased by credits. (All other accounts listed have debit balances and therefore appear in the debit column.) Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGr 2-55 aw-Hill.