ACCT1002 - Introduction to Financial Accounting - Lesson 3 (1).pdf

Chapter 3-1  The Accounting Information System Chapter 3-2 Financial Accounting, Fifth Edition  Study Objectives 1. Analyze the effect of business transactions on the basic accounting equation. 2. Explain what an a...

Chapter 3-1  The Accounting Information System Chapter 3-2 Financial Accounting, Fifth Edition  Study Objectives 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. Chapter 3-3  The 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 3-4  Accounting Transactions 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. Chapter 3-5  Accounting Transactions Question: Are the following events recorded in the accounting records? Discuss Purchased a product Event computer. design with Pay rent. potential customer. Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Record/ Don’t Record Chapter 3-6  Accounting Transactions Transaction Analysis The process of identifying the specific effects of economic events on the accounting equation. Basic Accounting Equation Stockholders’ Assets = Liabilities + Equity Chapter 3-7 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions Transaction Analysis Illustration 3-2 Expanded accounting equation Chapter 3-8 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 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 3-9 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 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 3-10 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 3. On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 Chapter 3-11 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 Chapter 3-12 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 5. On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 Chapter 3-13 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 Chapter 3-14 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 Chapter 3-15 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 Chapter 3-16 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 10. On October 20, Sierra paid a $500 dividend. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 10. -500 -500 Chapter 3-17 SO 1 Analyze the effect of business transactions on the basic accounting equation.  Accounting Transactions 11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. 1. +10,000 +10,000 2. +5,000 +5,000 3. -5,000 +5,000 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 Chapter 3-18  The Account Record of increases and decreases Account in a specific asset, liability, equity, revenue, or expense item. Debit = “Left” Credit = “Right” An Account can Account Name be illustrated in a Debit / Dr. Credit / Cr. T-Account form. Chapter 3-19 SO 2 Explain what an account is and how it helps in the recording process.  Debit and Credit Procedures 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 equal CREDITS. Chapter 3-20 SO 3 Define debits and credits and explain their use in recording business transactions.  Debit and Credit Procedures If Debits are greater than Credits, the account will have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 Balance $15,000 Chapter 3-21 SO 3 Define debits and credits and explain their use in recording business transactions.  Debit and Credit Procedures If Credits are greater than Debits, the account will have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,000 Chapter 3-22 SO 3 Define debits and credits and explain their use in recording business transactions.  Dr./Cr. Procedures for Assets and Liabilities Assets Debit / Dr. Credit / Cr. Assets - Debits should exceed credits. Normal Balance Chapter 3-23 Liabilities – Credits should exceed debits. Liabilities Debit / Dr. Credit / Cr. The normal balance is on the increase side. Normal Balance Chapter 3-24 Chapter 3-23 SO 3 Define debits and credits and explain their use in recording business transactions.  Dr./Cr. Procedures for Stockholders’ Equity Stockholders’ Equity Owner’s investments and Debit / Dr. Credit / Cr. revenues increase stockholder’s equity (credit). Normal Balance Dividends and expenses decrease Chapter 3-25 stockholder’s equity (debit). Common Stock Retained Earnings Dividends Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Normal Balance Normal Balance Normal Balance Chapter Chapter Chapter 3-25 3-25 3-23 Chapter 3-24 SO 3 Define debits and credits and explain their use in recording business transactions.  Dr./Cr. Procedures for Revenue and Expense Revenue The purpose of earning revenues is to benefit the Debit / Dr. Credit / Cr. stockholders. Normal Balance The effect of debits and credits on revenue accounts Chapter 3-26 Expense is the same as their effect Debit / Dr. Credit / Cr. on stockholders’ equity. Expenses have the opposite Normal Balance effect: expenses decrease Chapter 3-27 stockholders’ equity. Chapter 3-25 SO 3 Define debits and credits and explain their use in recording business transactions.  Debits and Credits Summary Liabilities Normal Debit / Dr. Credit / Cr. Normal Balance Balance Debit Credit Normal Balance Assets Chapter Stockholders’ Equity 3-24 Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter Expense 3-23 Revenue Chapter 3-25 Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-27 Chapter 3-26 Chapter 3-26 SO 3 Define debits and credits and explain their use in recording business transactions.  Debits and Credits Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Debit Credit Chapter 3-27 SO 3 Define debits and credits and explain their use in recording business transactions.  Debits and Credits Summary Review Question 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. Chapter 3-28 SO 3 Define debits and credits and explain their use in recording business transactions.  Debits and Credits Summary Review Question 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 3-29 SO 3 Define debits and credits and explain their use in recording business transactions.  Stockholders’ Equity Relationships Illustration 3-15 Chapter 3-30 SO 3 Define debits and credits and explain their use in recording business transactions.  Summary of Debit/Credit Rules Relationship among the assets, liabilities and stockholders’ equity of a business: Illustration 3-16 Basic Assets = Liabilities + Stockholders’ Equity Equation Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit. Chapter 3-31 SO 3 Define debits and credits and explain their use in recording business transactions.  Steps in the Recording Process Illustration 3-17 Transfer journal information Analyze each transaction Enter transaction in a journal to ledger accounts Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. Chapter 3-32 SO 4 Identify the basic steps in the recording process.  The Journal 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. Chapter 3-33 SO 5 Explain what a journal is and how it helps in the recording process.  The Journal Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. Oct. 1 Sierra issued common stock in exchange for $10,000 cash. 1 Sierra borrowed $5,000 by signing a note. 2 Sierra purchased office equipment for $5,000. Instructions - Journalize these transactions. Chapter 3-34 SO 4 Explain what a journal is and how it helps in the recording process.  Journalizing Oct. 1 Sierra issued common stock in exchange for $10,000 cash. General Journal Date Account Title Ref. Debit Credit Oct. 1 Cash 10,000 Common stock 10,000 Chapter 3-35 SO 4 Explain what a journal is and how it helps in the recording process.  Journalizing Oct. 1 Sierra borrowed $5,000 by signing a note. General Journal Date Account Title Ref. Debit Credit Oct. 1 Cash 5,000 Notes payable 5,000 Chapter 3-36 SO 4 Explain what a journal is and how it helps in the recording process.  Journalizing Oct. 2 Sierra purchased office equipment for $5,000. General Journal Date Account Title Ref. Debit Credit Oct. 2 Office equipment 5,000 Cash 5,000 Chapter 3-37 SO 4 Explain what a journal is and how it helps in the recording process.  The Ledger Ledger contains the entire group of accounts maintained by a company. Illustration 3-19 Chapter 3-38 SO 6 Explain what a ledger is and how it helps in the recording process.  Chart of Accounts Accounts arranged in sequence in which they are presented in the financial statements. Chapter 3-39 SO 6 Explain what a ledger is and how it helps in the recording process.  Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Journal J1 Date Account Title Ref. Debit Credit Oct. 1 Cash 101 10,000 Common stock 10,000 General Ledger Cash Acct. No. 101 Date Explanation Ref. Debit Credit Balance Oct. 1 Owner investment J1 10,000 10,000 Chapter 3-40 SO 7 Explain what posting is and how it helps in the recording process.  Posting Review Question 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. Chapter 3-41 SO 7 Explain what posting is and how it helps in the recording process.  The Recording Process Illustrated Illustration 3-21 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. Chapter 3-42 SO 7 Explain what posting is and how it helps in the recording process.  The Recording Process Illustrated Illustration 3-22 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. Chapter 3-43 SO 7 Explain what posting is and how it helps in the recording process.  The Recording Process Illustrated Illustration 3-23 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. Chapter 3-44 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-24 Chapter 3-45 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-25 Chapter 3-46 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-26 Chapter 3-47 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated , Additional Transactions Illustration 3-27 Chapter 3-48 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-28 Chapter 3-49 SO 7 Explain what posting is and how it helps in the recording process.  The Recording Process Illustrated Additional Transactions Illustration 3-29 Chapter 3-50 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-30 Chapter 3-51 SO 7 Explain what posting is and how it helps in the recording process. The Recording Process Illustrated Additional Transactions Illustration 3-31 Chapter 3-52 SO 7 Explain what posting is and how it helps in the recording process.  Summary Illustration of Journalizing Illustration 3-32 Chapter 3-53 SO 7 Explain what posting is and how it helps in the recording process.  Summary Illustration of Journalizing Illustration 3-32 Chapter 3-54 SO 7 Explain what posting is and how it helps in the recording process.  Summary Illustration of Posting Illustration 3-33 Chapter 3-55  The Trial Balance A list of accounts and their balances at a given time. Purpose is to prove that debits equal credits. Illustration 3-34 Chapter 3-56  The Trial Balance Limitations of a Trial Balance 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. Chapter 3-57 SO 8 Explain the purposes of a trial balance.  The Trial Balance Review Question 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. Chapter 3-58 SO 8 Explain the purposes of a trial balance.  Copyright Copyright © 2009 John Wiley & Sons, Inc. 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