Study Guide

ACC1001

A number of students in introductory accounting struggled with the basic accounting working documents and processes durin
and exams I have prepared the following study guide with specific examples to assist with your preparations.

Transaction Process Documents

From question a list of transactions we will review the processes for Journal Entries (JEs), trial balances and t-accounting. We w
following transactions for a construction company in this review section:

1-Oct Stockholders invest $25,000 in common stock in exchange for cash.

2-Oct The company hires a foreman for $63,000 per year.

3-Oct Buys a crane for $38,000 on account.

6-Oct Sells a building for $73,200 to be paid in 6 months.

10-Oct Receives cash of $1,400 in payment from a customer for work performed and invoiced earlier

15-Oct Buys land for a future building site.

18-Oct Buys paint, nails and screws from hardware store for $750 on account.

22-Oct Sells the old crane no longer in use for $2,500.

30-Oct Pays foreman $5,250 in salary for Oct.

31-Oct Pays hardware store $600 on account.

Journal Entries

The accounting manager instructs you to journalize (make journal entries) for the transactions above. JEs provide th
to the General Ledger to add transaction data for company activity. The JEs look like this:

1-Oct Cash 25,000

Common stock 25,000

In the first transaction the company receives cash for the sale of common stock. Note the form ; the Dr.
and the Cr. account second. The amount to be debited is always on the left hand column, the amount to
right hand column. Remember the rules (provided again later in this guide): an increase in an asset accou
in a liability or equity account is a Cr. entry. In this transaction, the company received cash, an increase, a
 To complete the JEs for the other transactions:

2-Oct No entry; the hiring of the foreman does not affect the books until the salary is ear

3-Oct Equipment (or PPE) 38,000

Accounts Payable (AP) 38,000

6-Oct Notes Receivable Short term 73,200

PPE 73,200

10-Oct Cash 1,400

Accounts Receivable (AR) 1,400

Note to this transaction: when the company invoiced the customer an AR amount of $1,400 was booked
the $1,400 the AR is relieved of that amount and cash was received. The cash is increased by a Dr. and th

15-Oct PPE-Land XX
Cash XX

Note to this transaction: you were not provided amounts for this transaction but the accounting looks th

18-Oct Supplies 750

AP 750

22-Oct Cash 2,500

PPE 2,500

30-Oct Salary Expense 5,250

Cash 5,250

31-Oct AP 600
Cash 600

Note to this transaction: a decrease in the AP liability account is a Dr. entry. A decrease to the cash asset

Trial Balance

At the monthly close the accountants for the company want to review the transactions they have booke
all entries were correctly completed. To check their JEs the accountants use a schedule called a trial bala
balance means the accountants are making a trial of all the transactions to make sure the entries are in b
accounting. If the trial balance does not balance, something is wrong and the accountants must find the
close the books for the month. In this class, you are the accountants and before you can go home for the
the trial balance is in balance, Dr.'s equal Cr.s booked for the month.
 The trial balance for our transactions looks like this:

Construction Company
Trial Balance Oct

Cash 23050
Coomon stock 25,000
PPE 37,700
AP 38150
Notes Receivable 73,200
AR 1,400
PPE-Land XX
Supplies 750
Salary Expense 5,250
102,250 102,250

In the trial balance only the balance of the account is presented. Until the Dr. total equals the Cr. total yo
go home.

T-accounting

When accountants are reviewing a complex set of transactions and need a method to visually understan
as a method to ensure the JEs planned are correct, they will use t-accountging to view the problem. Why
See the presentation of t-accounts below. Does it look like a capital T to you? It always has looked like th

A t-account looks like this using the first transaction from our list:

Cash Common Stock

1-Oct 25,000 1-Oct 25,000

To t-account each of the transactions in our list above, a t-account is drawn for each account. When t-ac
and trying to understand all the transactions as a whole, the accountant will use the same t-account for
transactions to an account. For instance, all cash transactions for the list above present in the t-account
Cash
1-Oct 25,000
10-Oct 1,400
15-Oct XX
22-Oct 2,500
30-Oct 5,250
31-Oct 600
 Total 23050

Note: the t-account is used to work out complex sets of transactions. It also serves to prove the trial bala
prove the t-account). See that the t-account balance is always totaled and should always agree to the tri
Additionally, the total is presented in the column that identifies the balance of the account as a Dr. (as in
Usually, asset account balances are a Dr. and liability accounts are a Cr..

Financial Statements

There are three financial statements used with a fourth growing in popularity:

Balance Sheet (BS): Tracks and presents the balance of assets, liabilities and stockholder's equity accounts at a spec
Basic rule for the BS is that assets=liabilities+stockholder's equity. As the accounts for our company(s), yo
the night or leave an exam question until the formula above is confirmed.

A classified BS is divided into Current and Longterm assets, Current and long term liabilities and the stock
for examples of presentation and what it looks like.

The Current Asset accounts are :

Cash and cash equivalents

Short term marketable securities
AR
Notes Receivable
Inventories
Prepaids
Other
Total of Current Assets

The Long Term or Noncurrent asset accounts can be viewed on pages 150, 202 and 252. They are often b

Current Liability accounts can be seen on those pages along with Noncurrent or Long term liability accou

Income Statement (IS)

An IS presents the revenue and expenses over a certain period of time. It is a performance based statem
Revenue and
expense accounts are part of the the IS and do not belong on the BS. Asset and liability accounts are BS a

REVENUE AND EXPENSE ACCOUNTS BELONG TO THE INCOME STATEMENT AND NOT THE BALANCE SHEE
ASSET AND LIABILITY ACCOUNTS BELONG TO THE BS AND NOT THE IS.
 Statement of Cash Flows

This statement records and presents the inflow and outflow of cash. It is often called the sources and use
for the presentation of the statement. The statement uses conclusions reached by the IS (Net Income) a
accounts from the IS for the period. Additionally, the statement uses changes in the BS accounts. Those c
management can better understand where the cash is coming from and where it is being used. Conceptu
the positive or negative effect of the changes in the BS accounts should equal the change in the cash bal
solves for the change in the cash balance during the period.

The different categories in the Cash Flow Statement are:

Operating Activity (Net Income, Depreciation and changes to working capital)

Investing Activity (changes in the balances of the PPE accounts)
Financing Activity (changes in the debt levels, changes in common stock and payments of divi

Retained Earnings Statement (has become the fourth statement)

The Statement is a simple calculation of the changes in earnings retained by the company and not paid t
in the form of dividends. Investors (stockholder's) or potential investors use this statement to quickly vie
to reinvest in the company's growth or paying out in dividends. Large retained earnings means there is g
Low or negative amounts of retained earnings means there is little equity in the company for the investo
As our accountants, for exams you will be expected to understand what accounts are presented in a BS a
Income Statement (IS) or the Statement of Cash flows

IF YOU STUDY THIS GUIDE USING THE PAGES REFERRED TO, YOU WILL HAVE AN EASY TIME OF EXAMs AND WILL BE PROVID
AND USE ACCOUNTING AS A SKILL IN YOUR CAREER. IN EVERY BUSINESS OR PERSONAL POSITION, KNOWING ACCOUNTING
WHO DOES NOT HAVE THE BASIC USE OF ACCOUNTING SKILLS. TAKE THE TIME AND MAKE THE EFFORT TO FINISH THE COUR
documents and processes during. Therefore, in preparation for the assignments
r preparations.

balances and t-accounting. We will use the

performed and invoiced earlier in the month.

ansactions above. JEs provide the official instruction

n stock. Note the form ; the Dr. account is always listed first
eft hand column, the amount to be credited is always in the
e): an increase in an asset account is a Dr. entry, an increase
any received cash, an increase, and increased the common stock equity account.
 the books until the salary is earned.

R amount of $1,400 was booked. When the customer paid

cash is increased by a Dr. and the AR decreased by a Cr..

tion but the accounting looks the same.

ry. A decrease to the cash asset account is a Cr. Entry.

e transactions they have booked to the GL and ensure

use a schedule called a trial balance. Literally, the trial
to make sure the entries are in balance, the basic rule of
d the accountants must find the mistake before they
before you can go home for the night you must ensure
e Dr. total equals the Cr. total your work is not done and you cannot

a method to visually understand the accounts that will be affected or

tging to view the problem. Why is it called t-accounting?
you? It always has looked like that to accountants.

wn for each account. When t-accounting more than one transaction

will use the same t-account for all entries for all the
above present in the t-account below:
lso serves to prove the trial balance (and the trial balance is used to
d should always agree to the trial balance total for the period.
nce of the account as a Dr. (as in this example) or a Cr..

older's equity accounts at a specific moment in time.

accounts for our company(s), you cannot go home for

ong term liabilities and the stockholder's equity. Refer to your text

0, 202 and 252. They are often broken down as shown on these pages.

rent or Long term liability accounts and the stockholder's equity accounts.

is a performance based statement.

et and liability accounts are BS accounts and do not belong on the IS.

NT AND NOT THE BALANCE SHEET

often called the sources and uses schedule. Refer to your text
eached by the IS (Net Income) and the depreciation and amortization
nges in the BS accounts. Those changes are divided into categories so that senior
where it is being used. Conceptually, the Net Income plus depreciation plus
qual the change in the cash balance of the company. This statement

working capital)

mon stock and payments of dividends)

by the company and not paid to stockholder's

use this statement to quickly view how the company is using the earnings
ained earnings means there is good equity in the company for the stockholders.
y in the company for the investors.
accounts are presented in a BS and which accounts are part of the

OF EXAMs AND WILL BE PROVIDED THE OPPORTUNITY TO UNDERSTAND

TION, KNOWING ACCOUNTING WILL PREPARE YOU BETTER THAN SOMEONE
HE EFFORT TO FINISH THE COURSE STRONGLY.