Processing Accounting

Information

Chapter 2

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Learning Objective 1

Analyze business
transactions.

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 The Account
Accounting’s main summary device
is the account, the record of changes.
Accounts are grouped in three broad categories,
according to the accounting equation:

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 The Account

Assets are the economic resources that

benefit the business now and in the future

Cash Land
Accounts receivable Buildings
Inventory Equipment,
Notes receivable furniture,
Prepaid expenses and fixtures
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 The Account

Liabilities are the debts of the company.

Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)

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 The Account

Stockholders’ (owners’) equity is the

owners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each
owner’s capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
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 The Account

Common Stock Retained Earnings

Dividends Revenues Expenses

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Accounting for Business Transac
tions

A transaction is any event that both affects

the financial position of the business entity
and can be reliably recorded.

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 Accounting for Business Transac
tions
The Lyons invest $50,000 to begin
the business, and Air & Sea Travel
issues common stock.

Stockholders’
Assets = Liabilities + Equity
(1) Cash + 50,000 = + 50,000*

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*Common stock
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 Accounting for Business Transac
tions
Air & Sea purchases land for an
office location, paying $40,000 in cash.
Stockholders’
Assets = Liabilities + Equity
Balance + 50,000 = + 50,000*
(2) Cash – 40,000
Land + 40,000
50,000 = + 50,000*
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*Common stock
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 Accounting for Business Transac
tions
The business buys stationery and other
office supplies, agreeing to pay $500
to the office-supply store within 30 days.
Stockholders’
Assets = Liabilities + Equity
Balance + 50,000 = + 50,000*
(3) Supplies + 500 = + 500
50,500 = 500 + 50,000
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*Common stock
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 Accounting for Business Transac
tions
Air & Sea Travel earns service revenue
of $5,500 and collects this amount in cash.

Stockholders’
Assets = Liabilities + Equity
Balance + 50,500 = 500 + 50,000*
(4) Cash + 5,500 = + 5,500
56,000 = 500 + 55,500
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*Common stock
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 Accounting for Business Transac
tions
Air & Sea Travel performs services for
customers on account for $3,000.

Stockholders’
Assets = Liabilities + Equity
Balance + 56,000 = 500 + 55,500
(5) Receivable + 3,000 = + 3,000
59,000 = 500 + 58,500
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 Accounting for Business Transac
tions
Air & Sea Travel pays $2,700 for the following
cash expenses: office rent $1,100,
employee salary $1,200, and utilities $400.
Stockholders’
Assets = Liabilities + Equity
Balance + 59,000 = 500 + 58,500
(6) Expenses – 2,700 = – 2,700
56,300 = 500 + 55,800
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 Accounting for Business Transac
tions
Air & Sea Travel pays $400 to the store from
which it purchased $500 worth of office
supplies in Transaction 3.
Stockholders’
Assets = Liabilities + Equity
Balance + 56,300 = 500 + 55,800
(7) Cash – 400 = – 400
55,900 = 100 + 55,800
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 Accounting for Business Transac
tions

The owners remodel their home at a cost of

$30,000, paying cash from personal funds.
This event is a transaction of the
personal entity, not the business entity.
No transaction is recorded for Air & Sea Travel.

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 Accounting for Business Transac
tions
The business collects $1,000
from a customer on account.
Stockholders’
Assets = Liabilities + Equity
Balance + 55,900 = 100 + 55,800
(9) Cash + 1,000
Receivable – 1,000
55,900 = 100 + 55,800
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 Accounting for Business Transac
tions
Air & Sea Travel sells land for a price of $22,000,
which is equal to the amount it paid for the land.
Stockholders’
Assets = Liabilities + Equity
Balance + 55,900 = 100 + 55,800
(10) Cash + 22,000
Land – 22,000
55,900 = 100 + 55,800
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 Accounting for Business Transac
tions
The corporation declares a dividend and pays
$2,100 cash to the stockholders.

Stockholders’
Assets = Liabilities + Equity
Balance + 55,900 = 100 + 55,800
(11) Cash – 2,100 = – 2,100
– 53,800 = 100 + 53,700
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Accounting for Business Transac
tions
Assets
Accounts Office
Cash + Receivable + Supplies + Land
(1) + 50,000
(2) – 40,000 + 40,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 1,100
– 1,200
– 400
(7) – 400
(8) Not a transaction of the business
(9) + 1,000 – 1,000
(10) + 22,000 – 22,000
(11) – 2,100
Bal. 33,300 2,000 500 18,000
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 Accounting for Business Transac
Liabilities +
tions
Stockholders’ Equity
Accounts Common Retained Type of Stockholders’
Payable + Stock + Earnings Equity Transaction
(1) + 50,000 Issued stock
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 1,100 Rent expense
– 1,200 Salary expense
– 400 Utilities expense
(7) – 400
(8)
(9)
(10)
(11) – 2,100 Dividends
Bal. 100 50,000 3,700
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 Income Statement
Month Ended April 30, 20x3
Revenue:
Service revenue $8,500
Expenses:
Salary expense $1,200
Rent expense 1,100
Utilities expense 400
Total expenses 2,700
Net income $5,800

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 Statement of Retained Earnings
Month Ended April 30, 20x3
Retained earnings, April 1, 20x3 $ 0
Add: Net income for the month 5,800
$5,800
Less: Dividends (2,100)
Retained earnings, April 30, 20x3 $3,700

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 Balance Sheet
April 30, 20x3
Assets Liabilities
Cash $ 33,300 Accounts Payable $ 100
Accounts receivable 2,000 Stockholders’ Equity
Office supplies 500 Common stock $50,000
Land 18,000 Retained earnings 3,700
Total stockholders’
equity $53,700
Total liabilities and
Total assets $ 53,800 stockholders’ equity $53,800

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 Statement of Cash Flows
Month Ended April 30, 20x3
Cash flows from operating activities:
Collections from customers ($5,500 + $1,000) $ 6,500
Cash payments to suppliers and employees
($2,700 + $400) (3,100)
Net cash inflow from from operating activities $ 3,400
Cash flows from investing activities:
Acquisition of land $(40,000)
Sale of land 22,000
Net cash outflow from investing activities (18,000)
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 Statement of Cash Flows
Month Ended April 30, 20x3
• Cash flows from operating activities: $ 3,400
• Cash flows from investing activities: (18,000)
• Cash flows from financing activities:
• Issuance (sale) of stock $50,000
• Payment of dividends (2,100)
• Net cash inflows from financing activities $47,900
• Net increase (decrease) in cash $33,300
• Cash balance, April 1, 20x3 0
• Cash balance, April 30, 20x3 $33,300

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Learning Objective 2

Understand how
accounting works.

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 Double-Entry Accounting

Double-entry bookkeeping means to record

the dual effects of each business transaction.

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 The T-Account
Account Title
Debit Credit

LEFT SIDE RIGHT SIDE

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 Increases and Decreases
in the Accounts
Accounting Stockholders’
Equation: Assets = Liabilities + Equity

Rules of
Debit and
Credit: Debit Credit Debit Credit Debit Credit
+ – – + – +

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 Rules of Debit and Credit
Air & Sea received $50,000 and issued stock.
Stockholders’
Assets = Liabilities + Equity
Cash Common Stock
Debit Credit
for for
Increase, Increase,
50,000 50,000

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 Rules of Debit and Credit
Air & Sea purchased land for $40,000 cash.
Stockholders’
Assets = Liabilities + Equity
Cash Common Stock
Bal. 50,000 Credit Bal. 50,000
for
Decrease,
40,000
Land
Debit
for
Increase,
40,000
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 Expansion of the
Accounting Equation
+
Common Stock
Assets Liabilities +
Retained Earnings
–
Dividends
+
Stockholders’ Revenues
Equity –
Expenses

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Learning Objective 3

Record business
transactions.

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Recording Transactions
in the Journal
Identify the transaction and
specify each account affected.

Determine whether each account is

increased or decreased by the transaction.
Use the rules of debits and credits.

Enter the transaction in the journal,

including a brief explanation for the entry.
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 Recording Transactions
in the Journal

Journal Page 1
Date Accounts and Explanation Debit Credit
April 2 Cash 50,000
Common Stock 50,000
Issued common stock

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Posting from Journal to Ledger

The journal is a chronological record

of all transactions listed by date.
The ledger is a grouping of all the
accounts; it shows their balances.
Data must be copied to the ledger –
a process called posting.

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 Posting from Journal to Ledger
Cash Individual asset accounts All individual
Cash
accounts
combined
make up
the ledger.
Accounts Ledger
Accounts
Payable Ledger
Payable
Individual liability accounts
Common
Common
Stock
Stock

Individual stockholders’ equity accounts

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 Posting from Journal to Ledger
Journal Entry
Accounts and Explanation Debit Credit
Cash 50,000
Common Stock 50,000
Issued common stock
Posting to the Ledger
Cash Common Stock
50,000 50,000

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 Flow of Accounting Data

Transaction Amounts
Transaction Transaction Entered in Posted to
Occurs Analyzed the Journal the Ledger

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 Accounts After Posting
ASSETS = LIABILITIES
Cash Accounts Payable
(1) 50,000 (2) 40,000 (7) 400 (3) 500
(4) 5,500 (6) 2,700 Bal. 100
(9) 1,000 (7) 400
(10) 22,000 (11) 2,100
Bal. 33,300
Accounts Receivable
(5) 3,000 (9) 1,000
Bal. 2,000
Office Supplies
(3) 500
Bal. 500
Land
(2) 40,000 (10) 22,000
Bal. 18,000
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 Accounts After Posting
+ STOCKHOLDERS’ EQUITY
Common Stock Dividends
(1) 50,000 (11) 2,100
Bal. 50,000 Bal. 2,100

REVENUE EXPENSES
Service Revenue Rent Expense
(4) 5,500 (6) 1,100
(5) 3,000 Bal. 1,100
Bal. 8,500
Salary Expense
(6) 1,200
Bal. 1,200
Utilities Expense
(6) 400
Bal. 400
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Learning Objective 4

Use a trial balance.

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 Trial Balance

A trial balance lists all accounts with

their balances – assets first, followed by
liabilities, and then stockholders’ equity.

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Correcting Accounting Errors

Search the records for a missing amount.

Divide the out-of-balance amount by 2
(a debit treated as a credit or vice versa).
Divide the out-of-balance amount
by 9, which may indicate a slide
or a transposition.

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 Chart of Accounts

It is a listing of all accounts and

account numbers used by a business.

Assets are often numbered beginning with 1,

liabilities with 2, stockholders’ equity with 3,
revenues with 4, and expenses with 5.

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 Air & Sea Travel
Chart of Accounts
BALANCE SHEET ACCOUNTS:
• Assets Liabilities Stockholders’ Equity
• 101 Cash 201 Accounts Payable 301 Common Stock
• 111 Accounts Receivable 231 Notes Payable 311 Dividends
• 141 Office Supplies 312 Retained Earnings
• 151 Office Furniture
• 191 Land
INCOME STATEMENT ACCOUNTS
(PART OF STOCKHOLDERS’ EQUITY):
• Revenues Expenses
• 401 Service Revenue 501 Rent Expense
• 502 Salary Expense
• 503 Utilities Expense
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Normal Balances of the Accounts

Assets Debit
Liabilities Credit
Stockholders’ Equity – overall Credit
Common stock Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit

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 Account in Four-Column Format

Account: Cash Account No. 101

Balance
Date Item Debit Credit Debit Credit
20x1
April 2 50,000 50,000
3 40,000 10,000

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 Learning Objective 5

Analyze transactions for

quick decisions.

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 Quick Decision Making

The managers of PepsiCo may consider

buying equipment that costs $100,000.
PepsiCo will borrow the money.
Management can analyze the effects of the
transactions by going directly to T-accounts.

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 Quick Decision Making
Transaction a – Borrow $100,000
Cash Note Payable
(a) 100,000 (a) 100,000

Transaction b – Purchase equipment

Cash Equipment Note Payable
(a) 100,000 (b) 100,000 (b) 100,000 (a) 100,000

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 HOMWORK
• READING
– Summary problem for your review
– Questing: 6, 12,
– CP 2-12
• WRITING
– E 2-10, E 2-11
– P 2-5B

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End of Chapter 2

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