Chapter 3

Processing Accounting
Information

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 External and Internal Events

• External event: interaction between an entity and its

environment
• Internal event: occurs entirely within an entity
• Transaction: any event that is recognized in a set of
financial statements

Introduction
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 Source Documents

• Used as evidence to record a transaction

• Different forms:
– Purchase invoice
– Sales invoice
– Cash register tape
– Time cards

Introduction
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Analyze the Effects of Transactions on the
Accounting Equation
• As transactions are recorded, the accounting equation
must remain in balance:
Assets = Liabilities + Stockholders’ Equity

Introduction
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 Issuance of Capital Stock
• Glengarry Health Club is started when Karen Bradley
and Kathy Drake file articles of incorporation with the
state to obtain a charter. Each invests $50,000 in the
business. In return, each receives 5,000 shares of
capital stock
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

1 $100,000 $100,000
Totals $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000

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 Acquisition of Property in Exchange
for a Note
• Company buys a piece of property for $200,000. The
seller agrees to accept a five-year promissory note.
The property consists of land valued at $50,000 and a
newly constructed building valued at $150,000
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $100,000 $100,000

2 $150,000 $50,000 $200,000
Bal. $100,000 $150,000 $50,000 $200,000 $100,000

Totals $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000 $300,000

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 Acquisition of Equipment on an Open
Account
• Karen and Kathy contact an equipment supplier and
buy $20,000 of exercise equipment: treadmills,
barbells, and stationary bicycles. The supplier agrees
to accept payment in full in 30 days
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $100,000 $150,000 $50,000 $200,000 $100,000

3 $20,000 $20,000
Bal. $100,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000

Totals $320,000 $320,000 $320,000 $320,000 $320,000 $320,000 $320,000 $320,000 $320,000

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 Sale of Monthly Memberships on
Account
• During January, the owners sell 300 monthly club
memberships for $50 each, or a total of $15,000. The
members have until the 10th of the following month to
pay
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $100,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000

4 $15,000 $15,000
Bal. $100,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $15,000

Totals $335,000 $335,000 $335,000 $335,000 $335,000 $335,000 $335,000 $335,000 $335,000

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 Sale of Court Time for Cash
• In addition to memberships, Glengarry sells court time.
Court fees are paid at the time of use and amount to
$5,000 for the first month
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $100,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $15,000
5 5,000 5,000
Bal. $105,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $20,000

Totals $340,000 $340,000 $340,000 $340,000 $340,000 $340,000 $340,000 $340,000 $340,000

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 Payment of Wages and Salaries
• Wages and salaries for the first month amount to
$10,000
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $105,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $20,000
6 -10,000 -10,000
Bal. $95,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $10,000

Totals $330,000 $330,000 $330,000 $330,000 $330,000 $330,000 $330,000 $330,000 $330,000

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 Payment of Utilities
• Cost of utilities for the first month is $3,000. Glengarry
pays this amount in cash
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $95,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $10,000
7 -3,000 -3,000
Bal. $92,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $7,000

Totals $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000

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 Collection of Accounts Receivable
• Amount received from members in payment of their
accounts is $4,000
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $92,000 $15,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $7,000
8 4,000 $-4,000
Bal. $96,000 $11,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $7,000

Totals $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000 $327,000

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 Payment of Dividends
• Karen and Kathy, acting on behalf of Glengarry Health
Club, decide to pay a dividend of $1,000 on the shares
of stock that each of them owns, or $2,000 in total
Assets=Liabilities + Stackholders’ Equity

Transaction Cash Accounts Equipment Building Land Accounts Notes Capital Stock Retained
Number Receivable Payable Payable Earnings

Bal. $96,000 $11,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $7,000
9 -2,000 -2,000
Bal. $94,000 $11,000 $20,000 $150,000 $50,000 $20,000 $200,000 $100,000 $5,000

Totals $325,000 $325,000 $325,000 $325,000 $325,000 $325,000 $325,000 $325,000 $325,000

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 Cost Principle

• Record an asset at the cost to acquire it and continue

to show this amount on all balance sheets until the
asset is disposed

Introduction
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 Account and Chart of Accounts

• Account: record used to accumulate amounts for each

individual asset, liability, revenue, expense, and
component of stockholders’ equity
• Chart of accounts: numerical list of all accounts used
by a company

Introduction
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 Analyzing Transactions

• General ledger: A book, a file, a hard drive, or another

device containing all of the accounts
• Double-entry system: system of accounting
– For every transaction recorded, total debits must equal
total credits
– Accounting equation must always be in balance
• T Account: format for showing amounts coming into
and leaving an account

Introduction
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Example 3.2—Using a T Account

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 Debits and Credits

• Tools to record increases and decreases in accounts

• Debits increase asset accounts, and credits increase
liability and stockholders’ equity accounts
• Additionally, debits increase expense accounts, and
credits increase revenue accounts

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Summary of the Rules for Increasing
and Decreasing Accounts

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Example 3.3—Determining Normal
Account Balances

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 Debits and Credits Applied to
Transactions (1 of 9)
(1) Issuance of capital stock

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 Debits and Credits Applied to
Transactions (2 of 9)
(2) Acquisition of property in exchange for a note

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 Debits and Credits Applied to
Transactions (3 of 9)
(3) Acquisition of equipment on an open account

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 Debits and Credits Applied to
Transactions (4 of 9)
(4) Sale of monthly memberships on account

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 Debits and Credits Applied to
Transactions (5 of 9)
(5) Sale of court time for cash

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 Debits and Credits Applied to
Transactions (6 of 9)
(6) Payment of wages and salaries

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 Debits and Credits Applied to
Transactions (7 of 9)
(7) Payment of utilities

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 Debits and Credits Applied to
Transactions (8 of 9)
(8) Collection of accounts receivable

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 Debits and Credits Applied to
Transactions (9 of 9)
(9) Payment of dividends

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 Journal (1 of 2)

• Chronological record of a company’s transactions

• Book of original entry
• Transactions are periodically posted from the journal to
ledger accounts
• Journalizing: act of recording journal entries

Introduction
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 Posting

• Process of transferring amounts from a journal to the

ledger accounts

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Example 3.6—Posting from the
Journal to the Ledger

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 Journal (2 of 2)

• Chronological record of a company’s transactions

• Book of original entry
• Transactions are periodically posted from the journal to
ledger accounts
• Journalizing: act of recording journal entries

Introduction
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Example 3.7—Preparing a Trial
Balance

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