What Are the Different Exchange Transactions?
Distribute earnings to owners.
Buy and sell goods or services.
Borrow and invest money.
Pay wages to employees.
Purchase land, buildings, and equipment.
Pay taxes to the government.
ExchangeTransactions
Business Documents
Examples: Sales invoice, purchase order, check stub.
Business documents are used to confirm that an arm’s-length transaction
has occurred. to establish the amounts
to be recorded. to facilitate the analysis
of business events. These documents must be
analyzed.
What is the Sequence of the Accounting Cycle?
Step 1Record the effects of the transactions.Record the effects of the transactions.Step 2Summarize the effects of transactions.1. Posting journal entries.
2. Preparing a trial balance.
Summarize the effects of transactions.1. Posting journal entries.
2. Preparing a trial balance.
Step 3Prepare reports.1. Adjusting entries.2. Preparing financial statements.3. Closing the books.
Prepare reports.1. Adjusting entries.2. Preparing financial statements.3. Closing the books.
Step 4
Analyze transactions.Analyze transactions.
Step 1: Analyze Transactions
What accounts are involved?
Did each account increase or decrease?
By how much?
Transaction analysis framework
Transaction analysis: breaks down complex
transactions into manageable pieces.
provides a self-checking mechanism.
What Is the Accounting Equation?
Assets = Liabilities + Owners’ Equity
Resources Creditors’claimsagainst
resources
= + Owners’claimsagainst
resources
A = L + OE
Describe Effect of the Following Transactions on a Company.
Borrow money
Invest in company
Pay off a note
Purchase equipment
Borrow funds to settle a debt
What Is the Rule of Double-Entry Accounting?
The debits must always equal the credits.
Debits = Credits
Accounts provide an efficient method to categorize transactions.
A T-account is a simplified depiction of an account.
Using Accounts
Name of Account
Debit Credit
The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?
Using a T-Account
35 12
Cash
23
Debits and Credits
Debits are simply
entries on the left.
Credits are simply entries on the right.
Remember:
DR CR DR CR DR CR (+) (-) (-) (+) (-) (+)
Debits and Credits
Assets = Liabilities + Owners’ Equity
Asset accounts: Debit is an increase. Credit is a decrease.
Liabilities and owners’ equity accounts:
Debit is a decrease.Credit is an increase.
Revenues
Increases in a company’s resources from the sale of goods or the performance of services.
Expenses
Decreases in a company’s resources incurred in the normal course of business to generate revenues.
Dividends
Distributions to owners, which reduce Owners’ Equity.
Expanding the Equation
Expanded Accounting Equation
Assets
DR CR+ –
=Liabilities
DR CR– +
+Owners’ Equity
DR CR– +
Capital Stock
DR CR– +
Retained Earnings
DR CR– +
Expenses
DR CR+ –
Dividends
DR CR+ –
Revenues
DR CR– +
Step 2: Record Transactions Record the results of the transactions in
a journal. Journalizing provides a chronological
record of all business activities.
Journal -- book of original entry
What is another name for the journal?
Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
General Journal Entry Format:
Date Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
Journal Entries
What is the three-step process?
1 Identify which accounts are involved.
2 For each account, determine if it is increased or decreased.
3 For each account, determine by how much it will change.
Supplies purchased for $25 are purchased “on account.”
Prepare the correct journal entry. What do we mean by purchased “on account”?
Example 1: Journal Entry
Jan. 1 Supplies . . . . . . . . . . . . . . . . . . 25
Accounts Payable . . . . . . . . 25
Purchased supplies on account.
We purchase on credit and use accounts payable.
Example 2: Journal Entry
Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100
Revenue . . . . . . . . . . . . . . . . 100
Received cash for services.
A check for $100 is received in payment for services rendered.
Make the correct journal entry.
Example 3: Journal Entry
Mar. 1 Accounts Receivable. . . . . . . . 75
Sales Revenue . . . . . . . . . . . 75
Sold merchandise on account.
Merchandise is sold to a customer on account for $75. The cost of the product was $60.
Make the journal entries.
Mar. 1 Cost of Goods Sold . . . . . . . . . 60
Inventory. . . . . . . . . . . . . . . . 60
To record cost and reduce inventory.
DateDate TransactionTransaction Ref.Ref. DebitsDebits CreditsCredits
Jan. 1 Supplies 25
Accounts Payable 25 Purchased supplies on account.
Feb. 1 Cash 101 100
Revenue 100 Received cash for services.
Mar. 1 Accounts Receivable 75
Sales Revenue 75 Sold merchandise on account.
Journal 1 Page 1
Entered when posted to ledger.
Step 3: Posting Journal Entries and Preparing a Trial Balance
Define the Following TermsPosting
transferring amounts from the journal to the ledger.
Ledger
a book of accounts where journal transactions are posted and thereby summarized.
Posting reference
a cross-reference number between the general journal and the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a company.
General Ledger
Date Explanation Ref. Debits Credits Balance
Jan. 1 Balance 100
2 Issued 100 shares of capitalstock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ1 300 800
4 Sold inventory GJ1 60 860
5 Monthly payment on loan GJ1 230 630
6 Revenue GJ1 2,500 3,130
ACCOUNT: Cash Account No. 101
ASSETS (100-199):Current Assets (100-150):101 Cash105 Accounts Receivable107 Inventory
Long-Term Assets (151-199):151 Land152 Buildings
LIABILITIES (200-299):Current Liabilities (200-219):201 Notes Payable202 Accounts Payable
Long-Term Liabilities (220-239):222 Mortgage Payable
OWNERS’ EQUITY (300-399):301 Capital Stock330 Retained Earnings
SALES (400-499):400 Sales Revenue
EXPENSES (500-599):500 Cost of Goods Sold501 Sales Salaries and
Commissions523 Rent Expense528 Advertising Expense573 Utilities Expense579 Accounting and Legal
Fees
Chart of Accounts
Determining Account Balances
Name of Account
Debit Credit
Accounts with typical debit
balances are?
Accounts with typical credit balances are?
ExpensesAssets
Dividends
Owners’ EquityRevenues or
IncomeLiabilities
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
Do you see the mnemonic memory device, DEAD COIL?
A listing of all account balances; provides a means to assure that debits equal credits.
Define The Trial Balance
From the data in the trial balance, the balance sheet and income statement can be prepared.
What is the Trial Balance used for?
The Example Company Trial Balance December 31, 2003
Debits Credits Cash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses 15 ______
Total $ 1,123 $ 1,123
Sample Trial Balance
The trial balance shows that debits equal credits.