Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle: During the Period Chapter 2

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Identify the basic steps in measuring external transactions Analyze the impact of external transactions on the accounting equation Assess whether the impact of external transactions results in a debit or credit to an account balance Record transactions using debits and credits Post transactions to T-accounts in the general ledger Prepare a trial balance 2-2

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Functions of Financial Accounting Measure business activities of the company Communicate measurements to external parties for decision making 2-3

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Measuring Business Activities 2-4

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Identify the Basic Steps in Measuring External Transactions. 2-5

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. External Transactions Transactions conducted with a separate economic entity Internal transaction: events that affect the financial position of the company but do not include an exchange with a separate economic entity 2-6

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Capturing Transactions in Accounts Account: Summary of all transactions related to a particular item over a period of time. Asset accounts: Cash, Supplies, and Equipment Liability accounts: Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable Stockholders’ equity accounts: Common Stock and Retained Earnings Chart of accounts: A list of all account names used to record transactions 2-7

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Measuring External Transactions 2-8

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Analyze the impact of external transactions on the accounting equation. 2-9

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Effects on the Basic Accounting Equation Each transaction will have a dual effect An increase on one side will increase the other side 2-10

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Understanding Effects of Transaction Ask these questions: What is one account affected by the transaction? Does it increase or decrease? What is a second account affected by the transaction? Does it increase or decrease? Do assets still equal liabilities plus stockholders’ equity? 2-11

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transactions of Eagle Golf Academy DateExternal Transactions in January (1) Dec. 1Sell shares of common stock for $25,000 to obtain the funds necessary to start the business (2) Dec. 1Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years (3) Dec. 1Purchase equipment necessary for giving golf training, $24,000 (4) Dec. 1Pay one year of rent in advance, $6,000 ($500 per month) (5) Dec. 6Purchase supplies on account, $2,300 (6) Dec. 12Provide golf training to customers for cash, $4,300 (7) Dec. 17Provide golf training to customers on account, $2,000 (8) Dec. 23Receive cash in advance for 12 golf training sessions to be given in the future, $600 (9) Dec. 28Pay salaries to employees, $2,800 (10) Dec. 30Pay cash dividends of $200 to shareholders 2-12

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25,000 What is one account affected by the transaction? Cash Does that account increase or decrease? Increase by $25,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25,000 What is a second account affected by the transaction? Common Stock Does that account increase or decrease? Increase by $25,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25,000 Do assets equal liabilities plus stockholders’ equity? Yes, assets increase by $25,000 and stockholders’ equity increase by $25,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 2—Borrow from the Bank Eagle borrows $10,000 from the bank and signs a note for it 2-16

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 3—Purchase Equipment Purchase equipment with cash, $24,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 4—Incur Costs for Rent Pay one year of rent in advance, $6,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 5—Incur Costs for Supplies Purchase of supplies on account, $2,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Expanded Accounting Equation 2-20

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 6—Provide Services for Cash Provide service to customers for cash, $4,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 7—Provide Services on Account Provide service to customers on account, $2,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 8—Receive Cash in Advance of Providing Services Receive cash in advance from customers, $

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 9—Incur Cost for Salaries Pay salaries to workers, $2,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Transaction 10—Pay Dividends Pay dividends to stockholders, $

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B Debits and Credits 2-26

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Assess Whether the Impact of External Transactions Results in a Debit or Credit to an Account Balance. 2-27

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Effects on Account Balances 2-28

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Debit and Credit Effects on Accounts in the Expanded Accounting Equation 2-29

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Debit and Credit Effects on Each Account Type A simple memory aid 2-30

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Record transactions using debits and credits. 2-31

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Recording Transactions Journal: provides a chronological record of all transactions Journal entry: format used for recording transactions Debits in a transaction must equal its credits 2-32

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Recording Transactions—Example On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25,000. Cash debited for $25,000 Common Stock credited for $25,

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Post transactions to T-accounts in the general ledger. 2-34

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Posting Posting: process of transferring the debit and credit information from the journal to individual accounts in the general ledger General ledger: includes all accounts used to record the company’s transactions Useful to calculate the account balances T-account: a simplified form of a general ledger account 2-35

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Posting—Example On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25,000. Debit to Cash is transferred to the Cash account Credit to Common Stock is transferred to the Common Stock account 2-36

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Summary of External Transactions Recorded for Eagle Golf Academy 2-37

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Summary of External Transactions Recorded for Eagle Golf Academy 2-38

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Summary of External Transactions Recorded for Eagle Golf Academy 2-39

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 6 Prepare a Trial Balance. 2-40

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Trial Balance A list of all accounts and their balances at a particular date Shows that total debits equal total credits Assists in preparing adjusting entries Used for internal purposes only Not published to external parties Not required to follow an order of listing 2-41

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Trial Balance—Example 2-42

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter