BALANCE SHEET EQUITATION AND OVER VIEW OF ACCOUNTING STRUCTURE

External and Internal Events External events: interaction between entity and outside environment Internal events: interaction within entity LO1

Source Documents Evidence needed in an accounting system to record Purchase Invoice Sales Invoice Evidence needed in an accounting system to record transactions Checks Cash Register Tape Receiving Document Shipping Document Payroll Records LO2

Issue Capital Stock for Cash 1/08 Transactions for Kumar Financial Service Stock Certificate Assets = Liabilities + Owners’ Equity Cash Capital Stock + P 100,000 = + P 100,000 The accounting equation must always remain in balance LO3 3

Purchase of Property in Exchange for Note Payable Assets = Liabilities + Owners’ Equity Land Note Payable + P50,000 = + P200,000 Building + P150,000 Increase on left has corresponding increase on right 4

Purchase of Equipment on Account I.O.U. Assets = Liabilities + Owners’ Equity Equip. Accts. Pay. + P20,000 = + P20,000 At least two accounts affected by every transaction 5

Effect of Revenue and Expenses on Retained Earnings Statement of Retained Earnings Income Statement Revenue – Expenses = Net Income (loss) Beg. R/E + Net Income (or – Net Loss) – Dividends = End. R/E 7

Sell Monthly Memberships on Account Assets = Liabilities + Owners’ Equity Accts. Rec. Retained Earnings + P15,000 = + P15,000 Revenues increase retained earnings 6

Revenues increase retained earnings Sell Court Time Assets = Liabilities + Owners’ Equity Cash Retained Earnings + P5,000 = + P5,000 Revenues increase retained earnings 6

Payment of Wages and Salaries Assets = Liabilities + Owners’ Equity Cash Retained Earnings – P10,000 = – P10,000 Expenses decrease retained earnings 8

Expenses also decrease assets or Payment of Utilities Assets = Liabilities + Owners’ Equity Cash Retained Earnings – P3,000 = – P3,000 Expenses also decrease assets or increase liabilities 8

Collection of Accounts Receivable Assets = Liabilities + Owners’ Equity Cash + P4,000 = (no change in Liab. or R/E) Accts. Rec. – P4,000 Assets were traded: accounts receivable for cash 10

Dividends directly reduce Payment of Dividends Assets = Liabilities + Owners’ Equity Cash Retained Earnings – P2,000 = – P2,000 Dividends directly reduce retained earnings 10

General Ledger A/R Cash +400 File or book that contains one page +100 –50 A/R +400 –100 Cash: +100 –50 File or book that contains one page (or entry) for each account LO4

Representation of one account in the general ledger The T Account Account Name Debits are entered on left Credits are entered on right Representation of one account in the general ledger LO5 17

The T Account Account Name 400 dr. 900 cr. 500 cr. Debits and credits are netted to obtain balance in account 500 cr. 17

Debits/Credits and the Accounting Equation OWNERS’ EQUITY Dr. Cr. + – + LIABILITIES Dr. Cr. – = ASSETS Dr. Cr. + – Opposite sides of the accounting equation are increased/decreased in an opposite way

Link Between Revenues and Retained Earnings Cr. Both accounts are increased with credits – + Revenues increase retained earnings (part of owners’ equity) REVENUES Dr. Cr. – +

Link Between Expenses and Dividends and Retained Earnings Retained earnings is decreased with debits DR. CR. – + Expenses and dividends decrease retained earnings DR. CR. EXPENSES AND DIVIDENDS + – Use debits to record(increase) expenses and dividends

Normal Account Balances Debit Credit Assets Expenses Dividends Liabilities Owners’ Equity Revenues all increased with debits all increased with credits 22 21

Transactions and T Accounts Stock Certificate Cash Capital Stock (1) 100,000 100,000 (1) (1) Issue capital stock for cash 3 22

Transactions and T Accounts Land (2) 150,000 Note Payable Building 200,000 (2) (2) 50,000 (2) Purchase property in exchange for note payable 3 23

Transactions and T Accounts I.O.U. Equipment Accounts Payable (3) 20,000 20,000 (3) (3) Purchase equipment on account 3 24

(4) Sell monthly memberships on account (5) Sell court time Transactions and T Accounts Cash Retained Earnings (1) 100,000 (5) 5,000 (4) 15,000 (5) 5,000 T Accounts reflect current and previous postings to the account for each period Accounts Receivable (4) 15,000 (4) Sell monthly memberships on account (5) Sell court time 3 25

(6) Pay employees wages for the month (7) Pay utilities for the month Transactions and T Accounts Wage Expense Cash (6) 10,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) Utilities Expense (7) 3,000 (6) Pay employees wages for the month (7) Pay utilities for the month 3 25

Transactions and T Accounts (8) Collection of accounts receivable Cash (1) 100,000 (5) 5,000 Accounts Receivable 10,000 (6) 3,000 (7) (4) 15,000 4,000 (8) (8) 4,000 (8) Collection of accounts receivable 3 24

Transactions and T Accounts Cash (1) 100,000 (5) 5,000 Retained Earnings 10,000 (6) 3,000 (7) (9) 2,000 15,000 (4) (8) 4,000 2,000 (9) 5,000 (5) (9) Pay dividends 3 24

Determine the Balance of the T Accounts Cash Accounts Receivable 10,000 (6) 3,000 (7) (4) 15,000 4,000 (8) (1) 100,000 (5) 5,000 11,000 2,000 (9) (8) 4,000 Retained Earnings 94,000 (9) 2,000 15,000 (4) 5,000 (5) 18,000 3 26

Posting from Journal Transactions are entered in: And then posted to: Ledger Accounts Cash Capital Stock And then posted to: Journal ( via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares LO6

Glengarry Health Club Trial Balance January 31, 2007 Debits Credits Cash Accounts Receivable Equipment Building Land Accounts Payable Notes Payable Capital Stock Membership Revenue Court Fee Revenue Wage Expense Utility Expense Dividends Totals P 94,000 11,000 20,000 150,000 50,000 P 20,000 200,000 100,000 15,000 5,000 10,000 3,000 2,000 P340,000 P340,000 LO7

End of Chapter 3