Processing Accounting Information Chapter 2

Analyze business transactions.

The Account Assets are the economic resources that benefit the business now and in the future Cash Accounts receivable Inventory Notes receivable Prepaid expenses Land Buildings Equipment, furniture, and fixtures

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)

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.

Accounting for Business Transactions A transaction is any event that both affects the financial position of the business entity and can be reliably recorded.

Accounting for Business Transactions 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* *Common stock

Accounting for Business Transactions Air & Sea purchases land for an office location, paying $40,000 in cash. Balance+ 50,000= +50,000* *Common stock (2) Cash– 40,000 Land+ 40,000 50,000= +50,000* Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions The business buys stationery and other office supplies, agreeing to pay $500 to the office-supply store within 30 days. *Common stock Balance+ 50,000= +50,000* (3) Supplies+ 500= ,500= ,000 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash. *Common stock Balance+ 50,500= ,000* (4) Cash+ 5,500= + 5,500 56,000= ,500 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions Air & Sea Travel performs services for customers on account for $3,000. Balance+ 56,000= ,500 (5) Receivable+ 3,000= + 3,000 59,000= ,500 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions Air & Sea Travel pays $2,700 for the following cash expenses: office rent $1,100, employee salary $1,200, and utilities $400. Balance+ 59,000= ,500 (6) Cash – 2,700= – 2,700 56,300= ,800 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions Air & Sea Travel pays $400 to the store from which it purchased $500 worth of office supplies in Transaction 3. Balance+ 56,300= ,800 (7) Cash– 400= – ,900= ,800 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions 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.

Accounting for Business Transactions The business collects $1,000 from a customer on account. Balance+ 55,900= ,800 (9) Cash+ 1,000 Receivable– 1,000 55,900= ,800 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land. Balance+ 55,900= ,800 (10) Cash+ 22,000 Land– 22,000 55,900= ,800 Stockholders’ Assets =Liabilities+Equity

Accounting for Business Transactions The corporation declares a dividend and pays $2,100 cash to the stockholders. Balance+ 55,900= ,800 (11) Cash– 2,100= – 2, ,800= ,700 Stockholders’ Assets =Liabilities+Equity

Income Statement 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 Month Ended April 30, 20x3

Statement of Retained Earnings 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 Month Ended April 30, 20x3

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

Statement of Cash Flows 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) Month Ended April 30, 20x3

Statement of Cash Flows 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 Month Ended April 30, 20x3

Understand how accounting works.

Double-Entry Accounting Double-entry bookkeeping means to record the dual effects of each business transaction.

The T-Account Account Title Debit LEFT SIDE RIGHT SIDE Credit

Increase-Decrease-Decrease-Increase Accounting Equation:Assets=Liabilities+ Stockholders’ Equity Rules of Debit and Credit: Debit + Debit – Debit – Credit – Credit + Credit +

Normal Balances of the Accounts AssetsDebit LiabilitiesCredit Stockholders’ Equity – overallCredit Common stockCredit Retained earningsCredit DividendsDebit RevenuesCredit ExpensesDebit

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

Rules of Debit and Credit Air & Sea purchased land for $40,000 cash. Common Stock Bal. 50,000 Cash Credit for Decrease, 40,000 Bal. 50,000 Land Debit for Increase, 40,000 Assets=Liabilities+ Stockholders’ Equity

Record business transactions.

Recording Transactions in the Journal DateAccounts and Explanation Debit Credit Journal Page 1 April 2Cash50,000 Common Stock50,000 Issued common stock

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

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

Accounts and Explanation Debit Credit Cash50,000 Common Stock50,000 Issued common stock Posting to the Ledger CashCommon Stock 50,000 Journal Entry 50,000

Accounts After Posting Cash (1)50,000 (2)40,000 (4) 5,500 (6) 2,700 (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 ASSETS Accounts Payable (7)400(3)500 Bal.100 LIABILITIES =

Accounts After Posting Common Stock (1)50,000 Bal.50,000 STOCKHOLDERS’ EQUITY Dividends (11)2,100 Bal.2,100 + Service Revenue (4) 5,500 (5) 3,000 Bal. 8,500 REVENUE Rent Expense (6)1,100 Bal.1,100 Salary Expense (6)1,200 Bal.1,200 Utilities Expense (6) 400 Bal. 400 EXPENSES

Use a trial balance.

Trial Balance A trial balance lists all accounts with their balances – assets first, followed by liabilities, and then stockholders’ equity. DEBITS CREDITS

Chart of Accounts It is a listing of all accounts and account numbers used by a business.

Air & Sea Travel Chart of Accounts Assets Liabilities Stockholders’ Equity 101 Cash201 Accounts Payable301 Common Stock 111 Accounts Receivable231 Notes Payable311 Dividends 141 Office Supplies312 Retained Earnings 151 Office Furniture 191 Land BALANCE SHEET ACCOUNTS: INCOME STATEMENT ACCOUNTS (PART OF STOCKHOLDERS’ EQUITY): Revenues Expenses 401 Service Revenue501 Rent Expense 502 Salary Expense 503 Utilities Expense

Account in Four-Column Format Balance DateItem DebitCredit DebitCredit 20x1 April250,00050, ,00010,000 Account: Cash Account No. 101