1 Processing Accounting Information Chapter 2

2 Learning Objective 1 Analyze business transactions.

3 The Account  Basic summary device  Accounts - three broad categories: –Assets –Liabilities –Stockholders’ Equity

4 The Account Assets - 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

5 The Account Liabilities - debts of the company [obligations the entity has to pay money or provide services (deferred revenues)] o Notes payable o Accounts payable o Accrued liabilities o Long-term liabilities (bonds)

6 The Account Stockholders’ (owners’) equity - owners’ claims to the assets of a corporation oCommon Stock oRetained Earnings oRevenues (these increase retained earnings) oExpenses (these decrease retained earnings)

7 Accounting for Business Transactions Transaction - an event that both affects the financial position of the business entity and can be reliably recorded

8 Accounting for Business Transactions 1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock. (1) 50,000 50,000

9 Accounting for Business Transactions 2. Air & Sea purchases land for an office location, paying $40,000 in cash (2) (40,000) 40,000 Bal 10,000 40,000 50,000

10 Accounting for Business Transactions 3. The business buys office supplies, agreeing to pay $500 to the office- supply store within 30 days. (3) Bal 10, , ,000

11 Accounting for Business Transactions 4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash. (4) 5,500 5,500 Bal 15, , ,000 5,500

12 Accounting for Business Transactions 5. Air & Sea Travel earns revenue for performing services for customers on account in the amount of $3,000. (5) 3,000 3,000 Bal 15,500 3, , ,000 8,500

13 Accounting for Business Transactions 6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400. (6) (2,700) (2,700) Bal 12,800 3, , ,000 5,800

14 Accounting for Business Transactions 7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3. (7) (400) (400) Bal 12,400 3, , ,000 5,800

15 Accounting for Business Transactions 8. The owners remodel their home at a cost of $30,000, paying cash from personal funds. This is a personal transaction, not a business transaction!

16 Accounting for Business Transactions 9. The business collects $1,000 from a customer on account. (9) 1,000 (1,000) Bal 13,400 2, , ,000 5,800

17 Accounting for Business Transactions 10. Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land. (10) 22,000 (22,000) Bal 35,400 2, , ,000 5,800

18 Accounting for Business Transactions 11. The corporation declares a dividend and pays $2,100 cash to the stockholders. (11) (2,100) (2,100) Bal 33,300 2, , ,000 3,700

19 Income Statement Air & Sea Travel Income Statement Month Ended April 30, 20x3 Revenue: Service revenue$8,500 Expenses: Salary expense$1,200 Rent expense1,100 Utilities expense 400 Total expenses2,700 Net income$5,800

20 Statement of Retained Earnings Air & Sea Travel Statement of Retained Earnings Month Ended April 30, 20x3 Retained earnings, April 1, 20x5$ 0 Add: Net income for the month5,800 Subtotal$5,800 Less: Dividends(2,100) Retained earnings, April 30, 20x5$3,700

21 Balance Sheet Assets Cash$ 33,300 Accounts receivable2,000 Office supplies500 Land18,000 Total assets$ 53,800 Liabilities Liabilities Accounts Payable$ 100 Stockholders’ Equity Stockholders’ Equity Common stock$50,000 Retained earnings 3,700 Total stockholders’ equity$53,700 equity$53,700 Total liabilities and stockholders’ equity $53,800 stockholders’ equity $53,800 Air & Sea Travel Balance Sheet April 30,20X3

22 Air & Sea Travel Statement of Cash Flows Month Ended April 30, 20x3 Cash flows from operating activities: Collections from customers ($5,500 + $1,000) $ 6,500 Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees Cash payments to suppliers and employees ($2,700 + $400) (3,100) ($2,700 + $400) (3,100) Net cash inflow from operating activities$ 3,400 Cash flows from investing activities: Acquisition of land$(40,000) Acquisition of land$(40,000) Sale of land 22,000 Sale of land 22,000 Net cash outflow from investing activities (18,000) Net cash outflow from investing activities (18,000) Cash flows from financing activities: Issuance (sale) of stock$50,000 Issuance (sale) of stock$50,000 Payment of dividends (2,100) Payment of dividends (2,100) Net cash inflows from financing activities$47,900 Net cash inflows from financing activities$47,900 Net increase (decrease) in cash$33,300 Cash balance, April 1, 20x5 0 Cash balance, April 30, 20x5$33,300

23 Learning Objective 2 Understand how accounting works.

24 Double-Entry Accounting Record the dual effects of each business transaction.

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

26 Increases and Decreases in the Accounts Accounting Equation:Assets=Liabilities+ Stockholders’ Equity Rules of Debit and Credit: Debit + Debit – Debit – Credit – Credit + Credit +

27 Rules of Debit and Credit Air & Sea received $50,000 and issued stock. Note that every debit must have an offsetting credit: Assets=Liabilities+ Stockholders’ Equity Debit for Increase, 50,000 Credit for Increase, 50,000 Cash Common Stock

28 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

29 Learning Objective 3 Record business transactions.

30 Journal Chronological record of all transactions listed by date.

31 Recording Transactions in the Journal April 2Cash 50,000 Common Stock 50,000 Issued common stock 1.Identify the transaction; specify each account affected. 2.Determine whether each account is increased or decreased. Use the rules of debits and credits 3.Enter transaction in the journal, including a brief explanation.

32 Posting from Journal to Ledger  Ledger - grouping of all the accounts, showing the balance of each account  Posting – the process of transferring debits and credits from a journal to the ledger

33 Posting from Journal to Ledger Journal Entry April 2Cash 50,000 Common Stock 50,000 Issued common stock 50,000 CashCommon Stock 50,000

34 Flow of Accounting Data Transaction Occurs Transaction Analyzed Transaction Entered in the Journal Amounts Posted to the Ledger

35 Learning Objective 4 Use a trial balance. Trial Balance - lists all accounts with their debit or credit balances

36 Chart of Accounts Listing of all accounts and account numbers used by a business

37 Normal Balances of the Accounts LiabilitiesEquityAssets =+ Debit forCredit for + - Normal Balance Liabilities Debit forCredit for - + Normal Balance Stockholder’s Equity Debit forCredit for - + Normal Balance

38 Normal Balances of the Accounts Stockholders’ Equity Debit forCredit for - + Normal Balance Common Stock Debit forCredit for - + Normal Balance Retained Earnings Debit forCredit for + - Normal Balance Expenses Debit forCredit for - + Normal Balance Revenues Decreases Retained Earnings Increases Retained Earnings

39 An Example Trial Balance for Air and Sea Travel

40 What if Your Trial Balance Does Not Balance? [Total debits do not equal credits]  What is the out of balance amount? Maybe you didn’t post a debit or credit of that amount.  Divide the out of balance amount by: –2: this would detect a debit posted as a credit or credit posted as a debit –9: this would detect a transposition error, if result is an integer number:  Posting of $84 entered incorrectly as $48  ($84-$48)/9=4