©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 1 Chapter 6 The Accounting System

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 2 Introduction to the Accounting System Part I

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 3 Learning Objective 1 Describe the basic classification structure accounting uses.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 4 Accounting’s Basic Classification Structure Accounts or general ledger accounts are sub-classification of assets, liabilities, and equity elements. To convert raw data into useful information, an accounting system needs some means of classifying economic events and transactions.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 5 Ledger Account Name & Number Accounting’s Basic Classification Structure Liability Accounts L Accounts SE Stockholders’ equity Accounts A Asset

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 6 Assets: 101 Cash 110 Accounts Receivable 120 Merchandise Inventory 130 Office Supplies 140 Prepaid Insurance 150 Delivery Truck 155 Accumulated Depreciation on Depreciation on Delivery Truck Delivery Truck Collins Container Corporation Chart of Accounts Liabilities: 200 Accounts Payable 210 Wages Payable 220 Interest Payable 240 Accrued Expenses 245 Unearned Revenue 250 Notes Payable

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 7 Stockholders’ Equity: 300 Common Stock 310 Additional Paid-in Capital Capital 320 Retained Earnings 325 Dividends Collins Container Corporation Chart of Accounts Expenses: 500 Cost of Goods Sold 620 Wage Expense 630 Rent Expense 640 Electricity Expense 645 Supplies Expense 650 Gasoline Expense 655 Insurance Expense 660 Depreciation Expense 670 Bank Service Charge 680 Interest Expense Revenues: 400 Sales 410 Delivery Service 420 Interest Revenue

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 8 Learning Objective 2 Describe the nine steps of the accounting cycle.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones6 - 9 The Accounting Cycle Analyze economic events and transactions. Journalize transactions. Post transactions to the general ledger. Prepare a trial balance. Prepare, journalize, and post adjusting entries.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Accounting Cycle Prepare an adjusted trial balance. Prepare financial statements. Prepare, journalize, and post closing entries. Prepare the post-closing trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 3 Describe and use journals and ledgers.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Journalizing Transactions Journals are sometimes called books of original entry. Journalizing transactions is the act of recording accounting transactions in a journal. Posting is the process of copying data from journals to the ledger.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Posting from the Journals to the General Ledger General Journal Cash$$ Common Stock$$ Cash$$ Notes Payable$$ Office Supplies$$ Cash$$ CashAccount No. 101 Date$$A $$B$$C Office SuppliesAccount No. 130 Date$$C Notes PayableAccount No. 250 Date$$B Common StockAccount No. 300 Date$$A

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 4 Explain the purpose of preparing a trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Preparing the Trial Balance Balance $$$ Cash Account No.101 Balance $$$ Levine Corporation Trial Balance June 30, 2003 Cash$$$ Accounts receivable$$$ Equipment$$$ Accounts payable$$$ Common stock$$$ Retained earnings$$$ Sales$$$ Cost of goods sold$$$ Wage expense$$$ Rent expense$$$ Utilities expense$$$

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 5 Explain why accountants make adjusting entries and what these entries accomplish.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Adjusting the General Ledger Accounts Adjusting entries are necessary to ensure that all revenue earned is reported, but no more; and that all expenses incurred are reported, but no more; and that asset, liability, and equity accounts are properly stated as of the balance sheet date. The adjusted trial balance is prepared after all of the adjusting entries have been made.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 6 Explain the closing process and the reason for it.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Preparing and Posting Closing Entries The closing process involves closing out one year of business and getting ready for the next. Close the revenue accounts to income summary. Close the expense accounts to income summary. Close income summary to retained earnings. Close the dividends account to retained earnings.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Application of Accounting Procedures Part II

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 1 Understand the effects of debits and credits and use them to make accounting entries.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Impact of Debits and Credits on Assets, Liabilities, and Equity Left side of the equation = Right side of the equation Debit sideCredit side = AssetsLiabilities + Equity =

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Impact of Debits and Credits on Assets, Liabilities, and Equity Debit balanceCredit balance = + AssetsLiabilities = Equity +

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Impact of Debits and Credits on Assets, Liabilities, and Equity NormalBalanceDebit Debits+Credits– NormalBalanceCredit Debits–Credits+ NormalBalanceCredit Debits–Credits+ EquityAssetsLiabilities =+

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 2 Make accounting entries using T-accounts and the general ledger.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The T-Account Holiday Isle Resorts buys $300 worth of supplies for cash. Cash Debit sideCredit side 300 Supplies Debit sideCredit side 300

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Effects of Debits and Credits on Equity Common stock (Credit balance) Debits decreases retained earnings Credits increases retained earnings Dividends (Debit balances) Expenses Revenues (Credit balances) Retained earnings (Credit balance) Assets (Debit balance) Liabilities (Credit balance) Equity =+

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Effects of Debits and Credits on Equity NormalBalanceDebit Debits+Credits– Dividends NormalBalanceCredit Debits–Credits+ Revenues NormalBalanceDebit Debits+Credits– Expenses

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Sample General Journal Entry Jul 31Cash 500 Rent Revenue500 To record July rent 31Property Tax Expense 200 Cash200 To record taxes 31Dividends 120 Cash120 To record dividends paid General Journal Page xx DatePost. DatePost. 2004DescriptionRef. Debit Credit 2004DescriptionRef. Debit Credit

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Analyzing and Journalizing Transactions a.On January 1, 2004, Collins Container Corporation began by issuing 1,000 shares of its $1 par common stock in exchange for $10,000 in cash. (a)Cash10,000 Common Stock 1,000 Additional Paid-in Capital 9,000 b.On January 1, the company borrowed cash of $20,000 on a 9%, one-year promissory note. (b)Cash20,000 Notes Payable20,000

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Analyzing and Journalizing Transactions (c)Prepaid Insurance 2,400 Cash 2,400 (d)Delivery Truck15,000 Cash15,000 c.On January 1, the company purchased a one-year insurance policy for $2,400 cash. d.On January 1, the company purchased a $15,000 delivery truck for cash.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Analyzing and Journalizing Transactions (f)Office Supplies2,000 Accounts Payable2,000 e.On January 4, the company ordered $4,200 worth of shipping supplies. The supplies are to be delivered in early February. (no transaction) f.On January 7, the company purchased office supplies for $2,000 on account (on a charge account).

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Analyzing and Journalizing Transactions (g)Merchandise Inventory16,000 Accounts Payable16,000 (h)Accounts Payable 750 Cash 750 g.On January 8, the company purchased merchandise inventory costing $16,000 on account. h.On January 12, the company paid $750 on account toward the office supplies purchased on January 7.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Additional Transactions j. Collins billed customers $12,600 for merchandise delivered to customers on January 26. Original cost was $7,400. k. Collins Corporation provides delivery services to some neighborhood businesses. On January 26, Collins billed one of these businesses $300 and collected cash of $150 from another business for delivery services. Total delivery services for neighboring businesses totaled $450. i.On January 22, the company received cash of $8,000 for merchandise it sold and delivered to customers that day. The original cost of the merchandise was $5,000.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Additional Transactions l.On January 27, the company paid $90 for gasoline used in the company’s delivery truck during the month of January. m.On January 27, the company paid wages to employees of $1,500. n.On January 28, the company received a $2,700 order from a customer for goods to be delivered in February. o.On January 31, the company paid $500 for January’s rent. p.On January 31, the company paid a dividend of $300.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 3 Post journal entries to the general ledger.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Sample General Journal Entry General Journal Page 1 DatePost. DatePost. 2004DescriptionRef. DebitCredit Jan 1Cash ,000 Common Stock 30010,000 Additional Paid-in Capital 310 9,000 To record the sale of 1,000 shares of $1 par common Account Name: CashAccount Number: 101 DatePost.Balance 2004DescriptionRef.DebitCredit Debit Credit Jan 1GJ 1 10,00010,000

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 4 Prepare a trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Trial Balance January 31, 2004 $17,610 12,900 12,900 3,600 3,600 2,000 2,000 2,400 2,400 15,000 15, ,400 12,400 1,500 1, $68,300$17,250 20,000 20,000 1,000 1,000 9,000 9,000 20,600 20, $68, Cash 110 Accounts Receivable 120 Merchandise Inventory 130 Office Supplies 140 Prepaid Insurance 150 Delivery Truck 200 Accounts Payable 250 Notes Payable 300 Common Stock 310 Additional Paid-in Capital 325 Dividends 400 Sales 410 Delivery Service Revenue 500 Cost of Goods Sold 620 Wage Expense 630 Rent Expense 650 Gasoline Expense Total Total

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 5 Prepare adjusting journal entries and reconcile a bank account.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Adjusting Process Examine each account. Determine the appropriate ending account balances. Determine the required increase or decrease. Make an adjusting entry.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Bank Reconciliation Example The bank statement of Collins Container shows a balance of $18,346 on January 31. The Cash account on the books has a balance of $17, The January 26 deposit of $150 does not appear on the bank statement.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Bank Reconciliation Example 2. Outstanding checks for $890 recorded in the journal have not been paid by the bank. 3. $28 of January interest earned by the company has not been recorded. 4. Bank service charges of $32 have not been recorded.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Balance per bank, January 31$18,346 Add deposit in transit 150 Deduct outstanding checks – 890 Correct bank balance$17,606 Bank Reconciliation Example Balance per books, January 31$17,610 Add January interest 28 Deduct bank service charges – 32 Correct cash balance$17,606

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 6 Prepare a worksheet and an adjusted trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Worksheet Cash Accounts receivable Inventory Office supplies Prepaid insurance Delivery truck Accumulated dep. Accounts payable Wages payable Interest payable Accrued expenses Unearned revenue Notes payable Common stock Paid-in capital Retained earnings Dividends Account Trial Balance Dr. Cr.17,61012,900 3,600 3,600 2,000 2,000 2,400 2,40015, ,25020,000 1,000 1,000 9,000 9,000 Adjustments Dr. Cr , ,60612,900 3,600 3,600 1,650 1,650 2,200 2,20015, ,250 1,200 1, ,000 1,000 1,000 9,000 9,000 Adjusted Trial Balance Dr. Cr.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Worksheet Sales Delivery revenue Interest revenue Cost of goods sold Wage expense Rent expense Electricity expense Supplies expense Gasoline expense Insurance expense Dep. expense Bank expense Interest expense Totals Account Trial Balance Dr. Cr. 12,400 1,500 1, ,30020, ,300 Adjustments Dr. Cr ,200 1, ,380 2, ,380 2,38012,400 2,700 2, ,02320, ,023 Adjusted Trial Balance Dr. Cr.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Worksheet Cash Accounts receivable Inventory Office supplies Prepaid insurance Delivery truck Accumulated dep. Accounts payable Wages payable Interest payable Accrued expenses Unearned revenue Notes payable Common stock Paid-in capital Retained earnings Dividends Account 17,60612,900 3,600 3,600 1,650 1,650 2,200 2,20015, ,250 1,200 1, ,000 1,000 1,000 9,000 9,000 Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr.17,60612,900 3,600 3,600 1,650 1,650 2,200 2,20015, ,250 1,200 1, ,000 1,000 1,000 9,000 9,000 Balance Sheet Dr. Cr.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Worksheet Account Adjusted Trial Balance Dr. Cr. Sales Delivery revenue Interest revenue Cost of goods sold Wage expense Rent expense Electricity expense Supplies expense Gasoline expense Insurance expense Dep. expense Bank expense Interest expense Totals Net income Totals 12,400 2,700 2, ,02320, ,023 Income Statement Dr. Cr.12,400 2,700 2, ,767 4,236 4,23621,00320, ,00321,00353,25653,25649,020 4,236 4,23653,256 Balance Sheet Dr. Cr.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 7 Prepare financial statements from a worksheet or an adjusted trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Financial Statements for Collins Container Corporation Income Statement For the Month Ended January 31, 2004 Sales$20,600 Less: Cost of goods sold 12,400 Gross margin$ 8,200 Operating expenses: Wages$2,700 Wages$2,700 Rent 500 Rent 500 Electricity 120 Electricity 120 Office supplies 350 Office supplies 350 Gasoline 90 Gasoline 90 Insurance 200 Insurance 200 Depreciation 225 – 4,185 Depreciation 225 – 4,185 Operating income$ 4,015 Delivery service revenue 375 Interest revenue 403 Bank service charge – 32 Interest expense – 150 Net income$ 4,236

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Financial Statements for Collins Container Corporation Statement of Stockholders’ Equity For the Month Ended January 31, 2004 Balance, January 1, 2004$ 0$ 0$ 0$ 0 Stock issued 1,000 9,000 10,000 Net income 4,236 4,236 Dividends – 300 – 300 Balance, January 31, 2004$1,000$9,000$3,936$13,936 Additional Paid-in Capital Retained Earnings Total Stock- holders’ Equity Common Stock

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Financial Statements for Collins Container Corporation Balance Sheet January 31, 2004 Assets:Liabilities: Cash$17,606Accounts payable$17,250 Accounts receivable 12,900Wages payable 1,200 Inventory 3,600Interest payable 150 Office supplies 1,650Accrued expenses 120 Prepaid insurance 2,200Unearned revenue 75 Delivery truck, net 14,775Notes payable 20,000 Total liabilities$38,795 Stockholders’ equity Stockholders’ equity Common stock$ 1,000 Paid-in capital 9,000 Paid-in capital 9,000 Total capital$10,000 Total capital$10,000 Retained earnings 3,936 Retained earnings 3,936 Total stockholders’ equity 13,936 Total liabilities and Total assets$52,731 stockholders’ equity$52,731

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 8 Prepare closing journal entries and a post-closing trial balance.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Closing Process Jan 31 Sales20,600 Delivery Service Revenue 375 Interest Revenue 28 Income Summary21,003 Jan 31 Income Summary16,767 Cost of Goods Sold and Other Expenses16,767 and Other Expenses16,767

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Closing Process Jan 31 Income Summary4,236 Retained Earnings4,236 Jan 31 Retained Earnings 300 Dividends 300

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Collins Container Corporation Post-Closing Trial Balance 1/31/04 $17,606 12,900 12,900 3,600 3,600 1,650 1,650 2,200 2,200 15,000 15,000$52, $17,250 1,200 1, ,000 20,000 1,000 1,000 9,000 9,000 3,936 3,936$52, Cash 110 Accounts receivable 120 Merchandise inventory 130 Office supplies 140 Prepaid insurance 150 Delivery truck 155 Accumulated depreciation 200 Accounts payable 210 Wages payable 220 Interest payable 240 Accrued expense 245 Unearned revenue 250 Notes payable 300 Common stock 310 Additional paid-in capital 320 Retained earnings Total

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones End of Chapter 6