1 Chapter 3 Processing Accounting Information Annual Report Financial Accounting, Alternate 4e by Porter and Norton

2 External vs. Internal Events external events: interaction between entity and outside environment internal events: interaction within entity

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

4 Assets = Liab. + O/E + Rev – Exp. Cash Capital Stock + 100,000= + 100,000 The accounting equation must always remain in balance Issue capital stock for cash 1/04 Transactions for Glengarry Health Club Stock Certificate

5 Assets = Liab. + O/E + Rev. – Exp. Land Note Pay. + $50,000 + $200,000 Building + $150,000 Purchase of property in exchange for note payable Increase on left has corresponding increase on right

6 Assets = Liab. + O/E + Rev. – Exp. Equip. Accts. Pay. + $20,000 = + $20,000 Purchase of equipment on account At least two accounts affected by every transaction I.O.U.

7 Sell monthly memberships on account Assets = Liab. + O/E + Rev. – Exp. Accts. Rec. Memberships + $15,000 = + $15,000 Revenues increase retained earnings

8 Sell court time Assets = Liab. + O/E + Rev. – Exp. Cash Court Fees + 5,000 = + 5,000 Revenues increase retained earnings

9 Assets = Liab. + O/E + Rev. – Exp. Cash Wages - 10,000= - 10,000 Payment of wages and salaries Expenses decrease retained earnings

10 Assets = Liab. + O/E + Rev. – Exp. Cash Utilities - 3,000= - 3,000 Payment of utilities Expenses also decrease assets or increase liabilities

11 Collection of accounts receivable Assets = Liab. + O/E + Rev. - Exp. Cash + $4,000 =(no change) Accts. Rec. - $4,000 Assets were traded: accounts receivable for cash

12 Assets = Liab. + O/E + Rev. – Exp. Cash Ret. Earn. - 2,000= - 2,000 Payment of dividends Dividends directly reduce retained earnings

13 Assets = Liab. + O/E + Rev. – Exp. Sold stock+ $100,000 = + $100,000 Bought prop. with note+ 200,000 = + $200,000 Bought equip. on acct.+ 20,000 = + 20,000 Sold memberships+ 15,000 = + $15,000 Sold court time+ 5,000 = + 5,000 Paid wages- 10,000 = - $10,000 Paid utilities- 3,000 = - 3,000 Collected A/R+ 4,000 = (no change) ,000 Paid dividends- 2,000 = - 2,000 Cumulative Effect of Transactions for Glengarry Health Club + $325,000 = $220,000 + $98,000 + $20,000 - $13,000

14 Revenue - Expenses = Net income (loss) Income Stmt. Stmt. of R/E Beginning R/E + Net income (or – net loss) - Dividends = Ending R/E Effect of Revenue and Expenses on Retained Earnings

15 Glengarry Health Club Income Statement For the Month Ended January 31, 2004 Revenues: Memberships $15,000 Court fees 5,000 $20,000 Expenses: Salaries and wages $10,000 Utilities 3,000 13,000 Net income $ 7,000 Net increase to retained earnings

16 Glengarry Health Club Statement of Retained Earnings For the Month Ended January 31, 2004 Beginning balance, Jan. 1, 2004: $ 0 Add: Net income for January7,000 Deduct: Dividends for January 2,000 Ending balance, Jan. 31, 2004: $ 5,000 Distribution of net income

17 Glengarry Health Club Balance Sheet January 31, 2004 Assets: Cash $ 94,000 Accts. Rec. 11,000 Equipment 20,000 Building 150,000 Land 50,000 Total assets $325,000 Liabilities & Owners’ Equity: Accounts payable$ 20,000 Notes payable 200,000 Capital stock 100,000 Retained earnings 5,000 Total liabilities & owners’ equity$325,000 Cost principle requires recording assets at cost

Sample Chart of Accounts ASSETS : Cash 101: Checking Account 102: Savings Account : Receivables 111: Accts. Receivable : : Prepaid Assets 121: Cleaning Supplies 122: Prepaid Insurance :Property, Plant & Equipment 131: Land 132: Building : LIABILITIES : Short-Term Liab. 201: Accts. Payable 202: Wages Payable : OWNERS’ EQUITY 301 Preferred Stock 302 Common Stock 303 Retained Earnings REVENUES : EXPENSES : 18

19 General Ledger File or book that contains one page (or entry) for each account. Cash A/R Cash:

20 Re-examine the Accounting Equation Assets = Liab. + O/E + Rev. – Exp. Balance Sheet Income Statement

21 End of Chapter 3