3 7/e Financial Statements and the Annual Report PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning

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

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 LO2

Assets = Liabilities + Owners’ Equity Cash Capital Stock + $ 100,000 = + $ 100,000 The accounting equation must always remain in balance Issue Capital Stock for Cash LO3

Purchase of Property in Exchange for Note Payable Increase on left has corresponding increase on right Assets = Liabilities + Owners’ Equity Land Note Payable + $50,000 = + $200,000 Building + $150,000

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

Sell Monthly Memberships on Account Assets = Liabilities + Owners’ Equity Accts. Rec. Retained Earnings + $15,000 = + $15,000 Revenues increase retained earnings

Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $10,000 = – $10,000 Expenses decrease retained earnings Payment of Wages and Salaries

Collection of Accounts Receivable Assets = Liabilities + Owners’ Equity Cash + $4,000 = (no change in Liab. or R/E) Accts. Rec. – $4,000 Assets were traded: accounts receivable for cash

Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $2,000= – $2,000 Payment of Dividends Dividends directly reduce retained earnings

Assets = Liabilities + O/E 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 in Liabilities + OE) – 4,000 Paid dividends– 2,000 = – 2,000 Cumulative Effect of Transactions for Glengarry Health Club + $325,000 = + $220,000 + $105,000

Glengarry Health Club Balance Sheet January 31, 2010 Assets Cash $ 94,000 Accts. Rec. 11,000 Equipment 20,000 Building 150,000 Land 50,000 Total assets$325,000 Liabilities and Owners’ Equity Accounts payable$ 20,000 Notes payable 200,000 Capital stock 100,000 Retained earnings 5,000 Total liabilities and owners’ equity$325,000

Glengarry Health Club Income Statement For the Month Ended January 31, 2010 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

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

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

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

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

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

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

The Journal  A chronological record of transactions  The book of original entry  Each entry has a debit and a credit that equals  Transactions normally recorded in general journal

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

Journal Entries Dr. Cr. Building 150,000 Land 50,000 Notes Payable 200,000 To record acquisition of property in exchange for note. Equipment 20,000 Accounts Payable 20,000 To record the acquisition of equipment on open account. Accounts Receivable 15,000 Membership Revenue 15,000 To record sale of monthly memberships on account

End of Chapter 3