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

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

3. 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. 4 Assets = Liabilities + Owners’ Equity 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. 5 Assets = Liabilities + Owners’ Equity Land Note Payable + $50,000 = + $200,000 Building + $150,000 Purchase of property in exchange for note payable Increase on left has corresponding increase on right

6. 6 Assets = Liabilities + Owners’ Equity Equip. Accts. Pay. + $20,000 = + $20,000 Purchase of equipment on account At least two accounts affected by every transaction I.O.U.

7. 7 Revenue - Expenses = Net income (loss) Income Stmt. Stmt. of R/E Beg. R/E + Net income (or – net loss) - Dividends = End. R/E Effect of Revenue and Expenses on Retained Earnings

8. 8 Sell monthly memberships on account Assets = Liabilities + Owners’ Equity Accts. Rec. Retained Earnings + $15,000 = + $15,000 Revenues increase retained earnings

9. 9 Sell court time Assets = Liabilities + Owners’ Equity Cash Retained Earnings + 5,000= + 5,000 Revenues increase retained earnings

10. 10 Assets = Liabilities + Owners’ Equity Cash Retained Earnings - 10,000= - 10,000 Payment of wages and salaries Expenses decrease retained earnings

11. 11 Assets = Liabilities + Owners’ Equity Cash Retained Earnings - 3,000= - 3,000 Payment of utilities Expenses also decrease assets or increase liabilities

12. 12 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

13. 13 Assets = Liabilities + Owners’ Equity Cash Retained Earnings - 2,000= - 2,000 Payment of dividends Dividends directly reduce retained earnings

14. 14 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

15. 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. 16 Glengarry Health Club Balance Sheet January 31, 2004 Assets: Cash $194,000 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

17. Sample Chart of Accounts 100 - 199 ASSETS 100 - 109: Cash 101: Checking Account 102: Savings Account 110 - 119: Receivables 111: Accts. Receivable : 120 - 129: Prepaid Assets 121: Cleaning Supplies 122: Prepaid Insurance 130 - 139:Property, Plant & Equipment 131: Land 132: Building : 200 - 299 LIABILITIES 200 - 209: Short-Term Liab. 201: Accts. Payable 202: Wages Payable : 300 - 399 OWNERS’ EQUITY 301 Preferred Stock 302 Common Stock 303 Retained Earnings 400 - 499 REVENUES : 500 - 599 EXPENSES : 17

18. 18 General Ledger File or book that contains one page (or entry) for each account. Cash +100 -50 A/R + 400 - 100 Cash: +100 - 50

19. 19 The T Account Account Name Representation of one account in the G/L Debits are entered on left Credits are entered on right

20. 20 The T Account 900 cr. Account Name 400 dr. 500 cr. Debits & credits are netted to obtain balance in account

21. 21 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

22. 22 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

23. 23 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

24. 24 Normal Balances Assets Expenses Dividends Liabilities Owners’ Equity Revenues DebitCredit all increased with debits all increased with credits

25. 25 Cash Capital Stock (1) 100,000 Transactions and T Accounts (1) Issue capital stock for cash Stock Certificate

26. 26 Transactions and T Accounts Land Building Note Payable (2) 150,000 (2) 50,000 (2) 200,000 (2) Purchase property in exchange for note payable

27. 27 Transactions and T Accounts Equipment Accounts Payable (3) 20,000 (3) Purchase equipment on account I.O.U.

28. 28 (4) Sell monthly memberships on account (5) Sell court time (4) 15,000 (5) 5,000 T Accounts reflect current and previous postings to the account for each period Cash (1) 100,000 (5) 5,000 Retained Earnings Transactions and T Accounts Accts. Rec. (4) 15,000

29. 29 (6) Pay employees wages for the month (7) Pay utilities for the month Wage Expense (6) 10,000 Utilities Expense (7) 3,000 Cash (6) 10,000 (7) 3,000 (1) 100,000 (5) 5,000 Transactions and T Accounts

30. 30 (8) Collection of accounts receivable Cash (8) 4,000 (1) 100,000 (5) 5,000 (6) 10,000 (7) 3,000 Accts. Rec. (8) 4,000 (4) 15,000 Transactions and T Accounts

31. 31 (9) Pay dividends Cash (8) 4,000 (1) 100,000 (5) 5,000 (6) 10,000 (7) 3,000 Retained Earnings (9) 2,000 Transactions and T Accounts (9) 2,000 (4) 15,000 (5) 5,000

32. 32 Balance the T Accounts Accts. Rec. (8) 4,000 (4) 15,000 Retained Earnings (9) 2,000 (4) 15,000 (5) 5,000 Cash (8) 4,000 (1) 100,000 (5) 5,000 (6) 10,000 (7) 3,000 (9) 2,000 94,000 18,000 11,000

33. 33 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:

34. 34 Cash Accts. Rec. Equipment Building Land Accounts Payable Notes Payable Capital Stock Membership Revenue Court Fee Revenue Wage Expense Utility Expense Dividends Total $ 94,000 11,000 20,000 150,000 50,000 $ 20,000 200,000 100,000 15,000 5,000 10,000 3,000 2,000 $ 340,000 Debits Credits Glengarry Health Club Trial Balance January 31, 2004

35. 35 End of Chapter 3