1. The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet 1

2. Learning Objectives In this chapter, you will: 1.Learn the conventions for recording transactions, including the dual nature of transactionsand the use of T-accounts and journal entries 2.Understand how the recording of transactions is the foundation for preparing financial statements 2

3. Three Bookkeeping Concepts Discussed in this Chapter Dual nature (duality) of transactions and events Use of T-accounts and journal entries – Recording the duality of a transaction or event Preparation of a simple balance sheet 3

4. Accounts Detailed accounts allow the decomposition of transaction to convey information Amount in each account appears on balance sheet or income statement Accounting does not prescribe a list of accounts – Accountants follow a conventional naming system 4

5. Accounts Balance sheet accounts: Permanent accounts that remain open, with nonzero balances, at the end of the reporting period Income statement accounts: Temporary accounts that have a zero balance at the end of the reporting period 5

6. What Accounts Make up the Typical Balance Sheet? 6 Assets=Liabilities+Shareholders’ Equity Cash Payables (i.e., Accounts, Notes, and Interest) Common Stock Marketable securities Advances from Customers (i.e., Unearned Revenue) Additional Paid-In Capital Receivables (i.e., Accounts and Notes) loanPreferred Stock InventoryBonds PayableRetained Earnings Prepaid ExpensesDeferred Income Taxes Accumulated Other Comprehensive Income Property, Plant, and Equipment Intangible Assets

7. Balance Sheet Classifications: Assets and Liabilities Current assets and current liabilities – Receipt or payment of assets expected to occur within one year or one operating cycle Noncurrent assets and noncurrent liabilities – Receipt or payment of assets expected to occur more than one year after the balance sheet date 7

8. Dual Effect of Transactions Balance Sheet Equation – Assets = Liabilities + Shareholders’ Equity Transactions will have one or some combination of these effects: – Increase an asset and increase either a liability or shareholders’ equity – Decrease an asset and decrease either a liability or shareholders’ equity – Increase one asset and decrease another asset – Increase one liability or shareholders’ equity and decrease another liability or shareholders’ equity 8

9. An Example of Dual Effects Let’s look at the first two transactions for Dugan Limited (Dugan) for their first quarter of business, ended March 31: 9 1.On January 1, Dugan issued 50,000 shares of €1 par value common stock for €200,000 in cash 2.On January 10, Dugan purchases merchandise inventory costing €60,000 from a supplier, agreeing to pay the supplier in the future

10. Balance Sheet Equality 10 TransactionsAssets=Liabilities +Shareholders’ Equity 1On January 1, Dugan issued 50,000 shares of €1 par value common stock for €200,000 in cash 200,000=+ Sub Total€200,000=€0€0+ 2On January 10, Dugan purchases merchandise inventory costing €60,000 from a supplier, agreeing to pay the supplier in the future 60,000= + Sub Total€260,000=€60,000+€200,000

11. T-Accounts Organizing and accumulating the accounting entries of transactions that affect an individual account Looks like the letter T, with a horizontal line bisected by a vertical line 11 Account Title

12. T-Account Conventions: Assets Increases in assets appear on the left side Decreases in assets appear on the right side 12 The Company receives $100 cash from a customer The Company pays $50 cash to a vendor 100 50 Cash

13. T-Account Conventions: Liabilities Decreases in liabilities appear on the left side Increases in liabilities appear on the right side 13 The Company pays its suppliers the $25 it owed them The Company agreed to pay suppliers $75 for items purchased 2575 Accounts Payable

14. T-Account Conventions: Shareholders’ Equity Decreases in shareholders’ equity appear on the left side Increases in shareholders’ equity appear on the right side 14 The Company retires $45 stated value common stock The Company issues $95 stated value common stock 4595 Common Stock

15. Debit Versus Credit Debit (Dr.) An entry on the left side Credit (Cr.) An entry on the right side 15 1)Increase in an asset, 2)Decrease in a liability, 3)Decrease in a shareholders’ equity item 1) Decrease in an asset, 2) Increase in a liability, 3) Increase in a shareholders’ equity item

16. Ending Balance of T-Accounts Assets – Beginning balance + Debits - Credits = Ending balance Liability and shareholders’ equity – Beginning balance + Credits - Debits = Ending balance 16

17. Journal Entries Formalize the reasoning that supports the transaction recorded Each journal entry reflects equal debits and credits Standardized format 17 Account Debited…………………… Amount Debited Account Credited…………….. Amount Credited

18. Illustration—Dugan Ltd. Let’s look at the journal entries made by Dugan Limited (Dugan) for transactions of its first quarter of business, ended March 31, 2013 18

19. Illustration—Dugan Ltd. 19 On January 1, Dugan issues 50,000 shares of €1 par value common stock for €200,000 in cash January 1, 2013 Dr. Cash200,000 Cr. Common Stock, at par*50,000 Cr. Additional Paid-in Capital**150,000 * (€1 x 50,000) ** (€200,000 – €50,000)

20. Illustration—Dugan Ltd. 20 On January 10, Dugan purchases merchandise inventory costing €60,000 from a supplier, agreeing to pay the supplier in the future January 10, 2013 Dr. Inventory60,000 Cr. Accounts Payable60,000

21. Illustration—Dugan Ltd. 21 On January 11, Dugan pays €36,000 cash to rent office space, furnishings, and a warehouse for the year ending December 31, 2013 Dugan’s asset here is prepaid rent not the office, furnishings or warehouse January 11, 2013 Dr. Prepaid Rent36,000 Cr. Cash36,000

22. On February 20, Dugan receives €22,000 from a customer for future merchandise shipments Dugan will deliver half on March 31 and half on June 30 Illustration—Dugan Ltd. 22 February 20, 2013 Dr. Cash22,000 Cr. Advances from Customers22,000

23. Illustration—Dugan Ltd. 23 March 1, Dugan pays €120,000 for equipment; it finances this purchase by signing a note payable with the bank for 5 years and agreeing to pay interest at the rate of 8% per year The equipment has a useful life of 10 years and no salvage value March 1, 2013 Dr. Equipment120,000 Cr. Note Payable120,000

24. March 12, Dugan sells merchandise at for €80,000; the merchandise sold had cost Dugan €40,000 and the customer agreed to pay Dugan in the second quarter Illustration—Dugan Ltd. 24 March 12, 2013 Dr. Accounts Receivable80,000 Cr. Sales Revenues80,000 Dr. Costs of Goods Sold40,000 Cr. Inventory40,000

25. Illustration—Dugan Ltd. 25 March 31, Dugan pays the supplier €24,000 of the amount due for the January 10 transaction March 31, 2013 Dr. Accounts Payable24,000 Cr. Cash24,000