1. Processing Accounting Information
Chapter 2
Processing Accounting Information
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2. Identify the five major steps in the accounting cycle.
Learning Objective 1
Identify the five major steps in the accounting cycle.
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3. Analyze Record Adjust Report Close The Accounting Cycle
Analyze transactions from source documents
Analyze
Journalize transactions
Prepare unadjusted trial balance
Record
Journalize adjusting entries
Prepare adjusted trial balance
Adjust
Prepare financial statements
Report
Journalize closing entries
Prepare post-closing trial balance
Close
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4. Analyze and record transactions using the accounting equation.
Learning Objective 2
Analyze and record transactions using the accounting equation.
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5. Analyzing Transactions
The accounting equation provides a convenient way to analyze and summarize accounting transactions.
Assets = Liabilities + Stockholders’ Equity
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6. Accounting Transaction
An economic event that must be recorded in the company’s accounting records.
An event that affects any of the elements of the accounting equation—assets, liabilities, or stockholders’ equity.
The accounting equation must stay in balance, therefore at least two elements are always affected by each recorded transaction.
Double-entry accounting
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7. The Accounting Equation Expanded
Assets =
Liabilities +
Stockholders’ Equity
Common Stock
Retained Earnings
+ Revenues
- Expenses
- Dividends
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8. Select the correct answer.
The first step in the accounting cycle
Report
Analyze
Record
Adjust
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9. The Accounting Equation—An Illustration
Mike Lester established Mike’s Bikes on December 1, Mike’s Bikes purchases bikes from various suppliers and sells them to customers.
The following slides illustrate several accounting transactions. Be sure to note that the accounting equation remains in balance following the recording of each
transaction.
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10. Issued Stock
On December 1, 2016, Mike invested $30,000 cash in exchange for the company’s common stock.
Assets =
Liabilities +
Stockholders’ Equity
Cash
Common Stock 1
+30,000
$30,000
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11. Paid Rent in Advance
On December 1, Mike’s Bikes prepaid a year’s building rent at $500 per month; meaning it paid $6,000.
Assets =
Liabilities +
Stockholders’ Equity
Cash
Prepaid Rent
Common Stock
+30,000 2
-6,000
+6,000
$24,000
$6,000
$30,000
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12. Purchased Merchandise Inventory on Account
On December 1, Mike’s Bikes purchased $3,000 of merchandise inventory on account.
Assets =
Liabilities +
Stockholders’ Equity
Cash
Merch. Inventory
Prepaid Rent
Accounts Payable
Common Stock
+30,000
-6,000
+6,000 3
+3,000
$24,000
$3,000
$6,000
$30,000
$33,000
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13. Signed Bank Note for Cash
On December 1, Mike’s Bikes obtained a two-year bank loan in the amount of $20,000. Annual interest charges on the note amount to 6 percent and are due each November 30.
Assets =
Liabilities +
Stockholders’ Equity
Cash
Merch. Inventory
Prepaid Rent
Accounts Payable
Notes Payable
Common Stock
+30,000
-6,000
+6,000
+3,000 4
+20,000
$44,000
$3,000
$6,000
$20,000
$30,000
$53,000
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14. Purchased Equipment
On December 2, Mike’s Bikes purchased equipment used for bike maintenance and assembly. Mike used $15,000 cash from the bank loan.
Assets =
Liabilities +
Stockholders’ Equity
Cash
Merch. Inventory
Prepaid Rent
Equip.
Accounts Payable
Notes Payable
Common Stock
+30,000
-6,000
+6,000
+3,000
+20,000 5
-15,000
+15,000
$29,000
$3,000
$6,000
$15,000
$20,000
$30,000
$53,000
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15. Hired a Part-Time Employee
The employee will be paid $1,000 per month.
There is no accounting transaction at the time of hiring since no asset, liability, or stockholders’ equity account is affected at this time.
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16. Sold Bikes
During December, Mike’s Bikes sold $12,000 of bikes for cash.
Assets =
Liabilities +
Stockholders’ Equity
Retained Earning
Cash
Merch. Inventory
Prepaid Rent
Equip.
Accounts Payable
Notes Payable
Revenue -
Expense
Common Stock
+30,000
-6,000
+6,000
+3,000
+20,000
-15,000
+15,000 6
+12,000
$41,000
$3,000
$6,000
$15,000
$20,000
$12,000
$30,000
$65,000
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17. Paid Employee
At the end of the month, Mike’s Bikes paid its part-time employee $1,000.
Assets =
Liabilities +
Stockholders’ Equity
Retained Earning
Cash
Merch. Inventory
Prepaid Rent
Equip.
Accounts Payable
Notes Payable
Revenue -
Expense
Common Stock
+30,000
-6,000
+6,000
+3,000
+20,000
-15,000
+15,000
+12,000 7
-1,000
$40,000
$3,000
$6,000
$15,000
$20,000
$12,000
$1,000
$30,000
$64,000
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18. Select the correct answer.
Purchasing supplies on account involves
An increase and a decrease to assets
An increase in assets and a decrease to liabilities
An increase in assets and an increase to liabilities
A decrease to assets and a decrease to liabilities
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19. Explain the nature, format, and purpose of the account.
Learning Objective 3
Explain the nature, format, and purpose of the account.
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20. New Account- Prepaid Rent
Asset
Paying the rent up front
Have not incurred the expense yet.
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21. New Account- Notes Payable
Liability
Borrow money from a bank
“Note”-promissory note-promise to pay
Principal-amount borrowed
Interest-annual rate paid to borrow
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22. Notes Payable Transactions
1) When money is borrowed
Dr: Cash
Cr: Notes Payable
2) When payment to principal is made
Dr: Notes Payable
Cr: Cash
3) When interest is paid
Dr: Interest Expense
Cr: Cash
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23. New Account--Unearned Revenue
Goods and/or services have not been provided
Customer is pre-paying for future good/service
Is not revenue if good/service not provided
Liability Account
Money belongs to customer
Business “owes” customer good/service.
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24. The Account
An individual record of the increases and decreases in a specific asset, liability, or stockholders’ equity item (account).
Cash
(1)
30,000
6,000
(2)
(4)
20,000
15,000
(5)
(6)
12,000
1,000
(7)
Bal.
40,000
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25. Learning Objective 4
Describe the system of debits and credits and its use in recording transactions.
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26. Debits and Credits
Debits and credits are terms used to indicate the recording of data entries.
Debit = left side
Credit = right side
Any Type of Account
Debit
Credit
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27. Explain the process of journalizing and posting transactions.
Learning Objective 5
Explain the process of journalizing and posting transactions.
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28. Recording Transactions
Create a journal entry to represent the accounting transaction.
Debit and credit appropriate accounts.
Post the journal entry to the general ledger with the following information:
Date
Account titles affected from the chart of accounts
Dollar amounts
An explanation
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29. Illustration of the Recording Process
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30. Another Illustration of the Recording Process
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31. Select the correct answer.
Recording the cash payment for wage expense involves:
A credit to cash and a debit to wage expense
A debit to cash and a debit to wage expense
A debit to cash and a credit to wage expense
A credit to cash and a credit to wage expense
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32. Describe the trial balance.
Learning Objective 6
Describe the trial balance.
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33. The Trial Balance
A listing of all accounts from the general ledger with their respective debit or credit balances
Prepared at the end of the accounting period
Serves as a check that debits = credits
Aids in the preparation of the financial statements
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34. Unadjusted Trial Balance
Example Trial Balance
Mike’s Bikes
Unadjusted Trial Balance
December 31, 2016
Debit
Credit
Cash
$40,000
Merchandise inventory
3,000
Prepaid rent
6,000
Equipment
15,000
Accounts payable
$ 3,000
Notes payable
20,000
Common stock
30,000
Sales revenue
12,000
Wages expense
1,000
______
Totals
$65,000
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35. Select the correct answer.
The trial balance
Is prepared at the beginning of the accounting period.
Is prepared after the financial statements.
Serves as a check to debits = credits.
Lists only the accounts from the general ledger with debit balances.
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36. Corporate Social Responsibility
Financial reporting is constrained by the requirement that only monetary amounts can be reported.
This constraint would greatly hinder corporate social responsibility reports.
The Global Reporting Initiative pioneered a widely used sustainability reporting framework with a wide range of measures.
Examples include carbon emissions, employee safety, and workforce diversity.
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