1. BALANCE SHEET EQUITATION
AND OVER VIEW OF
ACCOUNTING STRUCTURE

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

3. Source Documents Evidence needed in an accounting system to record
Purchase
Invoice
Sales
Invoice
Evidence needed
in an accounting
system to record
transactions
Checks
Cash
Register
Tape
Receiving
Document
Shipping
Document
Payroll
Records
LO2

4. Issue Capital Stock for Cash
1/08 Transactions for Kumar Financial Service
Stock
Certificate
Assets = Liabilities + Owners’ Equity
Cash Capital Stock
+ P 100,000 = P 100,000
The accounting equation must always remain in balance
LO3 3

5. Purchase of Property in Exchange for Note Payable
Assets = Liabilities + Owners’ Equity
Land Note Payable
+ P50, = + P200,000
Building
+ P150,000
Increase on left has
corresponding increase on right 4

6. Purchase of Equipment on Account
I.O.U.
Assets = Liabilities + Owners’ Equity
Equip. Accts. Pay.
+ P20,000 = + P20,000
At least two accounts affected
by every transaction 5

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

8. Sell Monthly Memberships on Account
Assets = Liabilities + Owners’ Equity
Accts. Rec Retained Earnings
+ P15,000 = P15,000
Revenues increase retained earnings 6

9. Revenues increase retained earnings
Sell Court Time
Assets = Liabilities + Owners’ Equity
Cash Retained Earnings
+ P5,000 = P5,000
Revenues increase retained earnings 6

10. Payment of Wages and Salaries
Assets = Liabilities + Owners’ Equity
Cash Retained Earnings
– P10,000 = – P10,000
Expenses decrease retained earnings 8

11. Expenses also decrease assets or
Payment of Utilities
Assets = Liabilities + Owners’ Equity
Cash Retained Earnings
– P3,000 = – P3,000
Expenses also decrease assets or
increase liabilities 8

12. Collection of Accounts Receivable
Assets = Liabilities + Owners’ Equity
Cash
+ P4, = (no change in Liab. or R/E)
Accts. Rec.
– P4,000
Assets were traded:
accounts receivable for cash 10

13. Dividends directly reduce
Payment of Dividends
Assets = Liabilities + Owners’ Equity
Cash Retained Earnings
– P2,000 = – P2,000
Dividends directly reduce
retained earnings 10

14. General Ledger A/R Cash +400 File or book that contains one page
+100
–50
A/R
+400
–100
Cash:
+100
–50
File or book that contains one page
(or entry) for each account
LO4

15. Representation of one account in the general ledger
The T Account
Account Name
Debits are
entered on left
Credits are
entered on right
Representation of one account in the general ledger
LO5 17

16. The T Account Account Name 400 dr. 900 cr. 500 cr. Debits and credits
are netted to obtain
balance in account
500 cr. 17

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

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

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

20. Normal Account Balances
Debit
Credit
Assets
Expenses
Dividends
Liabilities
Owners’ Equity
Revenues
all increased with debits
all increased with credits 22 21

21. Transactions and T Accounts
Stock
Certificate
Cash Capital Stock
(1) 100, ,000 (1)
(1) Issue capital stock for cash 3 22

22. Transactions and T Accounts
Land
(2) 150,000
Note Payable
Building ,000 (2)
(2) 50,000
(2) Purchase property in exchange for note payable 3 23

23. Transactions and T Accounts
I.O.U.
Equipment Accounts Payable
(3) 20, ,000 (3)
(3) Purchase equipment on account 3 24

24. (4) Sell monthly memberships on account (5) Sell court time
Transactions and T Accounts
Cash
Retained Earnings
(1) 100,000
(5) 5,000
(4) 15,000
(5) 5,000
T Accounts reflect
current and previous
postings to the account
for each period
Accounts Receivable
(4) 15,000
(4) Sell monthly memberships on account (5) Sell court time 3 25

25. (6) Pay employees wages for the month (7) Pay utilities for the month
Transactions and T Accounts
Wage Expense
Cash
(6) 10,000
(1) 100,000
(5) 5,000
10,000 (6)
3,000 (7)
Utilities Expense
(7) 3,000
(6) Pay employees wages for the month (7) Pay utilities for the month 3 25

26. Transactions and T Accounts (8) Collection of accounts receivable
Cash
(1) 100,000
(5) 5,000
Accounts Receivable
10,000 (6)
3,000 (7)
(4) 15,000
4,000 (8)
(8) 4,000
(8) Collection of accounts receivable 3 24

27. Transactions and T Accounts
Cash
(1) 100,000
(5) 5,000
Retained Earnings
10,000 (6)
3,000 (7)
(9) 2,000
15,000 (4)
(8) 4,000
2,000 (9)
5,000 (5)
(9) Pay dividends 3 24

28. Determine the Balance of the T Accounts
Cash
Accounts Receivable
10,000 (6)
3,000 (7)
(4) 15,000
4,000 (8)
(1) 100,000
(5) 5,000
11,000
2,000 (9)
(8) 4,000
Retained Earnings
94,000
(9) 2,000
15,000 (4)
5,000 (5)
18,000 3 26

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

30. Glengarry Health Club Trial Balance January 31, 2007
Debits Credits
Cash
Accounts Receivable
Equipment
Building
Land
Accounts Payable
Notes Payable
Capital Stock
Membership Revenue
Court Fee Revenue
Wage Expense
Utility Expense
Dividends
Totals
P 94,000
11,000
20,000
150,000
50,000
P 20,000
200,000
100,000
15,000
5,000
10,000
3,000
2,000
P340, P340,000
LO7

31. End of Chapter 3