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

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

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

4. Issue capital stock for cash
1/04 Transactions for Glengarry Health Club
Stock
Certificate
Assets = Liab O/E Rev – Exp.
Cash Capital Stock
+ 100,000 = ,000
The accounting equation must always remain in balance 3

5. Purchase of property in exchange for note payable
Assets = Liab. + O/E + Rev. – Exp.
Land Note Pay.
+ $50, $200,000
Building
+ $150,000
Increase on left has
corresponding increase on right 4

6. Purchase of equipment on account
I.O.U.
Assets = Liab O/E + Rev. – Exp.
Equip Accts. Pay.
+ $20,000 = + $20,000
At least two accounts affected
by every transaction 5

7. Sell monthly memberships on account
Assets = Liab. + O/E + Rev. – Exp.
Accts. Rec Memberships
+ $15,000 = $15,000
Revenues increase retained earnings 6

8. Revenues increase retained earnings
Sell court time
Assets = Liab. + O/E + Rev. – Exp.
Cash Court Fees
+ 5,000 = ,000
Revenues increase retained earnings 6

9. Payment of wages and salaries
Assets = Liab. + O/E + Rev. – Exp.
Cash Wages
- 10,000 = ,000
Expenses decrease retained earnings 8

10. Expenses also decrease assets or
Payment of utilities
Assets = Liab. + O/E + Rev. – Exp.
Cash Utilities
- 3,000 = ,000
Expenses also decrease assets or
increase liabilities 8

11. Collection of accounts receivable
Assets = Liab. + O/E + Rev. - Exp.
Cash
+ $4, = (no change)
Accts. Rec.
- $4,000
Assets were traded:
accounts receivable for cash 10

12. Dividends directly reduce
Payment of dividends
Assets = Liab O/E + Rev. – Exp.
Cash Ret. Earn.
- 2,000 = ,000
Dividends directly reduce
retained earnings 10

13. Cumulative Effect of Transactions for Glengarry Health Club
Assets = Liab O/E Rev. – Exp.
Sold stock + $100,000 = $100,000
Bought prop.
with note ,000 = + $200,000
Bought equip.
on acct ,000 = ,000
Sold
memberships ,000 = $15,000
Sold court time ,000 = ,000
Paid wages ,000 = $10,000
Paid utilities ,000 = ,000
Collected A/R ,000 = (no change)
,000
Paid dividends ,000 = ,000
+ $325,000 = $220, $98, $20,000 - $13,000 11

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

15. Glengarry Health Club Income Statement For the Month Ended January 31, 2004
Revenues:
Memberships $15,000
Court fees , $20,000
Expenses:
Salaries and wages $10,000
Utilities , ,000
Net income $ 7,000
Net increase to
retained earnings

16. Beginning balance, Jan. 1, 2004: $ 0 Add: Net income for January 7,000
Glengarry Health Club Statement of Retained Earnings For the Month Ended January 31, 2004
Beginning balance, Jan. 1, 2004: $
Add: Net income for January 7,000
Deduct: Dividends for January ,000
Ending balance, Jan. 31, 2004: $ 5,000
Distribution of
net income

17. Glengarry Health Club Balance Sheet January 31, 2004
Assets:
Cash $ 94,000
Accts. Rec ,000
Equipment ,000
Building ,000
Land ,000
Total assets $325,000
Liabilities & Owners’ Equity:
Accounts payable $ 20,000
Notes payable 200,000
Capital stock 100,000
Retained earnings ,000
Total liabilities &
owners’ equity $325,000
Cost principle requires recording assets at cost

18. Sample Chart of Accounts
ASSETS
: Cash
101: Checking Account
102: Savings Account
: Receivables
111: Accts. Receivable :
: Prepaid Assets
121: Cleaning Supplies
122: Prepaid Insurance
: Property, Plant
& Equipment
131: Land
132: Building
LIABILITIES
: Short-Term Liab.
201: Accts. Payable
202: Wages Payable :
OWNERS’ EQUITY
301 Preferred Stock
302 Common Stock
303 Retained Earnings
REVENUES
EXPENSES 18

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

20. Re-examine the Accounting Equation
Assets = Liab O/E Rev. – Exp.
Balance Sheet
Income Statement

21. End of Chapter 3