1. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 2 1

2. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Reviewing some basics, and fitting them into the accounting cycle Debits, credits, theory behind, and using them Journal entry steps to record transactions Prepare journal entries, post to ledger accounts, prepare trial balance

3. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reviewing some basics, and fitting them into the accounting cycle 3 1 1

4. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. ASSETS: Economic resources owned by the business Eg: Cash, Buildings, Accounts receivable, Prepaid rent LIABILITIES: Economic obligations to outsiders Eg: Accounts payable, Notes payable, Unearned revenue, Wages payable OWNERS’ EQUITY: The owners’ claim to the assets of the business Eg: Capital stock, retained earnings CAPITAL STOCK: Representation of owners’ equity due to contributions by stockholders to the corporation. Eg: Common stock, preferred stock RETAINED EARNINGS: Representation of owners’ equity due to undistributed earnings accumulated since the start of the business. REVENUES: Amounts earned by providing goods or services to customers. Eg. Services revenue, Sales revenue, Interest revenue. EXPENSES: The decrease in equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers. Resources consumed. Eg: Cost of goods sold, Wages expense, Building depreciation expense. DIVIDENDS: The decrease in retained earnings of a corporation caused by distribution of payments to stockholders, usually paid in the form of cash.

5. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. List of all accounts used by a company 5

6. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A = L + OE + Revenues – Expenses - Dividends This equation must always be true, or “in balance” Accounting tracks at least two sides of each transaction In/out, give/take, good/bad, earn/get, consume/pay This is Double entry accounting Realization Principle Revenue is recognized when the goods are provided or services are rendered. Matching Principle Expenses are recorded in the period in which resources are consumed.

7. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Writing directly to a one-sheet accounting equation format is quickly overwhelming The +- method of recording transactions was a mess too, especially if we did MORE business. Wouldn’t it be nice if there was a method of recording transactions that automatically kept everything easy to track AND at the same time provided another double check against entry error?

8. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Basic summary device Detailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equity Grouped in three broad categories Assets, Liabilities, Stockholders’ Equity Revenues, Expenses, Dividends reflect specific changes to Stockholders’ Equity 8

9. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 9 Record transactions in the journal Copy (post) to the ledger Prepare the trial balance

10. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journal Chronological record of transactions Good at capturing transactions Lousy for using/analyzing the data Ledger Holds all transaction information grouped by account The accounting data-base / information storehouse Trial Balance Lists all accounts with only their balances First step in summarizing data, toward financials Checks for errors: Out of balance = error 10

11. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 11

12. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 12

13. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 13

14. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Debits, credits, theory behind, and using them 14 2

15. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Record dual effects of each transaction Each transaction has a: Receiving side Giving side Examples: Company purchases supplies (receiving) with cash (giving) Company issues stock (giving) and receives cash (receiving) 15

16. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. + + Some AccountsOther Accounts The Yin & Yang of accounting - - Write up and explain the entire accounting equation with DR/CR

17. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The accounting equation must always balance Or a transaction was not properly recorded, and the financial statements no longer have any meaning. Debits = Credits This equation must also always be true - same reason If one of those isn’t true, A MISTAKE WAS MADE! This holds true for every single transaction and for everything all summed up.

18. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Only the 3 corners increase with Debits! All other account classifications increase with credits.

19. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

24. Practice following that exact sequence until you can write out the entire Robert’s Triangle in less than ONE MINUTE with no hesitation, no uncertainty, and absolutely no mistakes. If you don’t put in the work necessary to master this CRITICAL knowledge, you will not pass the class. Mastering this will allow you to address the upcoming topics with your complete attention.

25. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Match the accounting terms on the left with the corresponding definitions on the right. 1._____Posting 2._____ Receivable 3._____ Debit 4._____ Journal 5._____ Expense 6._____ Net Income 7._____ Normal Balance 8._____ Ledger 9._____ Payable 10._____ Equity 25 A.Using up assets in the course of operating a business B.Book of accounts C.An asset D.Record of transactions E.Left side of an account F.Side of an account where increases are recorded G.Copying data from the journal to the ledger H.Always a liability I.Revenues – Expenses = J.Assets – Liabilities = G C E D A I F B H J

26. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journal entry steps to record transactions 26 3

27. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identify each account affected and its type Determine if each account is increased or decreased Record transaction in the journal 27 Apply debit and credit rules

28. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize the first transaction of Smart Touch— the receipt of $30,000 cash and issuance of common stock Step 1: The accounts affected are Cash and Common stock. Cash is an asset. Common stock is equity. Both accounts increase by $30,000. Assets increase with debits. Equity increases with credits. 28

29. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Four parts: a)Date of transaction b)Title of account debited with dollar amount c)Title of account credited with dollar amount d)Brief explanation of transaction 29

30. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize: ID Account & Type Up or Down? DR or CR Record Journalize: ID Account & Type Up or Down? DR or CR Record Post to the ledger Create Trial Balance Jan 1: Received $10,000 cash in exchange for common stock. Jan 3: Bought equipment costing $5,000, and paid in cash. Jan 4: Purchased $300 in supplies with cash. Jan 15: Recorded cash services revenue for the first half of January, amounting to $1,500. Jan 15: Paid $500 in wages for the first half of January. Jan 16: Took supplies inventory and noted only $200 worth remaining.

31. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 31

32. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 32

33. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Get the feel, don’t get lost in the detail 33

34. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34

35. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identify each account affected and its type Determine if each account is increased or decreased Record transaction in the journal 35 Apply debit and credit rules

36. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 36 Everything else explains these These explain where assets came from and/or who they belong to. These explain where assets went – who took them These explain earnings power – to create assets/wealth

37. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Ned Brown opened a medical practice in San Diego, California. 1. Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation. 37 Jan 1The business received $29,000 cash and issued common stock. 2Purchased medical supplies on account, $14,000. 2Paid monthly office rent of $2,600. 3Recorded $8,000 revenue for service rendered to patients on account.

38. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan 1: The business received $29,000 cash and issued common stock Cash received indicates cash increases Cash is an Asset; Assets increase with debits Issued common stock; indicates equity is increasing Increase equity with credits 38 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1Cash 29,000 Common Stock 29,000 Issued stock.

39. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 2: Purchased medical supplies on account, $14,000 Medical Supplies, an asset, is increasing Assets increase with debits On account, increases accounts payable, a liability Increase liabilities with credits 39 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account.

40. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 2: Paid monthly office rent of $2,600 incurred rent, an expense, expense is increasing Expenses increase with debits Paid cash, cash is an asset Decrease assets with credits 40 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2Rent Expense 2,600 Cash 2,600 Paid office rent.

41. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Jan. 3: Recorded $8,000 revenue for service rendered to patients on account On account indicates Accounts receivable increase Accounts receivable is an Asset, Assets increase with debits Rendered services, services are revenues, indicates revenues are increasing Increase revenues with credits 41 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan3Accounts receivable 8,000 Service revenue 8,000 Performed service on account.

42. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1Cash 29,000 Common Stock 29,000 Issued stock. Cash Common stock 29,000

43. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan1 Medical supplies 14,000 Accounts payable 14,000 Purchased supplies on account. Medical supplies Accounts payable 14,000

44. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Jan2Rent Expense 2,600 Cash 2,600 Paid office rent. Cash Rent expense 2,600 29,000

45. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 45 GENERAL JOURNAL DATEDESCRIPTION RE F DEBITCREDIT Jan 3 Accounts receivable 8,000 Service revenue 8,000 Performed service on account. Accounts receivable Service revenue 8,000

46. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 46 Service revenue 8,000 Cash 29,0002,600 Accounts receivable 8,000 Accounts payable 14,000 Common stock 29,000 Medical supplies 14,000 Rent expense 2,600 Bal 26,400 Bal 14,000 Bal 8,000 Bal 14,000 Bal 2,600 Bal 29,000

47. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 47 Ned Brown, M.D., P.C. Trial Balance January 3, 2012 Cash Accounts receivable Medical supplies Accounts payable Common stock Service revenue Rent expense Total $ 26,400 8,000 14,000 $ 14,000 29,000 8,000 2,600 $51,000 $51,000 S2-9: PREPARE THE TRIAL BALANCE

48. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Search for missing account Divide the difference between total debits and total credits by two Is there a debit/credit balance for this amount posted in the wrong column? Divide out-of-balance amount by nine Slide–Adding or dropping a zero ($100 instead of $1,000) Transposition–Reversing two digits ($2,100 instead of $1,200) 48

49. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 49

50. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 50

51. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 51

52. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 52

53. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 53 If/when your group finishes the practice set through the trial balance, Grab one sec.gov procedure per group Follow the instructions to explore sec.gov, then discuss your companies’ revenue recognition policy information.

54. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Think of the account, journal, ledger (T-account), and chart as matching tools. Businesses are just matching the business transaction to the account description that best captures the specific event that occurred. The accounting equation must always balance after each transaction is recorded. To achieve this balance, we record transactions using a double entry accounting system. In that system, debits are on the left and credits are on the right. Debits always equal credits. 54

55. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A transaction occurs and is recorded on a source document. Then, we identify the account names affected by the transaction and determine whether the accounts increased or decreased using the rules of debit and credit for the six main account types. Next, we record the transaction in the journal, listing the debits first. We then post all transactions to the ledger (T-account). 55

56. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Once the ledger (T-account) balances are calculated, the ending balance for each account is transferred to the trial balance. Recall that the trial balance is a listing of all accounts and their balances on a specific date. Total debits must always equal total credits on the trial balance. If they do not, then review the correcting trial balance errors section on Page 81 of the textbook. 56

57. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 57

58. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 58 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.