1. The Mechanics of
Accounting

2. What Are the Different Exchange Transactions?
Borrow and invest money.
Purchase land, buildings, and equipment.
Buy and sell goods or services.
Pay wages to employees.
Pay taxes to the government.
Distribute earnings to owners. 2

3. Business Documents
Examples: Sales invoice, purchase order, check stub.
Business documents are used
to confirm that an arm’s-length transaction has occurred.
to establish the amounts to be recorded.
to facilitate the analysis of business events.
These documents must be analyzed.

4. What is the Sequence of the Accounting Cycle?
Step 1
Analyze transactions.
Step 2
Record the effects of the transactions.
Summarize the effects of transactions.
1. Posting journal entries.
2. Preparing a trial balance.
Step 3
Prepare reports.
1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
Step 4

5. Step 1: Analyze Transactions
Transaction analysis framework
What accounts are involved?
Did each account increase or decrease?
By how much?
Transaction analysis:
breaks down complex transactions into manageable pieces.
provides a self-checking mechanism.

6. What Is the Accounting Equation?
Assets = Liabilities + Owners’ Equity
Resources
Creditors’
claims
against
resources = +
Owners’

7. Describe Effect of the Following Transactions on a Company.
A = L OE
Borrow money
Invest in company
Pay off a note
Purchase equipment
Borrow funds to settle a debt 12

8. What Is the Rule of Double-Entry Accounting?
The debits must always equal the credits.
Debits = Credits

9. Using Accounts
Accounts provide an efficient method to categorize transactions.
A T-account is a simplified depiction of an account.
Name of Account
Debit
Credit 13

10. Using a T-Account
The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?
Cash 35 12 23 19

11. Debits and Credits Remember: Debits are simply entries on the left.
Credits are simply entries on the right. 15

12. Debits and Credits Assets = Liabilities + Owners’ Equity
DR CR DR CR DR CR
(+) (-) (-) (+) (-) (+)
Asset accounts:
Debit is an increase.
Credit is a decrease.
Liabilities and owners’ equity accounts:
Debit is a decrease.
Credit is an increase. 16

13. Expanding the Equation
Revenues
Increases in a company’s resources from the sale of goods or the performance of services.
Expenses
Decreases in a company’s resources incurred in the normal course of business to generate revenues.
Dividends
Distributions to owners, which reduce Owners’ Equity. 21

14. Expanded Accounting Equation
Assets
DR CR – =
Liabilities – +
Owners’ Equity
DR CR –
Capital Stock
DR CR –
Retained Earnings
Expenses
DR CR –
Dividends
Revenues – 22

15. Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
What is another name for the journal?
Journal -- book of original entry

16. Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
General Journal Entry Format:
Date Debit Entry xx
Credit Entry xx
Explanation.

17. 1 Identify which accounts are involved.
Journal Entries
What is the three-step process?
1 Identify which accounts are involved.
2 For each account, determine if it is increased or decreased.
3 For each account, determine by how much it will change.

18. Example 1: Journal Entry
Supplies purchased for $25 are purchased “on account.”
Prepare the correct journal entry. What do we mean by purchased “on account”?
Jan. 1 Supplies
Accounts Payable
Purchased supplies on account.
We purchase on credit and use accounts payable. 28

19. Example 2: Journal Entry
A check for $100 is received in payment for services rendered.
Make the correct journal entry.
Feb. 1 Cash
Revenue
Received cash for services. 28

20. Example 3: Journal Entry
Merchandise is sold to a customer on account for $75. The cost of the product was $60.
Make the journal entries.
Mar. 1 Accounts Receivable
Sales Revenue
Sold merchandise on account.
Mar. 1 Cost of Goods Sold
Inventory
To record cost and reduce inventory. 28

21. Journal 1 Page 1 Date Transaction Ref. Debits Credits
Jan. 1 Supplies 25
Accounts Payable 25
Purchased supplies on account.
Feb. 1 Cash
Revenue 100
Received cash for services.
Mar. 1 Accounts Receivable 75
Sales Revenue 75
Sold merchandise on account.
Entered when posted to ledger.

22. Step 3: Posting Journal Entries and Preparing a Trial Balance Define the Following Terms
transferring amounts from the journal to the ledger.
Ledger
a book of accounts where journal transactions are posted and thereby summarized.
Posting reference
a cross-reference number between the general journal and the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a company.

23. General Ledger ACCOUNT: Cash Account No. 101
Date Explanation Ref. Debits Credits Balance
Jan. 1 Balance
2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ
4 Sold inventory GJ
5 Monthly payment on loan GJ
6 Revenue GJ1 2,500 3,130
ACCOUNT: Cash
Account No. 101

24. Chart of Accounts ASSETS (100-199): OWNERS’ EQUITY (300-399):
Current Assets ( ):
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets ( ):
151 Land
152 Buildings
LIABILITIES ( ):
Current Liabilities ( ):
201 Notes Payable
202 Accounts Payable
Long-Term Liabilities ( ):
222 Mortgage Payable
OWNERS’ EQUITY ( ):
301 Capital Stock
330 Retained Earnings
SALES ( ):
400 Sales Revenue
EXPENSES ( ):
500 Cost of Goods Sold
501 Sales Salaries and Commissions
523 Rent Expense
528 Advertising Expense
573 Utilities Expense
579 Accounting and Legal Fees 37

25. Determining Account Balances
Name of Account
Debit
Credit
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
Accounts with typical debit balances are?
Accounts with typical credit balances are?
Owners’ Equity
Revenues or Income
Liabilities
Expenses
Assets
Dividends
Do you see the mnemonic memory device, DEAD COIL? 38

26. Define The Trial Balance
A listing of all account balances; provides a means to assure that debits equal credits.
What is the Trial Balance used for?
From the data in the trial balance, the balance sheet and income statement can be prepared. 38

27. Sample Trial Balance The Example Company Trial Balance
December 31, 2003
Debits Credits
Cash $ 21
Accounts Receivable 15
Inventory 12
Land 200
Accounts Payable $
Capital Stock 150
Retained Earnings 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Miscellaneous Expenses ______
Total $ 1,123 $ 1,123
The trial balance shows that debits equal credits. 39