1. ACG2021 Financial Accounting
Processing Accounting Information

2. The Accounting Information System
Income Statement
Balance Sheet
Cash Flow
Inputs
Process
Outputs
Business
Transaction
Accounts
Journal
General Ledger
Trial Balance

3. Learning Objective 1
Analyze business transactions.

4. Accounting for Business Transactions
Transaction - any event that both affects the financial position of the business entity and can be reliably recorded
Reliably Recorded (2 accounting principles, what are they?)

5. Transactions are Recorded in The Account
Basic summary device
Paper based
Computer based
???? based
Accounts - grouped into three broad categories
Assets
Liabilities
Stockholders’ Equity
Used to Accumulate $’s of every business transaction
How much cash did we receive/spend?
How much revenue did we earn?
How much was spent on rent for the year?

6. Chart of Accounts
The chart of accounts lists all accounts and their account numbers.
Accounts can be grouped under the financial statement headings:
Balance Sheet: Assets, Liabilities, and Stockholders’ Equity
Income Statement: Revenues and Expenses

7. Example Chart of Accounts

8. Recording Transactions (Processing)
Journalizing process:
Specify each account affected by the transaction
Classify each account as either asset, liability, stockholders’ equity, revenue, or expense
Determine whether each account is increased or decreased (use rules of debit and credit)
Record the transaction in a journal with a brief explanation.

9. The Account
Assets - economic resources that benefit the business now and in the future
Cash
Accounts receivable
Inventory
Notes receivable
Prepaid expenses
Land
Buildings
Equipment, furniture, and fixtures

10. The Account Liabilities - debts of the company Notes payable
Accounts payable
Accrued liabilities
Long-term liabilities (bonds)

11. The Account
Stockholders’ (owners’ or shareholders’) equity - owners’ claims against the assets of a corporation
Common Stock
Retained Earnings
Revenues
Expenses

12. Accounting for Business Transactions
1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock.
(1) , ,000

13. Accounting for Business Transactions
2. Air & Sea purchases land for an office location, paying $40,000 in cash
(40,000) ,000
Bal , , ,000

14. Accounting for Business Transactions
3. The business buys office supplies, agreeing to pay $500 to the office-supply store within 30 days.
(3)
Bal , , ,000

15. Accounting for Business Transactions
4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash.
(4) , ,500
Bal , , , ,500

16. Accounting for Business Transactions
5. Air & Sea Travel performs services for customers on account for $3,000.
(5) , ,000
Bal , , , , ,500

17. Accounting for Business Transactions
6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400.
(6) (2,700) (2,700)
Bal , , , , ,800
Bal , , , , ,800

18. Accounting for Business Transactions
7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3.
(7) (400) (400)
Bal , , , , ,800

19. Accounting for Business Transactions
8. The owners remodel their home at a cost of $30,000, paying cash from personal funds.
This is a personal transaction, not a business transaction!

20. Accounting for Business Transactions
The business collects $1,000 from a customer on account.
(9) , (1,000)
Bal , , , , ,800

21. Accounting for Business Transactions
10. Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.
(10) , (22,000)
Bal , , , , ,800

22. Accounting for Business Transactions
11. The corporation declares a dividend and pays $2,100 cash to the stockholders.
(11) (2,100) (2,100)
Bal , , , , ,700

23. Income Statement

24. Statement of Retained Earnings

25. Balance Sheet

26. Air & Sea Travel Statement of Cash Flows Month Ended April 30, 20x3
Cash flows from operating activities:
Collections from customers ($5,500 + $1,000) $ 6,500
Cash payments to suppliers and employees
($2,700 + $400) (3,100)
Net cash inflow from operating activities $ 3,400
Cash flows from investing activities:
Acquisition of land $(40,000)
Sale of land ,000
Net cash outflow from investing activities (18,000)
Cash flows from financing activities:
Issuance (sale) of stock $50,000
Payment of dividends (2,100)
Net cash inflows from financing activities $47,900
Net increase (decrease) in cash $33,300
Cash balance, April 1, 20x5 0
Cash balance, April 30, 20x5 $33,300

27. Learning Objective 2
Understand how accounting works.

28. ACG2021 Financial Accounting
Double-Entry Accounting
Understanding Debits/Credits

29. Double-Entry Accounting
Record the dual effects of each business transaction.

30. Double Entry Accounting
Each accounting transaction affects at least two accounts.
T-accounts can be used to represent accounts and their increases and decreases.
Every business transactions involves both a debit and a credit
Cash
Credit
(Right Side)
Debit
(Left Side)

31. Assets = Liabilities + Stockholders Equity
Using T-Accounts
Assets = Liabilities Stockholders Equity
Stockholders’
Equity
Assets
Liabilities =
Debit +
Credit -
Debit -
Credit +
Debit -
Credit +
Common
Stock
Credit for
increase,
$50,000
Cash
Debit for
Increase,
$50,000

32. Stockholders’ Equity Accounts
Expanded Accounting Equation
Common Stock +
Retained
Earnings -
Dividends
Revenues
Expenses
Assets
Liabilities =
Stockholders’
Equity

33. Using T-Accounts Expanded
Assets
Debit +
Credit -
Dividends
Expenses
Accounts that are increased with debits and have normal debit balances

34. Using T-Accounts Expanded
Accounts that are increased with credits and have normal credit balances
Liabilities
Debit -
Credit +
Stockholders’
Equity
Retained
Earnings
Revenue

35. Using T-Accounts
Cash
50,000
Common Stock
Bal. 50,000
Credit for decrease,
40,000
The balance in an account is the difference between the sum of the debits and the sum of the credits.
Bal. 10,000
Land
Debit for
Increase,
40,000
Bal. 40,000

36. Recording Transactions
Accounting transactions are entered in chronological order in the journal
Lists the Sequence of Business Events
What happened
What Accounts were effected
What $’s were exchanged

37. Recording Transactions
Journalizing process:
Specify each account affected by the transaction
Classify each account as either asset, liability, stockholders’ equity, revenue, or expense
Determine whether each account is increased or decreased (use rules of debit and credit)
Record the transaction in a journal with a brief explanation. Debits are at the left margin and credits are indented

38. Posting from Journal to Accounts / General Ledger
DATE
ACCOUNTS AND EXPLANATION
DEBIT
CREDIT
Apr 2 Cash ………………………………. 50,000
Common Stock ………...… ,000
Issued common stock
Common Stock
Cash
50,000
50,000

39. Posting to Accounts / General Ledger
Journal does not sort Business Events by Account
Thus, journal entries are periodically Posted to their respective Accounts
The Ledger

40. Flow of Accounting Data
Transaction occurs
Transaction analyzed
Transaction entered in journal
Amounts posted to the ledger accounts

41. Trial Balance A trial balance lists all accounts with their balances
Accounts are listed with assets first, then liabilities, then stockholders’ equity, revenues, and finally expenses
The trial balance
summarizes account balances
shows whether total debits equal total credits

42. Example Trial Balance

43. Finding Errors
Find the difference between total debits and total credits.
Search for a missing account with that balance.
Divide the difference by 2 and search for a debit recorded as a credit or vice-versa.
Divide the difference by 9. If you get an even amount, you may have either a slide or a transposition.

44. End of Chapter 2