1. Spiceland | Thomas | Herrmann Financial Accounting Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle: During the Period Chapter 2

2. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-2 Learning Objectives Identify the basic steps in measuring external transactions Analyze the impact of external transactions on the accounting equation Assess whether the impact of external transactions results in a debit or credit to an account balance Record transactions using debits and credits Post transactions to T-accounts in the general ledger Prepare a trial balance

3. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-3 Functions of Financial Accounting Measure business activities of the company Communicate measurements to external parties for decision making

4. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Measuring Business Activities 2-4

5. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Identify the Basic Steps in Measuring External Transactions. 2-5

6. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-6 External Transactions Transactions conducted with a separate economic entity Internal transaction: events that affect the financial position of the company but do not include an exchange with a separate economic entity

7. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-7 Capturing Transactions in Accounts Account: Summary of all transactions related to a particular item over a period of time. Asset accounts: Cash, Supplies, and Equipment Liability accounts: Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable Stockholders’ equity accounts: Common Stock and Retained Earnings Chart of accounts: A list of all account names used to record transactions

8. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Measuring External Transactions 2-8

9. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Analyze the impact of external transactions on the accounting equation. 2-9

10. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-10 Effects on the Basic Accounting Equation Each transaction will have a dual effect An increase on one side will increase the other side

11. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-11 Understanding Effects of Transaction Ask these questions: What is one account affected by the transaction? Does it increase or decrease? What is a second account affected by the transaction? Does it increase or decrease? Do assets still equal liabilities plus stockholders’ equity?

12. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Expanded Accounting Equation 2-12

13. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B Debits and Credits 2-13

14. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Assess Whether the Impact of External Transactions Results in a Debit or Credit to an Account Balance. 2-14

15. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Effects on Account Balances 2-15

16. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Debit and Credit Effects on Accounts in the Expanded Accounting Equation 2-16

17. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-17 Debit and Credit Effects on Each Account Type A simpler memory way

18. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Record transactions using debits and credits. 2-18

19. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-19 Recording Transactions Journal: provides a chronological record of all transactions Journal entry: format used for recording transactions Debits in a transaction must equal its credits

20. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Post transactions to T-accounts in the general ledger. 2-20

21. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-21 Posting Posting: process of transferring the debit and credit information from the journal to individual accounts in the general ledger General ledger: includes all accounts used to record the company’s transactions Useful to calculate the account balances T-account: a simplified form of a general ledger account

22. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Prepare a Trial Balance. 2-22

23. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-23 Trial Balance A list of all accounts and their balances at a particular date Shows that total debits equal total credits Assists in preparing adjusting entries Used for internal purposes only Not published to external parties Not required to follow an order of listing

24. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter 2 2-24