1. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1 Processing Accounting Information Chapter 2

2. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 2 Learning Objective 1 Analyze business transactions.

3. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 3 The Account Basic summary device Accounts - grouped in three broad categories Assets Liabilities Stockholders’ Equity

4. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 4 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

5. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 5 The Account Liabilities - debts of the company o Notes payable o Accounts payable o Accrued liabilities o Long-term liabilities (bonds)

6. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 6 The Account Stockholders’ (owners’) equity - owners’ claims to the assets of a corporation o Common Stock o Retained Earnings o Revenues o Expenses

7. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 7 Accounting for Business Transactions Transaction - any event that both affects the financial position of the business entity and can be reliably recorded

8. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 8 Accounting for Business Transactions 1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock. (1) 50,000 50,000

9. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 9 Accounting for Business Transactions 2. Air & Sea purchases land for an office location, paying $40,000 in cash (2) (40,000) 40,000 Bal 10,000 40,000 50,000

10. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 10 Accounting for Business Transactions 3. The business buys office supplies, agreeing to pay $500 to the office- supply store within 30 days. (3) 500 500 Bal 10,000 500 40,000 500 50,000

11. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 11 Accounting for Business Transactions 4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash. (4) 5,500 5,500 Bal 15,500 500 40,000 500 50,000 5,500

12. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 12 Accounting for Business Transactions 5. Air & Sea Travel performs services for customers on account for $3,000. (5) 3,000 3,000 Bal 15,500 3,000 500 40,000 500 50,000 8,500

13. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 13 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 12,800 3,000 500 40,000 500 50,000 5,800

14. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 14 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 12,400 3,000 500 40,000 100 50,000 5,800

15. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 15 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!

16. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 16 Accounting for Business Transactions 9. The business collects $1,000 from a customer on account. (9) 1,000 (1,000) Bal 13,400 2,000 500 40,000 100 50,000 5,800

17. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 17 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 (22,000) Bal 35,400 2,000 500 18,000 100 50,000 5,800

18. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 18 Accounting for Business Transactions 11. The corporation declares a dividend and pays $2,100 cash to the stockholders. (11) (2,100) (2,100) Bal 33,300 2,000 500 18,000 100 50,000 3,700

19. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 19 Income Statement Air & Sea Travel Income Statement Month Ended April 30, 20x3 Revenue: Service revenue$8,500 Expenses: Salary expense$1,200 Rent expense1,100 Utilities expense 400 Total expenses2,700 Net income$5,800

20. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 20 Statement of Retained Earnings Air & Sea Travel Statement of Retained Earnings Month Ended April 30, 20x3 Retained earnings, April 1, 20x5$ 0 Add: Net income for the month5,800 Subtotal$5,800 Less: Dividends(2,100) Retained earnings, April 30, 20x5$3,700

21. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 21 Balance Sheet Assets Cash$ 33,300 Accounts receivable2,000 Office supplies500 Land18,000 Total assets$ 53,800 Liabilities Accounts Payable$ 100 Stockholders’ Equity Common stock$50,000 Retained earnings 3,700 Total stockholders’ equity$53,700 Total liabilities and stockholders’ equity $53,800 Air & Sea Travel Balance Sheet April 30,20X3

22. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 22 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 22,000 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

23. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 23 Learning Objective 2 Understand how accounting works.

24. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 24 Double-Entry Accounting Record the dual effects of each business transaction.

25. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 25 The T-Account Account Title LEFT SIDE Debit RIGHT SIDE Credit

26. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 26 Increases and Decreases in the Accounts Accounting Equation:Assets=Liabilities+ Stockholders’ Equity Rules of Debit and Credit: Debit + Debit – Debit – Credit – Credit + Credit +

27. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 27 Rules of Debit and Credit Air & Sea received $50,000 and issued stock Assets=Liabilities+ Stockholders’ Equity Debit for Increase, 50,000 Credit for Increase, 50,000 Cash Common Stock

28. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 28 Rules of Debit and Credit Air & Sea purchased land for $40,000 cash. Common Stock Bal. 50,000 Cash Credit for Decrease, 40,000 Bal. 50,000 Land Debit for Increase, 40,000 Assets=Liabilities+ Stockholders’ Equity

29. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 29 Learning Objective 3 Record business transactions.

30. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 30 Journal Chronological record of all transactions listed by date.

31. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 31 Recording Transactions in the Journal April 2Cash 50,000 Common Stock 50,000 Issued common stock 1.Identify the transaction; specify each account affected. 2.Determine whether each account is increased or decreased. Use the rules of debits and credits 3.Enter transaction in the journal, including a brief explanation.

32. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 32 Posting from Journal to Ledger Ledger - grouping of all the accounts; it shows their balances. Posting – process of transferring debits and credits from journal to ledger

33. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 33 Posting from Journal to Ledger Journal Entry April 2Cash 50,000 Common Stock 50,000 Issued common stock 50,000 CashCommon Stock 50,000

34. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 34 Flow of Accounting Data Transaction Occurs Transaction Analyzed Transaction Entered in the Journal Amounts Posted to the Ledger

35. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 35 Learning Objective 4 Use a trial balance. Trial Balance - lists all accounts with their debit or credit balances

36. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 36 Chart of Accounts Listing of all accounts and account numbers used by a business

37. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 37 Normal Balances of the Accounts LiabilitiesEquityAssets =+ Debit forCredit for + - Normal Balance Liabilities Debit forCredit for - + Normal Balance Stockholder’s Equity Debit forCredit for - + Normal Balance

38. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 38 Normal Balances of the Accounts Stockholders’ Equity Debit forCredit for - + Normal Balance Common Stock Debit forCredit for - + Normal Balance Retained Earnings Debit forCredit for + - Normal Balance Expenses Debit forCredit for - + Normal Balance Revenues Decreases Retained Earnings Increases Retained Earnings

39. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 39 Learning Objective 5 Analyze transactions for quick decisions.

40. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 40 Quick Decision Making The managers of PepsiCo may consider buying equipment that costs $100,000. PepsiCo will borrow the money.

41. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 41 Quick Decision Making Note PayableCash (a) 100,000 Transaction a – Borrow $100,000 Cash (a) 100,000(b) 100,000 Equipment (b) 100,000 Note Payable (a) 100,000 Transaction b – Purchase equipment

42. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 42 End of Chapter 2