1. 3 7/e Financial Statements and the Annual Report PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning

2. External and Internal Events External events: interaction between entity and outside environment LO1 Internal events: Interaction within entity

3. Source Documents Evidence needed in an accounting system to record transactions Purchase Invoice Cash Register Tape Sales Invoice Receiving Document Payroll Records Shipping Document Checks LO2

4. Assets = Liabilities + Owners’ Equity Cash Capital Stock + $ 100,000 = + $ 100,000 The accounting equation must always remain in balance Issue Capital Stock for Cash LO3 1/10 Transactions for Glengarry Health Club

5. Purchase of Property in Exchange for Note Payable Increase on left has corresponding increase on right Assets = Liabilities + Owners’ Equity Land Note Payable + $50,000 = + $200,000 Building + $150,000

6. Assets = Liabilities + Owners’ Equity Equip. Accts. Pay. + $20,000 = + $20,000 Purchase of Equipment on Account At least two accounts affected by every transaction

7. Revenue – Expenses = Net Income (Loss) Income Statement Statement of Retained Earnings Beg. R/E + Net Income (or – Net Loss) – Dividends = End. R/E Effect of Revenue and Expenses on Retained Earnings

8. Sell Monthly Memberships on Account Assets = Liabilities + Owners’ Equity Accts. Rec. Retained Earnings + $15,000 = + $15,000 Revenues increase retained earnings

9. Sell Court Time for Cash Assets = Liabilities + Owners’ Equity Cash Retained Earnings + $5,000 = + $5,000 Revenues increase retained earnings

10. Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $10,000 = – $10,000 Expenses decrease retained earnings Payment of Wages and Salaries

11. Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $3,000= – $3,000 Payment of Utilities Expenses also decrease assets or increase liabilities

12. Collection of Accounts Receivable Assets = Liabilities + Owners’ Equity Cash + $4,000 = (no change in Liab. or R/E) Accts. Rec. – $4,000 Assets were traded: accounts receivable for cash

13. Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $2,000= – $2,000 Payment of Dividends Dividends directly reduce retained earnings

14. Assets = Liabilities + O/E Sold stock+ $100,000 = + $100,000 Bought prop. with note+ 200,000 = + $200,000 Bought equip. on acct.+ 20,000 = + 20,000 Sold memberships+ 15,000 = + 15,000 Sold court time+ 5,000 = + 5,000 Paid wages– 10,000 = – 10,000 Paid utilities– 3,000 = – 3,000 Collected A/R+ 4,000 = (no change in Liabilities + OE) – 4,000 Paid dividends– 2,000 = – 2,000 Cumulative Effect of Transactions for Glengarry Health Club + $325,000 = + $220,000 + $105,000

15. Glengarry Health Club Balance Sheet January 31, 2010 Assets Cash $ 94,000 Accts. Rec. 11,000 Equipment 20,000 Building 150,000 Land 50,000 Total assets$325,000 Liabilities and Owners’ Equity Accounts payable$ 20,000 Notes payable 200,000 Capital stock 100,000 Retained earnings 5,000 Total liabilities and owners’ equity$325,000

16. Glengarry Health Club Income Statement For the Month Ended January 31, 2010 Revenues: Memberships $15,000 Court fees 5,000 $20,000 Expenses: Salaries and wages $10,000 Utilities 3,000 13,000 Net income $ 7,000 Net increase to retained earnings

17. Sample Chart of Accounts 100–199: ASSETS 100–109: Cash 101: Checking Account 102: Savings Account 110–119: Receivables 111: Accounts Receivable 120–129: Prepaid Assets 121: Cleaning Supplies 122: Prepaid Insurance 130–139: Property, Plant, and Equipment 131: Land 132: Building : 200–299 LIABILITIES 200–209: Short-Term Liabilities 201: Accounts Payable 202: Wages Payable : 300–399 OWNERS’ EQUITY 301: Preferred Stock 302: Common Stock 303: Retained Earnings 400–499 REVENUES 500–599 EXPENSES LO4

18. General Ledger File or book that contains one page (or entry) for each account Cash +100 – 50 A/R +400 –100

19. The T Account Account Name Representation of one account in the general ledger Debits are entered on left Credits are entered on right LO5

20. The T Account 900 cr. Account Name 400 dr. 500 cr. Debits and credits are netted to obtain balance in account

21. Debits/Credits and the Accounting Equation = ASSETS Dr.Cr. + – + LIABILITIES Dr.Cr. + – OWNERS’ EQUITY Dr.Cr. + – Opposite sides of the accounting equation are increased/decreased in an opposite way

22. Link Between Revenues and Retained Earnings RETAINED EARNINGS Dr. Cr. REVENUES Dr. Cr. Revenues increase retained earnings (part of owners’ equity) Both accounts are increased with credits – – + +

23. Link Between Expenses and Dividends and Retained Earnings RETAINED EARNINGS DR.CR. + – DR.CR. EXPENSES AND DIVIDENDS + – Retained earnings is decreased with debits Use debits to record (increase) expenses and dividends Expenses and dividends decrease retained earnings

24. Normal Account Balances Assets Expenses Dividends Liabilities Owners’ Equity Revenues Debit Credit all increased with debits all increased with credits

25. Cash Capital Stock (1) 100,000 100,000 (1) Transactions and T Accounts (1) Issue capital stock for cash

26. Transactions and T Accounts Land (2) 50,000 Note Payable Building 200, 000 (2) (2) 150,000 (2) Purchase property in exchange for note payable

27. Transactions and T Accounts Equipment Accounts Payable (3) 20,000 20,000 (3) (3) Purchase equipment on account

28. (4) Sell monthly memberships on account 15,000 (4) Membership Revenue Transactions and T Accounts Accounts Receivable (4) 15,000

29. (5) Sell court time for cash 5,000 (4) Cash (1) 100,000 (5) 5,000 Court Fee Revenue Transactions and T Accounts T Accounts reflect current and previous postings to the account for each period

30. (6) Pay employees wages for the month (7) Pay utilities for the month (1) 100,000 (5) 5,000 Wage Expense (6) 10,000 Cash Transactions and T Accounts Utilities Expense (7) 3,000 10,000 (6) 3,000 (7)

31. (8) Collection of accounts receivable Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) Accounts Receivable 4,000 (8) (4) 15,000 Transactions and T Accounts

32. (9) Pay dividends Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) Dividends (9) 2,000 Transactions and T Accounts 2,000 (9)

33. Determine the Balance of the T Accounts Accounts Receivable 4,000 (8) (4) 15,000 Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) 2,000 (9) 94,000 11,000

34. The Journal  A chronological record of transactions  The book of original entry  Each entry has a debit and a credit that equals  Transactions normally recorded in general journal

35. Posting from Journal Journal (via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares Journal (via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares Transactions are entered in: Ledger Accounts Cash Capital Stock Ledger Accounts Cash Capital Stock And then posted to: LO6

36. Journal Entries Dr. Cr. Building 150,000 Land 50,000 Notes Payable 200,000 To record acquisition of property in exchange for note Equipment 20,000 Accounts Payable 20,000 To record the acquisition of equipment on open account Accounts Receivable 15,000 Membership Revenue 15,000 To record sale of monthly memberships on account

37. Journal Entries Dr. Cr. Cash 5,000 Court Fee Revenue 5,000 To record sale of court time for cash. Wage and Salary Expense 10,000 Cash 10,000 To record payment of wages and salaries. Utilities Expense 3,000 Cash 3,000 To record payment of utilities.

38. Journal Entries Dr. Cr. Cash 4,000 Accounts Receivable 4,000 To record collection of accounts receivable. Dividends 2,000 Cash 2,000 To record payment of dividends.

39. Cash Accounts Receivable Equipment Building Land Accounts Payable Notes Payable Capital Stock Membership Revenue Court Fee Revenue Wage Expense Utility Expense Dividends Totals $ 94,000 11,000 20,000 150,000 50,000 $ 20,000 200,000 100,000 15,000 5,000 10,000 3,000 2,000 $340,000 $340,000 Debits Credits Glengarry Health Club Trial Balance January 31, 2010 LO7

40. End of Chapter 3