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2. Key Components in the Process to Capture Accounting Information Accounting Transaction—any economic event that affects a company’s assets, liabilities or equity at the time of the event. Account—an accounting record that accumulates the activity of a specific item and yields the item’s balance. Chart of Accounts—the list of accounts that a company uses to capture its business.

3. Chart of Accounts Example Chart of Accounts 100 - 199 100 101 110 120 200 - 299 210 211 230 300 - 399 300 350 400 - 499 400 500 - 599 501 502 600 – 699 ASSETS Cash Accounts Receivable Supplies Equipment LIABILITIES Accounts Payable Unearned Revenues Notes Payable EQUITY Common Stock Retained Earnings REVENUES Service Revenue EXPENSES Wage Expense Interest Expense DIVIDENDS [

4. Accounting Transactions and the Accounting Equation The Basic Accounting Equation Assets=Liabilities+Equity All accounting transactions must be recorded in the accounting information system. To understand the nature of recording transactions, it is best to start with the fundamental accounting equation: Assets must always equal the sum of its liabilities and equity. Any change to the equation must be accompanied by a second change.

5. Dual Nature of Accounting If a transaction increases an asset account. For the equation to stay in balance, the transaction must either decrease another asset account or increase a liability or equity account. 5

6. The Double-Entry Accounting System Account Name Debit Side Credit Side All accounts can be represented in the form known as a T-account shown above. The left side of the account is known as the debit side and the right side of the account is the credit side. Any combination affecting assets, liabilities, and equity can occur, as long as the accounting equation stays in balance. Every accounting transaction affects at least two accounts.

7. means to “record an entry on the right side of an account.” A credit indicates: 1) a decrease in an asset, 2) an increase in a liability, or 3) an increase in a shareholders’ equity. means to “record an entry on the left side of an account.” A debit indicates: 1) an increase in an asset, 2) a decrease in a liability, or 3) a decrease in a shareholders’ equity. Debit Versus Credit Debit (Dr.)Credit (Cr.)

8. Changes in account balances To increase an account balance: Record on the same side as the normal balance. To decrease an account balance: Record on the opposite side as the normal balance.

9. Debit and Credit Summary Chart Type of Account Normal Balance Increase with a Decrease with a AssetDebit Credit LiabilityCredit Debit EquityCredit Debit RevenueCredit Debit ExpenseDebit Credit DividendDebit Credit

10. Journal, Ledger, and Trial Balance Journal is a chronological record of transactions. Because the journal is where transactions are first recorded into the accounting system, it is often called the book of original entry. Entries recorded in the journal are called journal entries. Ledger is a collection of accounts and their balances. Trial balance is a listing of accounts and their balances at a specific point in time.

11. Journal Entries The following standardized format indicates the accounts and amounts, with debits on the first line and credits (indented) on the second line: Date Account Debited…………………… Amount Debited Account Credited…………….. Amount Credited

12. Recording Transactions Into the Accounting System Accounting transactions are not recorded directly into the T- accounts. Instead, accounting transactions are first recorded in a journal. Account Name Debit Side Credit Side

13. Ledger The general ledger is really nothing more than a collection of T-accounts for a company, which means that the general ledger contains both the activity and balances of all company accounts. To get an account balance, one would have to find all journal entries affecting that account and then compute a balance. To avoid such a time consuming task, the information recorded in the general journal is transferred to a ledger. The most basic type of ledger is the general ledger.

14. Posting to Ledger Rent Revenue 450 Cash 1,350 Unearned Rent Revenue 4501,350 900 Step 1 – What accounts are affected and how are they affected? Step 2 – What debit and credit entries are required? Step 3 – Record the journal entry. Step 4 –Post the information to the ledger.

15. Trial Balance DebitCredit Asset Account(s) Liability Account(s) Equity Account(s) Revenue Account(s) Expense Account(s) Dividends Dollar amount Total debitsTotal Credits

16. Trial Balance Functions Equal Totals Helps in making any account adjustments Summarizes Accounts and Balances in one place

17. Trial Balance The trial balance presents a summary of the balances in the ledger. Notice that total debit balances equal total credit balances in the trial balance. Circle Films Trial Balance May 31 DebitCredit Cash Supplies Equipment Unearned Revenue Notes Payable Common Stock Service Revenue Advertising Expense Wage Expense Dividends $8,250 1,000 18,000 250 2,000 1,500 $2,000 9,000 15,000 5,000 Totals$31,000

18. Income Statement Circle Films Income Statement For the month ending May 31 Service Revenue Advertising Expense $250 Wage Expense 2,000 Total Expenses Net Income $5,000 2,250 $2,750

19. Statement of Retained Earnings Circle Films Statement of Retained Earning For the month ending May 31 Retained Earnings, May 1 + Net Income - Dividends Retained Earnings, May 31 $0 2,750 1,500 $1,250

20. Balance Sheet Circle Films Balance Sheet May 31 Cash Supplies Equipment Total Assets Unearned Revenue Notes Payable Total liabilities Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $8,250 1,000 18,000 $27,250 $2,000 9,000 $11,000 15,000 1,250 $16,250 $27,250

21. End of Chapter 3