1. Gary A. Porter and Curtis L. Norton
Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition
Gary A. Porter and Curtis L. Norton
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

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

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

4. Issue Capital Stock for Cash
January Transactions for Glengarry Health Club
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash Capital Stock
$100,000 = $ 100,000
The accounting equation must always remain in balance
LO3 3

5. Purchase of Property in Exchange for Note Payable
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Land Note Payable
$50,000 = $200,000
Building
$150,000
Increase on left of equal sign has
corresponding increase on right 4

6. Purchase of Equipment on Account
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Equip Accts. Pay.
$20,000 = $20,000
At least two accounts affected
by every transaction 5

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

8. Sell Monthly Memberships on Account
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses
Equity
Accts. Rec Membership Revenue
$15, = $15,000
Revenues increase retained earnings 6

9. Revenues increase retained earnings
Sell Court Time
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash Court Revenue
$5,000 = $5,000
Revenues increase retained earnings 6

10. Payment of Wages and Salaries
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash Wages Expense
($10,000) = ($10,000)
Expenses decrease retained earnings 8

11. Expenses also decrease assets or
Payment of Utilities
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash Utilities Expense
($3,000) = ($3,000)
Expenses also decrease assets or
increase liabilities 8

12. Collection of Accounts Receivable
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash
$4, = (no change in Liab. or R/E)
Accts. Rec.
( $4,000)
Assets were traded:
accounts receivable for cash 10

13. Dividends directly reduce
Payment of Dividends
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash Retained Earnings
($2,000) = ($2,000)
Dividends directly reduce
retained earnings 10

14. Cumulative Effect of Transactions for Glengarry Health Club
Assets = Liabilities Stockholders’
Equity
Sold stock + $100,000 = + $100,000
Bought prop.
with note ,000 = + $200,000
Bought equip.
on acct ,000 = ,000
Sold
memberships ,000 = ,000
Sold court time ,000 = ,000
Paid wages – ,000 = – ,000
Paid utilities – ,000 = – ,000
Collected A/R ,000 = (no change in Liabilities + OE)
– ,000
Paid dividends – ,000 = – ,000
+ $325,000 = $220, $105,000 11

15. Glengarry Health Club Balance Sheet January 31, 2007
Assets
Cash $ 94,000
Accts. Rec ,000
Equipment ,000
Building ,000
Land ,000
Total assets $325,000
Liabilities and Stock. Equity
Accounts payable $ 20,000
Notes payable 200,000
Capital stock 100,000
Retained earnings ,000
Total liabilities
and stock. equity $325,000

16. Glengarry Health Club Income Statement For the Month Ended January 31, 2007
Revenues:
Memberships $15,000
Court fees , $20,000
Expenses:
Salaries and wages $10,000
Utilities , ,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 STOCK. EQUITY
301: Preferred Stock
302: Common Stock
303: Retained Earnings
400–499 REVENUES
500–599 EXPENSES

18. General Ledger Cash A/R +400 File or book that contains one page
+100
–50
A/R
+400
–100
Cash:
+100
–50
File or book that contains one page
(or entry) for each account
LO4

19. Processing Accounting Information
The Transaction Effects Equation
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses
Equity
Shows how transactions are analyzed into account names and accounting equation categories for use in recording transactions
Shows how the balance sheet and the income statement are affected by the transactions

20. Appendix:
Accounting Tools:
Double-Entry System

21. Representation of one account in the general ledger
The T Account
Account Name
Debits are
entered on left
Credits are
entered on right
Representation of one account in the general ledger
LO5 17

22. The T Account Account Name 400 dr. 900 cr. 500 cr. Debits and credits
are netted to obtain
balance in account
500 cr. 17

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

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

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

26. Normal Account Balances
Debit
Credit
Assets
Expenses
Dividends
Liabilities
Stockholders’ Equity
Revenues
all increased with debits
all increased with credits 22 21

27. Transactions and T Accounts
Cash Capital Stock
(1) 100, ,000 (1)
(1) Issue capital stock for cash 3 22

28. Transactions and T Accounts
Land
(2) 50,000
Note Payable
Building ,000 (2)
(2) 150,000
(2) Purchase property in exchange for note payable 3 23

29. Transactions and T Accounts
Equipment Accounts Payable
(3) 20, ,000 (3)
(3) Purchase equipment on account 3 24

30. (4) Sell monthly memberships on account
Transactions and T Accounts
Accounts Receivable
Membership Revenue
(4) 15,000
(4) 15,000
(4) Sell monthly memberships on account 3 25

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

32. (6) Pay employees wages for the month (7) Pay utilities for the month
Transactions and T Accounts
Wage Expense
Cash
(6) 10,000
(1) 100,000
(5) 5,000
10,000 (6)
3,000 (7)
Utilities Expense
(7) 3,000
(6) Pay employees wages for the month (7) Pay utilities for the month 3 25

33. Transactions and T Accounts (8) Collection of accounts receivable
Cash
(1) 100,000
(5) 5,000
Accounts Receivable
10,000 (6)
3,000 (7)
(4) 15,000
4,000 (8)
(8) 4,000
(8) Collection of accounts receivable 3 24

34. Transactions and T Accounts
Cash
(1) 100,000
(5) 5,000
Dividends
10,000 (6)
3,000 (7)
(9) 2,000
(8) 4,000
2,000 (9)
(9) Pay dividends 3 24

35. Determine the Balance of the T Accounts
Cash
Accounts Receivable
10,000 (6)
3,000 (7)
(4) 15,000
4,000 (8)
(1) 100,000
(5) 5,000
11,000
2,000 (9)
(8) 4,000
Retained Earnings
94,000
(9) 2,000
15,000 (4)
5,000 (5)
18,000 3 26

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

37. Glengarry Health Club Trial Balance January 31, 2007
Debits Credits
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, $340,000
LO7

38. End of Chapter 3