1. 3
C H A P T E R
The Mechanics of
Accounting

2. Learning Objective 1
Understand the process of transforming transaction data into useful accounting information.

3. What Are the Different Exchange Transactions?2

4. Business Documents
Examples: Sales invoice, purchase order, check stub.
Business documents are used
to confirm that an arm’s-length transaction has occurred.
to establish the amounts to be recorded.
to facilitate the analysis of business events.
These documents must be analyzed.

5. What is the Sequence of the Accounting Cycle?
Step 1
Step 2
Step 3
Step 4

6. Learning Objective 2
Analyze transactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).

7. Step 1: Analyze Transactions
Transaction analysis framework
What accounts are involved?
Did each account increase or decrease?
By how much?
Transaction analysis:
breaks down complex transactions into manageable pieces.
provides a self-checking mechanism.

8. What Is the Accounting Equation?

9. Describe Effect of the Following Transactions on a Company
A = L OE
Borrow money
Invest in company
Pay off a note
Purchase equipment
Borrow funds to settle a debt 12

10. What Is the Rule of Double-Entry Accounting?

11. Accounts provide an efficient method to categorize transactions.
Using Accounts
Accounts provide an efficient method to categorize transactions.
A T-account is a simplified depiction of an account.
Name of Account
Debit
Credit 13

12. Using a T-Account
The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?
Cash 35 12 23 19

13. Debits and Credits Remember: Debits are simply entries on the left.
Credits are simply entries on the right. 15

14. Explain How Debits and Credits Work
Assets = Liabilities + Owners’ Equity 16

15. Expanding the Equation
Revenues
Increases in a company’s resources from the sale of goods or the performance of services.
Expenses
Decreases in a company’s resources incurred in the normal course of business to generate revenues.
Dividends
Distributions to owners, which reduce Owners’ Equity. 21

16. Draw the Expanded Accounting Equation22

17. Learning Objective 3
Record the effects of transactions using journal entries (step two of the accounting cycle).

18. Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
What is another name for the journal?

19. Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
General Journal Entry Format:
Date Debit Entry xx
Credit Entry xx
Explanation.

20. Journal Entries
What is the three-step process? 1 2 3

21. Example 1: Journal Entry
Supplies purchased for $25 are purchased “on account.”
Prepare the correct journal entry. What do we mean by purchased “on account?” 28

22. Example 2: Journal Entry
A check for $100 is received in payment for services rendered.
Make the correct journal entry. 28

23. Example 3: Journal Entry
Merchandise is sold to a customer on account for $75. The cost of the product was $60.
Make the journal entries. 28

24. Journal 1 Page 1 Date Transaction Ref. Debits Credits
Jan. 1 Supplies 25
Accounts Payable 25
Purchased supplies on account.
Feb. 1 Cash
Revenue 100
Received cash for services.
Mar. 1 Accounts Receivable 75
Sales Revenue 75
Sold merchandise on account.
Entered when posted to ledger.

25. Learning Objective 4
Summarize the resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).

26. Step 3: Posting Journal Entries and Preparing a Trial Balance Define the Following Terms
Ledger
Posting reference
Chart of accounts

27. General Ledger ACCOUNT: Cash Account No. 101
Date Explanation Ref. Debits Credits Balance
Jan. 1 Balance
2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ
4 Sold inventory GJ
5 Monthly payment on loan GJ
6 Revenue GJ1 2,500 3,130
ACCOUNT: Cash
Account No. 101

28. Chart of Accounts ASSETS (100-199): OWNERS’ EQUITY (300-399):
Current Assets ( ):
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets ( ):
151 Land
152 Buildings
LIABILITIES ( ):
Current Liabilities ( ):
201 Notes Payable
202 Accounts Payable
Long-Term Liabilities ( ):
222 Mortgage Payable
OWNERS’ EQUITY ( ):
301 Capital Stock
330 Retained Earnings
SALES ( ):
400 Sales Revenue
EXPENSES ( ):
500 Cost of Goods Sold
501 Sales Salaries and Commissions
523 Rent Expense
528 Advertising Expense
573 Utilities Expense
579 Accounting and Legal Fees 37

29. Determining Account Balances
Name of Account
Debit
Credit
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
Accounts with typical debit balances are?
Accounts with typical credit balances are?
Owners’ Equity
Revenues or Income
Liabilities
Expenses
Assets
Dividends
Do you see the mnemonic memory device, DEAD COIL? 38

30. Define The Trial Balance
What is the Trial Balance used for? 38

31. Sample Trial Balance The Example Company Trial Balance
December 31, 2006
Debits Credits
Cash $ 21
Accounts Receivable 15
Inventory 12
Land 200
Accounts Payable $
Capital Stock 150
Retained Earnings 24
Sales Revenue 919
Cost of Goods Sold 850
Advertising Expense 10
Miscellaneous Expenses ______
Total $ 1,123 $ 1,123 39

32. Learning Objective 5
Describe how technology has affected the first three steps of the accounting cycle.

33. List Advantages of Computers

34. List Disadvantages of Computers

35. End Chapter 3
"Failure is the
opportunity to
begin again with
more knowledge."
Henry Ford