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

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Presentation on theme: "The Mechanics of Accounting The Mechanics of Accounting C H A P T E R 3."— Presentation transcript:

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

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

3 What Are the Different Exchange Transactions? Exchange Transactions

4 Business Documents Examples: Sales invoice, purchase order, check stub. Business documents are used to confirm that an arms-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

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

8 What Is the Accounting Equation?

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

10 What Is the Rule of Double-Entry Accounting?

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

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 23

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

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

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

16 Draw the Expanded Accounting Equation

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: DateDebit Entry xx Credit Entry xx Explanation.

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

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

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

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.

24 DateTransactionRef.DebitsCredits Jan. 1 Supplies 25 Accounts Payable25 Purchased supplies on account. Feb. 1 Cash Revenue100 Received cash for services. Mar. 1 Accounts Receivable 75 Sales Revenue75 Sold merchandise on account. Journal 1 Page 1 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 Posting Ledger Posting reference Chart of accounts

27 General Ledger DateExplanation Ref. DebitsCredits Balance Jan. 1Balance100 2Issued 100 shares of capital stock at $10 per share GJ11,0001,100 3Purchased equipment GJ Sold inventory GJ Monthly payment on loan GJ Revenue GJ12,5003,130 ACCOUNT: CashAccount No. 101

28 ASSETS ( ): 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 Chart of Accounts

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

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

31 The Example Company Trial Balance December 31, 2006 DebitsCredits Cash$ 21 Accounts Receivable15 Inventory12 Land200 Accounts Payable$ 30 Capital Stock150 Retained Earnings24 Sales Revenue919 Cost of Goods Sold850 Advertising Expense10 Miscellaneous Expenses 15______ Total$ 1,123$ 1,123 Sample Trial Balance

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

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