McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 4 The Bookkeeping Process and Transaction Analysis

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved A = L + OE The Balance Sheet Equation— A Mechanical Key A = L + PIC + RE BEG + R - E The basic accounting equation can be expanded to include revenues and expenses. L O 1

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Transactions a.The owners invested $2,000. b.The company borrowed $6,000 from a bank. c.Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000. d.Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days. e.The company provided services for $8,000 and received cash. f.Wages of $2,000 were paid in cash. The Balance Sheet Equation L O 2

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved The Balance Sheet Equation L O 3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Bookkeeping Jargon Transactions are initially recorded in a journal. Cash Equipment Inventory Notes Payable Transactions are then recorded— posted to—individual accounts in the ledger. Accounts are used to organize or group transactions to facilitate financial statement preparation. L O 4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved T-Account The left side of the The left side of the T-account is always the debit side. Account Name Left Right Debit The right side of the The right side of the T-account is always the credit side. Credit L O 4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Debits and Credits ASSETS Debit for Increase Credit for Decrease EQUITIES Debit for Decrease Credit for Increase LIABILITIES Debit for Decrease Credit for Increase A = L + OE Paid-in capital Retained earnings Remember that owners’ equity includes paid-in capital and retained earnings. L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Revenue and Expenses Increases in owners’ equity. Increase with a credit. Decreases in owners’ equity. Increase with a debit. L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Debits and Credits A = L + OE L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Journal Entry Format Provide a reference date for each transaction. Debits are recorded first. Credits are indented and recorded after debits. Total debits must equal total credits. A brief description of the transaction to explain the entry. L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved The Bookkeeping Process Recorded in the Journal Account Name Debit Credit Posted to the Ledger Transactions Source Documents L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Types of Adjusting Entries The initial recording of a transaction does not result in assigning revenues to the period in which they were earned or expenses to the period in which they were incurred. Transactions for which cash has NOT yet been received or paid, but the effect of which must be recorded in the accounts in order to accomplish a matching of revenues and expenses. Reclassifications Accruals L O 6 At the end of the period, we need to make adjusting entries to bring the accounts up to date for the financial statements.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Examples include: Wages and Salaries Interest Payable Property Taxes Accruing Expenses L O 6 Accruing Revenues Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Adjusting entries: Prepaid Insurance Insurance Expense Supplies Supplies Expense End of month adjusting entries AssetsExpenses Reclassifying Assets to Expenses L O 6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Unearned Revenue Revenue Unearned Rental Revenue Rental Revenue Airline Ticket Advanced Sales Ticket Revenue End of month adjusting entries Liabilities Revenues Reclassify Liabilities to Revenues L O 6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Closing Entries Revenues and gains increase retained earnings Expenses, losses, and dividends decrease retained earnings L O 7