Processing Accounting Information Chapter 2 Processing Accounting Information © Cambridge Business Publishers

Analyze Record Adjust Report Close The Accounting Cycle Analyze transactions from source documents Analyze Journalize transactions Prepare unadjusted trial balance Record Journalize adjusting entries Prepare adjusted trial balance Adjust Prepare financial statements Report Journalize closing entries Prepare post-closing trial balance Close © Cambridge Business Publishers

Analyzing Transactions The accounting equation provides a convenient way to analyze and summarize accounting transactions. Assets = Liabilities + Stockholders’ Equity © Cambridge Business Publishers

Accounting Transaction An economic event that must be recorded in the company’s accounting records. An event that affects any of the elements (specific accounts) of the accounting equation – assets, liabilities, or stockholders’ equity. The accounting equation must stay in balance, therefore at least two elements are always affected by each recorded transaction. Double-entry accounting © Cambridge Business Publishers

The Accounting Equation Expanded Assets = Liabilities + Stockholders’ Equity Common Stock Retained Earnings + Revenues - Expenses - Dividends © Cambridge Business Publishers

Select the correct answer. The first step in the accounting cycle Report .Analyze Record Adjust © Cambridge Business Publishers

The Accounting Equation—An Illustration Mike Lester established Mike’s Bikes on December 1, 2016. Mike’s Bikes purchases bikes from various suppliers and sells them to customers. The following slides illustrate several accounting transactions. Be sure to note that the accounting equation remains in balance following the recording of each transaction. © Cambridge Business Publishers

Issued Stock On December 1, 2016, Mike invested $30,000 cash in exchange for the company’s common stock. Assets = Liabilities + Stockholders’ Equity Cash Common Stock 1 +30,000 $30,000 © Cambridge Business Publishers

Paid Rent in Advance On December 1, Mike’s Bikes prepaid a year’s building rent at $500 per month; meaning it paid $6,000. Assets = Liabilities + Stockholders’ Equity Cash Prepaid Rent Common Stock +30,000 2 -6,000 +6,000 $24,000 $6,000 $30,000 © Cambridge Business Publishers

Purchased Merchandise Inventory on Account On December 1, Mike’s Bikes purchased $3,000 of merchandise inventory on account. Assets = Liabilities + Stockholders’ Equity Cash Merch. Inventory Prepaid Rent Accounts Payable Common Stock +30,000 -6,000 +6,000 3 +3,000 $24,000 $3,000 $6,000 $30,000 $33,000 © Cambridge Business Publishers

Signed Bank Note for Cash On December 1, Mike’s Bikes obtained a two-year bank loan in the amount of $20,000. Annual interest charges on the note amount to 6 percent and are due each November 30. Assets = Liabilities + Stockholders’ Equity Cash Merch. Inventory Prepaid Rent Accounts Payable Notes Payable Common Stock +30,000 -6,000 +6,000 +3,000 4 +20,000 $44,000 $3,000 $6,000 $20,000 $30,000 $53,000 © Cambridge Business Publishers

Purchased Equipment On December 2, Mike’s Bikes purchased equipment used for bike maintenance and assembly. Mike used $15,000 cash from the bank loan. Assets = Liabilities + Stockholders’ Equity Cash Merch. Inventory Prepaid Rent Equip. Accounts Payable Notes Payable Common Stock +30,000 -6,000 +6,000 +3,000 +20,000 5 -15,000 +15,000 $29,000 $3,000 $6,000 $15,000 $20,000 $30,000 $53,000 © Cambridge Business Publishers

Hired a Part-Time Employee The employee will be paid $1,000 per month. There is no accounting transaction at the time of hiring since no asset, liability, or stockholders’ equity account is affected at this time. © Cambridge Business Publishers

Sold Bikes During December, Mike’s Bikes sold $12,000 of bikes for cash. Assets = Liabilities + Stockholders’ Equity Retained Earning Cash Merch. Inventory Prepaid Rent Equip. Accounts Payable Notes Payable Revenue - Expense Common Stock +30,000 -6,000 +6,000 +3,000 +20,000 -15,000 +15,000 6 +12,000 $41,000 $3,000 $6,000 $15,000 $20,000 $12,000 $30,000 $65,000 © Cambridge Business Publishers

Paid Employee At the end of the month, Mike’s Bikes paid its part-time employee $1,000. Assets = Liabilities + Stockholders’ Equity Retained Earning Cash Merch. Inventory Prepaid Rent Equip. Accounts Payable Notes Payable Revenue - Expense Common Stock +30,000 -6,000 +6,000 +3,000 +20,000 -15,000 +15,000 +12,000 7 -1,000 $40,000 $3,000 $6,000 $15,000 $20,000 $12,000 $1,000 $30,000 $64,000 © Cambridge Business Publishers

Select the correct answer. Purchasing supplies on account involves An increase and a decrease to assets An increase in assets and a decrease to liabilities .An increase in assets and an increase to liabilities A decrease to assets and a decrease to liabilities © Cambridge Business Publishers

The Account (T-Account “Illustrative”) An individual record of the increases and decreases in a specific asset, liability, or stockholders’ equity item (account). Cash (1) 30,000 6,000 (2) (4) 20,000 15,000 (5) (6) 12,000 1,000 (7) Bal. 40,000 © Cambridge Business Publishers

Debits and Credits & Normal Balances Debits and credits are terms used to indicate the recording of data entries. Debit = left side entry Credit = right side entry Any Type of Account Debit Credit Note: Normal balances of an account are the side that an increase is recorded © Cambridge Business Publishers

Recording Transactions “General Journal” Create a journal entry to represent the accounting transaction. Debit and credit appropriate accounts. Post the journal entry to the general ledger with the following information: Date Account titles affected from the chart of accounts Dollar amounts An explanation © Cambridge Business Publishers

Illustration of the Recording Process from General Journal to General Ledger **A General Ledger is a listing of each account and the amounts posted to the account © Cambridge Business Publishers

Another Illustration of the Recording Process © Cambridge Business Publishers

Select the correct answer. Recording the cash payment for wage expense involves: .A credit to cash and a debit to wage expense A debit to cash and a debit to wage expense A debit to cash and a credit to wage expense A credit to cash and a credit to wage expense © Cambridge Business Publishers

The Trial Balance A listing of all accounts from the general ledger with their respective debit or credit balances Prepared at the end of the accounting period Serves as a check that debits = credits Aids in the preparation of the financial statements © Cambridge Business Publishers

The Trial Balance A listing of all accounts from the general ledger with their respective debit or credit balances Prepared at the end of the accounting period Serves as a check that debits = credits Aids in the preparation of the financial statements © Cambridge Business Publishers

Unadjusted Trial Balance Example Trial Balance Mike’s Bikes Unadjusted Trial Balance December 31, 2016 Debit Credit Cash $40,000 Merchandise inventory 3,000 Prepaid rent 6,000 Equipment 15,000 Accounts payable $ 3,000 Notes payable 20,000 Common stock 30,000 Sales revenue 12,000 Wages expense 1,000 ______ Totals $65,000 © Cambridge Business Publishers

Select the correct answer. The trial balance Is prepared at the beginning of the accounting period. Is prepared after the financial statements. .Serves as a check to debits = credits. Lists only the accounts from the general ledger with debit balances. © Cambridge Business Publishers

Corporate Social Responsibility Financial reporting is constrained by the requirement that only monetary amounts can be reported. This constraint would greatly hinder corporate social responsibility reports. The Global Reporting Initiative pioneered a widely used sustainability reporting framework with a wide range of measures. Examples include carbon emissions, employee safety, and workforce diversity. © Cambridge Business Publishers

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