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

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

What Are the Different Exchange Transactions? 2

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.

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

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

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.

What Is the Accounting Equation?

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

What Is the Rule of Double-Entry Accounting?

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

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

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

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

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

Draw the Expanded Accounting Equation 22

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

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?

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.

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

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

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

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

Journal 1 Page 1 Date Transaction Ref. Debits Credits Jan. 1 Supplies 25 Accounts Payable 25 Purchased supplies on account. Feb. 1 Cash 101 100 Revenue 100 Received cash for services. Mar. 1 Accounts Receivable 75 Sales Revenue 75 Sold merchandise on account. Entered when posted to ledger.

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

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

General Ledger ACCOUNT: Cash Account No. 101 Date Explanation Ref. Debits Credits Balance Jan. 1 Balance 100 2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,100 3 Purchased equipment GJ1 300 800 4 Sold inventory GJ1 60 860 5 Monthly payment on loan GJ1 230 630 6 Revenue GJ1 2,500 3,130 ACCOUNT: Cash Account No. 101

Chart of Accounts ASSETS (100-199): OWNERS’ EQUITY (300-399): Current Assets (100-150): 101 Cash 105 Accounts Receivable 107 Inventory Long-Term Assets (151-199): 151 Land 152 Buildings LIABILITIES (200-299): Current Liabilities (200-219): 201 Notes Payable 202 Accounts Payable Long-Term Liabilities (220-239): 222 Mortgage Payable OWNERS’ EQUITY (300-399): 301 Capital Stock 330 Retained Earnings SALES (400-499): 400 Sales Revenue EXPENSES (500-599): 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

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

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

Sample Trial Balance The Example Company Trial Balance December 31, 2006 Debits Credits Cash $ 21 Accounts Receivable 15 Inventory 12 Land 200 Accounts Payable $ 30 Capital Stock 150 Retained Earnings 24 Sales Revenue 919 Cost of Goods Sold 850 Advertising Expense 10 Miscellaneous Expenses 15 ______ Total $ 1,123 $ 1,123 39

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

List Advantages of Computers

List Disadvantages of Computers

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