© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Operating activities include the cash effects of revenue and expense transactions.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Investing activities include the cash effects of purchasing and selling assets.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Financing activities include the cash effects of transactions with the owners and creditors.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Relationships Among Financial Statements Beginning of period End of period Balance Sheet Time Income Statement Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Forms of Business Organizations Sole Proprietorship Partnership Corporation

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Reporting Ownership Equity in the Balance Sheet Sole Proprietorship Partnership Corporation

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Use of Financial Statements by Outsiders Creditors Investors Two concerns: Liquidity & Profitability Two concerns: Liquidity & Profitability

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Need for Adequate Disclosure Notes to the financial statements often provide facts necessary for the proper interpretation of the statements. Income Statement Balance Sheet Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin End of Chapter 2

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin THE ACCOUNTING CYCLE: Capturing Economic Events Chapter 3

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Role of Accounting Records Establishes accountability for assets and transactions. Keeps track of routine business activities. Obtains detailed information about a particular transaction. Evaluates efficiency and performance within company. Maintains evidence of company’s business activities.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Seven Basic Steps of the Accounting Cycle 1.Transactions are analyzed and recorded in the journal. 2.Transactions are posted to the ledger. 3.A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed. 4.Financial statements are prepared. 5.Adjusting entries are journalized and posted. 6.Closing entries are journalized and posted. 7.A post-closing trial balance is prepared.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Ledger The entire group of accounts is kept together in an accounting record called a ledger. Cash Accounts Payable Capital Stock Accounts are individual records showing increases and decreases.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Use of Accounts Increases are recorded on one side of the T- account, and decreases are recorded on the other side. Left or Debit Side Right or Credit Side Title of Account

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Each financial statement item, called an account, is included in the ledger.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A group of accounts for a business entity is called a ledger.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A list of the accounts in a ledger is called a chart of accounts.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Major Account Classifications Assets are resources owned by the business. Liabilities are debts owed to outsiders (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Major Account Classifications Liabilities are debts owed to outsiders (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable Assets are resources owned by the business. Liabilities are often identified on the balance sheet by titles that include payable.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Owners’ (stockholders’) equity is the owner’s right to the assets of the business. Revenues are increases in owner’s equity as a result of selling services or products. Capital Stock Retained Earnings Dividends Fees Earned Fares Earned Commission Revenue Expenses are the using up of assets or consuming of services to generate revenue. Rent Expense Salary Expense Utilities Expense Major Account Classifications

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The T-Account The T-account has a title. Cash

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The T-Account The left side of the account is the debit side. Cash Left side debit

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The T-Account The right side of the account is the credit side. Cash Left side debit Right side credit

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The T-Account Cash 3,750 4,300 2, , ,900 Typical entries

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Balancing a T-Account

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash 3,750 4,300 2, , ,900 10,950 First, foot the debit side.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 850 1, ,900 Cash 3,750 4,300 2,900 10,950 5,850 Next, foot the credit side. Next, foot the credit side.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 850 1, ,900 Cash 3,750 4,300 2,900 10,950 5,850 Subtract total credits from total debits to obtain the account balance. 5,100

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Transactions and Balance Sheet Accounts

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Post. Ref. JOURNAL DateDescriptionDebitCredi t Page Nov Cash Capital Stock Issued capital stock for cash. (A)On November 1, Chris Clark deposits $25,000 in a bank account in the name of Net Solutions in exchange for capital stock.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Effects of this entry in the Ledger Cash Nov. 125,000 Capital Stock (A)On November 1, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in exchange for capital stock.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Land Cash Purchased land for building site. (B)On November 5, NetSolutions bought land for $20,000, paying cash.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Effects of this entry in the Ledger Cash Nov. 125,000Nov. 520,000 Land Nov. 520,000 (B)On November 5, NetSolutions bought land for $20,000, paying cash.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Supplies Accounts Payable Purchased supplies on account. (C)On November 10, NetSolutions purchased supplies on account for $1,350.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin (C)On November 10, NetSolutions purchased supplies on account for $1,350. Effects of this entry in the Ledger Supplies Nov. 101,350 Accounts Payable Nov. 101,350

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 30 Accounts Payable Cash Paid creditors on account (F)On November 30, NetSolutions paid creditors on account, $950.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash Nov. 125,000Nov. 525, , ,650 Effects of this entry in the Ledger Accounts Payable Nov. 101,350Nov (F)On November 30, NetSolutions paid creditors on account, $950.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Debits Credits Asset accounts……….Increase (+)Decrease (-) Liability accounts……Decrease (-)Increase (+) Owner’s equity (capital) accounts….Decrease (-)Increase (+) Rules of Debit / Credit Balance Sheet Accounts

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Credit for increases (+) Credit for decreases (–) Debit for increases (+) Debit for decreases (–) ASSETS Asset Accounts LIABILITIES Liability Accounts Balance Sheet Accounts Debit for decreases (–) Credit for increases (+) Stockholders’ Equity Accounts OWNERS’ EQUITY

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin (D)On November 18, NetSolutions received fees of $7,500 from customers for services provided. 18Cash Fees Earned Received fees from customers

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Effects of this entry in the Ledger Cash Nov. 125,000Nov. 525,000 Fees Earned Nov. 187, ,500 (D)On November 18, NetSolutions received fees of $7,500 from customers for services provided.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin (E)Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $ Wages Expense Rent Expense Utilities Expense Miscellaneous Expense Cash Paid expenses

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Effects of this entry in the Ledger Cash Nov. 125,000Nov. 5 25,000 Wages Expense Nov. 302, ,500 Rent Expense Nov Utilities Expense Nov Miscellaneous Expense Nov ,650 (E)Throughout the month, NetSolutions incurred the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin In every entry the sum of the debits always equal the sum of the credits.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin (G)On November 30, a count revealed that $800 of the supplies inventory had been used. 30 Supplies Expense Supplies Supplies used during November

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Effects of this entry in the Ledger Supplies Nov. 101,350 Supplies Expense Nov (G)On November 30, a count revealed that $800 of the supplies inventory had been used.