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ACG2021 Financial Accounting
Processing Accounting Information
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The Accounting Information System
Income Statement Balance Sheet Cash Flow Inputs Process Outputs Business Transaction Accounts Journal General Ledger Trial Balance
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Learning Objective 1 Analyze business transactions.
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Accounting for Business Transactions
Transaction - any event that both affects the financial position of the business entity and can be reliably recorded Reliably Recorded (2 accounting principles, what are they?)
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Transactions are Recorded in The Account
Basic summary device Paper based Computer based ???? based Accounts - grouped into three broad categories Assets Liabilities Stockholders’ Equity Used to Accumulate $’s of every business transaction How much cash did we receive/spend? How much revenue did we earn? How much was spent on rent for the year?
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Chart of Accounts The chart of accounts lists all accounts and their account numbers. Accounts can be grouped under the financial statement headings: Balance Sheet: Assets, Liabilities, and Stockholders’ Equity Income Statement: Revenues and Expenses
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Example Chart of Accounts
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Recording Transactions (Processing)
Journalizing process: Specify each account affected by the transaction Classify each account as either asset, liability, stockholders’ equity, revenue, or expense Determine whether each account is increased or decreased (use rules of debit and credit) Record the transaction in a journal with a brief explanation.
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The Account Assets - economic resources that benefit the business now and in the future Cash Accounts receivable Inventory Notes receivable Prepaid expenses Land Buildings Equipment, furniture, and fixtures
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The Account Liabilities - debts of the company Notes payable
Accounts payable Accrued liabilities Long-term liabilities (bonds)
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The Account Stockholders’ (owners’ or shareholders’) equity - owners’ claims against the assets of a corporation Common Stock Retained Earnings Revenues Expenses
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Accounting for Business Transactions
1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock. (1) , ,000
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Accounting for Business Transactions
2. Air & Sea purchases land for an office location, paying $40,000 in cash (40,000) ,000 Bal , , ,000
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Accounting for Business Transactions
3. The business buys office supplies, agreeing to pay $500 to the office-supply store within 30 days. (3) Bal , , ,000
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Accounting for Business Transactions
4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash. (4) , ,500 Bal , , , ,500
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Accounting for Business Transactions
5. Air & Sea Travel performs services for customers on account for $3,000. (5) , ,000 Bal , , , , ,500
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Accounting for Business Transactions
6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400. (6) (2,700) (2,700) Bal , , , , ,800 Bal , , , , ,800
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Accounting for Business Transactions
7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3. (7) (400) (400) Bal , , , , ,800
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Accounting for Business Transactions
8. The owners remodel their home at a cost of $30,000, paying cash from personal funds. This is a personal transaction, not a business transaction!
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Accounting for Business Transactions
The business collects $1,000 from a customer on account. (9) , (1,000) Bal , , , , ,800
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Accounting for Business Transactions
10. Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land. (10) , (22,000) Bal , , , , ,800
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Accounting for Business Transactions
11. The corporation declares a dividend and pays $2,100 cash to the stockholders. (11) (2,100) (2,100) Bal , , , , ,700
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Income Statement
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Statement of Retained Earnings
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Balance Sheet
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Air & Sea Travel Statement of Cash Flows Month Ended April 30, 20x3
Cash flows from operating activities: Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees ($2,700 + $400) (3,100) Net cash inflow from operating activities $ 3,400 Cash flows from investing activities: Acquisition of land $(40,000) Sale of land ,000 Net cash outflow from investing activities (18,000) Cash flows from financing activities: Issuance (sale) of stock $50,000 Payment of dividends (2,100) Net cash inflows from financing activities $47,900 Net increase (decrease) in cash $33,300 Cash balance, April 1, 20x5 0 Cash balance, April 30, 20x5 $33,300
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Learning Objective 2 Understand how accounting works.
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ACG2021 Financial Accounting
Double-Entry Accounting Understanding Debits/Credits
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Double-Entry Accounting
Record the dual effects of each business transaction.
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Double Entry Accounting
Each accounting transaction affects at least two accounts. T-accounts can be used to represent accounts and their increases and decreases. Every business transactions involves both a debit and a credit Cash Credit (Right Side) Debit (Left Side)
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Assets = Liabilities + Stockholders Equity
Using T-Accounts Assets = Liabilities Stockholders Equity Stockholders’ Equity Assets Liabilities = Debit + Credit - Debit - Credit + Debit - Credit + Common Stock Credit for increase, $50,000 Cash Debit for Increase, $50,000
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Stockholders’ Equity Accounts
Expanded Accounting Equation Common Stock + Retained Earnings - Dividends Revenues Expenses Assets Liabilities = Stockholders’ Equity
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Using T-Accounts Expanded
Assets Debit + Credit - Dividends Expenses Accounts that are increased with debits and have normal debit balances
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Using T-Accounts Expanded
Accounts that are increased with credits and have normal credit balances Liabilities Debit - Credit + Stockholders’ Equity Retained Earnings Revenue
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Using T-Accounts Cash 50,000 Common Stock Bal. 50,000 Credit for decrease, 40,000 The balance in an account is the difference between the sum of the debits and the sum of the credits. Bal. 10,000 Land Debit for Increase, 40,000 Bal. 40,000
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Recording Transactions
Accounting transactions are entered in chronological order in the journal Lists the Sequence of Business Events What happened What Accounts were effected What $’s were exchanged
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Recording Transactions
Journalizing process: Specify each account affected by the transaction Classify each account as either asset, liability, stockholders’ equity, revenue, or expense Determine whether each account is increased or decreased (use rules of debit and credit) Record the transaction in a journal with a brief explanation. Debits are at the left margin and credits are indented
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Posting from Journal to Accounts / General Ledger
DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT Apr 2 Cash ………………………………. 50,000 Common Stock ………...… ,000 Issued common stock Common Stock Cash 50,000 50,000
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Posting to Accounts / General Ledger
Journal does not sort Business Events by Account Thus, journal entries are periodically Posted to their respective Accounts The Ledger
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Flow of Accounting Data
Transaction occurs Transaction analyzed Transaction entered in journal Amounts posted to the ledger accounts
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Trial Balance A trial balance lists all accounts with their balances
Accounts are listed with assets first, then liabilities, then stockholders’ equity, revenues, and finally expenses The trial balance summarizes account balances shows whether total debits equal total credits
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Example Trial Balance
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Finding Errors Find the difference between total debits and total credits. Search for a missing account with that balance. Divide the difference by 2 and search for a debit recorded as a credit or vice-versa. Divide the difference by 9. If you get an even amount, you may have either a slide or a transposition.
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End of Chapter 2
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