2. Chapter 2 The Accounting Information System and the Accounting Cycle

3. LEARNING OBJECTIVES Chart of Accounts JOURNAL ENTRIES! T-ACCOUNTS !-Post transactions Prepare a Trial Balance Understand Accounting Cycle

4. Now that we’ve analyzed the effect transactions have on the Accounting Equation We need to standardize the format Each transaction must be recorded in a manner that: o Is recognizable by General Ledger Software o Can be interpreted efficiently by accounting professionals o Accurately reflects the economic activity

5. Are you left-handed? If I ask a class how many people are left-handed Invariably, several people raise their left hands!

6. Why did these folks raise their left hands? Because that’s how their brains are wired! That’s their dominant side.

7. Let’s play some basketball… If these same left-handed people were playing basketball…. We’d expect them to dribble with their left hands….

8. Go up the court on the left side….. And have their strong shot on the left.

9. Let’s play some Defense…. How would we defend against these left-handed players? We’d force them to the right!

10. What does Basketball have to do with Accounting? Assets are left-handed! That’s no surprise….they dominate the left-hand side of the Accounting Equation. They have the “home court advantage” on the left-hand side.

11. The Accounting word for “left” is DEBIT! Assets are “debit-handed” They are dominant on the left And weak on the right

12. Assets are strong on the left Strong on LeftWeak on Right Dominant

13. Logical, isn’t it?

14. So, if Assets Are on the left-hand side of the equation And increase on the left… How would you expect Liabilities and Equity to behave?

15. Liabilities and Equity are strong on the Right And weak on the left That’s no surprise….they dominate the right-hand side of the Accounting Equation. They have the “home court advantage” on the right-hand side.

16. The Accounting word for “right” is CREDIT! Liabilities and Equity are “credit-handed” They are dominant on the right And weak on the left

17. Liabilities and Equity are strong on the right Strong on Right Weak on Left Dominant

18. Statement of Stockholders’ Equity Let’s take a closer look at Equity Contributed Capital Dividends Revenues Expenses Income Statement

19. Here’s a trick to help you remember the four components of equity…. Think of the Owner going for a R I D E Revenues Investments Dividends Expenses Increase Equity Decrease Equity

20. Statement of Stockholders’ Equity Stockholders RIDE! I nvestment D ividends R evenues E xpenses Income Statement

21. An item’s location in the accounting equation determines its STRONG side

22. The left-hand side of the equation goes up on the left; Increase with debits Decrease with Credits Increase with Credits Decrease with Debits + with Credits the right-hand side of the equation goes up on the right! + with Revenues - With Expenses - With Dividends RIDE!

23. Armed with this knowledge of Debits and Credits, we’re ready to start into the Accounting Cycle. The Accounting Cycle begins with the analysis of transactions, and Ends with a Post-Closing Trial Balance.

24. The Accounting Cycle In this Chapter, we’ll cover Steps 1 through 3

25. Journalizing Transactions End Chapter 2 Begin Chapter 3 For each transaction, we will: Analyze the impact on the accounting equation Apply the rules for Debits and Credits Prepare the journal entry Post the Entry to the T accounts.

26. 25LESSON 3-1 A FIVE-COLUMN JOURNAL page 57

27. 26LESSON 3-1 Source Documents - CHECKS page 58

28. 27LESSON 3-1 OTHER SOURCE DOCUMENTS page 59 memorandum calculator tape receipt

29. Transaction 1) June 1 – Received $50,000 from its shareholders in exchange for common stock. #DateAccount Titles and DescriptionsDebitCredit To record: _________________________________________ #DateAccount Titles and DescriptionsDebitCredit 16/1/2007Cash 50,000 Common Stock 50,000 To record Stockholders' contribution.

30. Transaction 2) June 2 - Paid $1,500 cash for Rent Expense. #DateAccount Titles and DescriptionsDebitCredit 2 #DateAccount Titles and DescriptionsDebitCredit 26/2/2007Rent Expense 1,500 Cash 1,500 To record payment of rent (for current month).

31. Transaction 3) June 5 – Paid $1,200 for an insurance policy that begins July 1. #DateAccount Titles and DescriptionsDebitCredit #DateAccount Titles and DescriptionsDebitCredit 26/5/2007Prepaid Insurance 1,200 Cash 1,200 To record payment for Future Insurance.

32. Transaction 4) June 10 – Performed Services for clients, on account (developed a web site for them, sent them a bill), $3,000. #DateAccount Titles and DescriptionsDebitCredit 46/10/2009Accounts Receivable 3,000 Service Revenue 3,000 Performed Services for clients, on account (developed a web site for them, sent them a bill), $3,000 #DateAccount Titles and DescriptionsDebitCredit

33. #DateAccount Titles and DescriptionsDebitCredit 56/14/2009Utility Expense (Or Internet Expense) 50 Accounts Payable 50 To record payment of Comcast bill (for current month). Transaction 5) June 14 – Received a bill from Comcast for Internet services for June but will not be paid until July, $50. #DateAccount Titles and DescriptionsDebitCredit

34. Transaction 6) June 18 – Paid cash of $645 for operating expenses, of which $ 100 was for Advertising and $545 was for Travel, which done in June. #DateAccount Titles and DescriptionsDebitCredit 66/18/2007Advertising Expense 100 Travel Expense 545 Cash 645 To record payment of expenses. #DateAccount Titles and DescriptionsDebitCredit

35. Transaction 7) June 24 – Received cash of $1,000 from the customers that were billed on June 10. #DateAccount Titles and DescriptionsDebitCredit 76/24/2007Cash 1,000 Accounts Receivable 1,000 To record collection of Accounts Receivable #DateAccount Titles and DescriptionsDebitCredit

36. Transaction 8) June 30 – Purchased a printer by signing a Note Payable due on December 31, $600. #DateAccount Titles and DescriptionsDebitCredit 86/30/2007Equipment 600 Notes Payable 600 To record purchase of printer, payment due 12/31/07. #DateAccount Titles and DescriptionsDebitCredit

37. CASHACCOUNTS RECEIV.Prepaid Insurance Equipment Accounts Payable Notes Payable Common Stock Service Revenue Utilities Expense Advertising Expense Travel Expense Rent Expense Posting to T Accounts

38. CASH ACCOUNTS RECEIV. Prepaid Insurance 50,000 3,000 1,000 1,200 1,000 1,500 1,200 645 47,655 2,000 1,200 Equipment Accounts Payable Notes Payable 600 50 600 50 600 Common Stock Service Revenue Utilities Expense 50,000 3,000 50 50,000 3,000 50 Advertising Expense Travel Expense Rent Expense 100 545 1,500 100 545 1,500 Posting to T Accounts - solution

39. ____________________________________ TRIAL BALANCE As of: _______________________________ AccountDebitCredit Total The Trial Balance

40. The Trial Balance - solution Quality Web Design SOLUTION TRIAL BALANCE As of: June 30, 2007 AccountDebitCredit Cash 47,655 Accounts Receivable 2,000 Prepaid Insurance 1,200 Equipment 600 Accounts Payable 50 Notes Payable 600 Common Stock 50,000 Service Revenue 3,000 Utilities Expense 50 Advertising Expense 100 Travel Expense 545 Rent Expense 1,500 Total 53,650

41. Financial Statements (3) Quality Web Design Income Statement _____________________________________ REVENUES: EXPENSES: NET INCOME Quality Web Design Statement of Retained Earnings _____________________________________ Retained Earnings - ending balance Quality Web Design Balance Sheet ___________________________________ ASSETS LIABILITIES STOCKHOLDERS' EQUITY TOTAL ASSETS TOTAL LIABs & STOCK. EQUITY

42. Financial Statements (3) - solution Quality Web Design SOLUTION Income Statement For the month ended: June 30, 2007 REVENUES: Service Revenue $ 3,000 EXPENSES: Utilities Expense $ 50 Advertising Expense $ 100 Travel Expense $ 545 Rent Expense $ 1,500 2,195 NET INCOME $ 805 Quality Web Design Statement of Retained Earnings For the month ended: June 30, 2007 Retained Earnings - beginning balance $ - Net Income for the year 805 Less: Dividends - Retained Earnings - ending balance $ 805 Quality Web Design Balance Sheet AS OF: June 30, 2007 ASSETS LIABILITIES Cash $ 47,655 Accounts Payable $ 50 Accounts Receivable $ 2,000 Notes Payable $ 600 Prepaid Insurance $ 1,200 Total Current Liabilities $ 650 Total Current Assets $ 50,855 STOCKHOLDERS' EQUITY Common Stock $ 50,000 Equipment $ 600 Retained Earnings 805 Total Stockholders' Equity 50,805 TOTAL ASSETS $ 51,455 TOTAL LIABs & STOCK. EQUITY $ 51,455

43. End – Chapter 3