Chapter 3 Processing Accounting Information

Notes:

1,455 AD - 1516 AD

What Should You Understand After

Today
WhatisAccounting?
Whatarethe4financialstatements
Temporaryvs.PermanentAccounts
StockvsFlow
Howfinancialstatementsconnecttoeachother
Theaccountingcycleisaprocessthatcreatesfinancialstatements
Cashvs.AccrualAccounting
Creditshavetoequaldebits
BalancesheetmustalwaysBALANCE!!!!!!

Chapter 3 Processing Accounting Information

Notes:

WhatIsBusiness?
Activities

toprovide
members
ofan
economic
system

with
goods
and
services

LO1

FormsofOrganization
SoleProprietorship
Partnership
Corporation

oneowner

twoormoreowners
entityorganizedunder
lawsofaparticularstate

LO2

Chapter 3 Processing Accounting Information

Notes:

NonbusinessEntities
GovernmentEntities

Federal,State,and
LocalGovernments

PrivateOrganizations

Hospitals,Universities,
Cooperatives

TheNatureofBusinessActivity
Financing
Activities

Investing
Activities

Operating
Activities

Examples:
borrowing
saleofstock

purchaseofassets

saleof

products/services
costsincurred
tooperate
business
LO3

Chapter 3 Processing Accounting Information

Notes:

WhatIsAccounting?
Identifying
Measuring

Economic
Information

to
various
users

Communicating

LO4

InternalandExternal
UsersofAccountingInformation
Current
and
Potential
Owners

Bankers
Creditors
Internal
Users
Management

Financial
Analysts

Suppliers
Trade
Associations

Government
Agencies

Chapter 3 Processing Accounting Information

Notes:

DecisionsMadewith
FinancialInformation
Invest??

Addnew
productline??

Borrow $$??

Build newplant??

Extendcredit$$??

Loan$$??

Start newbusiness??

Sellstocksorbonds??

TheAccountingEquation
Assets=Liabilities+OwnersEquity
(orStockholdersEquity)

Economic
resources

Creditors
claims
toassets

Owners
claims
toassets

Examples:
Cash
Accountsreceivable
Land

Accountspayable
Notespayable

Capitalstock
Retainedearnings
LO5

Chapter 3 Processing Accounting Information

Notes:

BalanceSheet
(snapshotoffinancialposition)

Assets

Liabilities

+
OwnersEquity
(orStockholdersEquity)

TopoftheWorld
BalanceSheet
June30,2012
A

A=L+SE

Currentassets:
Cash
$200
Accountsreceivable
600
Land
4,000
Lodge,liftsandequipment 2,500
Totalassets

$7,300

Chapter 3 Processing Accounting Information

Notes:

TopoftheWorld
BalanceSheet
June30,2012

A=L+SE

LiabilitiesandStockholdersEquity

=L
Liabilities:
Accountspayable
Salariesandwagespayable
Notespayable
Totalliabilities

$700
400
3,000

$4,100

+SE

Stockholdersequity:
Capitalstock
Retainedearnings1,200
Totalstockholdersequity

$2,000
$3,200

TotalLiabilitiesandStockholdersEquity$7,300

IncomeStatement
(foraperiodoftime)

Revenues
Less:Expenses
Netincome

$$
($$)
$$

Chapter 3 Processing Accounting Information

Notes:

TopoftheWorld
IncomeStatement
FortheYearEndedJune30,2012
Revenues Expenses=NetIncome
Revenues:
Lifttickets
Revenues
Equipmentrentals
Totalrevenues
Expenses:
Salariesandwages
Depreciation
Water,gas,andelectricity
Expenses
Insurance
Interest
Incometaxes
Totalexpenses
Netincome
Net Income

$5,800
2,200
$8,000

$2,000
100
1,500
1,100
300
1,000
6,000
$2,000

StatementofRetainedEarnings
(foraperiodoftime)

Beginningretainedearnings
$$$
Add: Netincomefortheperiod
$$$
Deduct: Dividendsfortheperiod($$$)
Endingretainedearnings
$$$

Chapter 3 Processing Accounting Information

Notes:

TopoftheWorld
StatementofRetainedEarnings
FortheYearEndedJune30,2012
Retainedearnings,beginningoftheyear$0
Add: Netincomefortheyear

2,000

Deduct: Dividendsfortheyear(800)
Retainedearnings,endoftheyear$1,200

TopoftheWorld
StatementofCashFlows
FortheYearendedJune30,2012
Cashflowsfromoperatingactivities:
Cashcollectedfromcustomers
Cashpaymentsfor:
Salariesandwages
Water,gas,andelectricity
Insurance
Interest
Incometaxes
Totalcashpayments

Netcashprovidedbyoperatingactivities

$7,400
$1,000
1,500
400
300
1,000
4,800
$2,600

Chapter 3 Processing Accounting Information

Notes:

TopoftheWorld
StatementofCashFlows
FortheYearendedJune30,2012
Cashflowsfrominvestingactivities:
Purchaseofland
$(4,000)
Purchaseoflodge,liftandequipment
(2,600)
Netcashflowsfrominvestingactivities
$(6,600)
Cashflowsfromfinancingactivities:
Proceedsfromissuanceoflongtermnote
$3,000
Proceedsfromissuanceofcapitalstock
2,000
Dividendsdeclaredandpaid
(800)
Netcashflowsfromfinancingactivities
4,200
Netincreaseincash
$200
Cashatbeginningofyear
0
Cashattheendoftheyear
$200

RelationshipamongFinancialStatements
TopoftheWorldExample
IncomeStatementforYearendedJune30,2012

Revenues
Less:Expenses
Netincome

$8,000
(6,000)
$2,000

StatementofRetainedEarningsforYearendedJune30,2012
Beginningbalance,retainedearnings
$0
Add:Netincome
2,000
Deduct:Cashdividends
(800)
Endingbalance,retainedearnings$1,200

BalanceSheets
June30,2012
Totalassets$7,300
Liabilities4,100
Capitalstock2,000
Retainedearnings 1,200
Totalliabilitiesandstockholdersequity$7,300

July1,2011
$0
0
0
0
$0

Chapter 3 Processing Accounting Information

Notes:

ExternalandInternalEvents
Externalevents:interactionbetweenentity
andoutsideenvironment

Internalevents:
Interactionwithin
entity
LO1

SourceDocuments
Purchase
Invoice
Cash
Register
Tape
Payroll
Records

Evidenceneeded
inanaccounting
systemtorecord
transactions
Shipping
Document

Sales
Invoice

Checks

Receiving
Document
LO2

Chapter 3 Processing Accounting Information

Notes:

IssueCapitalStockforCash
1/12TransactionsforGlengarryHealthClub

Assets=Liabilities+StockholdersEquity
Cash
+$100,000=

CapitalStock
+$100,000

Theaccountingequationmustalways
remaininbalance
LO3

PurchaseofPropertyin
ExchangeforNotesPayable
Assets =Liabilities+StockholdersEquity
Land
NotesPayable
+$50,000=+$200,000
Building
+$150,000
Increaseonlefthas
correspondingincreaseonright

Chapter 3 Processing Accounting Information

Notes:

PurchaseofEquipment
onAccount
Assets =Liabilities+StockholdersEquity
Equip.
Accts.Pay.
+$20,000=+$20,000

Atleasttwoaccountsaffected
byeverytransaction

EffectofRevenueandExpenses
onRetainedEarnings
IncomeStatement
Revenue
Expenses
=NetIncome(Loss)

Statementof
RetainedEarnings
Beg.R/E
+NetIncome
(or NetLoss)
Dividends
=End.R/E

Chapter 3 Processing Accounting Information

Notes:

SellMonthlyMemberships
onAccount
Assets=Liabilities+StockholdersEquity
Accts.Rec.
+$15,000=

RetainedEarnings
+$15,000

Revenuesincreaseretainedearnings

SellCourtTimeforCash
Assets=Liabilities+StockholdersEquity
Cash
RetainedEarnings
+$5,000=+$5,000

Revenuesincreaseretainedearnings

Chapter 3 Processing Accounting Information

Notes:

PaymentofWages
andSalaries
Assets=Liabilities+StockholdersEquity
Cash
$10,000=

RetainedEarnings
$10,000

Expensesdecreaseretainedearnings

PaymentofUtilities
Assets =Liabilities+StockholdersEquity
Cash
$3,000 =

RetainedEarnings
$3,000

Expensesalsodecreaseassets
orincreaseliabilities

Chapter 3 Processing Accounting Information

Notes:

Collectionof
AccountsReceivable
Assets=Liabilities+StockholdersEquity
Cash
+$4,000

= (nochangeinLiab.orS/E)

Accts.Rec.
$4,000

Assetsweretraded:
accountsreceivableforcash

PaymentofDividends
Assets=Liabilities+StockholdersEquity
Cash
$2,000 =

RetainedEarnings
$2,000

Dividendsdirectlyreduceretainedearnings

Chapter 3 Processing Accounting Information

Notes:

CumulativeEffectofTransactionsfor
GlengarryHealthClub
Assets =Liabilities +S/E
Soldstock
Boughtprop.
withnote
Boughtequip.
onacct.
Sold
memberships
Soldcourttime
Paidwages
Paidutilities
CollectedA/R
Paiddividends

+$100,000 =

+$100,000

+200,000=+$200,000
+20,000

=+20,000

+15,000 =
+15,000
+5,000 =
+5,000
10,000=

10,000

3,000=

3,000
+ 4,000=(nochangeinLiabilities+SE)

4,000

2,000 =

2,000

+$325,000=+$220,000+$105,000

GlengarryHealthClub
BalanceSheet
January31,2012
Assets
Cash$ 94,000
Accts.Rec. 11,000
Equipment
20,000
Building 150,000
Land
50,000
Totalassets $325,000

LiabilitiesandStockholdersEquity

Accountspayable
Notespayable
Capitalstock
Retainedearnings

$20,000
200,000
100,000
5,000

Totalliabilities
andstockholdersequity

$325,000

Chapter 3 Processing Accounting Information

Notes:

GlengarryHealthClub
IncomeStatement
FortheMonthEndedJanuary31,2012
Revenues:
Memberships
Courtfees
Expenses:
WagesandSalaries
Utilities
Netincome

$15,000
5,000
$10,000
3,000

$20,000

13,000
$7,000

SampleChartofAccounts
100199:ASSETS
100109:Cash
101:
CheckingAccount
102:
SavingsAccount
110119:Receivables
111:

AccountsReceivable

120129:PrepaidAssets
121:
CleaningSupplies
122:
PrepaidInsurance
130139:Property,Plant,and
Equipment
131:
Land
132:
Building
:

200299

LIABILITIES

200209:ShortTermLiabilities
201:
AccountsPayable
202:
Wages&SalariesPayable
:

300399
301:
302:
303:

STOCKHOLDERSEQUITY
PreferredStock
CommonStock
RetainedEarnings

400499

REVENUES

500599

EXPENSES

LO4

Chapter 3 Processing Accounting Information

Notes:

GeneralLedger
Cash
+100
50

A/R
+400
100

Fileorbookthatcontainsonepage
(orentry)foreachaccount

TheTAccount
AccountName
Debitsare
enteredonleft

Creditsare
enteredonright

Representationofoneaccountinthegeneralledger
LO5

Chapter 3 Processing Accounting Information

Notes:

The T Account
Account Name
400 dr.

900 cr.

Debits and credits

are netted to obtain
balance in account

500 cr.

Debits/Creditsand
theAccountingEquation
=

ASSETS

LIABILITIES

STOCKHOLDERS
EQUITY

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Oppositesidesoftheaccountingequationare
increased/decreasedinanoppositeway

Chapter 3 Processing Accounting Information

Notes:

LinkBetweenRevenuesand
RetainedEarnings
RETAINED
EARNINGS
Dr.

Bothaccounts
areincreased
withcredits

+
Cr.

REVENUES
Dr.

Cr.
+

Revenuesincrease
retainedearnings
(partofstockholdersequity)

LinkBetweenExpensesand
DividendsandRetainedEarnings
RETAINED
EARNINGS
Retainedearningsis
decreasedwithdebits
Expensesanddividends
decreaseretainedearnings
Usedebitstorecord(increase)
expensesanddividends

DR.

CR.

EXPENSESAND
DIVIDENDS
DR.

CR.

Chapter 3 Processing Accounting Information

Notes:

NormalAccountBalances
Debit
Assets
Expenses
Dividends
allincreased
withdebits

Credit
Liabilities
StockholdersEquity

Revenues
allincreased
withcredits

TransactionsandTAccounts
CashCapitalStock
(1)100,000

100,000(1)

(1)Issuecapitalstockfor cash

Chapter 3 Processing Accounting Information

Notes:

TransactionsandTAccounts
Land
(2)50,000

NotesPayable
Building

200,000(2)

(2)150,000

(2)Purchasepropertyinexchange
forapromissorynote.

TransactionsandTAccounts
Equipment
(3)20,000

AccountsPayable
20,000(3)

(3)Purchaseequipmentonaccount

Chapter 3 Processing Accounting Information

Notes:

TransactionsandTAccounts
AccountsReceivable MembershipRevenue
15,000(4)

(4)15,000

(4)Sellmonthlymembershipsonaccount

TransactionsandTAccounts
Cash
(1)100,000
(5)5,000

CourtFeeRevenue
5,000(5)

TAccountsreflect
currentandprevious
postingstotheaccount
foreachperiod

(5)Sellcourttimeforcash

Chapter 3 Processing Accounting Information

Notes:

TransactionsandTAccounts
Wage&SalaryExpense
(6)10,000

Cash
(1)100,000 10,000(6)
(5)5,000 3,000(7)

UtilitiesExpense
(7)3,000

(6)Payemployeeswagesforthemonth
(7)Payutilitiesforthemonth

TransactionsandTAccounts
Cash
(1)100,000 10,000(6)
(5)5,000 3,000(7)
(8)4,000

AccountsReceivable
(4)15,000 4,000(8)

(8)Collectionofaccountsreceivable

Chapter 3 Processing Accounting Information

Notes:

TransactionsandTAccounts
Cash

Dividends

(1)100,000 10,000(6)
(5)5,000 3,000(7)
(8)4,000 2,000(9)

(9)2,000

(9)Paydividends

DeterminetheBalance
oftheTAccounts
Cash

AccountsReceivable

(1)100,000 10,000(6)
(5)5,000 3,000(7)
(8)4,000 2,000(9)

(4)15,000 4,000(8)

94,000

11,000

Chapter 3 Processing Accounting Information

Notes:

TheJournal
Achronologicalrecordoftransactions
Thebookoforiginalentry
Eachentryhasadebitandacredit
thatequals
Transactionsnormallyrecordedin
general journal

PostingfromJournal
Transactionsare
enteredin:

Andthenpostedto:

Journal
(viajournalentries):
Dr.Cr.
Cash
100,000
CapitalStock
100,000

LedgerAccounts
Cash
CapitalStock

Torecordtheissuanceof10,000shares
LO6

Chapter 3 Processing Accounting Information

Notes:

JournalEntries
Dr.Cr.
Building
150,000
Land
50,000
NotesPayable
200,000
Torecordacquisitionofpropertyinexchangefornote
Equipment20,000
AccountsPayable
20,000
Torecordtheacquisitionofequipmentonopenaccount
AccountsReceivable15,000
MembershipRevenue15,000
Torecordsaleofmonthlymembershipsonaccount

JournalEntries
Cash
CourtFeeRevenue
Torecordsaleofcourttime
forcash.

Dr.Cr.
5,000
5,000

WageandSalaryExpense10,000
Cash
Torecordpaymentofwages
andsalaries.

10,000

UtilitiesExpense3,000
Cash3,000
Torecordpaymentofutilities.

Chapter 3 Processing Accounting Information

Notes:

JournalEntries
Cash
AccountsReceivable
Torecordcollectionofaccounts
receivable.

Dr.Cr.
4,000
4,000

Dividends2,000
Cash
Torecordpaymentofdividends.

2,000

GlengarryHealthClub
TrialBalance
January31,2012
Cash
AccountsReceivable
Equipment
Building
Land
AccountsPayable
NotesPayable
CapitalStock
MembershipRevenue
CourtFeeRevenue
WageandSalaryExpense
UtilityExpense
Dividends
Totals

DebitsCredits
$94,000
11,000
20,000
150,000
50,000
$20,000
200,000
100,000
15,000
5,000
10,000
3,000
2,000
$340,000

$340,000
LO7

Chapter 3 Processing Accounting Information

Notes:

EndofChapter3