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Chapter 2

Chapter 2. Reporting Investing and Financing Results on the Balance Sheet. Supercut’s Situation. All businesses—big and small—need systems for organizing information.

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Chapter 2

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  1. Chapter 2 Reporting Investing and Financing Results on the Balance Sheet

  2. Supercut’s Situation All businesses—big and small—need systems for organizing information. In this chapter, we will focus on the decisions that business managers make when starting up a single Supercuts salon and how their accounting systems track the financial results of the salon’s investing and financing activities.

  3. The Basic Accounting Equation Assets = Liabilities + Stockholders' Equity Remember the basic accounting equation from chapter 1? In this chapter we will focus on how business activities affect this equation.

  4. Learning Objective 1 Explain and select common balance sheet account titles.

  5. You and your parents only have $50,000 to contribute to these start-up costs. You determined that a $20,000 loan from a bank would provide enough cash to cover the rest of the costs. What accounts do you think would likely appear on the balance sheet of your Supercuts store? Business Activities and Balance Sheet Accounts • Let’s think about what’s involved in getting your Supercuts hair salon up and running: • Select a rental location • Renovate the space • Buy furniture and salon equipment • Buy a computer and software • Buy shampoos and the like

  6. Business Activities and Balance Sheet Accounts

  7. Sample Chart of Accounts The chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system. The next slide provides a description of each account listed.

  8. Learning Objective 2 Apply transaction analysis to business transactions.

  9. The Accounting Cycle (1) Analyze (2) Record (3) Summarize

  10. Transaction Step 1: Analyze A transaction is an exchange or an event that has a direct economic effect on the assets, liabilities, or stockholders’ equity of a business.

  11. Exchanges involving assets, liabilities, and stockholders’ equity that you can see between the company and someone else. External Exchanges Events occurring within the company, for example, using some assets to create an inventory product. Internal Events Step 1: Analyze

  12. Transaction Analysis Two simple ideas are used when analyzing transactions: Duality of Effects Every transaction has at least two effects on the basic accounting equation. A = L+ SE Remember that assets must equal liabilities plus stockholders’ equity for every accounting transaction. Assets = Liabilities + Stockholders' Equity

  13. A = L+ SE Cash (an asset) decreases. Supplies (an asset) increases. Transaction Analysis—Examples Pay cash for hair spray supplies. • Duality of Effects • Supercuts gives Cash. • Supercuts receives Supplies.

  14. A = L+ SE Accounts Payable (a liability) increases. Supplies (an asset) increases. Transaction Analysis—Examples Buy hair supplies on credit. • Duality of Effects • Supercuts gives Accounts Payable. • Supercuts receives Supplies.

  15. A = L+ SE Cash (an asset) decreases. Accounts Payable (a liability) decreases. Transaction Analysis—Examples Pay cash for amount owed. • Duality of Effects • Supercuts gives Cash. • Supercuts eliminates Accounts Payable.

  16. DECIDE: An Approach to Analyzing Transactions Let’s work through a few examples using the DECIDE approach.

  17. You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account. Take a minute and think about these steps.

  18. You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.

  19. Your salon pays $42,000 cash for equipment. Take a minute and think about these steps.

  20. Your salon pays $42,000 cash for equipment.

  21. Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years. Take a minute and think about these steps.

  22. Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.

  23. Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month. Take a minute and think about these steps.

  24. Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.

  25. Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet. Take a minute and think about these steps.

  26. Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet. Did you get this one?

  27. Your company pays the $2,000 owed to the equipment supplier in (d). Take a minute and think about these steps.

  28. Your company pays the $2,000 owed to the equipment supplier in (d).

  29. Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month. Take a minute and think about these steps.

  30. Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month.

  31. Learning Objective 3 Use journal entries and T-accounts to show how business transactions affect the balance sheet.

  32. Ledger Posted to Entered in Used to prepare Journal Financial Statements Steps 2 & 3: Record and Summarize Transactions

  33. Ledger A journal is a record of each day’s transactions. A ledger is a collection of records that summarize the effects of transactions entered in the journal. Journal The Journal and Ledger

  34. The Debit/Credit Framework Take a moment to see how the increase symbol + appears on the left side of the T-account for accounts on the left side of the accounting equation and on the right side of the T-account for accounts on the right side of the equation. The same balancing logic applies to decreases, which are on the side of the T-account closest to the equals sign.

  35. Debit = Left Credit = Right Debit Credit Debit Credit Debit Credit Asset accounts increase on the left or debitside and decreaseon the right or credit side. Stockholders’ equity accounts increase on the right or credit side and decrease on the left or debit side. Liability accounts increase on the right or credit side and decrease on the left ordebit side. The Debit/Credit Framework In every transaction, the total dollar value of all debits equals the total dollar value of all credits.

  36. Formal Journal Entries Step 2: Recording Journal Entries

  37. Simplified Journal Entries Step 2: Recording Journal Entries

  38. Journal Ledger Steps 3: Summarizing in Ledger Accounts By themselves, journal entries show the effects of transactions, but do not indicate the balance in each account. That is why we need ledger accounts. After journal entries have been recorded, their dollar amounts are copied (“posted”) to each ledger account affected by the transaction so that account balances can be computed.

  39. The T-Account Ledger The T-account is a simplified version of a ledger. T-Account

  40. Transactions In Journals In Ledgers DECIDE Journal Entries T-Accounts A Review of The Accounting Cycle (1) Analyze (2) Record (3) Summarize

  41. You incorporate your Supercuts salon on August 1. The company issues stock certificates to you and your parents in exchange for $50,000, which is deposited in the company’s bank account.

  42. Your salon pays $42,000 cash for equipment.

  43. Your company borrows $20,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years.

  44. Your salon installs $18,000 of additional equipment, paying $16,000 in cash and giving an informal promise to pay $2,000 at the end of the month.

  45. Your company orders $800 of shampoo and other operating supplies from Tigi. None have been received yet. Because this event involves the exchange of only promises, it is not considered a transaction. No journal entry is needed.

  46. Your company pays the $2,000 owed to the equipment supplier in (d).

  47. Your company receives $630 of the supplies ordered in (e), and promises to pay for them next month.

  48. T-Account Balances To compute the balance in T-accounts, draw a single line through each T-account below the amounts you wish to total. Then, calculate the ending balance by converting each T-account into equation form, as shown here for Cash and Accounts Payable.

  49. T-Accounts All ending balances are positive so they are shown on the “+” side with a double underline.

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