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CAPTURING ECONOMIC EVENTS

CAPTURING ECONOMIC EVENTS. STUDY OBJECTIVES After studying this chapter, you should understand:. Title of Account. Left or debit side. Right or credit side. Debit balance. Credit balance. STUDY OBJECTIVE 1 THE ACCOUNT.

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CAPTURING ECONOMIC EVENTS

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  1. CAPTURING ECONOMIC EVENTS STUDY OBJECTIVES After studying this chapter, you should understand:

  2. Title of Account Left or debit side Right or credit side Debit balance Credit balance STUDY OBJECTIVE 1THE ACCOUNT • An account is an individual record of increases and decreases in a specific asset, liability, or owner’s equity item. • Commonly referred to as “T-Accounts.”

  3. DR CR STUDY OBJECTIVE 2 DEBITS AND CREDITS • Debitmeans left • Credit means right • When the debit amounts exceed the credits, an account has a debit balance; when the reverse is true, the account has a credit balance.

  4. Assets Liabilities Equity DOUBLE-ENTRY SYSTEM • In a double-entry system, equal debits and credits are made in the accounts for each transaction. • Thus, the accounting equation will always stay in balance.

  5. DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES Increase assets Decrease assets Decrease liabilities Increase liabilities Debits Credits

  6. REVIEW QUESTION DEBIT & CREDIT EFFECTS ON ASSETS & LIABILITIES • Which accounts below are decreased by debits? • Inventory • Accounts Payable • Dividends • Cash • Notes payable Answer: Accounts payable and Notes payable Why? Both are liabilities, which are increased by credits and decreased by debits.

  7. Assets Increase Decrease Debit Credit Liabilities Decrease Increase Debit Credit NORMAL BALANCE OF ASSET & LIABILITY ACCOUNTS Normal Balance Normal Balance

  8. DEBIT & CREDIT EFFECTS ON STOCKHOLDERS’ EQUITY Decrease equity Increase equity COMMON STOCK/RETAINED EARNINGS Debits Credits

  9. NORMAL BALANCE OF STOCKHOLDERS EQUITY Normal Balance COMMON STOCK/RETAINED EARNINGS Decrease Increase Debit Credit

  10. DEBIT & CREDIT EFFECTS ON DIVIDENDS Normal Balance DIVIDENDS Increase Decrease Debit Credit

  11. DEBIT & CREDIT EFFECTS ON REVENUES Decrease revenues Increase revenues Increase expenses Decrease expenses Debits Credits

  12. Expenses Increase Decrease Debit Credit NORMAL BALANCES OF REVENUES & EXPENSES Revenues Decrease Increase Debit Credit NormalBalance NormalBalance

  13. Liabilities Assets Stockholders’ Equity Common Stock Dividends Assets Liabilities Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - Revenues Expenses Dr. Cr. Dr. Cr. - + + - EXPANDED ACCOUNTING EQUATION = + = + - + -

  14. JOURNAL LEDGER JOURNAL STUDY OBJECTIVE 3 THE RECORDING PROCESS Illustration 2-13 1.Analyze each transaction 2. Enter transactions in a journal 3. Transfer journal information to the ledgers

  15. STUDY OBJECTIVE 4 JOURNALS • Transactions are initially recorded in chronological order in a journal before being transferred to the accounts. • The journal records the complete effect of each transactions, making errors easy to locate • Every company has a general journal which contains • Transaction dates • Account titles • References • Two amount columns

  16. SIMPLE JOURNAL ENTRY If an entry involves only two accounts, one debit and one credit, it is considered a simple entry. GENERAL JOURNAL J1 Date Account Titles and Explanation Ref. Debit Credit 2007 July 1 Cash 20,000 K. Browne, Capital 20,000 (Invested cash in the business)

  17. Date Account Titles and Explanation Ref. Debit Credit 2007 July 1 Delivery Equipment 14,000 Cash 8,000 Accounts Payable 6,000 (Purchased truck for cash COMPOUND JOURNAL ENTRY When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. GENERAL JOURNAL J1 1 2 with balance on account) 3

  18. The general ledger contains all the assets, liabilities, and stockholders’ equity accounts for a given company STUDY OBJECTIVE 5 THE LEDGER Individual Stockholders’ Equity Individual Assets Individual Liabilities Equipment Interest Payable Dividends Fees Earned Land Salaries Payable Common Stock Supplies Accounts Payable Retained Earnings Cash Notes Payable

  19. J1 GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2007 GENERAL LEDGER July 1 Cash 20,000 Common Stock 20,000 (Invested cash in the business) STUDY OBJECTIVE 6 POSTING Posting is the process of transferring entries from the journals to specific accounts in the General Ledger

  20. COMMON STOCK NO. 25 Date Explanation Ref. Debit Credit Balance 2007 Sept. 1 J1 15,000 15,000 POSTING A JOURNAL ENTRY GENERAL JOURNAL J1 In the ledger, enter in the appropriate columns of the account(s) debited the date, journal page, and debit amount shown in the journal. Date Account Titles and Explanation Ref. Debit Credit 2007 Sept. 1 Cash 10 15,000 Common Stock 25 15,000 (invested cash in business) GENERAL LEDGER CASH NO. 10 Date Explanation Ref. Debit Credit Balance 2007 Sept. 1 J1 15,000 15,000 Transaction information is transferred to the individual ledger accounts affected.

  21. CHART OF ACCOUNTS Most companies have a chart of accounts that lists the accounts and the account numbers which identify their location in the ledger.

  22. October 1, C.R. Byrd invests $10,000 cash in exchange for ownership interest in Pioneer Advertising Agency, Inc. Transaction Basic Analysis The asset Cash is increased $10,000, and Common Stock is increased $10,000. Debits increase assets: debit Cash $10,000. Credits increase stockholders’ equity: credit Common Stock, $10,000. Debit-Credit Analysis INVESTMENT OF CASH BY STOCKHOLDERS

  23. INVESTMENT OF CASH BY STOCKHOLDERS JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 1 Cash 101 10,000 Common Stock 311 10,000 ( Issued shares of stock for cash ) POSTING Common Stock 311 Cash 101 Oct. 1 10,000 Oct. 1 10,000

  24. October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable. Transaction Basic Analysis The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000. Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000. Debit-Credit Analysis PURCHASE OF OFFICE EQUIPMENT

  25. PURCHASE OF OFFICE EQUIPMENT JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 1 Office Equipment 157 5,000 Notes Payable 200 5,000 (Issued 3-month, 12% note for office equipment) POSTING Notes Payable 200 Office Equipment 157 Oct. 1 5,000 Oct. 1 5,000

  26. October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31. Transaction The asset Cash is increased $1,200; the liability Unearned Fees is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned fees are considered a liability even though the word payable is not used. Basic Analysis Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Fees $1,200. Debit-Credit Analysis RECEIPT OF CASH FOR FUTURE SERVICES

  27. Date Account Titles and Explanation Ref. Debit Credit Oct. 2 Cash 1,200 101 Unearned Fees 209 1,200 (Received advance from R. Knox for future services) RECEIPT OF CASH FOR FUTURE SERVICES JOURNAL ENTRY POSTING Cash 101 Unearned Fees 209 Oct. 1 10,000 Oct. 2 1,200 2 1,200

  28. October 3, office rent for October is paid in cash, $900. Transaction Basic Analysis The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900. Debit-Credit Analysis Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900. PAYMENT OF MONTHLY RENT

  29. PAYMENT OF MONTHLY RENT JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 3 Rent Expense 729 900 Cash 101 900 (Paid October rent) POSTING Cash 101 Rent Expense 729 Oct. 3 900 Oct. 1 10,000 Oct. 3 900 2 1,200

  30. October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30. Transaction The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future. Basic Analysis Debit-Credit Analysis Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600. PAYMENT FOR INSURANCE

  31. Date Account Titles and Explanation Ref. Debit Credit Oct. 4 Prepaid Insurance 130 600 Cash 101 600 (Paid one - year policy; effective date October 1) PAYMENT FOR INSURANCE JOURNAL ENTRY POSTING Prepaid Insurance 130 Cash 101 Oct. 4 600 Oct. 1 10,000 Oct. 3 900 2 1,200 4 600

  32. October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500. Transaction Basic Analysis The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500. Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500. Debit-Credit Analysis PURCHASE OF SUPPLIES ON CREDIT

  33. PURCHASE OF SUPPLIES ON CREDIT JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 5 Advertising Supplies 126 2,500 Accounts Payable 201 2,500 (Purchased supplies on account from Aero Supply) POSTING Advertising Supplies 126 Accounts Payable 201 Oct. 5 2,500 Oct. 5 2,500

  34. REVIEW QUESTION PURCHASE OF SUPPLIES FOR CASH What are the journal/ledger entries if the $2,500 of advertising supplies was purchased with cash?

  35. October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26. Transaction A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business transaction beginning on October 15. Basic Analysis Debit-Credit Analysis A debit-credit analysis is not needed because there is no accounting entry. HIRING EMPLOYEES

  36. October 20, the board of directors declares and pays a $500 cash dividend to stockholders. Transaction Basic Analysis The dividends account is increased $500; the asset Cash is decreased $500. Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500. Debit-Credit Analysis DECLARATION AND PAYMENT OF DIVIDEND

  37. DECLARATION AND PAYMENT OF DIVIDEND JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Dividends Oct. 20 332 500 Cash 101 500 (Withdrew cash for personal use) POSTING Cash 101 Dividends 332 Oct. 1 10,000 Oct. 3 900 Oct. 20 500 2 1,200 4 600 20 500

  38. October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.) Transaction Basic Analysis The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000. Debit-Credit Analysis Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000. PAYMENT OF SALARIES

  39. PAYMENT OF SALARIES JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 26 Salaries Expense 726 4,000 Cash 101 4,000 (Paid salaries to date) POSTING Salaries Expense 726 Cash 101 Oct. 26 4,000 Oct. 1 10,000 Oct. 3 900 2 1,200 4 600 20 500 26 4,000

  40. October 31, received $10,000 in cash from Copa Company for advertising services rendered in October. Transaction Basic Analysis The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000. Debit-Credit Analysis Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000. RECEIPT OF CASH FOR SERVICES PROVIDED

  41. RECEIPT OF CASH FOR SERVICES PROVIDED JOURNAL ENTRY Date Account Titles and Explanation Ref. Debit Credit Oct. 31 Cash 101 10,000 Fees Earned 400 10,000 (Received cash for fees earned) POSTING Cash 101 Fees Earned 400 Oct. 1 10,000 Oct. 3 900 Oct. 31 10,000 2 1,200 4 600 31 10,000 20 500 26 4,000

  42. STUDY OBJECTIVE 7 THE TRIAL BALANCE • A trial balance is a list of accounts and their balances at a given time. • The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. • If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. • The procedures for preparing a trial balance consist of: • 1 List the account titles and their balances. • 2 Total the debit and credit columns. • 3 Prove the equality of the two columns.

  43. PIONEER ADVERTISING AGENCY Trial Balance October 31, 2007 Debit Credit Cash $ 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned F ees 1,200 Common Stock 10,000 Dividends 500 Fees Earned 10,000 Salaries Expense 4,000 Rent Expense 900 TRIAL BALANCE The total debits must equal the total credits. $ 28,700 $ 28,700

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