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Processing Accounting Information

Processing Accounting Information. Chapter 2. Analyze business transactions. The Account. Assets are the economic resources that benefit the business now and in the future. Cash Accounts receivable Inventory Notes receivable Prepaid expenses. Land Buildings Equipment,

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Processing Accounting Information

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  1. Processing Accounting Information Chapter 2

  2. Analyze business transactions.

  3. The Account Assets are the 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

  4. The Account Liabilities are the debts of the company. Notes payable Accounts payable Accrued liabilities (for expenses incurred but not paid) Long-term liabilities (bonds)

  5. The Account Stockholders’ (owners’) equity is the owners’ claims to the assets of a corporation. A proprietorship uses a single account. A partnership uses separate accounts for each owner’s capital balance and withdrawals. A corporation uses separate capital accounts for each source of capital.

  6. Accounting for Business Transactions A transactionis any event that both affects the financial position of the business entity and can be reliably recorded.

  7. Stockholders’ Assets = Liabilities + Equity (1) Cash + 50,000 = + 50,000* *Common stock Accounting for Business Transactions Transaction 1: The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock.

  8. Stockholders’ Assets = Liabilities + Equity Balance + 50,000 = + 50,000* (2) Cash – 40,000 Land + 40,000 50,000 = + 50,000* *Common stock Accounting for Business Transactions Transaction 2: Air & Sea purchases land for an office location, paying $40,000 in cash.

  9. Stockholders’ Assets = Liabilities + Equity Balance + 50,000 = + 50,000* (3) Supplies + 500 = + 500 50,500 = 500 + 50,000 *Common stock Accounting for Business Transactions Transaction 3: The business buys stationery and other office supplies, agreeing to pay $500 to the office-supply store within 30 days.

  10. Stockholders’ Assets = Liabilities + Equity Balance + 50,500 = 500 + 50,000* (4) Cash + 5,500 = + 5,500 56,000 = 500 + 55,500 *Common stock Accounting for Business Transactions Transaction 4: Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash.

  11. Stockholders’ Assets = Liabilities + Equity Balance + 56,000 = 500 + 55,500 (5) Receivable + 3,000 = + 3,000 59,000 = 500 + 58,500 Accounting for Business Transactions Transaction 5: Air & Sea Travel performs services for customers on account for $3,000.

  12. Stockholders’ Assets = Liabilities + Equity Balance + 59,000 = 500 + 58,500 (6) Cash – 2,700 = – 2,700 56,300 = 500 + 55,800 Accounting for Business Transactions Transaction 6: Air & Sea Travel pays $2,700 for the following cash expenses: office rent $1,100, employee salary $1,200, and utilities $400.

  13. Stockholders’ Assets = Liabilities + Equity Balance + 56,300 = 500 + 55,800 (7) Cash – 400 = – 400 55,900 = 100 + 55,800 Accounting for Business Transactions Transaction 7: Air & Sea Travel pays $400 to the store from which it purchased $500 worth of office supplies in Transaction 3.

  14. Accounting for Business Transactions Transaction 8: The owners remodel their home at a cost of $30,000, paying cash from personal funds. This event is a transaction of the personal entity, not the business entity. No transaction is recorded for Air & Sea Travel.

  15. Stockholders’ Assets = Liabilities + Equity Balance + 55,900 = 100 + 55,800 (9) Cash + 1,000 Receivable – 1,000 55,900 = 100 + 55,800 Accounting for Business Transactions Transaction 9: The business collects $1,000 from a customer on account.

  16. Stockholders’ Assets = Liabilities + Equity Balance + 55,900 = 100 + 55,800 (10) Cash + 22,000 Land – 22,000 55,900 = 100 + 55,800 Accounting for Business Transactions Transaction 10: Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.

  17. Stockholders’ Assets = Liabilities + Equity Balance + 55,900 = 100 + 55,800 (11) Cash – 2,100 = – 2,100 + 53,800 = 100 + 53,700 Accounting for Business Transactions Transaction 11: The corporation declares a dividend and pays $2,100 cash to the stockholders.

  18. Month Ended April 30, 20x3 Revenue: Service revenue $8,500 Expenses: Salary expense $1,200 Rent expense 1,100 Utilities expense 400 Total expenses 2,700 Net income $5,800 Income Statement

  19. Month Ended April 30, 20x3 Retained earnings, April 1, 20x3 $ 0 Add: Net income for the month 5,800 $5,800 Less: Dividends (2,100) Retained earnings, April 30, 20x3 $3,700 Statement of Retained Earnings

  20. April 30, 20x3 Assets Cash $ 33,300 Accounts receivable 2,000 Office supplies 500 Land 18,000 Total assets $ 53,800 Liabilities Accounts Payable $ 100 Stockholders’ Equity Common stock $50,000 Retained earnings 3,700 Total stockholders’ equity $53,700 Total liabilities and stockholders’ equity $53,800 Balance Sheet

  21. 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 from operating activities $ 3,400 Cash flows from investing activities: Acquisition of land $(40,000) Sale of land 22,000 Net cash outflow from investing activities (18,000) Statement of Cash Flows

  22. Cash flows from operating activities: $ 3,400 Cash flows 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 financingactivities $47,900 Net increase (decrease) in cash $33,300 Cash balance, April 1, 20x3 0 Cash balance, April 30, 20x3 $33,300 Statement of Cash Flows Month Ended April 30, 20x3

  23. Understand how accounting works.

  24. Double-Entry Accounting Double-entry bookkeeping means to record the dual effects of each business transaction. Assets = Liabilities + Stockholders' Equity

  25. Account Title Debit Credit RIGHT SIDE LEFT SIDE The T-Account

  26. Accounting Equation: Assets = Liabilities + Stockholders’ Equity Rules of Debit and Credit: Debit + Credit – Debit – Credit + Debit – Credit + Increase-Decrease-Decrease-Increase

  27. Normal Balances of the Accounts Assets Debit Liabilities Credit Stockholders’ Equity – overall Credit Common stock Credit Retained earnings Credit Dividends Debit Revenues Credit Expenses Debit

  28. Assets = Liabilities + Stockholders’ Equity Common Stock Cash Debit for Increase, 50,000 Credit for Increase, 50,000 Rules of Debit and Credit Air & Sea received $50,000 and issued stock.

  29. Assets = Liabilities + Stockholders’ Equity Common Stock Cash Bal. 50,000 Credit for Decrease, 40,000 Bal. 50,000 Land Debit for Increase, 40,000 Rules of Debit and Credit Air & Sea purchased land for $40,000 cash.

  30. Record business transactions.

  31. Recording Transactionsin the Journal Journal Page 1 Date Accounts and Explanation Debit Credit April 2 Cash 50,000 Common Stock 50,000 Issued common stock

  32. Posting from Journal to Ledger The journal is a chronological record of all transactions listed by date. The ledger is a grouping of all the accounts; it shows their balances. Data must be copied to the ledger – a process called posting.

  33. Cash Individual asset accounts Accounts Payable Individual liability accounts Common Stock Individual stockholders’ equity accounts Posting from Journal to Ledger All individual accounts combined make up the ledger. Ledger

  34. Posting to the Ledger Cash Common Stock 50,000 50,000 Posting from Journal to Ledger Journal Entry Accounts and Explanation Debit Credit Cash 50,000 Common Stock 50,000 Issued common stock

  35. = LIABILITIES ASSETS Cash (1) 50,000 (2) 40,000 (4) 5,500 (6) 2,700 (9) 1,000 (7) 400 (10) 22,000 (11) 2,100 Bal. 33,300 Accounts Payable (7) 400 (3) 500 Bal. 100 Accounts Receivable (5) 3,000 (9) 1,000 Bal. 2,000 Office Supplies (3) 500 Bal. 500 Land (2) 40,000 (10) 22,000 Bal. 18,000 Accounts After Posting

  36. REVENUE EXPENSES Service Revenue (4) 5,500 (5) 3,000 Bal. 8,500 Rent Expense (6) 1,100 Bal. 1,100 Salary Expense (6) 1,200 Bal. 1,200 Utilities Expense (6) 400 Bal. 400 Accounts After Posting + STOCKHOLDERS’ EQUITY Common Stock (1) 50,000 Bal. 50,000 Dividends (11) 2,100 Bal. 2,100

  37. Use a trial balance.

  38. DEBITS CREDITS Trial Balance A trial balance lists all accounts with their balances – assets first, followed by liabilities, and then stockholders’ equity.

  39. Chart of Accounts It is a listing of all accounts and account numbers used by a business.

  40. BALANCE SHEET ACCOUNTS: Assets Liabilities Stockholders’Equity 101 Cash 201 Accounts Payable 301 Common Stock 111 Accounts Receivable 231 Notes Payable 311 Dividends 141 Office Supplies 312 Retained Earnings 151 Office Furniture 191 Land INCOME STATEMENT ACCOUNTS (PART OF STOCKHOLDERS’ EQUITY): Revenues Expenses 401 Service Revenue 501 Rent Expense 502 Salary Expense 503 Utilities Expense Air & Sea TravelChart of Accounts

  41. Account: Cash Account No. 101 Balance Date Item Debit Credit Debit Credit 20x1 April 2 50,000 50,000 3 40,000 10,000 Account in Four-Column Format

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