1 / 34

Chapter 3: Processing Accounting Information

Chapter 3: Processing Accounting Information. The first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Equity. Transaction Analysis.

uriel
Download Presentation

Chapter 3: Processing Accounting Information

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 3:ProcessingAccounting Information

  2. The first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Equity Transaction Analysis

  3. All business transactions will have an effect on at least 2 items in the accounting equation. For example, if you buy a car with cash, you decrease one asset (cash) and increase another asset (auto). If you purchased a car by signing a note, you would increase an asset (auto), and increase a liability (notes payable). Transaction Analysis

  4. Using a spreadsheet approach, analyze the transactions listed on the next slide. Note that effects may be on both sides of the equation (in the same direction), or effects may be on one side of the equation with offsetting directions. Each transaction will affect at least 2 items in the accounting equation. The equation will still be in balance after the transaction is posted. Class Problem

  5. The following activities were during the first month of operation of Cordova Repair Company: The owners of Cordova Repair Company contributed $20,000 cash in exchange for stock ownership in the company. Cordova purchased equipment which cost $20,000. Cordova paid $8,000 cash and financed the balance at the bank. Cordova completed repair services on a fleet of automobiles for Collierville Corporation, and billed Collierville $8,000 for the services. Cordova paid rent expense of $5,000 for the month. Cordova collected $4,000 from Collierville Co. Cordova distributed a $500 dividend to its shareholders. Class Problem - Transactions

  6. Cash + A/R + Equip. = N/P + CS + RE 1. = 2. = 3. = 4. = 5. = 6. _____ _____ _____= _____ _____ _____ Class Problem -Spreadsheet 20,000 20,000 ( 8,000) 20,000 12,000 8,000 8,000 Rev. (5,000) (5,000) Exp. 4,000 (4,000) (500) (500)Div. Tot. 10,500 + 4,000 + 20,000 = 12,000 + 20,000 + 2,500

  7. Income Statement Revenues$8,000 Expenses5,000 Net Income$3,000 Statement of Retained Earnings RE (beginning)$ 0 Add: Net Income3,000 Less: Dividends(500) RE (ending)$2,500 Class Problem: Financial Statements

  8. Balance Sheet Assets Cash $10,500 A/R 4,000 Equipment $20,000 Total$34,500 Liabilities and S.E. N/P $ 12,000 CS 20,000 RE (ending)2,500 Total $34,500 Class Problem: Financial Statements

  9. The first step in the accounting process is transaction analysis. The second step is the recording of transactions and events (journal entries). The third step is the posting of the information to the ledger accounts (general ledger). The fourth step is the preparation of the trial balance (this is used to construct the financial statements). The Accounting Process

  10. Note that the transaction analysis was relatively simple with a few transactions and a few accounts. However, with thousands of transactions and hundreds of accounts, the spreadsheet program is not sufficient. Therefore accountants use a “double entry” system based on debits and credits. The Double Entry System

  11. Debit (dr) - means an entry to the left hand side of an account. Credit (cr) - means an entry to the right hand side of an account. Note that a debit or credit, per se, does not indicate increase or decrease. To decide the effect of a debit or credit, the type of account must be considered. Double Entry Accounting

  12. Based on the accounting equation, we can increase or decrease various accounts depending on their classification: Assets = Liabilities + Equity Increase DR = CR CR Decrease CR = DR DR Note that we use debits and credits instead of plusses and minuses. Note, also, that bank terminology is reversed from the customer perspective. Effect of Debits and Credits

  13. Assets have normal debitbalances and are increased with a debit. Liabilities and equitieshave normal creditbalances and are increased with a credit. Revenues (a part of equity) have normal credit balances and are increased with a credit. Expenses (which decrease equity) have normal debitbalances and are increased with a debit. Dividends (which decrease equity) have a normal debit balance and are increased with a debit. The following rules can be derived from the basic formula:

  14. To initially record transactions, we use a journal entry to represent the debits and credits. For example, in the Chapter 3 Class Problem, Item 1: Debit Credit Cash 20,000 Common Stock 20,000 Note that the debit is to the left and the credit is to the right. First we list the account (left hand entry on top), then the amount. The Format of a Journal Entry

  15. 2: Purchased equip. costing $20,000. Equip. 20,000 Cash 8,000 Notes Pay. 12,000 3: Billed customer $8,000. A/R 8,000 Service Revenue 8,000 Now back to the Class Problem and prepare the other journal entries:

  16. 4: Paid $5,000 cash for expenses. Expenses 5,000 Cash 5,000 5: Collected $4,000 from customer. Cash 4,000 A/R 4,000 Now back to the Class Problem, and prepare the other journal entries:

  17. 6: Paid $500 cash dividend to owners. Dividends 500 Cash 500 Note that dividends is a contra equity and reduces retained earnings. Now back to the Class Problem, and prepare the other journal entries:

  18. Components of the basic accounting cycle include: A. Preparation of Journal Entries (Chapter 3) -Post to the General Ledger -Unadjusted Trial Balance B. Preparation of Adjusting Journal Entries (Chapter 4) -Post to the General Ledger -Adjusted Trial Balance C. Financial Statements (Chapter 4) D. Closing Journal Entries (Chapter 4) -Post ClosingTrial Balance The Accounting Cycle

  19. The first step in the accounting process. Prepared for daily activity. Usually journalized in special journals for efficiency, but we will record in “General Journal” format. Identified through a document flow: cash receipt, record a cash sale charge receipt, record a sale on account bank note, record a notes payable employee time card, record wages The Journal Entries from the Class Problem are GJEs. A. General Journal Entries (GJEs)

  20. The G/L serves as a place to “total” amounts by account titles. After GJEs (and later – adjusting journal entries) are recorded, they are posted (by account) to the G/L. We will use “T” accounts to represent G/L accounts where needed. The General Ledger (G/L)

  21. Back to Class Problem: Posting to G/LNow post transactions (for Cash) to “T” account: Cash 20,000 8,000 4,000 5,000 500 Bal. 10,500

  22. Trial balances are prepared throughout the accounting cycle. The Unadjusted Trial Balance represents G/L totals (by account) at a particular point in time. From the Chapter 3 Class Problem, the Unadjusted Trial Balance would consist of a list of all of the ending debit or credit balances taken from the various “T” account totals (illustrated on the next slide). The Unadjusted Trial Balance is a preliminary total, and is a starting point for the Adjusting Journal Entries (discussed in next chapter). Unadjusted Trial Balance

  23. Debit Credit Cash 10,500 Accounts Receivable 4,000 Equipment 20,000 Notes Payable 12,000 Common Stock 20,000 Retained Earnings-Begin 0 Revenues 8,000 Expenses 5,000 Dividends 500 Totals 40,000 40,000 Unadjusted Trial Balance – Class Problem(after posting and totaling G/L accounts)

  24. The Unadjusted Trial Balance is the starting point for the financials, but other analyses must be performed and recorded before the financial statements are complete. These analyses are discussed in Chapter 4. Unadjusted Trial Balance

  25. Analyze total effect (items 1-5): Assets = Liabilities + SE 1. = 2. = 3. = 4. = 5. = Exercise 3-3 NE NE I & D = NE I I NE I NE I D D NE I & D = NE NE NE

  26. Journalize, THEN post to T-accounts (text requirement skips journals - we will not). 1. Received $6,500 x 3 = $19,500 Cash 19,500 Common Stock 19,500 2. Office Supplies 130 Cash 130 3. Van 15,000 A/P 15,000 Exercise 3-10

  27. 4. Cash 125 Delivery Service Rev. 125 5. A/R 200 Delivery Service Rev. 200 6. A/P 15,000 Cash 15,000 7. Cash 200 A/R 200 (Now post to T-accounts.) Exercise 3-10

  28. Exercise 3-10 Cash A/R Office Supp. 200 19,500 130 130 200 125 15,000 200 4,695 0 130 Common Stock Delivery Service Rev. Van A/P 15,000 15,000 19,500 15,000 125 200 15,000 19,500 0 325

  29. Now prepare the trial balance: DR CR Cash 4,695 Office Supplies 130 Van 15,000 Common Stock 19,500 Delivery Service Rev. 325 Totals 19,825 19,825 Exercise 3-11

  30. a. Cash 150,000 Capital Stock 150,000 b. Rent Expense 400 Cash 400 c.Cash 100,000 Notes Payable 100,000 Problem 3-9A

  31. d. Software (Equipment) 950 Cash 950 e. A/R 12,500 Consulting Revenue 12,500 f. Salary Expense 3,000 Cash 3,000 g. Utilities Expense 100 A/P 100 Problem 3-9A

  32. 10/1 Cash 66,000 CS 66,000 10/2 Land 15,000 Bldg. 75,000 Cash 9,000 N/Pay 81,000 10/3 Furniture 25,000 Cash 5,000 Acct. Pay 20,000 10/9 Equipment 3,500 Cash 3,500 10/12 Supplies 2,500 Acct. Pay 2,500 P3-7A

  33. 10/13 Cash 1,150 Ticket Revenue 400 Concession Revenue 750 10/17 Acct. Receivable 750 Rent Revenue 750 10/23 Cash 375 Acct. Receivable 375 10/24 Cash 1,700 Ticket Revenue 500 Concession Revenue 1,200 10/26 Dividends 750 Cash 750 P3-7A

  34. 10/27 Utilities Expense 1,275 Cash 1,275 10/30 Wage & Sal Exp. 2,250 Cash 2,250 10/31 Cash 2,000 Ticket Revenue 700 Concession Rev. 1,300 Add: at 10/31, Rapid City calculated that it had used $2,100 of the concession supplies that were purchased on 10/12. AJE? 10/31 Supplies Expense 2,100 Supplies 2,100 P3-7A

More Related