Financial accounting the impact on decision makers 9e chapter 3

Chapter Processing Accounting Information External and Internal Events  Event: a happening of consequence to an entity  External event: interaction between an entity and its environment  Internal event: occurs entirely within an entity  Transaction: any event, external or internal, that is recognized in a set of financial statements LO Role of Source Documents in an Accounting System  Source document: used as evidence to record a transaction  Different Forms:  Purchase Invoice  Sales Invoice  Cash register tape  Time cards LO Analyze the Effects of Transactions on the Accounting Equation  Accounting equation: Assets =Liabilities + Stockholders’ Equity Issuance of Capital Stock  Glengarry Health Club is started when Karen Bradley and Kathy Drake file articles of incorporation with the state to obtain a charter Each invests $50,000 in the business In return, each receives 5,000 shares of capital stock Acquisition of Property in Exchange for a Note  Company buys a piece of property for $200,000 The seller agrees to accept a five-year promissory note The property consists of land valued at $50,000 and a newly constructed building valued at $150,000 Acquisition of Equipment on an Open Account  Karen and Kathy contact an equipment supplier and buy $20,000 of exercise equipment: treadmills, barbells, and stationary bicycles The supplier agrees to accept payment in full in 30 days Sale of Monthly Memberships on Account  During January, the owners sell 300 monthly club memberships for $50 each, or a total of $15,000 The members have until the 10th of the following month to pay Sale of Court Time for Cash  In addition to memberships, Glengarry sells court time Court fees are paid at the time of use and amount to $5,000 for the first month Payment of Wages and Salaries  Wages and salaries for the first month amount to $10,000 Debits and Credits Applied to Transactions Cash (1)100,000 Capital Stock 100,000 (1) Debits and Credits Applied to Transactions (2) Acquisition of property in exchange for a note Building (2)150,000 Land (2) 50,000 Notes Payable 200,000 (2) Debits and Credits Applied to Transactions (3) Acquisition of equipment on an open account Equipment (3) 20,000 Accounts Payable 20,000 (3) Debits and Credits Applied to Transactions (4) Sale of monthly memberships on account Accounts Receivable (4) 15,000 Membership Revenue 15,000 (4) Debits and Credits Applied to Transactions (5) Sale of court time for cash Cash (1)100,000 (5) 5,000 Court Fee Revenue 5,000 (5) T Accounts reflect current and previous postings to the account for each period Debits and Credits Applied to Transactions (6) Payment of wages and salaries Cash Wage & Salary Expense (1)100,000 10,000 (6) (6) 10,000 (5) 5,000 Debits and Credits Applied to Transactions (7) Payment of utilities Cash Utilities Expense (1)100,000 10,000 (6) (7) 3,000 (5) 5,000 3,000 (7) Debits and Credits Applied to Transactions (8) Collection of accounts receivable Cash Accounts Receivable (1)100,000 10,000 (6) (4) 15,000 4,000 (8) (5) 5,000 3,000 (7) (8) 4,000 Debits and Credits Applied to Transactions (9) Payment of dividends Cash Dividends (1)100,000 10,000 (6) (9) 2,000 (5) 5,000 3,000 (7) (8) 4,000 2,000 (9) Journal  Chronological record of a company’s transactions  Book of original entry  Transactions are periodically posted from the journal to ledger accounts  Journalizing: act of recording journal entries LO Posting  Process of transferring amounts from a journal to the ledger accounts Example 3.6—Posting from the Journal to the Ledger Trial Balance  List of each account and its balance at a specific point in time  Used to prove the equality of debits and credits  Normally prepared at the end of the accounting period  Basis for preparation of financial statements LO Example 3.7—Preparing a Trial Balance End of Chapter [...]... drive, or another device containing all of the accounts Identify and Analyze  The accounting equation is the basis for financial statements  For every transaction, three questions must be answered: 1 2 3 What type of activity did the transaction reflect? What accounts are affected by the transaction, and are they increased or decreased? Which financial statements are affected by the transaction? Identify... Posting  Process of transferring amounts from a journal to the ledger accounts Example 3. 6—Posting from the Journal to the Ledger Trial Balance  List of each account and its balance at a specific point in time  Used to prove the equality of debits and credits  Normally prepared at the end of the accounting period  Basis for preparation of financial statements LO 7 ...Payment of Utilities  Cost of utilities for the first month is $3, 000 Glengarry pays this amount in cash Collection of Accounts Receivable  Amount received from members in payment of their accounts is $4,000 Payment of Dividends  Karen and Kathy, acting on behalf of Glengarry Health Club, decide to pay a dividend of $1,000 on the shares of stock that each of them owns, or $2,000 in total Cost Principle... of the Rules for Increasing and Decreasing Accounts Example 3. 3—Determining Normal Account Balances Debits and Credits Applied to Transactions Cash (1)100,000 Capital Stock 100,000 (1) Debits and Credits Applied to Transactions (2) Acquisition of property in exchange for a note Building (2)150,000 Land (2) 50,000 Notes Payable 200,000 (2) Debits and Credits Applied to Transactions (3) Acquisition of... and continue to report this amount on all balance sheets until the asset is disposed  These assets are not carried at market value, but at original cost (with few exceptions) Accounts  Account: record used to accumulate monetary amounts for each asset, liability, revenue, expense, and component of stockholders’ equity  Chart of Accounts: numerical list of all of the accounts an entity uses LO 4 The. .. equipment on an open account Equipment (3) 20,000 Accounts Payable 20,000 (3) Debits and Credits Applied to Transactions (4) Sale of monthly memberships on account Accounts Receivable (4) 15,000 Membership Revenue 15,000 (4) Debits and Credits Applied to Transactions (5) Sale of court time for cash Cash (1)100,000 (5) 5,000 Court Fee Revenue 5,000 (5) T Accounts reflect current and previous postings to the. .. (1)100,000 10,000 (6) (4) 15,000 4,000 (8) (5) 5,000 3, 000 (7) (8) 4,000 Debits and Credits Applied to Transactions (9) Payment of dividends Cash Dividends (1)100,000 10,000 (6) (9) 2,000 (5) 5,000 3, 000 (7) (8) 4,000 2,000 (9) Journal  Chronological record of a company’s transactions  Book of original entry  Transactions are periodically posted from the journal to ledger accounts  Journalizing: act... each period Debits and Credits Applied to Transactions (6) Payment of wages and salaries Cash Wage & Salary Expense (1)100,000 10,000 (6) (6) 10,000 (5) 5,000 Debits and Credits Applied to Transactions (7) Payment of utilities Cash Utilities Expense (1)100,000 10,000 (6) (7) 3, 000 (5) 5,000 3, 000 (7) Debits and Credits Applied to Transactions (8) Collection of accounts receivable Cash Accounts Receivable... Analyze  Wages and salaries for the first month amount to $10,000 for Glengarry T account T Account: format for showing amounts coming into and leaving an account Example 3. 2—Using a T Account Debits and Credits  Tools to record increases and decreases in accounts  Debits increase asset accounts, and credits increase liability and stockholders’ equity accounts  Additionally, debits increase expense ... drive, or another device containing all of the accounts Identify and Analyze  The accounting equation is the basis for financial statements  For every transaction, three questions must be answered:... Transactions (3) Acquisition of equipment on an open account Equipment (3) 20,000 Accounts Payable 20,000 (3) Debits and Credits Applied to Transactions (4) Sale of monthly memberships on account... Sales Invoice  Cash register tape  Time cards LO Analyze the Effects of Transactions on the Accounting Equation  Accounting equation: Assets =Liabilities + Stockholders’ Equity Issuance of