Chapter 3:financial and accounting

Chapter The Mechanics of Accounting Albrecht, Stice, Stice, Swain COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation Thomson, the Star logo, and South-Western are trademarks used herein under license Food for thought • You are running a grocery store List 10 potential transactions • How you transform the transaction data into a report of useful information? The Accounting Cycle Step Step Step Step Analyze Analyze transactions transactions Record Record the theeffects effects of of the the transactions transactions Summarize Summarizethe theeffects effects of of transactions transactions 1 2 Posting Postingjournal journalentries entries Preparing Preparingaatrial trialbalance balance Prepare Preparereports reports 1 2 3 Adjusting Adjustingentries entries Preparing Preparingfinancial financialstatements statements Closing Closingthe thebooks books #1: Analysis of Transactions with the Accounting Equation A = L + OE Borrow money Invest in company Pay off a note Purchase equipment Borrow funds to settle a debt Which transactions will be included in financial statements? • • • • ABC bought a truck ABC sold a product The competitors cut prices ABC signed a contract to build a road next year • ABC plans to develop new technology How about this? • A company buys a building In addition to paying $20,000 cash, the company agrees to pay $10,000 per year for the next 10 years • The company will also pay a $2,000 property tax bill associated with the building from last year • As part of the purchase, the company gave the former owners of the building 500 shares of stock • Finally, the building will require $23,000 worth of repairs and renovations before it can be used • How much should be recorded as the cost of the building #2: Record the effects of transactions in a journal #3 Summarize: A Post journal entries to accounts in the ledger Terminology to Help Analyze Transactions • Account – Accounting record where similar transactions are recorded • T-Account – Simplified depiction of an account • Debit – Entry on the LEFT • Credit Name of Account Debit Credit – Entry on the RIGHT Double Entry Accounting • Debits must ALWAYS equal credits! – If for every transaction, debits equal credits, then the accounting equation will balance 10 #4: Prepare reports Income statement Prepare B/S Prepare statement of cash flows Journals and Journal Entries • Journal – An accounting record in which transactions are originally entered – Chronological record General Journal Entry Format: Date Debit Entry xx Credit Entry xx Explanation 19 Journal Entries steps for success: Identify which accounts are involved Determine if the account is increased or decreased Determine by how much the account has changed 20 Journal Entry Example • You purchase $250 worth of inventory for cash on January 30 – Remember the step process January 30 Inventory $250 Cash $250 To record purchase of inventory 21 Compound Journal Entry • Compound Journal Entry – A journal entry that involves more than one debit or more than one credit or both • You make a mortgage payment of $175 Of this, $150 reduces the mortgage while $25 is interest Interest expense $25 Mortgage payable $150 Cash $175 To record monthly mortgage payment 22 Posting Journal Entries • Posting – Transferring amounts from the journal to the ledger • Ledger – A book of accounts where journal transactions are posted and thereby summarized • Chart of accounts – A systematic listing of all accounts used by a company 23 The General Ledger ACCOUNT: Cash Date Explanation Account No 101 Ref Debits Credits Jan Balance Balance 100 Issued 100 shares of capital stock at $10 per share GJ1 Purchased equipment GJ1 Sold inventory GJ1 Monthly payment on loan GJ1 Revenue GJ1 1,000 1,100 300 60 860 230 2,500 800 630 3,130 After all the journal entries are posted to the ledger, the account balance can be computed by summing 24 up all of the debits and credits The Trial Balance • Trial Balance – A listing of all account balances – Provides a means of ensuring debits equal credits – From this data, the balance sheet and income statement can be prepared – Prepared by listing all accounts and their respective balances 25 Example Trial Balance The Example Company Debits = Credits Trial Balance December 31, 2009 Debits Cash Accounts Receivable Inventory Land Accounts Payable Capital Stock Retained Earnings Sales Revenue Cost of Goods Sold Advertising Expense Miscellaneous Expenses Total $ 21 15 12 200 850 10 15 $ 1,123 Credits $ 30 150 24 919 $ 1,123 26 How Have Computers Changed the Accounting Cycle? • Allows businesses to calculate vast amounts of data quickly • Eases posting of journal entries and summarizing the data into reports and financial statements • Computers can’t think That is your job! Practice #3 – 42/p 115 Practice • Record journal entries • Posting journal entries to accounts in the ledger • Trial balance • Prepare financial statements Ray and Barbara decide to open a computer programming service which he names Softbyte On September 1, 2011, they invest $15,000 cash in exchange for common stock Softbyte purchases computer equipment for $7,000 cash Softbyte purchases for $1,600 paper and other supplies Softbyte receives $1,200 cash from customers for programming services it has provided Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date Softbyte provides $3,500 of programming services for customers The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200 Softbyte pays its $250 Daily News bill in cash Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)] 10 The corporation pays a dividend of $1,300 in cash ... equipment GJ1 Sold inventory GJ1 Monthly payment on loan GJ1 Revenue GJ1 1,000 1,100 30 0 60 860 230 2,500 800 630 3, 130 After all the journal entries are posted to the ledger, the account balance can... Advertising Expense Miscellaneous Expenses Total $ 21 15 12 200 850 10 15 $ 1,1 23 Credits $ 30 150 24 919 $ 1,1 23 26 How Have Computers Changed the Accounting Cycle? • Allows businesses to calculate... require $ 23, 000 worth of repairs and renovations before it can be used • How much should be recorded as the cost of the building #2: Record the effects of transactions in a journal #3 Summarize: