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C H A P T E R . 3. The Mechanics of Accounting. Learning Objective 1. Understand the process of transforming transaction data into useful accounting information. Exchange Transactions. What Are the Different Exchange Transactions?. Business Documents.

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slide1
C H A P T E R

3

The Mechanics of

Accounting

learning objective 1
Learning Objective 1
  • Understand the process of transforming transaction data into useful accounting information.
business documents
Business Documents
  • Examples: Sales invoice, purchase order, check stub.
  • Business documents are used
    • to confirm that an arm’s-length transaction has occurred.
    • to establish the amounts to be recorded.
    • to facilitate the analysis of business events.
  • These documents must be analyzed.
learning objective 2
Learning Objective 2
  • Analyze transactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).
step 1 analyze transactions

Transaction analysis:

  • breaks down complex transactions into manageable pieces.
  • provides a self-checking mechanism.
Step 1: Analyze Transactions

Transaction analysis framework

  • What accounts are involved?
  • Did each account increase or decrease?
  • By how much?
slide9

Describe Effect of the Following Transactions on a Company

A = L + OE

Borrow money

Invest in company

Pay off a note

Purchase equipment

Borrow funds to settle a debt

using accounts

Name of Account

Credit

Debit

Using Accounts
  • Accounts provide an efficient method to categorize transactions.
  • A T-account is a simplified depiction of an account.
using a t account

The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?

Cash

23

Using a T-Account

12

35

debits and credits
Debits and Credits

Remember:

  • Debits are simply entries on the left.

Credits are simply entries on the right.

slide14

Explain How Debits and Credits Work

Assets = Liabilities + Owners’ Equity

expanding the equation
Expanding the Equation
  • Revenues
    • Increases in a company’s resources from the sale of goods or the performance of services.
  • Expenses
    • Decreases in a company’s resources incurred in the normal course of business to generate revenues.
  • Dividends
    • Distributions to owners, which reduce Owners’ Equity.
learning objective 3
Learning Objective 3
  • Record the effects of transactions using journal entries (step two of the accounting cycle).
step 2 record transactions
Step 2: Record Transactions
  • Record the results of the transactions in a journal.
  • Journalizing provides a chronological record of all business activities.

What is another name for the journal?

step 2 record transactions1

General Journal Entry Format:

Date Debit Entry . . . . . . . . . . . . . . . xx

Credit Entry . . . . . . . . . . . . xx

Explanation.

Step 2: Record Transactions
  • Record the results of the transactions in a journal.
  • Journalizing provides a chronological record of all business activities.
journal entries
Journal Entries
  • What is the three-step process?
    • 1

2

3

example 1 journal entry
Example 1: Journal Entry

Supplies purchased for $25 are purchased “on account.”

Prepare the correct journal entry. What do we mean by purchased “on account?”

example 2 journal entry
Example 2: Journal Entry

A check for $100 is received in payment for services rendered.

Make the correct journal entry.

example 3 journal entry
Example 3: Journal Entry

Merchandise is sold to a customer on account for $75. The cost of the product was $60.

Make the journal entries.

journal 1 page 1

Entered when posted to ledger.

Journal 1 Page 1

Date Transaction Ref. Debits Credits

Jan. 1 Supplies 25

Accounts Payable 25

Purchased supplies on account.

Feb. 1 Cash 101 100

Revenue 100

Received cash for services.

Mar. 1 Accounts Receivable 75

Sales Revenue 75

Sold merchandise on account.

learning objective 4
Learning Objective 4
  • Summarize the resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).
step 3 posting journal entries and preparing a trial balance define the following terms
Step 3: Posting Journal Entries and Preparing a Trial BalanceDefine the Following Terms
  • Posting
  • Ledger
  • Posting reference
  • Chart of accounts
general ledger

ACCOUNT: Cash

Account No. 101

Date Explanation Ref. Debits Credits Balance

Jan. 1 Balance 100

2 Issued 100 shares of capital stock at $10 per share GJ1 1,000 1,100

3 Purchased equipment GJ1 300 800

4 Sold inventory GJ1 60 860

5 Monthly payment on loan GJ1 230 630

6 Revenue GJ1 2,500 3,130

General Ledger
chart of accounts
Chart of Accounts

ASSETS (100-199):

Current Assets (100-150):

101 Cash

105 Accounts Receivable

107 Inventory

Long-Term Assets (151-199):

151 Land

152 Buildings

LIABILITIES (200-299):

Current Liabilities (200-219):

201 Notes Payable

202 Accounts Payable

Long-Term Liabilities (220-239):

222 Mortgage Payable

OWNERS’ EQUITY (300-399):

301 Capital Stock

330 Retained Earnings

SALES (400-499):

400 Sales Revenue

EXPENSES (500-599):

500 Cost of Goods Sold

501 Sales Salaries and Commissions

523 Rent Expense

528 Advertising Expense

573 Utilities Expense

579 Accounting and Legal Fees

determining account balances

Name of Account

Credit

Debit

An account’s

balance is usually

on the side that

increases the

account. It is

referred to as the

“Normal Balance.”

  • Accounts with typical debit balances are?
  • Accounts with typical credit balances are?
Determining Account Balances
  • Owners’ Equity
  • Revenues or Income
  • Liabilities
  • Expenses
  • Assets
  • Dividends

Do you see the mnemonic memory device, DEAD COIL?

define the trial balance
Define The Trial Balance

What is the Trial Balance used for?

slide31

Sample Trial Balance

The Example Company

Trial Balance

December 31, 2006

Debits Credits

Cash $ 21

Accounts Receivable 15

Inventory 12

Land 200

Accounts Payable $ 30

Capital Stock 150

Retained Earnings 24

Sales Revenue 919

Cost of Goods Sold 850

Advertising Expense 10

Miscellaneous Expenses 15______

Total $ 1,123 $ 1,123

learning objective 5
Learning Objective 5
  • Describe how technology has affected the first three steps of the accounting cycle.
end chapter 3
End Chapter 3

"Failure is the

opportunity to

begin again with

more knowledge."

Henry Ford

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