Chapter 2

1. Dr Cr Chapter 2 The Accounting Process

2. Chapter 2--Learning Objectives 1. Analyze transactions based upon the accounting equation

3. Accounting Equation Assets = Liabilities + Equity or Assets - Liabilities = Equity

4. Accounting Equation Assets = Liabilities + Equity Assets Have value Will generate future cash flows

5. Accounting Equation Assets = Liabilities + Equity Assets Factory building Equipment Accounts receivable

6. Accounting Equation Assets = Liabilities + Equity Liabilities Obligations Incurred to Acquire Assets

7. Accounting Equation Assets = Liabilities + Equity Liabilities Accounts Payable Salaries Payable Bonds Payable

8. Accounting Equation Assets = Liabilities + Equity Equity Owner Claim to Assets Assets - Liabilities

9. The Accounting Equation Investments by Owners Distributions to Owners Assets = Liabilities + Equity Revenues - Expenses Gains - Losses

10. Transactions & Events • Affect Balance Sheet only • Affect Balance Sheet & Earnings

11. Transactions affecting the balance sheet • Investments by owners • Distributions to owners • Use assets to acquire other assets • Use assets to extinguish debt • Acquire assets by incurring debt

12. Accounting Equation Assets = Liabilities + Equity Example Purchased a Car for $22,000 Paid $5,000 down Signed a note for the balance

13. Effect on Accounting Equation Assets = Liabilities + Equity Car $22,000 Note $17,000 Cash ( 5,000) Assets $17,000 = Liab $17,000

14. Transactions affecting Earnings • Earnings = Change in net assets, excluding investments by and distributions to owners • Equity = Net assets • Earnings increase equity • Earnings = Revenues - Expenses + Gains - Losses • Earnings increase equity through revenues, expenses, gains & losses

15. Chapter 2--Learning Objectives 2. Interpret the four traditional financial statements

16. Financial Statements 1. Income statement 2. Statement of changes in shareholders’ equity 3. Balance sheet 4. Statement of cash flows

17. Income StatementElements • Revenues • Expenses • Gains • Losses } For the accounting period

18. Statement of changes in shareholders’ equity • Investments by owners • Distributions to owners • Net income or loss } For the accounting period

19. Balance SheetElements • Assets • Liabilities • Equity } At the end of the accounting period

20. Statement of cash flows • Investing activities • Financing activities • Operating activities } For the accounting period

21. Relationship of Financial Statements

22. Statement of Owner’s Equity Income Statement Balance Sheet Revenue + Gains - Expenses -Losses Net Income

23. Revenue + Gains - Expenses -Losses Net Income Statement of Owner’s Equity Income Statement Balance Sheet } R/E Beginning Balance + Net Income - Dividends R/E Ending Balance

24. Revenue + Gains - Expenses -Losses R/E BB + Net Income - Dividends R/E EB Net Income Statement of Owner’s Equity Income Statement Balance Sheet

25. Revenue + Gains - Expenses -Losses R/E BB + Net Income - Dividends R/E EB Net Income Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity

26. Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses R/E EB Net Income

27. Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses R/E EB Net Income

28. Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses R/E EB Net Income

29. Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses R/E EB Net Income

30. Statement of Owner’s Equity Income Statement Balance Sheet Assets Liabilities Equity R/E BB + Net Income - Dividends Revenue + Gains - Expenses -Losses R/E EB Net Income

31. Chapter 2--Learning Objectives 3. Understand the accounting model including the purpose of journals and ledgers

32. Journals • Journals - Books of Original Entry • Record transactions or events • i.e, Journal entries • In chronological order • Complete record of effects of transaction on accounts • Accounts and amounts debited /credited

33. Sample Transaction Paid $1,000 on Account to XYZ Supplies Journal Entry Accounts Payable 1,000 Cash 1,000

34. Ledgers • Ledgers - Contain Accounts • General Ledger • Contains accounts for financial statement elements

35. Posting • From Journal to General Ledger Account

36. Journal Entry Accounts Payable 1,000 Cash 1,000 Accounts Payable Debit Credit 10,000 1,000 9,000

37. Types of Journal • General Journals • Special Journals

38. Special Journals • Cash Receipts Journal • Cash Disbursements Journal • Purchases Journal • Sales Journal

39. Cash Receipts Journal • Record All receipts of Cash • ie, deposits to the bank • Examples: • Cash sales • Received Cash on account • Sold company truck for cash

40. Cash Disbursements Journal • Record All payments of Cash • ie, checks written • Examples: • Paid supplier on account • Purchased truck for cash • Made mortgage payment

41. Sales Journal • Record All Sales on Account • When sale is made and no cash is received

42. Purchases Journal • Record All Purchases of merchandise on Account • When purchases are made and no cash is paid • Purchases of items other than merchandise are recorded in the general journal

43. General Journal • For All other Journal Entries • Examples: • Adjusting • Closing • Sales & purchase returns

44. Chapter 2--Learning Objectives 4. Perform the steps in the accounting process

45. Accounting Cycle Transactions Events Record Accumulate in Accounts Outputs Financial Statements Inputs Source Docs

46. During the Accounting Period • Identify transactions & events to record • Journalize transactions & events • Post from journals to ledgers

47. At the end of the accounting period • Prepare Unadjusted Trial Balance • Journalize & Post adjusting entries • Prepare Adjusted Trial Balance • Prepare Financial Statements • Journalize & Post closing entries • Prepare Post Closing Trial Balance

48. At beginning of next accounting period 10 Journalize & Post reversing entries

49. Adjusting Entries - Types • Deferrals • Accruals • Estimated Items • Inventory

50. Deferrals • Prepaid Expenses • Unearned revenues