chapter 2
Download
Skip this Video
Download Presentation
Chapter 2

Loading in 2 Seconds...

play fullscreen
1 / 40

Chapter 2 - PowerPoint PPT Presentation


  • 497 Views
  • Uploaded on

Chapter 2 The Recording Process of Accounting Information Objectives of the Chapter I. Definitions of accounts on the financial statements (F/S). II. Learning the accounting process (AP) in preparing financial statements. a. using the accounting equation, b. using the double-entry system.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 2' - adamdaniel


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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 2

Chapter 2

The Recording Process of Accounting Information

objectives of the chapter
Objectives of the Chapter

I. Definitions of accounts on the financial statements (F/S).

II. Learning the accounting process (AP) in preparing financial statements.

a. using the accounting equation,

b. using the double-entry system.

Processing Accounting Information

i definitions of accounts on financial statements
I. Definitions of Accounts on Financial Statements
  • Assets: economic resources that benefit the business in the future, including:
  • Cash: in all forms: (coins, currency, checking accounts,…)
  • Account receivable: an oral promise for future cash receipt as a result of sales.
  • Inventory (or merchandise): goods for sale.
  • Note receivable: a written promissory note that the customer will pay a fixed amount by a certain date.

Processing Accounting Information

i definitions of accounts on financial statements contd
I. Definitions of Accounts on Financial Statements (contd.)
  • Prepaid expenses: expenses paid in advance.
  • Land: recorded at cost of land.
  • Buildings: record at cost, subject to depreciation.
  • Equipment, furniture and fixture: record at cost, subject to depreciation.

Processing Accounting Information

i definitions of accounts on financial statements contd5
I. Definitions of Accounts on Financial Statements (contd.)
  • Liabilities: legal obligations.
  • Note Payable: a written promissory note that the business promises to pay.
  • Account payable: an oral promise to pay, arising from credit purchases of inventory and other goods.
  • Accrued liabilities: liabilities that have occurred but have not been paid. For example: salary payable, interest payable, etc.

Processing Accounting Information

i definitions of accounts on financial statements contd6
I. Definitions of Accounts on Financial Statements (contd.)
  • Stockholders’ equity: the owners’ claims to the assets of a corporation including:
  • Common stock: represents the owners’ investment.
  • Retained earnings: the cumulative net income earned by the corporation over its lifetime , minus cumulative losses and dividends.
  • Dividends: distribution of earnings to stockholders.

Processing Accounting Information

i definitions of accounts on financial statements contd7
I. Definitions of Accounts on Financial Statements (contd.)
  • Revenues: increase or inflow of assets; will eventually increase stockholders’ equity (i.e., sales revenue)
  • Expenses: decrease or outflow of assets; will eventually decrease stockholders’ equity.
  • Gains: increase in assets from incidental transactions not related to the major operation.
  • Losses: decrease in assets from incidental transactions.

Processing Accounting Information

ii accounting process and preparation of financial statements
II. Accounting Process and Preparation of Financial Statements
  • How do accountants prepare financial statements?
    • Identify,measure and recordbusiness transactions for business entities

Processing Accounting Information

accounting process cont
Accounting Process (Cont.)

a. Using the accounting equation.

Accounting Equation:

Assets = Liabilities + Stockholders’ Equity

b. Using the double-entry system (the process includes the recording of Journal entries, posting Journal entries to ledger accounts, work sheet (including adjustments…), prepare financial statements and closing entries)

Processing Accounting Information

a using the accounting equation exhibit 2 1 from financial accounting by harrison and horegren
a. Using the Accounting Equation - Exhibit 2-1 (from Financial Accounting by Harrison and Horegren)

Analysis of Air & Sea Travel, Inc., Transactions

Panel A - Details of transactions

(1) Issued stock to the owners who invested $50,000 cash in the business.

(2) Paid $40,000 cash for land.

(3) Bought $500 of office supplies on account.

(4) Received $5,500 cash from customers for service revenue earned.

Processing Accounting Information

using the accounting equation exhibit 2 1 contd
Using the Accounting Equation - Exhibit 2-1 (contd.)

(5) Performed services for customers on account, $3,000.

(6) Paid cash expenses: rent, $1,100; employee salary, $1,200; utilities, $400.

(7) Paid $400 on the account payable created in Transaction 3.

(8) Owners paid personal funds to remodel home. This is not a transaction of the business.

Processing Accounting Information

using the accounting equation exhibit 2 1 contd12
Using the Accounting Equation - Exhibit 2-1 (contd.)

(9) Received $1,000 on the account receivable created in Transaction 5.

(10) Sold land for cash at its cost of $22,000.

(11) Declared and paid a dividend of $2,100 to the stockholders.

Processing Accounting Information

using the accounting equation exhibit 2 1 contd13
Using the Accounting Equation - Exhibit 2-1 (contd.)

PANEL B - Analysis of transactions

Income Statement Data

Statement of Cash Flows Data

Balance Sheet Data

For Financial statements, see Exhibit 2-2.

13

Processing Accounting Information

b introduction of the double entry system and journal entries
b.Introduction of the Double-Entry System and Journal Entries

A. Double-entry system

B. The T- accounts

C. Increases and decreases in the accounts

D. Examples of journalizing and posting transactions

Processing Accounting Information

a double entry system
A. Double-Entry System
  • Each transaction affects at least two accounts and the balance of the accounting equation must be maintained.
  • Example: Purchases inventory and charges to accounts payable

Assets = Liabilities + Equity

Inventory  Accounts Payable 

+ +

Processing Accounting Information

a double entry system contd
A. Double-Entry System (contd.)

Processing Accounting Information

b introduction of the t account
B. Introduction of the T- account

Inventory Accounts Payable

Debit Credit Debit Credit

Processing Accounting Information

c increases and decreases in the accounts
Debit

Credit

A

Credit

Debit

Credit

Debit

Revenue

L

Credit

Debit

Debit

Credit

Expense

E

C. Increases and Decreases in the Accounts

Processing Accounting Information

d examples of journalizing and posting transactions
D. Examples of Journalizing and Posting Transactions

1. Transaction: Air & Sea Travel, Inc., received $50,000 cash from the business and in turn issued common stock to them.

Journal Entry:

Cash 50,000

Common Stock 50,000

Issued common stock to owners.

Ledger Accounts:

Cash Common Stock

50,000 50,000

Processing Accounting Information

d examples of journalizing and posting transactions contd
D. Examples of Journalizing and Posting Transactions (contd.)

2. Transaction: The business paid $40,000 cash for land as a future office location.

Journal Entry:

Land 40,000

Cash 40,000

Paid cash for land.

Ledger Accounts:

Cash Land

50,000 40,000 40,000

Processing Accounting Information

d examples of journalizing and posting transactions contd21
D. Examples of Journalizing and Posting Transactions (contd.)

3. Transaction: The business purchased $500 office supplies on account.

Journal Entry:

Office Supplies 500

Accounts Payable 500

Ledger Accounts:

Office Supplies Accounts Payable

500 500

Processing Accounting Information

d examples of journalizing and posting transactions contd22
D. Examples of Journalizing and Posting Transactions (contd.)

4. Transaction: The business performed travel service for clients and received cash of $5,500.

Journal Entry:

Cash 5,500

Service Revenue 5,500

Ledger Accounts:

Cash Service Revenue

50,000 40,000 5,500

5,500

Processing Accounting Information

d examples of journalizing and posting transactions contd23
D. Examples of Journalizing and Posting Transactions (contd.)

5. Transaction: The business performed service for clients who did not pay immediately. Air & Sea Travel billed the clients for $3,000 on account.

Journal Entry:

Accounts Receivable 3,000

Service Revenue 3,000

Ledger Accounts:

Accounts Receivable Service Revenue

3,000 5,500

3,000

8,500

Processing Accounting Information

d examples of journalizing and posting transactions contd24
D. Examples of Journalizing and Posting Transactions (contd.)

6. Transaction: The business paid $2,700 for the following expenses: office rent, $1,100; employee salary; $1,200; and utilities, $400.

Journal Entry:

Rent Expense 1,100

Salary Expense 1,200

Utilities Expense 400

Cash 2,700

Ledger Accounts:

Cash Rent Expense

50,000 40,000 1,100

5,500 2,700

Salary Expense Utilities Expense

1,200 400

24

Processing Accounting Information

d examples of journalizing and posting transactions contd25
D. Examples of Journalizing and Posting Transactions (contd.)

7. Transaction: The business paid $400 on the account payable created in Transaction 3.

Journal Entry:

Accounts Payable 400

Cash 400

Ledger Accounts:

Cash Accounts Payable

50,000 40,000 400 500

5,500 2,700

400 100

Processing Accounting Information

d examples of journalizing and posting transactions contd26
D. Examples of Journalizing and Posting Transactions (contd.)

8. Transaction: The Lyons remodeled their personal residence. This is not a transaction of the travel agency, so no journal entry is made.

Processing Accounting Information

d examples of journalizing and posting transactions contd27
D. Examples of Journalizing and Posting Transactions (contd.)

9. Transaction: The business collected $1,000 cash on account from the clients in transaction 5.

Journal Entry:

Cash 1,000

Accounts Receivable 1,000

Ledger Accounts:

Cash Accounts Receivable

50,000 40,000 3,000 1,000

5,500 2,700

1,000 400 2,000

Processing Accounting Information

d examples of journalizing and posting transactions contd28
D. Examples of Journalizing and Posting Transactions (contd.)

10. Transaction; The business sold land for its cost of $22,000, receiving cash

Journal Entry:

Cash 22,000

Land 22,000

Ledger Accounts:

Cash Land

50,000 40,000 40,000 22,000

5,500 2,700

1,000 400 18,000

22,000

Processing Accounting Information

d examples of journalizing and posting transactions contd29
D. Examples of Journalizing and Posting Transactions (contd.)

11. Transaction: Air & Sea Travel, Inc., paid the Lyons cash dividends of $2,100.

Journal Entry:

Dividends 2,100

Cash 2,100

Ledger Accounts:

Cash Dividends

50,000 40,000 2,100

5,500 2,700

1,000 400

22,000 2,100

33,300

Processing Accounting Information

d examples of journalizing and posting transactions contd30
D. Examples of Journalizing and Posting Transactions (contd.)
  • The followings are examples of T-accounts, trial balance and financial statements of the example in Exhibit 2.1.

Processing Accounting Information

exhibit 2 2 from financial accounting by harrison and horgren
Exhibit 2-2 (from Financial Accounting by Harrison and Horgren)

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

A/P

(7) 400 (3) 500

Bal. 100

EXPENSES

Rent Exp.

(6) 1,100 Bal. 1,100

Comm Stock

(1) 50,000

Bal. 50,000

Cash

(1) 50,000 (2) 40,000

(4) 5,500 (6) 2,700

(9) 1,000 (7) 400

(10) 22,000 (11) 2,100

Bal. 33,300

Dividends

(11) 2,100 Bal. 2,100

Salary Exp.

(6) 1,200 Bal. 1,200

A/R

(5) 3,000 (9) 1,000

Bal. 2,000

Office Supplies

(3) 500

Bal. 500

Utilities Exp.

(6) 400 Bal. 400

REVENUE

Service Rev.

(4) 5,500

(5) 3,000

Bal. 8,500

Land

(2) 40,000 (10) 22,000

Bal. 18,000

31

Processing Accounting Information

exhibit 2 3 from financial accounting by harrison and horngren
Exhibit 2-3 (from Financial Accounting by Harrison and Horngren)

AIR & SEA TRAVEL, INC.

Trail Balance

4/30/19x1

Balance

Account Title Debit Credit

Cash $33,300

Accounts receivable 2,000

Office supplies 500

Land 18,000

Accounts payable $ 100

Common Stock 50,000

Dividends 2,100

Service revenue 8,500

Rent expense 1,100

Salary expense 1,200

Utilities expense 400

Total $58,600 $58,600

32

Processing Accounting Information

exhibit 2 4 from financial accounting by harrison and horngren
Exhibit 2-4 (from Financial Accounting by Harrison and Horngren)

AIR & SEA TRAVEL, INC.

Income Statement

Month Ended April 30, 19x1

Revenue:

Service revenue ($5,500+$3,000) ... $ 8,500

Expenses:

Salary expense ……………………… $1,200

Rent expense ……………………….. 1,100

Utilities expense …………………….. 400

Total expenses ……………………… 2,700

Net income …………………………….. $5,800

AIR & SEA TRAVEL, INC.

Statement of Retained Earnings

Month Ended April 30, 19x1

Retained earnings, April 1, 19x1 ……... $ 0

Add: Net income for the month ..……… 5,800

5,800

Less: Dividends …………………………. 2,100

Retained earnings, April 30, 19x1……… $3,700

33

Processing Accounting Information

exhibit 2 3 contd
Exhibit 2-3 (contd.)

Statement of Retained Earnings

Month Ended April 30, 19x1

Retained earnings, April 1, 19x1 ……... $ 0

Add: Net income for the month ..……… 5,800

5,800

Less: Dividends …………………………. 2,100

Retained earnings, April 30, 19x1……… $3,700

AIR & SEA TRAVEL, INC.

Balance Sheet

April 30, 19x1

AssetsLiabilities

Cash …………... $33,300 Accounts payable …... $ 100

A/R …………….. 2,000

Office supplies .. 500 Stockholders’ Equity

Land …………... 18,000 Common stock ………. 50,000

Retained earnings …... 3,700

Total stockholders’

equity …………….. 53,700

Total liabilities and

Total assets ……. $53,800 stockholders’ equity... $53,800

34

Processing Accounting Information

exhibit 2 3 contd35
Exhibit 2-3 (contd.)

Balance Sheet, April 30, 19x1

AssetsLiabilities

Cash ……………………. $33,300 Accounts payable ……………... $ 100

A/R ……………………... 2,000

Office supplies ………... 500 Stockholders’ Equity

Land ……………………. 18,000 Common stock ……………….... 50,000

Retained earnings …………….. 3,700

Total stockholders’ equity ….. 53,700

Total liabilities and

Total assets ………….… $53,800 stockholders’ equity………….. $53,800

Statement of Cash Flows, Month Ended April 30, 19x1

Cash flows from operating activities:

Receipts:

Collections fm customers ($5,500+1,000) …….. $ 6,500

Payments:

To suppliers and employees ($2700+400) ……. (3,100)

Net cash inflow fm operating activities ……... 3,400

Cash flows from investing activities:

Acquisition of land ………………………………….. $(40,000)

Sale of land ………………………………………….. 22,000

Net cash outflow from investing activities…... (18,000)

Cash flows from financing activities:

Issuance (sale) of stock to owners ……………….. $50,000

Dividends ……………………………………………. (2,100)

Net cash inflow from financing activities……. 47,900

Net increase in cash ………………………………….. $33,300

Cash balance, April 1, 19x1 …………………………. 0

Cash balance, April 30, 19x1 ………………………... $33,300

35

Processing Accounting Information

an example of the journal and a ledger account cash contd
An Example of the Journal and A Ledger Account (cash): (contd.)

The Ledger: all individual accounts (assets, liability, and stockholder’s equity accounts) combined make up the ledger.

Processing Accounting Information

the flows of accounting data
The Flows of Accounting Data

Transaction

Analysis

Takes

Place

Source

Documents

Prepared

Transaction

Entered in

Journal

Amounts

Posted to

Ledger

Transaction

Occurs

Processing Accounting Information

the normal balance of an account
The Normal Balance of an Account

Assets Debit

Liabilities Credit

Stockholder’s Equity Credit

(overall)

Common Stock Credit

Retained Earnings Credit

Dividends Debit

Revenues Credit

Expenses Debit

Processing Accounting Information

the chart of accounts
The Chart of Accounts

Processing Accounting Information

ad