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?. Borrow and invest money.
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.
The Mechanics of
Understand the process of transforming transaction data into useful accounting information.
Record the effects of the transactions.
Summarize the effects of transactions.
1. Posting journal entries.
2. Preparing a trial balance.
1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
Analyze transactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).
A = L + OE
Invest in company
Pay off a note
Borrow funds to settle a debt
The debits must always equal the credits.
Debits = Credits
Debits are simply entries on the left.
Credits are simply entries on the right.
Assets = Liabilities + Owners’ Equity
DR CR DR CR DR CR
(+) (-) (-) (+) (-) (+)
Debit is an increase.
Credit is a decrease.
Increases in a company’s resources from the sale of goods or the performance of services.
Decreases in a company’s resources incurred in the normal course of business to generate revenues.
Distributions to owners, which reduce Owners’ Equity.
Record the effects of transactions using journal entries (step two of the accounting cycle).
What is the three-step process?
1Identify which accounts are involved.
2For each account, determine if it is increased or decreased.
3For each account, determine by how much it will change.
Accounts Payable . . . . . . . . 25
Purchased supplies on account.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”?
We purchase on credit and use accounts payable.
Revenue . . . . . . . . . . . . . . . . 100
Received cash for services.Example 2: Journal Entry
A check for $100 is received in payment for services rendered.
Make the correct journal entry.
Sales Revenue . . . . . . . . . . . 75
Sold merchandise on account.
Mar. 1 Cost of Goods Sold . . . . . . . . . 60
Inventory. . . . . . . . . . . . . . . . 60
To record cost and reduce inventory.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.
Summarize the resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).
transferring amounts from the journal to the ledger.
a book of accounts where journal transactions are posted and thereby summarized.
a cross-reference number between the general journal and the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a company.
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 3,130General Ledger
Current Assets (100-150):
105 Accounts Receivable
Long-Term Assets (151-199):
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
400 Sales Revenue
500 Cost of Goods Sold
501 Sales Salaries and Commissions
523 Rent Expense
528 Advertising Expense
573 Utilities Expense
579 Accounting and Legal Fees
balance is usually
on the side that
account. It is
referred to as the
Do you see the mnemonic memory device, DEAD COIL?
A listing of all account balances; provides a means to assure that debits equal credits.
What is the Trial Balance used for?
From the data in the trial balance, the balance sheet and income statement can be prepared.
Sample Trial Balance
The Example Company
December 31, 2003
Cash $ 21
Accounts Receivable 15
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
Describe how technology has affected the first three steps of the accounting cycle.
"Failure is the
begin again with