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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?. Borrow and invest money.

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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.

what are the different exchange transactions
Exchange

Transactions

What Are the Different Exchange Transactions?

Borrow and invest money.

Purchase land, buildings, and equipment.

Buy and sell goods or services.

Pay wages to employees.

Pay taxes to the government.

Distribute earnings to owners.

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.
slide5
What is the Sequence of the Accounting Cycle?

1

Step

2

Step

Record the effects of the transactions.

3

Summarize the effects of transactions.

1. Posting journal entries.

2. Preparing a trial balance.

Step

4

Prepare reports.

1. Adjusting entries.

2. Preparing financial statements.

3. Closing the books.

Step

Analyze transactions.

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?
what is the accounting equation
Resources

Creditors’

claims

against

resources

Owners’

claims

against

resources

=

+

What Is the Accounting Equation?

Assets = Liabilities + Owners’ Equity

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

what is the rule of double entry accounting
What Is the Rule of Double-Entry Accounting?

The debits must always equal the credits.

Debits = Credits

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
Cash

23

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?

12

35

debits and credits
Debits and Credits

Debits are simply entries on the left.

Remember:

Credits are simply entries on the right.

slide14
Debits and Credits

Assets = Liabilities + Owners’ Equity

DR CR DR CR DR CR

(+) (-) (-) (+) (-) (+)

Asset accounts:

Debit is an increase.

Credit is a decrease.

  • Liabilities and owners’ equity accounts:
    • Debit is a decrease.
    • Credit is an increase.
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.

expanded accounting equation
Assets

DR CR

+ –

Liabilities

DR CR

– +

Owners’ Equity

DR CR

– +

=

+

Capital Stock

DR CR

– +

Retained Earnings

DR CR

– +

Expenses

DR CR

+ –

Dividends

DR CR

+ –

Revenues

DR CR

– +

Expanded Accounting Equation
learning objective 3
Learning Objective 3

Record the effects of transactions using journal entries (step two of the accounting cycle).

step 2 record transactions
Journal -- book of original entryStep 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 transactions19
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?

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.

example 1 journal entry
Jan. 1 Supplies . . . . . . . . . . . . . . . . . . 25

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.

example 2 journal entry
Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100

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.

example 3 journal entry
Mar. 1 Accounts Receivable. . . . . . . . 75

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.

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 Balance Define the Following Terms

Posting

transferring amounts from the journal to the ledger.

Ledger

a book of accounts where journal transactions are posted and thereby summarized.

Posting reference

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.

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

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.

slide31
The trial balance shows that debits equal credits.

Sample Trial Balance

The Example Company

Trial Balance

December 31, 2003

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.

advantages of computers
Advantages of Computers
  • Large amounts of information can be quickly processed without mathematical errors.
  • More documents can be produced than humanly possible in the same amount of time.
  • Common tasks can be automated for increased efficiency.
disadvantages of computers
Disadvantages of Computers
  • Computer hardware and software require human judgment and input.
  • GIGO (garbage in, garbage out).
  • Once an error is identified, fixing the problem may require many adjustments.
end chapter 3
End Chapter 3

"Failure is the

opportunity to

begin again with

more knowledge."

Henry Ford

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