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Processing Accounting Information Chapter 2 Learning Objective 1 Analyze business transactions. The Account Basic summary device Accounts - grouped in three broad categories Assets Liabilities Stockholders’ Equity The Account

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processing accounting information

Processing Accounting Information

Chapter 2

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

learning objective 1
Learning Objective 1

Analyze business transactions.

the account
The Account
  • Basic summary device
  • Accounts - grouped in three broad categories
    • Assets
    • Liabilities
    • Stockholders’ Equity
the account4
The Account

Assets - economic resources that benefit the business now and in the future

  • Cash
  • Accounts receivable
  • Inventory
  • Notes receivable
  • Prepaid expenses
  • Land
  • Buildings
  • Equipment, furniture, and fixtures
the account5
The Account

Liabilities - debts of the company

  • Notes payable
  • Accounts payable
  • Accrued liabilities
  • Long-term liabilities (bonds)
the account6
The Account

Stockholders’ (owners’) equity - owners’ claims to the assets of a corporation

  • Common Stock
  • Retained Earnings
  • Revenues
  • Expenses
accounting for business transactions
Accounting for Business Transactions

Transaction - any event that both affects the financial position of the business entity and can be reliably recorded

accounting for business transactions8
Accounting for Business Transactions

1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock.

(1) 50,000 50,000

accounting for business transactions9
Accounting for Business Transactions

2. Air & Sea purchases land for an office location, paying $40,000 in cash

  • (40,000) 40,000

Bal 10,000 40,000 50,000

accounting for business transactions10
Accounting for Business Transactions

3. The business buys office supplies, agreeing to pay $500 to the office-supply store within 30 days.

(3) 500 500

Bal 10,000 500 40,000 500 50,000

accounting for business transactions11
Accounting for Business Transactions

4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash.

(4) 5,500 5,500

Bal 15,500 500 40,000 500 50,000 5,500

accounting for business transactions12
Accounting for Business Transactions

5. Air & Sea Travel performs services for customers on account for $3,000.

(5) 3,000 3,000

Bal 15,500 3,000 500 40,000 500 50,000 8,500

accounting for business transactions13
Accounting for Business Transactions

6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400.

(6) (2,700) (2,700)

Bal 12,800 3,000 500 40,000 500 50,000 5,800

Bal 12,800 3,000 500 40,000 500 50,000 5,800

accounting for business transactions14
Accounting for Business Transactions

7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3.

(7) (400) (400)

Bal 12,400 3,000 500 40,000 100 50,000 5,800

accounting for business transactions15
Accounting for Business Transactions

8. The owners remodel their home at a cost of $30,000, paying cash from personal funds.

This is a personal transaction, not a business transaction!

accounting for business transactions16
Accounting for Business Transactions
  • The business collects $1,000 from a customer on account.

(9) 1,000 (1,000)

Bal 13,400 2,000 500 40,000 100 50,000 5,800

accounting for business transactions17
Accounting for Business Transactions

10. Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.

(10) 22,000 (22,000)

Bal 35,400 2,000 500 18,000 100 50,000 5,800

accounting for business transactions18
Accounting for Business Transactions

11. The corporation declares a dividend and pays $2,100 cash to the stockholders.

(11) (2,100) (2,100)

Bal 33,300 2,000 500 18,000 100 50,000 3,700

income statement
Income Statement

Air & Sea Travel

Income Statement

Month Ended April 30, 20x3

Revenue:

Service revenue $8,500

Expenses:

Salary expense $1,200

Rent expense 1,100

Utilities expense 400

Total expenses 2,700

Net income $5,800

statement of retained earnings
Statement of Retained Earnings

Air & Sea Travel

Statement of Retained Earnings

Month Ended April 30, 20x3

Retained earnings, April 1, 20x5 $ 0

Add: Net income for the month 5,800

Subtotal $5,800

Less: Dividends (2,100)

Retained earnings, April 30, 20x5 $3,700

balance sheet
Assets

Cash $ 33,300

Accounts receivable 2,000

Office supplies 500

Land 18,000

Total assets $ 53,800

Liabilities

Accounts Payable $ 100

Stockholders’ Equity

Common stock $50,000

Retained earnings 3,700

Total stockholders’

equity $53,700

Total liabilities and

stockholders’ equity $53,800

Balance Sheet

Air & Sea Travel

Balance Sheet

April 30,20X3

air sea travel statement of cash flows month ended april 30 20x3
Air & Sea TravelStatement of Cash FlowsMonth Ended April 30, 20x3

Cash flows from operating activities:

Collections from customers ($5,500 + $1,000) $ 6,500

Cash payments to suppliers and employees

($2,700 + $400) (3,100)

Net cash inflow from 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 $50,000

Payment of dividends (2,100)

Net cash inflows from financing activities $47,900

Net increase (decrease) in cash $33,300

Cash balance, April 1, 20x5 0

Cash balance, April 30, 20x5 $33,300

learning objective 2
Learning Objective 2

Understand how accounting works.

double entry accounting
Double-Entry Accounting

Record the dual effects of each business transaction.

the t account

Debit

Credit

The T-Account

Account Title

RIGHT SIDE

LEFT SIDE

increases and decreases in the accounts

Accounting

Equation:

Assets

=

Liabilities

+

Stockholders’

Equity

Rules of

Debit and

Credit:

Debit

+

Credit

Debit

Credit

+

Debit

Credit

+

Increases and Decreasesin the Accounts
rules of debit and credit

Assets

=

Liabilities

+

Stockholders’

Equity

Rules of Debit and Credit

Air & Sea received $50,000 and issued stock

Common Stock

Cash

Debit

for

Increase,

50,000

Credit

for

Increase,

50,000

rules of debit and credit28

Assets

=

Liabilities

+

Stockholders’

Equity

Rules of Debit and Credit

Air & Sea purchased land for $40,000 cash.

Common Stock

Cash

Bal. 50,000

Credit

for

Decrease,

40,000

Bal. 50,000

Land

Debit

for

Increase,

40,000

learning objective 3
Learning Objective 3

Record business transactions.

journal
Journal

Chronological record of all transactions listed by date.

recording transactions in the journal
Recording Transactionsin the Journal
  • Identify the transaction; specify each account affected.
  • Determine whether each account is increased or decreased. Use the rules of debits and credits
  • Enter transaction in the journal, including a brief explanation.

April 2 Cash 50,000

Common Stock 50,000

Issued common stock

posting from journal to ledger
Posting from Journal to Ledger
  • Ledger - grouping of all the accounts; it shows their balances.
  • Posting – process of transferring debits and credits from journal to ledger
posting from journal to ledger33

50,000

Posting from Journal to Ledger

Journal Entry

April 2 Cash 50,000

Common Stock 50,000

Issued common stock

Cash

Common Stock

50,000

flow of accounting data

Transaction

Occurs

Transaction

Analyzed

Transaction

Entered in

the Journal

Amounts

Posted to

the Ledger

Flow of Accounting Data
learning objective 4
Learning Objective 4

Use a trial balance.

Trial Balance - lists all accounts with their debit or credit balances

chart of accounts
Chart of Accounts

Listing of all accounts and account numbers used by a business

normal balances of the accounts

Stockholder’s

Equity

Assets

Liabilities

Debit for

Credit for

Debit for

Credit for

Debit for

Credit for

+

-

-

+

-

+

=

+

Assets

Liabilities

Equity

Normal

Balance

Normal

Balance

Normal

Balance

Normal Balances of the Accounts
normal balances of the accounts38

Retained Earnings

Revenues

Common Stock

Debit for

Debit for

Debit for

Credit for

Credit for

Credit for

-

-

-

+

+

+

Normal

Balance

Normal

Balance

Normal

Balance

Expenses

Debit for

Credit for

+

-

Normal

Balance

Normal Balances of the Accounts

Stockholders’ Equity

Decreases Retained Earnings

Increases Retained Earnings

learning objective 5
Learning Objective 5

Analyze transactions for quick decisions.

quick decision making
Quick Decision Making

The managers of PepsiCo may consider buying equipment that costs $100,000. PepsiCo will borrow the money.

quick decision making41

Transaction b – Purchase equipment

Cash

Equipment

Note Payable

(a) 100,000 (b) 100,000

(a) 100,000

(b) 100,000

Quick Decision Making

Transaction a – Borrow $100,000

Cash

Note Payable

(a) 100,000

(a) 100,000

end of chapter 2
End of Chapter 2

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren