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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 l.jpg

Processing Accounting Information

Chapter 2

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


Learning objective 1 l.jpg
Learning Objective 1

Analyze business transactions.


The account l.jpg
The Account

  • Basic summary device

  • Accounts - grouped in three broad categories

    • Assets

    • Liabilities

    • Stockholders’ Equity


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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


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The Account

Liabilities - debts of the company

  • Notes payable

  • Accounts payable

  • Accrued liabilities

  • Long-term liabilities (bonds)


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The Account

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

  • Common Stock

  • Retained Earnings

  • Revenues

  • Expenses


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Accounting for Business Transactions

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


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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


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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


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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


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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


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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


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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


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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


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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!


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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


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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


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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


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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


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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


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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 l.jpg
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


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Learning Objective 2

Understand how accounting works.


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Double-Entry Accounting

Record the dual effects of each business transaction.


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Debit

Credit

The T-Account

Account Title

RIGHT SIDE

LEFT SIDE


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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 l.jpg

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


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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


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Learning Objective 3

Record business transactions.


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Journal

Chronological record of all transactions listed by date.


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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


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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


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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


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Transaction

Occurs

Transaction

Analyzed

Transaction

Entered in

the Journal

Amounts

Posted to

the Ledger

Flow of Accounting Data


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Learning Objective 4

Use a trial balance.

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


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Chart of Accounts

Listing of all accounts and account numbers used by a business


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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 l.jpg

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


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Learning Objective 5

Analyze transactions for quick decisions.


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Quick Decision Making

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


Quick decision making41 l.jpg

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


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End of Chapter 2

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


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