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Annual Report Processing & Accounting Information

This chapter explores the processing of accounting information for annual reports, including the interaction between internal and external events, source documents, and the accounting equation. Examples and explanations of various transactions are provided.

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Annual Report Processing & Accounting Information

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  1. Chapter 3 Annual Report Processing Accounting Information Financial Accounting 4e by Porter and Norton

  2. internal events: interaction within entity External vs. Internal Events external events: interaction between entity and outside environment

  3. Source Documents Sales Invoice Purchase Invoice Evidence needed in an accounting system to record transactions Checks Cash Register Tape Receiving Document Shipping Document Payroll Records

  4. 1/04 Transactions for Glengarry Health Club Stock Certificate Issue capital stock for cash Assets = Liabilities + Owners’ Equity CashCapital Stock + 100,000 = + 100,000 The accounting equation must always remain in balance

  5. Purchase of property in exchange for note payable Assets = Liabilities + Owners’ Equity LandNote Payable + $50,000 = + $200,000 Building + $150,000 Increase on left has corresponding increase on right

  6. Purchase of equipment on account I.O.U. Assets = Liabilities + Owners’ Equity Equip.Accts. Pay. + $20,000 = + $20,000 At least two accounts affected by every transaction

  7. Effect of Revenue and Expenses on Retained Earnings Income Stmt. Stmt. of R/E Revenue - Expenses = Net income (loss) Beg. R/E + Net income (or – net loss) - Dividends = End. R/E

  8. Sell monthly memberships on account Assets = Liabilities + Owners’ Equity Accts. Rec.Retained Earnings + $15,000 = + $15,000 Revenues increase retained earnings

  9. Sell court time Assets = Liabilities + Owners’ Equity CashRetained Earnings + 5,000 = + 5,000 Revenues increase retained earnings

  10. Payment of wages and salaries Assets = Liabilities + Owners’ Equity CashRetained Earnings - 10,000 = - 10,000 Expenses decrease retained earnings

  11. Payment of utilities Assets = Liabilities + Owners’ Equity CashRetained Earnings - 3,000 = - 3,000 Expenses also decrease assets or increase liabilities

  12. Collection of accounts receivable Assets = Liabilities + Owners’ Equity Cash + $4,000 = (no change in Liab. or R/E) Accts. Rec. - $4,000 Assets were traded: accounts receivable for cash

  13. Payment of dividends Assets = Liabilities + Owners’ Equity CashRetained Earnings - 2,000 = - 2,000 Dividends directly reduce retained earnings

  14. Cumulative Effect of Transactions for Glengarry Health Club Assets = Liabilities + O/E Sold stock + $100,000 = + $100,000 Bought prop. with note + 200,000 = + $200,000 Bought equip. on acct. + 20,000 = + 20,000 Sold memberships + 15,000 = + 15,000 Sold court time + 5,000 = + 5,000 Paid wages - 10,000 = - 10,000 Paid utilities - 3,000 = - 3,000 Collected A/R + 4,000 = (no change in Liabilities + OE) - 4,000 Paid dividends - 2,000 = - 2,000 + $325,000 = + $220,000 + $105,000

  15. Glengarry Health ClubIncome StatementFor the Month ended January 31, 2004 Revenues: Memberships $15,000 Court fees 5,000 $20,000 Expenses: Salaries and wages $10,000 Utilities 3,000 13,000 Net income $ 7,000 Net increase to retained earnings

  16. Assets: Cash $194,000 Accts. Rec. 11,000 Equipment 20,000 Building 150,000 Land 50,000 Total assets $325,000 Liabilities & Owners’ Equity: Accounts payable $ 20,000 Notes payable 200,000 Capital stock 100,000 Retained earnings 5,000 Total liabilities & owners’ equity $325,000 Glengarry Health ClubBalance SheetJanuary 31, 2004

  17. 100 - 199 ASSETS 100 - 109: Cash 101: Checking Account 102: Savings Account 110 - 119: Receivables 111: Accts. Receivable : 120 - 129: Prepaid Assets 121: Cleaning Supplies 122: Prepaid Insurance 130 - 139: Property, Plant & Equipment 131: Land 132: Building : 200 - 299 LIABILITIES 200 - 209: Short-Term Liab. 201: Accts. Payable 202: Wages Payable : 300 - 399 OWNERS’ EQUITY 301 Preferred Stock 302 Common Stock 303 Retained Earnings 400 - 499 REVENUES : 500 - 599 EXPENSES : Sample Chart of Accounts 17

  18. A/R +400 - 100 Cash: +100 - 50 Cash +100 -50 General Ledger File or book that contains one page (or entry) for each account.

  19. The T Account Account Name Debits are entered on left Credits are entered on right Representation of one account in the G/L

  20. The T Account Account Name 400 dr. 900 cr. Debits & credits are netted to obtain balance in account 500 cr.

  21. OWNERS’ EQUITY + ASSETS = LIABILITIES Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + Debits/Credits and the Accounting Equation Opposite sides of the accounting equation are increased/decreased in an opposite way

  22. RETAINED EARNINGS Dr. Cr. - + REVENUES Dr. Cr. - + Link Between Revenues and Retained Earnings Both accounts are increased with credits Revenues increase retained earnings (part of owners’ equity)

  23. EXPENSES AND DIVIDENDS DR. CR. + - Link Between Expenses and Dividends and Retained Earnings RETAINED EARNINGS Retained earnings is decreased with debits DR. CR. - + Expenses and dividends decrease retained earnings Use debits to record(increase) expenses and dividends

  24. Assets Expenses Dividends Liabilities Owners’ Equity Revenues Normal Balances Debit Credit all increased with debits all increased with credits

  25. Stock Certificate Transactions and T Accounts Cash Capital Stock (1) 100,000 (1) 100,000 (1) Issue capital stock for cash

  26. Transactions and T Accounts Land Building Note Payable (2) 150,000 (2) 50,000 (2) 200,000 (2) Purchase property in exchange for note payable

  27. Transactions and T Accounts Equipment Accounts Payable (3) 20,000 (3) 20,000 I.O.U. (3) Purchase equipment on account

  28. Transactions and T Accounts (4) Sell monthly memberships on account(5) Sell court time Cash Retained Earnings (4) 15,000 (5) 5,000 (1) 100,000 (5) 5,000 T Accounts reflect current and previous postings to the account for each period Accts. Rec. (4) 15,000

  29. Transactions and T Accounts (6) Pay employees wages for the month(7) Pay utilities for the month Wage Expense Cash (6) 10,000 (6) 10,000 (7) 3,000 (1) 100,000 (5) 5,000 Utilities Expense (7) 3,000

  30. Transactions and T Accounts Accts. Rec. Cash (1) 100,000 (5) 5,000 (6) 10,000 (7) 3,000 (8) 4,000 (4) 15,000 (8) 4,000 (8) Collection of accounts receivable

  31. Transactions and T Accounts Cash Retained Earnings (1) 100,000 (5) 5,000 (6) 10,000 (7) 3,000 (9) 2,000 (9) 2,000 (8) 4,000 (4) 15,000 (5) 5,000 (9) Pay dividends

  32. Accts. Rec. Balance the T Accounts Cash (8) 4,000 (1) 100,000 (5) 5,000 (4) 15,000 (6) 10,000 (7) 3,000 11,000 (9) 2,000 (8) 4,000 Retained Earnings 94,000 (9) 2,000 (4) 15,000 (5) 5,000 18,000

  33. And then posted to: • Ledger Accounts • Cash • Capital Stock Posting from Journal Transactions are entered in: Journal ( via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares

  34. Glengarry Health Club Trial Balance January 31, 2004 Debits Credits Cash Accts. Rec. Equipment Building Land Accounts Payable Notes Payable Capital Stock Membership Revenue Court Fee Revenue Wage Expense Utility Expense Dividends Total $ 94,000 11,000 20,000 150,000 50,000 $ 20,000 200,000 100,000 15,000 5,000 10,000 3,000 2,000 $ 340,000 $ 340,000

  35. End of Chapter 3

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