External and Internal Events External events interaction between

External and Internal Events External events: interaction between entity and outside environment Internal events: Interaction within entity © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 1

Source Documents Purchase Invoice Cash Register Tape Payroll Records Evidence needed in an accounting system to record transactions Shipping Document Sales Invoice Checks Receiving Document © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 2

Issue Capital Stock for Cash Assets = Liabilities + Stockholder’ Equity Cash + $ 100, 000 = Capital Stock + $ 100, 000 The accounting equation must always remain in balance © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 3

Purchase of Property in Exchange for Notes Payable Assets = Land + $50, 000 Liabilities + Stockholders’ Equity Notes Payable = + $200, 000 Building + $150, 000 Increase on left has corresponding increase on right © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Effect of Revenue and Expenses on Retained Earnings Income Statement Revenue – Expenses = Net Income (Loss) Statement of Retained Earnings Beg. R/E + Net Income (or – Net Loss) – Dividends = End. R/E © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Sell Monthly Memberships on Account Assets = Liabilities + Stockholders’ Equity Accts. Rec. + $15, 000 = Retained Earnings + $15, 000 Revenues increase retained earnings © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Payment of Wages and Salaries Assets = Liabilities + Stockholders’ Equity Cash – $10, 000 = Retained Earnings – $10, 000 Expenses decrease retained earnings © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Collection of Accounts Receivable Assets = Liabilities + Stockholders’ Equity Cash + $4, 000 = (no change in Liab. or S/E) Accts. Rec. – $4, 000 Assets were traded: accounts receivable for cash © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Payment of Dividends Assets = Liabilities + Stockholders’ Equity Cash – $2, 000 = Retained Earnings – $2, 000 Dividends directly reduce retained earnings © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Cumulative Effect of Transactions for Glengarry Health Club Assets = Liabilities + Sold stock Bought prop. with note Bought equip. on acct. Sold memberships Sold court time Paid wages Paid utilities Collected A/R Paid dividends + $100, 000 = + 200, 000 = + $200, 000 + 20, 000 = + 20, 000 + + – – = = = 15, 000 10, 000 3, 000 4, 000 2, 000 + S/E $100, 000 + 15, 000 + 5, 000 – 10, 000 – 3, 000 (no change in Liabilities + SE) = + $325, 000 = + $220, 000 – 2, 000 + $105, 000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Glengarry Health Club Balance Sheet January 31, 2012 Assets Cash $ 94, 000 Accts. Rec. 11, 000 Equipment 20, 000 Building 150, 000 Land 50, 000 Total assets $325, 000 Liabilities and Stockholders’ Equity Accounts payable Notes payable Capital stock Retained earnings $ 20, 000 200, 000 100, 000 5, 000 Total liabilities and stockholders’ equity $325, 000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Glengarry Health Club Income Statement For the Month Ended January 31, 2012 Revenues: Memberships $15, 000 Court fees 5, 000 Expenses: Wages and Salaries $10, 000 Net in Utilities retain creas 3, 000 e to ed ea rning Net income s $20, 000 13, 000 $ 7, 000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The T Account Name Debits are entered on left Credits are entered on right Representation of one account in the general ledger © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 5

The T Account Name 400 dr. Debits and credits are netted to obtain balance in account 900 cr. 500 cr. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Debits/Credits and the Accounting Equation ASSETS = LIABILITIES STOCKHOLDERS’ + EQUITY Dr. Cr. Dr. + – – + – Cr. + Opposite sides of the accounting equation are increased/decreased in an opposite way © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Link Between Revenues and Retained Earnings RETAINED EARNINGS Dr. – + Cr. REVENUES Dr. – Cr. + Both accounts are increased with credits Revenues increase retained earnings (part of stockholders’ equity) © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Link Between Expenses and Dividends and Retained Earnings Retained earnings is decreased with debits Expenses and dividends decrease retained earnings Use debits to record (increase) expenses and dividends RETAINED EARNINGS DR. – CR. + EXPENSES AND DIVIDENDS DR. CR. + – © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Normal Account Balances Debit Assets Expenses Dividends all increased with debits Credit Liabilities Stockholders’ Equity Revenues all increased with credits © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The Journal A chronological record of transactions The book of original entry Each entry has a debit and a credit that equals v Transactions normally recorded in general journal v v v © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Posting from Journal Transactions are entered in: And then posted to: Journal (via journal entries): Cash Capital Stock Dr. 100, 000 Cr. Ledger Accounts • Cash • Capital Stock 100, 000 To record the issuance of 10, 000 shares © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO 6

Journal Entries Dr. 150, 000 Building Land Notes Payable To record acquisition of property in exchange for note. Equipment Accounts Payable To record the acquisition of equipment on open account. Accounts Receivable Membership Revenue To record sale of monthly memberships on account 20, 000 15, 000 Cr. 200, 000 20, 000 15, 000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U. S. only, with content that may be different from the U. S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

End of Chapter 3