The Accounting Cycle During the Period Financial Accounting

The Accounting Cycle: During the Period Financial Accounting Chapter 2 Spiceland | Thomas | Herrmann Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -2 Learning Objectives • Identify the basic steps in measuring external transactions • Analyze the impact of external transactions on the accounting equation • Assess whether the impact of external transactions results in a debit or credit to an account balance • Record transactions using debits and credits • Post transactions to T-accounts in the general ledger • Prepare a trial balance Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -3 Functions of Financial Accounting • Measure business activities of the company • Communicate measurements to external parties for decision making Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -4 Part A Measuring Business Activities Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -5 Learning Objective 1 Identify the Basic Steps in Measuring External Transactions. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -6 External Transactions • Transactions conducted with a separate economic entity • Internal transaction: events that affect the financial position of the company but do not include an exchange with a separate economic entity Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -7 Capturing Transactions in Accounts • Account: Summary of all transactions related to a particular item over a period of time. • Asset accounts: Cash, Supplies, and Equipment • Liability accounts: Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable • Stockholders’ equity accounts: Common Stock and Retained Earnings • Chart of accounts: A list of all account names used to record transactions Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -8 Measuring External Transactions Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -9 Learning Objective 2 Analyze the impact of external transactions on the accounting equation. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Effects on the Basic Accounting Equation 2 -10 • Each transaction will have a dual effect • An increase on one side will increase the other side Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Understanding Effects of Transaction • Ask these questions: • What is one account affected by the transaction? • Does it increase or decrease? • What is a second account affected by the transaction? • Does it increase or decrease? • Do assets still equal liabilities plus stockholders’ equity? Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -11

2 -12 Transactions of Eagle Golf Academy Date External Transactions in January (1) Dec. 1 (2) Dec. 1 (3) Dec. 1 (4) Dec. 1 (5) Dec. 6 (6) Dec. 12 (7) Dec. 17 (8) Dec. 23 (9) Dec. 28 (10) Dec. 30 Sell shares of common stock for $25, 000 to obtain the funds necessary to start the business Borrow $10, 000 from the local bank and sign a note promising to repay the full amount of the debt in three years Purchase equipment necessary for giving golf training, $24, 000 Pay one year of rent in advance, $6, 000 ($500 per month) Purchase supplies on account, $2, 300 Provide golf training to customers for cash, $4, 300 Provide golf training to customers on account, $2, 000 Receive cash in advance for 12 golf training sessions to be given in the future, $600 Pay salaries to employees, $2, 800 Pay cash dividends of $200 to shareholders Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25, 000 • What is one account affected by the transaction? • Cash • Does that account increase or decrease? • Increase by $25, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -13

Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25, 000 • What is a second account affected by the transaction? • Common Stock • Does that account increase or decrease? • Increase by $25, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -14

Transaction 1—Issue Common Stock Eagle sells shares of common stock for $25, 000 • Do assets equal liabilities plus stockholders’ equity? • Yes, assets increase by $25, 000 and stockholders’ equity increase by $25, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -15

Transaction 2—Borrow from the Bank Eagle borrows $10, 000 from the bank and signs a note for it Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -16

2 -17 Transaction 3—Purchase Equipment Purchase equipment with cash, $24, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -18 Transaction 4—Incur Costs for Rent Pay one year of rent in advance, $6, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Transaction 5—Incur Costs for Supplies Purchase of supplies on account, $2, 300 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -19

2 -20 The Expanded Accounting Equation Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Transaction 6—Provide Services for Cash Provide service to customers for cash, $4, 300 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -21

Transaction 7—Provide Services on Account Provide service to customers on account, $2, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -22

Transaction 8—Receive Cash in Advance of Providing Services Receive cash in advance from customers, $600 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -23

Transaction 9—Incur Cost for Salaries Pay salaries to workers, $2, 800 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -24

2 -25 Transaction 10—Pay Dividends Pay dividends to stockholders, $200 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -26 Part B Debits and Credits Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -27 Learning Objective 3 Assess Whether the Impact of External Transactions Results in a Debit or Credit to an Account Balance. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -28 Effects on Account Balances Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Debit and Credit Effects on Accounts in the Expanded Accounting Equation Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -29

Debit and Credit Effects on Each Account Type • A simple memory aid Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -30

2 -31 Learning Objective 4 Record transactions using debits and credits. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -32 Recording Transactions • Journal: provides a chronological record of all transactions • Journal entry: format used for recording transactions • Debits in a transaction must equal its credits Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -33 Recording Transactions—Example • On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25, 000. • Cash debited for $25, 000 • Common Stock credited for $25, 000 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -34 Learning Objective 5 Post transactions to T-accounts in the general ledger. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -35 Posting • Posting: process of transferring the debit and credit information from the journal to individual accounts in the general ledger • General ledger: includes all accounts used to record the company’s transactions • Useful to calculate the account balances • T-account: a simplified form of a general ledger account Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -36 Posting—Example • On December 1, Eagle Golf Academy sells shares of common stock to investors for cash of $25, 000. • Debit to Cash is transferred to the Cash account • Credit to Common Stock is transferred to the Common Stock account Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Summary of External Transactions Recorded for Eagle Golf Academy Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -37

Summary of External Transactions Recorded for Eagle Golf Academy Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -38

Summary of External Transactions Recorded for Eagle Golf Academy Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 2 -39

2 -40 Learning Objective 6 Prepare a Trial Balance. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -41 Trial Balance • A list of all accounts and their balances at a particular date • Shows that total debits equal total credits • Assists in preparing adjusting entries • Used for internal purposes only • Not published to external parties • Not required to follow an order of listing Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -42 Trial Balance—Example Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

2 -43 End of Chapter 2 Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.