Chapter
02
The Accounting
Information System
Roles of Financial
Accounting
Measure business activities of the
company.
Communicate those measurements to
external parties for decision-making
purposes.
purposes
2
Measuring Business Activities
Classification of Business
Activities
TRANSACTIONS
EXTERNAL INTERNAL
TRANSACTIONS TRANSACTIONS
With in the
company
Do not include
With a separate a separate
economic entity economici entity
tit
4
Measuring External Transactions
5
Analyze the Impact of External
Transactions on the Accounting
Equation
Each transaction will have a dual effect. If an
economic event increases one side of the
equation, then it also increases the other side
of the equation by the same amount
amount.
A
Assets
t = Li biliti
Liabilities + St kh ld
Stockholders'
' Equity
E it
(resources) (claims to resources)
6
Ask yourself these
questions…
1. “What is one account in the accounting
equation affected by the transaction? Does that
account increase or decrease?”
2 “What
2. What is a second account in the accounting
equation affected by the transaction? Did that
account increase or decrease?”
3. ”Do assets still equal liabilities plus
stockholders’ equity?
stockholders equity?”
7
Effects of transactions on the Expanded
Accounting Equation
Basic
Assets = Liabilities + Stockholders' Equity
Stockholders Accounting
Equation
Common Stock + Retained Earnings
Expanded
Revenues − Expenses – Dividends
Net Income
8
External Transactions of Eagle
G lf Academy
Golf A d
Type of
Transaction Date External Transactions in January Activity
(1) Jan. 1 Sell shares of common stock for Financing
$25,000 to obtain the funds necessary
to start the business.
(2) Jan. 1 Borrow $10,000 from the local bank Financing
and sign a note promising to repay the
full amount of the debt in three y
years.
(3) Jan. 1 Purchase equipment necessary for Investing
giving golf training, $24,000.
(4) Jan. 1 Pay one year of rent in advance, Operating
$6,000 ($500 per month).
(5) Jan. 6 Purchase supplies on account, $2,300. Operating
External Transactions of Eagle
G lf Academy
Golf A d (Contd.)
(C d )
Type of
Transaction Date External Transactions in January Activity
(6) Jan. 12 Provide golf training to customers for Operating
cash, $3,600.
(7) Jan. 17 Provide golf training to customers on Operating
account, $2,500.
(8) Jan. 23 Receive cash in advance for 10 golf Operating
training sessions to be given in the
future, $600.
(9) Jan. 28 Pay salaries to employees, $2,800. Operating
((10)) Jan. 30 Payy cash dividends of $200 to Financing
g
shareholders.
10
Transaction(1): Issue
Common Stock
To generate cash from external sources
sources, Eagle
sells shares of common stock for $25,000.
Stock certificate
Eagle Golf Academy Investors
Assets = Liabilities + Stockholders' Equity
Cash +$25,000 = Common Stock +$25,000
Note: The accounting
g equation
q balances. If one side of the equation
q
increases, so does the other side. We can use this same series of
questions to understand the effect of any business transaction.
Transaction(2): Borrow from
the Bank
Seeking cash from another external source, Eagle
borrows $10,000 from the bank and signs a note for it.
Eagle Golf Academy Bank
Assets = Liabilities + Stockholders' Equity
C h
Cash +$10
+$10,000
000 = Notes
N t P Payable
bl +$10,000
+$10 000
12
Summary of Initial Financing
Transactions Eagle Gold
Academy
The effects of the two financing activities we’ve
we ve analyzed
are summarized below
Assets = Liabilities + Stockholders' Equity
Financing Activities:
(1) Cash +$25,000 Common Stock +$25,000
(2) Cash +$10,000
+$10 000 Notes Payable +$10,000
+$10 000
Total $35,000 = $10,000 + $25,000
13
Transaction(3):
Purchase Equipment
q p
Purchase equipment with cash, $24,000.
Eagle Golf Academy
Supplier
Assets = Liabilities + Stockholders' Equity
Equipment +$24,000
Cash -$24,000
$24 000
Summary of Initial Financing and
Investing Transactions of Eagle
Golf Academy
Assets = Liabilities + Stockholders' Equity
Stockholders
Financing Activities:
(1) Cash +$25,000 Common Stock +$25,000
((2)) Cash +$10,000
, Notes Payable
y +$10,000
,
$35,000 = $10,000 + $25,000
Investing Activities:
((3)) Equipment +$24,000
Cash -$24,000
Total $35,000 = $10,000 + $25,000
15
Transactions(4) and(5): Incur
Costs for Rent and Supplies
pp
Pay one year of rent in advance, $6,000.
Rental space
Landlord
Eagle Golf Academy
Assets = Liabilities + Stockholders' Equity
Prepaid Rent +$6,000
Cash -$6,000
$6 000
16
Transactions(4) and(5): Incur Costs for
Rent and Supplies
Purchase of supplies on account, $2,300.
Eagle Golf Academy Supplier
Assets = Liabilities + Stockholders' Equity
Supplies +$2,300 = Account Payable +$2,300
17
Transations(6) and (7): Provide
Services to Customers
Providing service to customers for cash causes both assets
and stockholders’ equity to increase.
Training
Eagle Golf Academy Customers
Assets = Liabilities + Stockholders' Equity
Cash +$3,600 = Common Stock + Retained Earnings
+$3,600
$3 600
Revenues − Expenses – Dividends
Service
Revenue
Transations(6)
( ) and ((7):
) Provide
Services to Customers
Similarly, providing service to customers on account
causes both assets and stockholders’ equity to increase
Training
Eagle Golf Academy Customers
Assets = Liabilities + Stockholders' Equity
Stockholders
Accounts +$2,500 = Common Stock + Retained Earnings
Recievable +$2,500
Revenues − Expenses – Dividends
Service
Revenue
19
Transaction(8): Receive Cash
i Ad
in Advance ffrom C
Customer
t
Receive cash in advance from customers, $600.
Eagle Golf Academy Customers
Assets = Liabilities + Stockholders' Equity
Cash +$600 = Unearned Common Stock + Retained Earnings
Revenue
+$600 Revenues − Expenses – Dividends
20
Transaction(9): Incur Cost for
Salaries
Pay salaries to workers, $2,800
Labor
Eagle Golf Academy Employee
Assets = Liabilities + Stockholders' Equity
Cash $2 800 =
-$2,800 Common Stock + Retained Earnings
-$2,800
Revenues − Expenses – Dividends
Salaries
Expense
Transaction (10):
Pa Di
Pay Dividends
idends
Pay dividends to stockholders, $200
Reduced Claims to
Company’s Resources
Eagle Golf Academy Investors
Assets = Liabilities + Stockholders' Equity
Cash -$200 = Common Stock + Retained Earnings
-$200
Revenues − Expenses – Dividends
Dividends
Summary y of All Ten External
Transactions of Eagle Golf Academy
Assets = Liabilities Stockholders’ Equity
Financing Activities:
(1) Cash $25,000 Common Stock $25,000
(2) Cash $10,000 Notes Payable $10,000
Subtotal $35,000 = $10,000 $25,000
Investing Activities:
(3) Equipment $24,000
Cash -$24,000
Subtotal $35,000 = $10,000 $25,000
Operating Activities:
(4) Prepaid
P R
id Rent $6,000
$6 000
Cash -$6,000
(5) Supplies $2,300 Accounts Payable $2,300
(6) Cash $3,600 Service Revenue $3,600
(7) Accounts Receivable $2,500 Service Revenue $2,500
C h
(8) Cash $600 Unearned Revenue $600
(9) Cash -$2,800 Salaries Expense -$2,800
Subtotal $41,200 = $12,900 $28,300
Financing Activity:
(10) Cash -$200 Dividends -$200
T l
Total $41 000
$41,000 = $12 900
$12,900 $28 100
$28,100
(page 81)
Debits and Credits
Or—”How to say the most obvious things in the most obscure fashion
possible.”
Assess Whether the Impact of External
Transactions Results in a Debit or Credit
to an Account Balance
Debits and Credit and the Accounting
g Equation
q
Assets = Liabilities + Stockholders' Equity
Debit Credit Debit Credit Debit Credit
25
Debit and Credit Effects on Accounts in
th E
the Expanded
d dA Accounting
ti E Equation
ti
Assets = Liabilities + Stockholders' Equity
Debit Credit Debit Credit Debit Credit
Common Stock + Retained Earnings
Debit Credit Debit Credit
Revenues - Expenses - Dividends
Debit Credit Debit Credit Debit Credit
Net Income
Remember this or you’re
DEAD
D=Debits
(are for)
E E
E=Expenses
A=Assets
D=Dividends
Ask
A k yourself
lf th
these
questions…
1. “Is there an increase or decrease in the first
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?
credit?”
2. “Is there an increase or decrease in the second
account involved in the transaction? Should I
record that increase or decrease with a debit or a
credit?”
3. “Do total debits equal total credits?”
Recall Our Example
Eagle issues common stock for cash of $25,000
in transaction (1).
Assets = Liabilities + Stockholders' Equity
Cash +$25,000 = Common +$25,000
Stock
C h
Cash C
Common St
Stock
k
Debit Credit Debit Credit
25,000 25,000
29
Recall Our Example
The bank borrowing of $10,000 in transaction (2) has the
f ll i effects:
following ff t
Assets = Liabilities + Stockholders' Equity
Cash +$10,000 = Notes +$10,000
Payable
C
Cash Notes Payable
Debit Credit Debit Credit
10,000 10,000
30
Record Transactions Using
Debits and Credits
A jjournal p
provides a chronological
g record of all
transactions affecting a firm.
January 1 Debit Credit
Cash (+A ) ..................................................... 25,000
Common Stock ((+SE ) ........................... 25,000
,
(Issue common stock for cash)
y1
January Debit Credit
Cash (+A ) ..................................................... 10,000
Notes Payable (+L ) ............................... 10,000
(Borrow by signing long-term
long term note)
Summaryy of External Transactions
Recorded for Eagle Golf Academy
January 1 Debit Credit
Cash (+A ) ..................................................... 25,000
Common Stock (+SE ) ........................... 25,000
(Issue common stock for cash)
January 1
Cash (+A ) ..................................................... 10,000
Notes Payable (+L ) ............................... 10,000
(Borrow by signing long-term note)
January 1
Equipment (+A ) ............................................ 24,000
Cash (-A ) ............................................... 24,000
(Purchase equipment for cash)
January 1
Prepaid Rent (+A ) ......................................... 6,000
Cash (−A ) ................................................ 6,000
(Prepay rent for cash)
y6
January
Supplies (+A ) ................................................ 2,300
Accounts Payable (+L ) ............................. 2,300
32
(Purchase supplies on account)
Summary of External Transactions Recorded
f Eagle
for E l G Golflf Academy
A d (C
(Contd.)
td )
January 12 Debit Credit
Cash (+A ) ....................................................... 3 600
3,600
Service Revenue (+R, +SE ) .................... 3,600
(Provide training to customers for cash)
January 17
Accounts
A t R i bl (+A ) ..............................
Receivable 2 500
2,500
Service Revenue (+R, +SE ) .................... 2,500
(Provide training to customers on account)
January 23
Cash
C ( A ) .......................................................
h (+A 600
Unearned Revenue (+L ) ........................... 600
(Receive cash in advance from customers)
January 28
Salaries
S l i Expense
E ( E −SE
(+E, SE ) .......................... 2 800
2,800
Cash (−A ) ................................................. 2,800
(Pay work ers’ salaries)
January 30
Dividends (+D, −SE ) ...................................... 200
Cash (−A ) ................................................. 200
(Pay cash dividends) 33
P t Transactions
Post T ti to
t T-accounts
T t in
i th
the
General Ledger
The process of transferring the debit and credit information
from the journal to individual accounts in the general
ledger is called posting.
A T-account is a simplified form of a general ledger account
with
ith space att th
the ttop ffor the
th accountt title
titl and
d ttwo sides
id
for recording debits and credits.
34
Th T Account
The A t
(can you guess how it got its name?)
Account Name
Debits are Credits are
entered on left entered on right
Representation of one account in the general ledger
LO5
The T Account
Account Name
400 dr. 900 cr.
Debits and credits
are netted to obtain 500 cr.
balance in account
Normal Account Balances
Debit Credit
Expenses
E Liabilities
Assets q y
Owners’ Equity
Dividends Revenues
all increased all increased
with debits with credits
Post Transactions to T-accounts in
the General Ledger
Cash
Debit Credit
(1) 25,000
Total (2) 10,000
D bit
Debits (3) 24,000
24 000
(Increases) (4) 6,000 Total
$39,200 (6) 3,600 Credits
((8)) 600 ((Decreases))
(9) 2,800 $33,000
Ending (10) 200
Balance Bal. 6,200
38
Summary of the Measurement
Process
39
Posting
os g External
e a Transactions
a sac o s oof Eagle
ag e
Golf Academy to General Ledger Accounts
Assets = + Stockholders' Equity
q y
Accounts Accounts Common Retained
Cash Receivable Payable Stock Earnings
(1) 25,000 (3) 24,000 (7) 2,500 (5) 2,300 (1) 25,000 0
((2)) 10,000 ((4)) 6,000
(6) 3,600 (9) 2,800 Bal. 2,500 Bal. 2,300 Bal. 25,000 0
(8) 600 (10) 200
Bal. 6,200
Prepaid Unearned Service Salaries
Supplies Rent Revenue Revenue Expense
(5) 2,300 (4) 6,000 (8) 600 (6) 3,600 (9) 2,800
(7) 2,500
Bal. 2,300 Bal. 6,000 Bal. 600 Bal. 6,100 Bal. 2,800
Notes
Equipment Payable Dividends
(3) 24,000 (2) 10,000 (10) 200
Bal 24
Bal. 24,000
000 Bal 10
Bal. 10,000
000 Bal
Bal. 200
40
Prepare a Trial Balance
Some facts about a trial balance
1. A trial balance is a list of all accounts and their balances at a
particular
ti l d date,
t showing
h i th thatt total
t t lddebits
bit equall total
t t l credits.
dit
2. Another purpose of the trial balance is to assist us in preparing
adjusting
j g entries ((for internal transactions).
)
3. It is not a published financial statement to be used by external
parties, there is no required order for listing accounts in the trial
balance.
balance
4. The trial balance is used for internal purposes only and
provides a check on the equality of the debits and credits.
41
Trial Balance of Eagle Golf
A d
Academy
Eagle Golf Academy
Trial Balance
January 31
Account Title Debit Credit
Cash $6 200
$6,200
Accounts Receivable 2,500
Supplies 2,300
Prepaid Rent 6,000
E i
Equipment t 24 000
24,000
Accounts Payable $2,300
Unearned Revenue 600
Notes Payable 10,000
C
Common S
Stock 2 000
25,000
Retained Earnings 0
Dividends 200
Service Revenue 6,100
Salaries Expense 2,800
Totals $44,000 $44,000
