Processing Accounting Information

BBA Emphasis (Honors)

Kathmandu University
School of Management (KUSOM)

1
LO1
External and Internal Events
External events: interaction between entity
and outside environment

Internal events:
Interaction within
entity
2
LO1
 External and Internal Events
• Is the purchase of a new ship an internal or
external event?
• The company subsequently recognizes the use
of the ship by recording depreciation. Is this
an internal or external event?

The term transaction to refer to any event,

external or internal, that is recognized in a set
of financial statements.
3
 External and Internal Events
• What is necessary to recognize an event in the
records? Are all economic events recognized
as transactions by the accountant?

An event must be measured to be recognized. Certain events are

relatively easy to measure: the payroll for the week, the
amount of equipment destroyed by an earthquake, or the
sales for the day.

A company hires a new chief executive. How can it reliably

measure the value of the new officer to the company?
4
 Source Documents
• A piece of paper that is used as evidence to
record a transaction.
• Basis for recording transactions.
• Not all recognizable events are supported by a
standard source document.
• For certain events, some form of documentation
must be generated. For example, no standard
source document exists to recognize the financial
consequences from a fire or the settlement of a
lawsuit. Documentation is just as important for
those types of events as it is for standard,
recurring transactions.
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 Source Documents
Purchase Sales
Invoice Evidence needed Invoice
in an accounting
Cash system to record
Checks
Register transactions
Tape

Payroll Shipping Receiving

Records Document Document

LO2
 Analyzing Effect of Transaction on Accounting
Equation

• For every transaction, it is essential to

analyze its effect on the accounting equation:
Assets = Liabilities + Stockholders’ Equity

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Segregate the following items as Assets, Liabilities,
Shareholders’ equity, Expenses and Revenue
Cash Retained earnings
Inventory Land
Notes payable Accounts payable
Capital stock Supplies on hand
Supplies expense Account receivable
Equipment Tax Electricity expense
Wages expense Miscelleneous expense
Utilities expense Sales revenue
Depreciation Interest expense
Dividend Plant and Machinery
Salaries Investment 8
 Segregate the following items as Assets, Liabilities,
Shareholders’ equity, Expenses and Revenue

Cash A Retained earnings E

Inventory A Land A
Notes payable L Accounts payable L
Capital stock E Supplies on hand A
Supplies expense Ex Account receivable A
Tax
Equipment expense A Electricity expense Ex
Wages is also Ex Miscelleneous expense Ex
expense
Utilities expense Ex Sales revenue R
Depreciation Ex Interest expense Ex
Dividend Ex Plant and Machinery A
Salaries Ex Investment A9
Affect of transactions on Accounting
equation
Effect on Asset and
Starting
Cash Shareholder’s equity side
business
of equation

Effect on Asset side of

Cash
Buying of equation only
Assets
Effect on Asset and liability
Credit
side of equation

Effect on Asset and Retained

Revenues
Revenues and earnings side of equation
Expense
Expenses Effect on Asset and Retained
earnings side of equation
10
Issue Capital Stock for Cash
• The company is started when Kiran and Kaif
file articles of incorporation with the state to
obtain a charter. Each invests $50,000 in the
business. In return, each receives 5,000 shares
of capital stock. Thus, each of them owns 50%
of the outstanding stock of the company and
has a claim to 50% of its assets.

11
 Issue Capital Stock for Cash
Transactions for Glengarry Health Club

Assets = Liabilities + Stockholders’ Equity

Cash Capital Stock
+ $ 100,000 = + $ 100,000

The accounting equation must

always remain in balance
12
LO3
Purchase of Property in Exchange
for Notes Payable
The company buys a piece of property for $200,000. The
seller agrees to accept a five-year promissory note.

The note is given by the health club to the seller and is a

written promise to repay the principal amount of the loan at
the end of five years. To the company, the promissory note is
a liability. The property consists of land valued at $50,000
and a newly constructed building valued at $150,000. The
effect of this transaction on the accounting equation is to
increase both assets and liabilities by $200,000.

13
 Purchase of Property in Exchange
for Notes Payable
Assets = Liabilities + Stockholders’ Equity
Land Notes Payable
+ $50,000 = + $200,000
Building
+ $150,000

Increase on left has

corresponding increase on right 14
 Purchase of Equipment
on Account
Kiran and Kaif contact an equipment
supplier and buy $20,000 of exercise
equipment: treadmills, barbells, and
stationary bicycles. The supplier agrees to
accept payment in full in 30 days.

15
 Purchase of Equipment
on Account
Assets = Liabilities + Stockholders’ Equity
Equipment Account Payable
+ $20,000 = + $20,000

At least two accounts affected

by every transaction
16
 Effect of Revenue and Expenses
on Retained Earnings (R/E)
Statement of
Income Statement
Retained Earnings
Beg. R/E
Revenue – Expenses + Net Income
= Net Income (Loss) (or – Net Loss)
– Dividends
= End. R/E 17
 Sell Monthly Memberships
on Account
During January, they sell 300 monthly club memberships for $50 each, or a
total of $15,000. The members have until the 10th of the following month
to pay.
Glengarry does not have cash from the new members; instead, it has a
promise from each member to pay cash in the future. This promise from a
customer to pay an amount owed is an asset called an account receivable.
The other side of this transaction is an increase in the stockholders’ equity
(specifically, Retained Earnings) in the business. In other words, the assets
have increased by $15,000 without any increase in a liability or any
decrease in another asset. The increase in stockholders’ equity indicates
that the owners’ residual interest in the assets of the business has
increased by this amount. This inflow of assets resulting from the sale of
goods and services by a business is called revenue.
18
 Sell Monthly Memberships
on Account
Assets = Liabilities + Stockholders’ Equity
Accts. Rec. Retained Earnings
+ $15,000 = + $15,000

Revenues increase retained earnings

19
 Sell Court Time for Cash
• In addition to memberships, Glengarry sells
court time. Court fees are paid at the time of
use and amount to $5,000 for the first
month

20
 Sell Court Time for Cash

Assets = Liabilities + Stockholders’ Equity

Cash Retained Earnings
+ $5,000 = + $5,000

Revenues increase retained earnings

21
 Payment of Wages
and Salaries
• The wages and salaries for the first month amount
to $10,000.
The payment of this amount results in a decrease in
Cash and a decrease in the owners’ claim on the
assets, that is, a decrease in Retained Earnings.

This outflow of assets resulting from the sale of

goods or services is called an expense.
22
 Payment of Wages
and Salaries
Assets = Liabilities + Stockholders’ Equity
Cash Retained Earnings
– $10,000 = – $10,000

Expenses decrease retained earnings

23
 Payment of Utilities
• The cost of utilities for the first month is $3,000.
Glengarry pays this amount in cash. Both the utilities
and the salaries and wages are expenses, and they
have the same effect on the accounting equation.

Cash is decreased, accompanied by a corresponding

decrease in the owners’ claim on the assets of
the business

24
 Payment of Utilities
Assets = Liabilities + Stockholders’
Equity
Cash Retained Earnings
– $3,000 = – $3,000

Expenses also decrease assets

or increase liabilities
25
 Collection of
Accounts Receivable
• Even though the January monthly
memberships are not due until the 10th of the
following month, some of the members pay
their bills by the end of January. The amount
received from members in payment of their
accounts is $4,000.
• The effect of the collection of an open account
is to increase Cash and decrease Accounts
Receivable. 26
 Collection of
Accounts Receivable
Assets = Liabilities + Stockholders’ Equity
Cash
+ $4,000 = (no change in Liability or S/E)
Accts. Rec.
– $4,000

Assets were traded:

accounts receivable for cash
27
 Payment of Dividends
At the end of the month, Kiran and Kaif, acting on
behalf of Glengarry Health Club, decide to pay a
dividend of $1,000 on the shares of stock that each
of them owns, or $2,000 in total.
The effect of this dividend is to decrease both Cash
and Retained Earnings. That is, the company is
returning cash to the owners based on the
profitable operations of the business. The
transaction not only reduces Cash but also
decreases the owners’ claims on the assets.
Dividends are not an expense, but rather a direct
reduction of Retained Earnings.
28
 Payment of Dividends

Assets = Liabilities + Stockholders’ Equity

Cash Retained Earnings
– $2,000 = – $2,000

Dividends directly reduce retained earnings

29
 Accounting Equation of Glengarry Health
Club Transactions for the month of January
Cumulative Effect of Transactions for Glengarry
Health Club
Assets = Liabilities + S/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 + SE)
– 4,000
Paid dividends – 2,000 = – 2,000
+ $325,000 = + $220,000 + $105,000
31
 What Is an Account?
• A record used to accumulate monetary amounts
for each individual asset, liability, revenue,
expense, and component of stockholders’ equity.

• In the Glengarry Health Club example, nine

accounts were used: Cash, Accounts Receivable,
Equipment, Building, Land, Accounts Payable,
Notes Payable, Capital Stock, and Retained
Earnings.
32
Normal Account Balances
Debit Credit
Assets Liabilities
Expenses Stockholders’ Equity
Dividends Revenues
all increased all increased with
with debits credits
34
 Chart of Accounts
• A numerical list of all of the accounts an entity uses.
• For example, all asset accounts might be numbered
from 100 to 199; liability accounts, from 200 to 299;
equity accounts, from 300 to 399; revenues, from
400 to 499; and expenses, from 500 to 599.

35
 Sample Chart of Accounts
100–199: ASSETS 200–299 LIABILITIES
100–109: Cash 200–209: Short-Term Liabilities
201: Accounts Payable
101: Checking Account 202: Wages & Salaries
102: Savings Account Payable
110–119: Receivables :
111: Accounts Receivable 300–399 STOCKHOLDERS’
120–129: Prepaid Assets EQUITY
301: Preferred Stock
121: Cleaning Supplies 302: Common Stock
122: Prepaid Insurance 303: Retained Earnings
130–139: Property, Plant, and
Equipment 400–499 REVENUES
131: Land
132: Building 500–599 EXPENSES
:

LO4
 General Ledger
A/R
A book, a file, a hard drive, or another device containing
all of the accounts.

Cash +400
+100
– 50 –100

File or book that contains one page

(or entry) for each account
37
• Double entry system
The origin of the double-entry system of accounting
traced to Venice, Italy, in 1494.
Every business transaction will involve two accounts
(or more). For example, when a company
borrows money from its bank, the company's
Cash account will increase and its liability account
Loans Payable will increase.

• T account
The format often used to analyze transactions
which shows amounts coming into and leaving an
account.

38
 Debits/Credits and
the Accounting Equation
STOCKHOLDERS’
ASSETS = LIABILITIES + EQUITY

Dr. Cr. Dr. Cr. Dr. Cr.

+ – – + – +

Opposite sides of the accounting equation are

increased/decreased in an opposite way
39
Link Between Revenues and
Retained Earnings
RETAINED
EARNINGS Both accounts
are increased
–
Dr. +
Cr. with credits

REVENUES
Revenues increase
retained earnings
–
Dr. Cr.
+ (part of stockholders’ equity)

40
 Link Between Expenses and Dividends
and Retained Earnings
RETAINED
EARNINGS
Retained earnings is
decreased with debits DR. CR.

– +
Expenses and dividends
decrease retained earnings EXPENSES AND
DIVIDENDS
Use debits to record (increase) DR. CR.
expenses and dividends
+ – 41
Normal Account Balances
Debit Credit
Assets Liabilities
Expenses Stockholders’ Equity
Dividends Revenues
all increased all increased with
with debits credits
42
 The T Account
Account Name

Debits are Credits are

entered on left entered on right

Representation of one account in the general ledger

43
LO5
 The T Account
Account Name

400 dr. 900 cr.

Debits and credits
are netted to obtain
balance in account 500 cr.

44
 The Journal
A chronological record of transactions
The book of original entry
 Each entry has a debit and a credit
that equals
 Transactions normally recorded in
general journal
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 Posting from Journal
Transactions are
entered in: And then posted to:
Journal
Journal
(via
(viajournal
journalentries):
entries): Ledger
LedgerAccounts
Accounts
•• Cash
Cash
Dr.
Dr. Cr.
Cr. •• Capital
Cash CapitalStock
Stock
Casha/c…
a/c…drdr 100,000
100,000
To
ToCapital
CapitalStock
Stocka/c
a/c 100,000
100,000
To
Torecord
recordthe
theissuance
issuanceof
of10,000
10,000shares
shares

LO6
46
 Journal Entries
Dr. Cr.
Building a/c……Dr 150,000
Land a/c……Dr 50,000
To Notes Payable a/c 200,000
To record acquisition of property in exchange for note

Equipment a/c……Dr 20,000

To Accounts Payable a/c 20,000
To record the acquisition of equipment on open account

Accounts Receivable a/c……Dr 15,000

To Membership Revenue a/c 15,000
To record sale of monthly memberships on account

47
 Journal Entries
Dr. Cr.
Cash a/c….dr 5,000
To Court Fee Revenue a/c
5,000
To record sale of court time
for cash.

Wage and Salary Expense a/c….dr 10,000

To Cash a/c 10,000
To record payment of wages
and salaries.

Utilities Expense a/c….dr 3,000

To Cash a/c 3,000
To record payment of utilities. 48
 Journal Entries
Dr. Cr.
Cash a/c….dr 4,000
To Accounts Receivable a/c 4,000
To record collection of accounts
receivable.

Dividends a/c….dr 2,000

To Cash a/c 2,000
To record payment of dividends.

49
 Transactions and T Accounts
Cash Capital Stock
(1) 100,000 100,000 (1)

(1) Issue capital stock for cash

50
 Transactions and T Accounts
Land
(2) 50,000
Notes Payable
Building 200, 000 (2)
(2) 150,000

(2) Purchase property in exchange

for a promissory note. 51
 Transactions and T Accounts
Equipment Accounts Payable
(3) 20,000 20,000 (3)

(3) Purchase equipment on account

52
 Transactions and T Accounts

Accounts Receivable Membership Revenue

(4) 15,000 15,000 (4)

(4) Sell monthly memberships on account

53
 Transactions and T Accounts
Cash Court Fee Revenue
(1) 100,000 5,000 (5)
(5) 5,000
T Accounts reflect
current and previous
postings to the account
for each period

(5) Sell court time for cash

54
 Transactions and T Accounts
Wage & Salary Expense Cash
(6) 10,000 (1) 100,000 10,000 (6)
(5) 5,000 3,000 (7)

Utilities Expense
(7) 3,000

(6) Pay employees wages for the month

(7) Pay utilities for the month
55
 Transactions and T Accounts
Cash Accounts Receivable
(1) 100,000 10,000 (6) (4) 15,000 4,000 (8)
(5) 5,000 3,000 (7)
(8) 4,000

(8) Collection of accounts receivable

56
 Transactions and T Accounts
Cash Dividends
(1) 100,000 10,000 (6) (9) 2,000
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9)

(9) Pay dividends

57
 Determine the Balance
of the T Accounts
Cash Accounts Receivable
(1) 100,000 10,000 (6) (4) 15,000 4,000 (8)
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9) 11,000

94,000

58
 Glengarry Health Club
Trial Balance
January 31, 2014
Debits Credits
Cash $ 94,000
Accounts Receivable 11,000
Equipment 20,000
Building 150,000
Land 50,000
Accounts Payable $ 20,000
Notes Payable 200,000
Capital Stock 100,000
Membership Revenue 15,000
Court Fee Revenue 5,000
Wage and Salary Expense 10,000
Utility Expense 3,000
Dividends 2,000

Totals $340,000 $340,000 59

LO7
 Glengarry Health Club
Balance Sheet
January 31, 2022
Assets Liabilities and Stockholders’ Equity
Cash $ 94,000 Accounts payable $ 20,000
Notes payable 200,000
Accts. Rec. 11,000
Capital stock 100,000
Equipment 20,000 Retained earnings 5,000
Building 150,000 Total liabilities
Land 50,000 and stockholders’ equity $325,000
Total assets $325,000

60
 Glengarry Health Club
Income Statement
For the Month Ended January 31, 2022
Revenues:
Memberships $15,000
Court fees 5,000 $20,000
Expenses:
Wages and Salaries
Net i$10,000
ncrea
Utilities retain se 3,000 13,000
ed ea to
Net income rning $ 7,000
s
61
End of Chapter 2

62