ACG2021 Financial Accounting

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ACG2021Financial Accounting

Processing Accounting Information

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The Accounting Information System

Inputs Process OutputsBusiness

Transaction

1. Accounts2. Journal3. General

Ledger4. Trial

Balance

1. Accounts2. Journal3. General

Ledger4. Trial

Balance

1) Income Statement

2) Balance Sheet3) Cash Flow

1) Income Statement

2) Balance Sheet3) Cash Flow

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Learning Objective 1

Analyze business transactions.

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Accounting for Business TransactionsTransaction - any event that both

affects the financial position of the business entity and can be reliably recordedReliably Recorded (2 accounting

principles, what are they?)

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Transactions are Recorded inThe Account Basic summarysummary device

Paper based Computer based ???? based

Accounts - grouped into three broad categories Assets Liabilities Stockholders’ Equity

Used to Accumulate $’s of every business transaction How much cash did we receive/spend? How much revenue did we earn? How much was spent on rent for the year?

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Chart of Accounts

The chart of accounts lists all accounts and their account numbers.

Accounts can be grouped under the financial statement headings: Balance Sheet: Assets, Liabilities, and

Stockholders’ Equity Income Statement: Revenues and

Expenses

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Example Chart of Accounts

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Recording Transactions (Processing) Journalizing process:

Specify each account affected by the transaction

Classify each account as either asset, liability, stockholders’ equity, revenue, or expense

Determine whether each account is increased or decreased (use rules of debit and credit)

Record the transaction in a journal with a brief explanation.

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The Account

Assets - economic resources that benefit the business now and in the future

•Cash•Accounts receivable•Inventory•Notes receivable•Prepaid expenses

•Land•Buildings•Equipment, furniture, and fixtures

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The Account

Liabilities - debts of the companyo Notes payableo Accounts payableo Accrued liabilities o Long-term liabilities (bonds)

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The Account

Stockholders’ (owners’ or shareholders’) equity - owners’ claims against the assets of a corporationo Common Stocko Retained Earningso Revenueso Expenses

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Accounting for Business Transactions1. The Lyons invest $50,000 to

begin the business, and Air & Sea Travel issues common stock.

Analysis of Transactions

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

A s s e t s = Stockholder's

Equity

(1) 50,000 50,000

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Accounting for Business Transactions2. Air & Sea purchases land for an

office location, paying $40,000 in cash

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

(1) 50,000 50,000

(2) (40,000) 40,000Bal 10,000 40,000 50,000

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Accounting for Business Transactions

3. The business buys office supplies, agreeing to pay $500 to the office-supply store within 30 days.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

(1) 50,000 50,000 (2) (40,000) 40,000 Bal 10,000 40,000 50,000

A s s e t s = Stockholder's

Equity

(3) 500 500Bal 10,000 500 40,000 500 50,000

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Accounting for Business Transactions4. Air & Sea Travel earns service

revenue of $5,500 and collects this amount in cash.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 10,000 40,000 50,000 (3) 500 500 Bal 10,000 500 40,000 500 50,000

A s s e t s = Stockholder's

Equity

(4) 5,500 5,500Bal 15,500 500 40,000 500 50,000 5,500

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Accounting for Business Transactions5. Air & Sea Travel performs services

for customers on account for $3,000.

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 10,000 40,000 50,000 (3) 500 500 Bal 10,000 500 40,000 500 50,000 (4) 5,500 5,500 Bal 15,500 500 40,000 500 50,000 5,500

(5) 3,000 3,000Bal 15,500 3,000 500 40,000 500 50,000 8,500

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Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 10,000 500 40,000 500 50,000 (4) 5,500 5,500 Bal 15,500 500 40,000 500 50,000 5,500 (5) 3,000 3,000 Bal 15,500 3,000 500 40,000 500 50,000 8,500

Accounting for Business Transactions

6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400.

(6) (2,700) (2,700) Bal 12,800 3,000 500 40,000 500 50,000 5,800

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Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 15,500 500 40,000 500 50,000 5,500 (5) 3,000 3,000 Bal 15,500 3,000 500 40,000 500 50,000 8,500 (6) (2,700) (2,700) Bal 12,800 3,000 500 40,000 500 50,000 5,800

Accounting for Business Transactions

7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3.

(7) (400) (400) Bal 12,400 3,000 500 40,000 100 50,000 5,800

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Accounting for Business Transactions8. The owners remodel their home at

a cost of $30,000, paying cash from personal funds.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 15,500 3,000 500 40,000 500 50,000 8,500 (6) (2,700) (2,700) Bal 12,800 3,000 500 40,000 500 50,000 5,800 (7) (400) (400) Bal 12,400 3,000 500 40,000 100 50,000 5,800

A s s e t s = Stockholder's

Equity

This is a personal transaction, not a

business transaction!

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Accounting for Business Transactions9. The business collects $1,000 from

a customer on account.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 15,500 3,000 500 40,000 500 50,000 8,500 (6) (2,700) (2,700) Bal 12,800 3,000 500 40,000 500 50,000 5,800 (7) (400) (400) Bal 12,400 3,000 500 40,000 100 50,000 5,800

A s s e t s = Stockholder's

Equity

(9) 1,000 (1,000)Bal 13,400 2,000 500 40,000 100 50,000 5,800

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Accounting for Business Transactions10. Air & Sea Travel sells land for a

price of $22,000, which is equal to the amount it paid for the land.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 13,400 2,000 500 40,000 100 50,000 5,800

A s s e t s = Stockholder's

Equity

(10) 22,000 (22,000)Bal 35,400 2,000 500 18,000 100 50,000 5,800

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Accounting for Business Transactions

11. The corporation declares a dividend and pays $2,100 cash to the stockholders.

Liabilities

Trans Cash Accounts Receivable

Office Supplies Land

Accounts payable

Common

Stock Retained Earnings

Bal 13,400 2,000 500 40,000 100 50,000 5,800 (10) 22,000 (22,000) Bal 35,400 2,000 500 18,000 100 50,000 5,800

A s s e t s = Stockholder's

Equity

(11) (2,100) (2,100)Bal 33,300 2,000 500 18,000 100 50,000 3,700

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Income Statement

Air and Sea Travel, Inc. Income Statement

Month Ended April 30, 20X3 Revenue Service Revenue..................... $8,500 Expenses Salary expense ....................... $1,200 Rent expense .......................... 1,100 Utilities expense..................... 400 Total expenses........................ 2,700 Net Income................................... $5,800

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Statement of Retained Earnings

Air and Sea Travel, Inc. Statement of Retained Earnings Month Ended April 30, 20X3

Retained Earnings, April 1, 20X3.................... $ 0 Add: Net Income for the month ...................... 5,800 5,800 Less: Dividends.............................................. (2,100) Retained Earnings, April 30, 20X3 .................. $3,700

Air and Sea Travel, Inc. Statement of Retained Earnings Month Ended April 30, 20X3

Retained Earnings, April 1, 20X3.................... $ 0 Add: Net Income for the month ...................... 5,800 5,800 Less: Dividends.............................................. (2,100) Retained Earnings, April 30, 20X3 .................. $3,700

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Balance Sheet

Air and Sea Travel, Inc. Balance Sheet April 30, 20X3

Assets

Cash................................... $33,300 Accounts receivable .......... 2,000 Office supplies .................. 500 Land .................................. 18,000 ______ Total Assets....................... $53,800

Liabilities Accounts payable....................$ 100

Stockholders’ Equity Common stock ...................... 50,000 Retained earnings.................. 3,700 Total stockholders’ equity .. 53,700 Total liabilities and ______ Stockholders’ equity ......... $53,800

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Air & Sea TravelStatement of Cash Flows

Month Ended April 30, 20x3

Cash flows from operating activities: Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees ($2,700 + $400) (3,100)Net cash inflow from operating activities $ 3,400Cash flows from investing activities: Acquisition of land $(40,000) Sale of land 22,000 Net cash outflow from investing activities (18,000)Cash flows from financing activities: Issuance (sale) of stock $50,000 Payment of dividends (2,100) Net cash inflows from financing activities $47,900Net increase (decrease) in cash $33,300Cash balance, April 1, 20x5 0Cash balance, April 30, 20x5 $33,300

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Learning Objective 2

Understand how accounting works.

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ACG2021Financial Accounting

Double-Entry Accounting

Understanding Debits/Credits

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Double-Entry Accounting

Record the dual effects of each business transaction.

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Double Entry Accounting

Each accounting transaction affects at least two accounts.

T-accounts can be used to represent accounts and their increases and decreases.

Every business transactions involves both a debit and a credit

Cash

Credit

(Right Side)

Debit

(Left Side)

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Using T-Accounts

Assets = Liabilities + Stockholders Equity

CashDebit forIncrease,$50,000

CommonStock

Credit for increase,$50,000

Assets

Debit+

Credit-

=Liabilities

Debit-

Credit+

Stockholders’Equity

Debit-

Credit+

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Stockholders’ Equity Accounts

Expanded Accounting Equation

Assets

Liabilities

Stockholders’Equity

Common Stock

+RetainedEarnings

-Dividends

+Revenues

-Expenses

=

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Using T-Accounts Expanded

Accounts that are increased with debits and

have normal debit balances

Assets

Debit+

Credit-

Dividends

Debit+

Credit-

Expenses

Debit+

Credit-

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Using T-Accounts Expanded

Accounts that are increased with credits

and have normal credit balances

Liabilities

Debit-

Credit+

Stockholders’Equity

Debit-

Credit+

RetainedEarnings

Debit-

Credit+

Revenue

Debit-

Credit+

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Using T-Accounts

The balance in an account is the difference between the sum of the debits and the sum of the credits.

Cash

50,000 Credit for decrease,40,000

Bal. 10,000

Common Stock

Bal. 50,000

Land

Debit forIncrease,40,000

Bal. 40,000

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Recording Transactions

Accounting transactions are entered in chronological order in the journal

Lists the Sequence of Business EventsWhat happenedWhat Accounts were effectedWhat $’s were exchanged

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Recording Transactions

Journalizing process: Specify each account affected by the

transaction Classify each account as either asset, liability,

stockholders’ equity, revenue, or expense Determine whether each account is increased

or decreased (use rules of debit and credit) Record the transaction in a journal with a brief

explanation. Debits are at the left margin and credits are indented

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Posting from Journal to Accounts / General Ledger

DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT

Apr 2 Cash ………………………………. 50,000Common Stock ………...….... 50,000

Issued common stock

Cash

50,000

Common Stock

50,000

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Posting to Accounts / General Ledger

Journal does not sort Business Events by Account

Thus, journal entries are periodically PostedPosted to their respective AccountsAccountsThe LedgerThe Ledger

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Flow of Accounting Data

Transaction occursTransaction analyzedTransaction entered in journalAmounts posted to the ledger

accounts

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Trial Balance

A trial balance lists all accounts with their balances

Accounts are listed with assets first, then liabilities, then stockholders’ equity, revenues, and finally expenses

The trial balance summarizes account balances shows whether total debits equal total

credits

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Example Trial Balance

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Finding Errors

Find the difference between total debits and total credits. Search for a missing account with that

balance. Divide the difference by 2 and search for

a debit recorded as a credit or vice-versa.

Divide the difference by 9. If you get an even amount, you may have either a slide or a transposition.

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End of Chapter 2