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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright 2012 The McGraw-Hill Companies, I
nc.McGraw-Hill/Irwin
The Accounting CycleCapturing Economic EventsChapter 3
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The Role of AccountingRecords
Establishes accountability for assetsand transactions.
Keeps track of routine businessactivities.
Obtains detailed information about aparticular transaction.
Evaluates efficiency andperformance within company.
Maintains evidence of a companys
business activities.
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3-3
The Ledger
The entire group of
accounts is kepttogether in anaccounting record
called a ledger .
Cash
AccountsPayable
CapitalStock
Accounts areindividual recordsshowing increases
and decreases .
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The Use of Accounts
Increases are
recorded on oneside of the Taccount, and
decreases arerecorded on the
other side.
Leftor
DebitSide
Rightor
CreditSide
Title of Account
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Cash5/1 8,000 5/2 2,500
5/25 75 5/8 2,0005/29 750 5/28 150 5/31 50
5/31 4,125Bal.
Receipts areon the debit
side.
Payments areon the credit
side.
The balance is thedifference between thedebit and credit entries
in the account.
Debit and Credit Entries
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A = L + OEASSETSDebit
forIncrease
Creditfor
Decrease
EQUITIES
Debitfor
Decrease
Creditfor
Increase
LIABILITIES
Debitfor
Decrease
Creditfor
Increase
Debits and credits affect accounts as follows:
Debit and Credit Entries
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A = L + OEDebit
balances Credit
balances=In the double-entry accounting system,every transaction is recorded by equaldollar amounts of debits and credits.
Double Entry Accounting The Equalityof Debits and Credits
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Lets recordselected
transactionsfor JJs Lawn
Care Service in
the accounts.
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May 1: Jill Jones and her family invested $8,000in JJs Lawn Care Service and received 800 sharesof stock.
Capital Stock5/1 8,000
Cash5/1 8,000
Cash increases
$8,000 with a debit.
Capital Stockincreases $8,000
with a credit.
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May 2: JJs purchased a riding lawn mowerfor $2,500 cash.
Tools & Equipment
5/2 2,500
Cash
5/1 8,000 5/2 2,500
Cash decreases$2,500 with a credit.
Tools & Equipmentincreases $2,500
with a debit.
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Posting Journal Entries to theLedger Accounts
Posting simply
means updating theledger accounts forthe effects of the
transactionsrecorded in the journal.
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2011May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.General Ledger Cash
Date Debit Credit Balance2011
May 1 8,000 8,000
Posting Journal Entries to theLedger Accounts
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2011May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.General Ledger Capital Stock
Date Debit Credit Balance2011
May 1 8,000 8,000
Posting Journal Entries to theLedger Accounts
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GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2011May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.
Lets see what the cash account looks likeafter posting the cash portion of this
transaction for JJs Lawn Care Service.
Posting Journal Entries to theLedger Accounts
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General Ledger Cash
Date Debit Credit Balance
2011May 1 8,000 8,000
2 2,500 5,500
This ledger format is referred to as arunning balance .
Ledger Accounts After Posting
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General Ledger Cash
Date Debit Credit Balance
2011May 1 8,000 8,000
2 2,500 5,500
T accounts are simplified versions ofthe ledger account that only show the
debit and credit columns.
Ledger Accounts After Posting
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Net income is not an asset its an increasein owners equity from profits of the
business.
A = L + OEIncrease Decrease
As income is earned,either an asset is
increased or a liability is
decreased.
Increase
Net incomealways results inthe increase of
Owners Equity
What is Net Income?
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A = L + OERetained Earnings
CapitalStock
RetainedEarnings
The balance in the Retained Earnings accountrepresents the total net income of the corporation
over the entire lifetime of the business, less allamounts which have been distributed to the
stockholders as dividends.
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JJ's Lawn Care ServiceIncome Statement
For the Month Ended May 31, 2011Sales Revenue 750$Operating Expense:
Gasoline Expense 50 Net Income 700$
The income statement summarizes the profitabilityof a business for a specified period of time .
The Income Statement: APreview
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Accounting Periods
Time Period PrincipleTo provide users offinancial statements
with timely information,net income is
measured for relativelyshort accountingperiods of equal
length.
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The Matching Principle:When To Record Revenue
Matching Principle
Revenue should berecognized at thetime goods are sold
and services arerendered.
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The Matching Principle:When To Record Expenses
Matching Principle Expenses should be
recorded in theperiod in which they
are used up.
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The Accrual Basis of Accounting
CurrentAccounting Period
FutureAccounting Period
Jan. 1, 2011 Dec. 1, 2011 Jan. 1, 2012 Dec. 1, 2012
Cash is received orpaid here
The income statementreports revenue or
expense here
The income statementreports revenue or
expenses here
Cash is received orpaid here
OR
But . . .
But . . .
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Debit and Credit Rules forRevenue and Expenses
EQUITIES
Debitfor
Decrease
Creditfor
Increase
Expensesdecreaseowners
equity.
Revenuesincreaseowners
equity.
EXPENSES
Creditfor
Decrease
Debitfor
Increase
REVENUES
Debitfor
Decrease
Creditfor
Increase
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EQUITIES
Debitfor
Decrease
Creditfor
Increase
Payments toowners
decreaseownersequity.
Ownersinvestments
increaseownersequity.
DIVIDENDS
Creditfor
Decrease
Debitfor
Increase
Dividends
CAPITAL STOCK
Debitfor
Decrease
Creditfor
Increase
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Lets analyze the
revenue andexpensetransactions for
JJs Lawn CareService for themonth of May.
We will alsoanalyze a dividendtransaction.
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May 29: JJs provided lawn care services fora client and received $750 in cash.
Sales Revenue
5/29 750
Cash increases$750 with a debit.
Sales Revenueincreases $750 with
a credit.
Cash5/1 8,000 5/2 2,500
5/29 750 5/8 2,000
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May 31: JJs Lawn Care paid Jill Jones andher family a $200 dividend.
Dividends5/31 200
Cash decreases$200 with a credit.
Dividends increase$200 with a debit.
Cash
5/1 8,000 5/2 2,5005/29 750 5/8 2,0005/31 50 5/31 200
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JJ' L C S i
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JJ's Lawn Care Service Unadjusted Trial Balance
May 31, 2011Cash 3,925$Accounts receivable 75 Tools & equipment 2,650 Truck 15,000 Notes payable 13,000$Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50
Total 21,900$ 21,900$
All balances are taken from the ledger accounts on May 31 after
considering all of JJs transactions for the month.
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The Accounting Cycle inPerspective
Accountants spendmuch of their time
focusing on themore analyticalaspects of their
discipline.
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End of Chapter 3
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