Acct 2210 Chp 3 The Double-Entry Accounting System (including Debit & Credit Notation) McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies,

Acct 2210 Chp 3

The Double-Entry Accounting System (including Debit & Credit Notation)

McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO 1

Describe business

events using debit/credit terminology.

3-2

Debit/Credit Terminology

= +Debi

tCredi

t

Assets

Debit

Credit

Liabilities

Debit

Credit

Equity

Claims

+ + +- - -

In every transaction, the total dollar value of all debits equals the total dollar value of all credits.

3-3

LO 2

Record transactions in T-accounts

and show their effect on

financial statements.

3-4

Double-Entry Accounting

Let’s see how debits and

credits work by looking at

transactions for Collins

Brokerage Services.

3-5

Collins Brokerage Services began the period with the following balances: $5,000 in cash, $4,000 in common stock, and $1,000 in retained earnings.

Assets = Liab. +Cash Comm. Stk. Ret. Earn.

5,000 = n/a + 4,000 + 1,000

Equity

= +

Debit Credit Debit Credit Debit CreditBal. 5,000 4,000 Bal. 1,000 Bal.

Ret. Earn.EquityAssets Liabilities

Cash Common Stock

3-6

Event 1: Collins acquired $25,000 from the issue of common stock.

1. Increase assets (cash).

2. Increase equity (common stock).

Asset Source

Transaction

Assets = Liab. + Equity Revenue - Expenses = Net

Income 25,000 = n/a + 25,000 n/a - n/a = n/a 25,000 FA

Cash Flow

= +

Debit Credit Debit Credit+ - - +25,000 25,000

Assets Liabilities EquityCash Common Stock

3-7

Event 2: Collins purchased $850 of supplies on account.

1. Increase assets (supplies).

2. Increase liabilities (accounts payable).

Asset Source

Transaction


Income 850 = 850 + n/a n/a - n/a = n/a n/a

Cash Flow

= +

Debit Credit Debit Credit+ - - +

850 850

Assets Liabilities EquitySupplies Accounts Payable

3-8

Event 3: Collins collected $1,800 as an advance to provide future services over a one-year period starting March 1.


2. Increase liabilities (unearned revenue).

Asset Source

Transaction


Income 1,800 = 1,800 + n/a n/a - n/a = n/a 1,800 OA

Cash Flow

= +

Debit Credit Debit Credit+ - - +1,800 1,800

Assets Liabilities EquityCash Unearned Revenue

3-9

Event 4: Collins provided $15,760 of services on account.

1. Increase assets (accounts receivable).

2. Increase stockholders’ equity (consulting revenue).

Asset Source

Transaction


Income 15,760 = n/a + 15,760 15,760 - n/a = 15,760 n/a

Cash Flow

= +

Debit Credit Debit Credit Debit Credit+ - - + + -15,760 15,760

Assets Liabilities EquityAccounts Receivable Consulting Revenue

3-10

Event 5: Collins purchased land for $26,000 cash.

1. Increase assets (land).

2. Decrease assets (cash).

Asset Exchange

Transaction

= Liab. + Equity Revenue - Expenses = Net

Income (26,000) + 26,000 = n/a + n/a n/a - n/a = n/a (26,000) IA

Cash Flow Assets

= +

Debit Credit Debit Credit+ - + -

26,000 26,000

CashLiabilities Equity

LandAssets

3-11

Event 6: Collins paid $1,200 cash for a one-year insurance policy with coverage starting August 1.

1. Increase assets (prepaid insurance).


Asset Exchange

Transaction


Income (1,200) + 1,200 = n/a + n/a n/a - n/a = n/a (1,200) OA

Cash Flow Assets

= +


1,200 1,200

Liabilities EquityPrepaid Insurance

AssetsCash

3-12

Event 7: Collins collected $13,400 from accounts receivable.


2. Decrease assets (accounts receivable).

Asset Exchange

Transaction


Income 13,400 + (13,400) = n/a + n/a n/a - n/a = n/a 13,400 OA

Cash Flow Assets

= +

Debit Credit Debit Credit+ - + -13,400 13,400

CashLiabilities Equity

Accounts ReceivableAssets

3-13

Event 8: Collins paid $9,500 for salaries expense.


2. Decrease equity (salaries expense).

Asset Use Transaction


Income (9,500) = n/a + (9,500) n/a - 9,500 = (9,500) (9,500) OA

Cash Flow

= +


9,500 9,500

Assets Liabilities EquityCash Salaries Expense

3-14

Event 9: Collins paid an $800 cash dividend.


2. Decrease equity (dividends).



Income (800) = n/a + (800) n/a - n/a = n/a (800) FA

Cash Flow

= +


800 800

Assets Liabilities EquityCash Dividends

3-15

Event 10: Collins paid $850 to settle accounts payable.


2. Decrease liabilities (accounts payable).



Income (850) = (850) + n/a n/a - n/a = n/a (850) OA

Cash Flow

= +

Debit Credit Debit Credit+ - - +

850 850

EquityCash Accounts Payable

Assets Liabilities

3-16

Event 11: Collins recognized $1,900 of other operating expenses on account.

1. Increase liabilities (accounts payable).

2. Decrease equity (advertising expense).

Claims Exchange

Transaction


Income n/a = 1,900 + (1,900) n/a - 1,900 = (1,900) n/a

Cash Flow

= +

Debit Credit Debit Credit- + + -

1,900 1,900

Assets Liabilities EquityOther Oper. Exp.Accounts Payable

3-17

Adjustment 1: Collins Consultants recognized $750 accrued interest revenue.

1. Increase assets (interest receivable).

2. Increase equity (interest revenue).

Asset Source

Transaction


Income 750 = n/a + 750 750 - n/a = 750 n/a

Cash Flow

= +

Debit Credit Debit Credit

+ - - +

750 750

Assets Liabilities Equity

Interest Receivable Interest Revenue

3-18

Adjustment 2: As of December 31, 2013, Collins had earned $1,500 of the $1,800 of revenue that it deferred in Event 3.

1. Decrease liabilities (unearned revenue).

2. Increase equity (consulting revenue).

Claims Exchange

Transaction


Income n/a = (1,500) + 1,500 1,500 - n/a = 1,500 n/a

Cash Flow

= +

Debit Credit Debit Credit- + - +1,500 1,500

Assets Liabilities EquityConsulting RevenueUnearned Revenue

$ 1,800 12 months =150$ 10 months =

$150 per month $1,500 revenue

3-19

Adjustment 3: As of December 31, 2013, Collins had $800 of accrued salaries expense that will be paid in 2014.

1. Increase liabilities (salaries payable).

2. Decrease equity (salaries expense).

Claims Exchange

Transaction


Income n/a = 800 + (800) n/a - 800 = (800) n/a

Cash Flow

= +

Debit Credit Debit Credit

- + + -

800 800

Assets Liabilities Equity

Salaries ExpenseSalaries Payable

3-20

Adjustment 4: As of December 31, 2013, Collins had used $500 of the $1,200 of insurance coverage that it had paid for in Event 6.

1. Decrease assets (prepaid insurance).

2. Decrease equity (insurance expense).



Income (500) = n/a + (500) n/a - 500 = (500) n/a

Cash Flow

= +


500 500

Assets Liabilities EquityPrepaid Insurance Insurance Expense

$ 1,200 12 months =100$ 5 months =

$100 per month $500 insurance expense

3-21

Adjustment 5: As of December 31, 2013, a physical count of supplies on hand revealed that $125 worth of supplies were available for future use.

1. Decrease assets (supplies).

2. Decrease equity (supplies expense).



Income (725) = n/a + (725) n/a - 725 = (725) n/a

Cash Flow

= +


725 725

Assets Liabilities EquitySupplies Supplies Expense

Beginning Balance

+ Purchases =Asset

Available for Use

-Ending

Balance=

Asset Used

-$ + 850$ = 850$ - 125$ = 725$

3-22

LO 3

Record transactions

using the general journal

format and show their effect on the financial statements.

3-23

The General Journal

Accountants initially record

data from source documents into a

journal.

Special Journals

General Journals

Date Account Title Debit CreditAug. 1 Cash 1,000

Service Revenue 1,000

3-24

3-25

3-26

3-27

LO 4

Prepare a trial balance and

explain how it is used to prepare financial

statements.3-28

3-29

3-30

3-31

3-32

3-33

3-34

LO 5

Use a return on assets ratio, debt

to assets ratio, and a return on equity ratio to analyze

financial statements.

3-35

Return on Assets Ratio

Net IncomeTotal Assets

Evaluating performance requires considering the size of the investment

base used to produce the income.

This ratio measures the relationship between the level of income and the size of the investment. A larger ratio means the company did a better job

of managing its assets.

3-36

Debt to Assets Ratio

Total DebtTotal Assets

Borrowing money is risky business. This ratio helps evaluate the level of

debt risk.

A smaller ratio indicates that there is less debt risk for the company.

3-37

Return on Equity Ratio

Net IncomeStockholders’

Equity

Owners are interested in this ratio to determine their return on their

investment in the company.

A larger ratio indicates that the owners have a higher return on their

investment.

3-38

Stockholders like a lot of debt if the company can

take advantage of positive financial

leverage.

Creditors prefer less debt and more equity

because equity represents a buffer of

protection.

Stockholders vs. Creditors

3-39

End of Chapter Three

3-40

Documents

Acct 2210 Chp 3 The Double-Entry Accounting System (including Debit & Credit Notation) McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies,