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The lecture notes by Dr. Vincent Chen for NUS module ACC1002X Financial Accounting.
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S f A ti C lSequence of Accounting Cycle
1. Analyze transactions2. Record the effects of transactions3. Summarize the effects of transactions
• Posting journal entries• Preparing a trial balance
4. Prepare financial reports (Lecture 3)• Adjusting entries• Preparing financial statements
Cl i th b kby Vincent Chen 3
• Closing the books
Basic Concepts
• Account and Ledger
Basic Concepts
Account and Ledger
CashAccounts are individual Cash
Accounts
records showing increasesand decreases.
The entire group of accounts is kept together
Accounts Payable
C it laccounts is kept together in an accounting record
called a ledger.
Capital Stock
by Vincent Chen 4
Basic Concepts
• The use of accounts
Basic Concepts
The use of accounts– Increases are recorded on one side of the T-account,
and decreases are recorded on the other side.
Title of the Account
Debit Credit
by Vincent Chen 5
Basic Concepts
• Debits and credit
Basic Concepts
Cash
Debits and credit
Cash5/1 8,000 5/2 2,500
5/25 75 5/8 2,000Receipts are on the
Payments 5/29 750 5/28 150
5/31 50 /
are on the debit side.
are on the credit side.
5/31 4,125Ba l.
The balance is the difference between the
debit and credit entries in
by Vincent Chen 6
the account.
Basic Concepts
Debits and credits affect accounts as follows:
Basic Concepts
Debits and credits affect accounts as follows:
AA = LL + OEOEASSETSASSETS EQUITIESEQUITIESLIABILITIESLIABILITIES
Debit for Increase
Credit for Decrease
Debit for Decrease
Credit for Increase
Debit for Decrease
Credit for Increase
by Vincent Chen 7
Basic Concepts• Double entry system
Basic Concepts
– Each transaction is recorded with at least one debit and one credit
– For every transaction, total debits must be equal to total creditsf (– Total debits must be equal to total credits of all accounts (must
be balanced)
AA = LL + OEOEDebit Debit Credit Credit
by Vincent Chen 8
balancesbalances balancesbalances
Step 1 Analyzing TransactionsStep 1 Analyzing Transactions
• Is this transaction related to the company?– Entity principle: only record economic
activities to a specific business entity
• How does this transaction affect the• How does this transaction affect the financial positions of the company
Use debit and credit and the equality– Use debit and credit and the equality
Assets = Liabilities + Owners’ Equityby Vincent Chen 10
q y
Example 1: May 1: Jack and his family investedExample 1: May 1: Jack and his family invested $8,000 in NUS Lawn Care Service and received 800 shares of stock.
Will Cash increase Will Capital Stock increase oror decrease? increase or decrease?
by Vincent Chen 11
Example 1: May 1: Jack and his family investedExample 1: May 1: Jack and his family invested $8,000 in NUS Lawn Care Service and received 800 shares of stock.
Cash increases $8,000 with a
Capital Stock increases $8,000
with a creditdebit. with a credit.
Capital Stock5/1 8,000
Cash5/1 8,000
by Vincent Chen 12
Example 2: May 2: NUS purchased a lawn mower forExample 2: May 2: NUS purchased a lawn mower for $2,500 in cash.
Will Cash increase Will Equipment increase oror decrease? increase or decrease?
by Vincent Chen 13
Example 2: May 2: NUS purchased a lawn mower forExample 2: May 2: NUS purchased a lawn mower for $2,500 in cash.
Cash decreases $2,500 with a
Equipment increases $2,500
with a debitcredit. with a debit.
Equipment5/2 2,500
Cash5/1 8,000 5/2 2,500
by Vincent Chen 14
Step 2 Record the Effects of Transactions
• Journal: Similar to a financial diary, a chronological listing of all businesschronological listing of all business transactions throughout the year
• Journal entry: A recording of a transaction h d bit l t ditwhere debits equal to credits
by Vincent Chen 16
GENERAL JOURNAL (pp.12)
Date Account Titles and Explanation Debit Credit2010
May 1 Cash 8,000Capital Stock 8,000
Owners invest cash in the business.
GENERAL JOURNAL (pp.14)
Date Account Titles and Explanation Debit Credit20102010
May 2 Equipment 2,500Cash 2,500
by Vincent Chen 17
Purchased lawn mower.
Debits and Credits for Revenue and Expense (pp 7)(pp.7)
EQUITIESEQUITIESExpensesExpenses RevenuesRevenuesEQUITIESEQUITIES
Debit for Debit for DecreaseDecrease
Credit for Credit for IncreaseIncrease
Expenses Expenses decrease decrease owners’ owners’
Revenues Revenues increase increase owners’ owners’
equity.equity. equity.equity.
EXPENSESEXPENSES REVENUESREVENUES
Credit for Credit for DecreaseDecrease
Debit for Debit for IncreaseIncrease
Debit for Debit for DecreaseDecrease
Credit for Credit for IncreaseIncrease
by Vincent Chen 18
Investments by and Payments to Owners (pp 7)
EQUITIESEQUITIESPayments to Owners’
(pp.7)
EQUITIESEQUITIES
Debit for Debit for DecreaseDecrease
Credit for Credit for IncreaseIncrease
owners decrease
owners’ equity
investments increase
owners’ equityowners’ equity. owners’ equity.
DIVIDENDSDIVIDENDS CAPITAL STOCKCAPITAL STOCK
Credit for Credit for DecreaseDecrease
Debit for Debit for IncreaseIncrease
Debit for Debit for DecreaseDecrease
Credit for Credit for IncreaseIncrease
by Vincent Chen 19
Step 3 Summarize the effects ofStep 3 Summarize the effects of transactions
• Posting (copying) journal entries to• Posting (copying) journal entries to accounts in ledgers
• Preparing a trial balance
by Vincent Chen 21
Step 3 Summarize the effects of transactions
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit20102010
May 1 Cash 8,000Capital Stock 8,000
Owners invest cash in the business.General LedgerCash
Date Debit Credit Balance2010
M 1 8 000 8 000by Vincent Chen 22
May 1 8,000 8,000
Step 3 Summarize the effects of transactions
GENERAL JOURNALGENERAL JOURNAL
Date Account Titles and Explanation Debit Credit20102010
May 1 Cash 8,000Capital Stock 8,000Capital Stock 8,000
Owners invest cash in the business.General LedgerCapital Stockp
Date Debit Credit Balance2010
by Vincent Chen 23May 1 8,000 8,000
St 3 S i th ff t f t tiStep 3 Summarize the effects of transactions
Leger acco nt after posting• Leger account after posting
General LedgerGeneral LedgerCash
Date Debit Credit Balance2010
May 1 8,000 8,000 2 2,500 5,500
by Vincent Chen 24
St 3 S i th ff t f t tiStep 3 Summarize the effects of transactions
General LedgerGeneral LedgerCash
Date Debit Credit Balance2010
May 1 8,000 8,000 2 2 500 5 5002 2,500 5,500
T accounts are simplified versions of the ledgerT accounts are simplified versions of the ledger account that only show the debit and credit
columns.by Vincent Chen 25
columns.
Step 3 Summarize the effects ofStep 3 Summarize the effects of transactions
• Posting (copying) journal entries to• Posting (copying) journal entries to accounts in ledgers
• Preparing a trial balance
by Vincent Chen 26
All balances are NUS Lawn Care Service
Unadjusted Trial BalanceMay 31, 2010
taken from the ledger accounts on May 31 afterMay 31, 2010
Cash 3,925$ Accounts receivable 75 T l & i t 2 650
on May 31 after considering all of
NUS’s transactions forTools & equipment 2,650
Truck 15,000 Notes payable 13,000$
transactions for the month.
Notes payable 13,000$ Accounts payable 150 Capital stock 8,000 Di id d 200 Proves equality ofDividends 200 Sales revenue 750 Gasoline expense 50
Proves equality of debits and credits.
by Vincent Chen 27
p Total 21,900$ 21,900$
The Accounting Cycle
Make end ofJournalize
transactions. Post entries to the ledger accounts
Prepare trial balance.
Make end-of-year
adjustments.accounts.
by Vincent Chen 28
Prepare adjusted trial balance.
Prepare financial statements.
Prepare after-closing trial balance.
Journalize and post closing
entries.