PowerPoint advanced finance Chapter (3)

8/13/2019 PowerPoint advanced finance Chapter (3)

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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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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



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GENERAL JOURNAL


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



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GENERAL JOURNAL


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.



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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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PowerPoint advanced finance Chapter (3)