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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