acct 100 chapter 2 the recording process of accounting information

ACCT 100

Chapter 2

The Recording Process of Accounting Information

Processing Accounting Information 2

Objectives of the Chapter

I. Definitions of accounts on the financial statements (F/S).

II. Learning the accounting process (AP) in preparing financial statements.

a. using the accounting equation,

b. using the double-entry system.


I. Definitions of Accounts on Financial Statements

Assets: economic resources that benefit the business in the future, including:

Cash: in all forms: (coins, currency, checking accounts,…)

Account receivable: an oral promise for future cash receipt as a result of sales.

Inventory (or merchandise): goods for sale. Note receivable: a written promissory note that

the customer will pay a fixed amount by a certain date.


I. Definitions of Accounts on Financial Statements (contd.)

Prepaid expenses: expenses paid in advance.

Land: recorded at cost of land. Buildings: record at cost, subject to

depreciation. Equipment, furniture and fixture: record

at cost, subject to depreciation.



Liabilities: legal obligations. Note Payable: a written promissory note

that the business promises to pay. Account payable: an oral promise to pay,

arising from credit purchases of inventory and other goods.

Accrued liabilities: liabilities that have occurred but have not been paid. For example: salary payable, interest payable, etc.



Stockholders’ equity: the owners’ claims to the assets of a corporation including:

Common stock: represents the owners’ investment.

Retained earnings: the cumulative net income earned by the corporation over its lifetime , minus cumulative losses and dividends.

Dividends: distribution of earnings to stockholders.



Revenues: increase or inflow of assets; will eventually increase stockholders’ equity (i.e., sales revenue)

Expenses: decrease or outflow of assets; will eventually decrease stockholders’ equity.

Gains: increase in assets from incidental transactions not related to the major operation.

Losses: decrease in assets from incidental transactions.


II. Accounting Process and Preparation of Financial Statements

How do accountants prepare financial statements? Identify, measure and record business

transactions for business entities


Accounting Process (Cont.)

a. Using the accounting equation.

Accounting Equation:Assets = Liabilities + Stockholders’ Equity

b. Using the double-entry system (the process

includes the recording of Journal entries,

posting Journal entries to ledger accounts,

work sheet (including adjustments…),

prepare financial statements and closing

entries)


a. Using the Accounting Equation - Exhibit 2-1 (from Financial Accounting by Harrison and Horegren)

Analysis of Air & Sea Travel, Inc., Transactions

Panel A - Details of transactions

(1) Issued stock to the owners who invested $50,000 cash in the business.

(2) Paid $40,000 cash for land.

(3) Bought $500 of office supplies on account.

(4) Received $5,500 cash from customers for service revenue earned.


Using the Accounting Equation - Exhibit 2-1 (contd.)

(5) Performed services for customers on account, $3,000.

(6) Paid cash expenses: rent, $1,100; employee salary, $1,200; utilities, $400.

(7) Paid $400 on the account payable created in Transaction 3.

(8) Owners paid personal funds to remodel home. This is not a transaction of the business.



(9) Received $1,000 on the account receivable created in Transaction 5.

(10) Sold land for cash at its cost of $22,000.

(11) Declared and paid a dividend of $2,100 to the stockholders.



Type of Assets = Liabilities + Stockholders'

Office Comm Retained Equity Cash + A/R + Sup. + Land A/P + Stock + Earnin Transaction

1 50,000 50,000 Issued stockto owners

2 -40,000 40,0003 500 5004 5,500 5,500 Service rev.5 3,000 3,000 Service rev.6 -1,100 = -1,100 Rent exp.

-1,200 -1,200 Salary exp.-400 -400 Utilities exp.

7 -400 -4008 Not a transaction of the business9 1,000 -1,000

10 22,000 -22,00011 -2100 -2,100 Dividends

Bal. 33,300 2000 500 18,000 100 50,000 3,700

53,800 53,800

Stockholders' Equity

PANEL B - Analysis of transactions

Sta

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Flo

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Sta

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Balance Sheet Data

For Financial statements, see Exhibit 2-2.13


b.Introduction of the Double-Entry System and Journal Entries

A. Double-entry system

B. The T- accounts

C. Increases and decreases in the accounts

D. Examples of journalizing and posting transactions


A. Double-Entry System

Each transaction affects at least two accounts and the balance of the accounting equation must be maintained.

Example: Purchases inventory and charges to accounts payable

Assets = Liabilities + EquityInventory Accounts Payable + +


A. Double-Entry System (contd.)

Asset = Liabilities + Equity Revenue Expense1 + -2 + +3 + +4 - -5 - -6 + +7 - -89

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B. Introduction of the T- account

Inventory Accounts Payable

Debit Credit Debit Credit


Debit

Credit

Credit

Debit

Credit

Debit

A

L

E

Revenue

Expense

Credit

Debit

Debit

Credit

C. Increases and Decreases in the Accounts


D. Examples of Journalizing and Posting Transactions

1. Transaction: Air & Sea Travel, Inc., received $50,000 cash from the business and in turn issued common stock to them.

Journal Entry: Cash 50,000

Common Stock 50,000Issued common stock to owners.

Ledger Accounts:Cash Common Stock

50,000 50,000


D. Examples of Journalizing and Posting Transactions (contd.)

2. Transaction: The business paid $40,000 cash for land as a future office location.

Journal Entry: Land 40,000

Cash 40,000 Paid cash for land.

Ledger Accounts: Cash Land

50,000 40,000 40,000



3. Transaction: The business purchased $500 office supplies on account.

Journal Entry: Office Supplies 500

Accounts Payable 500

Ledger Accounts: Office Supplies Accounts Payable

500 500



4. Transaction: The business performed travel service for clients and received cash of $5,500.


Service Revenue 5,500

Ledger Accounts: Cash Service Revenue 50,000 40,000 5,500 5,500



5. Transaction: The business performed service for clients who did not pay immediately. Air & Sea Travel billed the clients for $3,000 on account.

Journal Entry: Accounts Receivable 3,000

Service Revenue 3,000

Ledger Accounts: Accounts Receivable Service Revenue 3,000 5,500 3,000

8,500



6. Transaction: The business paid $2,700 for the following expenses: office rent, $1,100; employee salary; $1,200; and utilities, $400.

Journal Entry: Rent Expense 1,100Salary Expense 1,200Utilities Expense 400

Cash 2,700Ledger Accounts:

Cash Rent Expense 50,000 40,000 1,100 5,500 2,700

Salary Expense Utilities Expense 1,200 400

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7. Transaction: The business paid $400 on the account payable created in Transaction 3.

Journal Entry: Accounts Payable 400

Cash 400

Ledger Accounts: Cash Accounts Payable

50,000 40,000 400 500 5,500 2,700

400 100



8. Transaction: The Lyons remodeled their personal residence. This is not a transaction of the travel agency, so no journal entry is made.



9. Transaction: The business collected $1,000 cash on account from the clients in transaction 5.


Accounts Receivable 1,000

Ledger Accounts: Cash Accounts Receivable

50,000 40,000 3,000 1,000 5,500 2,700 1,000 400 2,000



10.Transaction; The business sold land for its cost of $22,000, receiving cash


Land 22,000

Ledger Accounts: Cash Land

50,000 40,000 40,000 22,000 5,500 2,700 1,000 400 18,00022,000



11.Transaction: Air & Sea Travel, Inc., paid the Lyons cash dividends of $2,100.

Journal Entry: Dividends 2,100

Cash 2,100

Ledger Accounts: Cash Dividends

50,000 40,000 2,100 5,500 2,700 1,000 400 22,000 2,10033,300



The followings are examples of T-accounts, trial balance and financial statements of the example in Exhibit 2.1.


Exhibit 2-2 (from Financial Accounting by Harrison and Horgren)

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

Cash(1) 50,000 (2)40,000(4) 5,500 (6) 2,700(9) 1,000 (7) 400

(10)22,000 (11) 2,100Bal.33,300

A/P(7) 400 (3) 500

Bal. 100

Comm Stock(1) 50,000

Bal. 50,000

EXPENSESRent Exp.

(6) 1,100Bal.1,100

A/R(5) 3,000 (9) 1,000

Bal. 2,000

Office Supplies(3) 500

Bal. 500

Land(2) 40,000 (10)22,000

Bal.18,000

Dividends(11) 2,100Bal.2,100

REVENUEService Rev.

(4) 5,500(5) 3,000

Bal. 8,500

Salary Exp.(6) 1,200Bal.1,200

Utilities Exp.(6) 400Bal. 400

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Exhibit 2-3 (from Financial Accounting by Harrison and Horngren)

Balance Account Title Debit

Credit Cash $33,300Accounts receivable 2,000Office supplies 500Land 18,000Accounts payable

$ 100Common Stock

50,000Dividends 2,100Service revenue

8,500Rent expense 1,100Salary expense 1,200Utilities expense 400Total $58,600

$58,600

AIR & SEA TRAVEL, INC.Trail Balance

4/30/19x1

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Exhibit 2-4 (from Financial Accounting by Harrison and Horngren)

Revenue:Service revenue ($5,500+$3,000) ... $ 8,500

Expenses:Salary expense ……………………… $1,200Rent expense ……………………….. 1,100Utilities expense …………………….. 400Total expenses ……………………… 2,700

Net income …………………………….. $5,800

AIR & SEA TRAVEL, INC.Income Statement

Month Ended April 30, 19x1

Retained earnings, April 1, 19x1 ……...

$ 0Add: Net income for the month ..………

5,800

5,800Less: Dividends ………………………….

2,100Retained earnings, April 30, 19x1………

$3,700

AIR & SEA TRAVEL, INC. Statement of Retained Earnings

Month Ended April 30, 19x1

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Exhibit 2-3 (contd.)

Retained earnings, April 1, 19x1 ……...

$ 0Add: Net income for the month ..………

5,800

5,800Less: Dividends ………………………….

2,100Retained earnings, April 30, 19x1………

$3,700

Statement of Retained EarningsMonth Ended April 30, 19x1

Assets LiabilitiesCash …………... $33,300 Accounts payable …...

$ 100A/R …………….. 2,000Office supplies .. 500 Stockholders’

EquityLand …………... 18,000 Common stock ……….

50,000Retained earnings …...

3,700 Total stockholders’ equity ……………..

53,700 Total liabilities and

Total assets ……. $53,800 stockholders’ equity...$53,800

AIR & SEA TRAVEL, INC. Balance SheetApril 30, 19x1

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Exhibit 2-3 (contd.)

Statement of Cash Flows, Month Ended April 30, 19x1Cash flows from operating activities:

Receipts:Collections fm customers ($5,500+1,000) ……..$ 6,500

Payments:To suppliers and employees ($2700+400) …….(3,100)

Net cash inflow fm operating activities ……...3,400

Cash 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 to owners ……………….. $50,000 Dividends ……………………………………………. (2,100)

Net cash inflow from financing activities…….47,900

Net increase in cash …………………………………..$33,300

Cash balance, April 1, 19x1 ………………………….0

Cash balance, April 30, 19x1 ………………………...$33,300

Balance Sheet, April 30, 19x1Assets Liabilities

Cash ……………………. $33,300 Accounts payable ……………... $ 100

A/R ……………………... 2,000Office supplies ………... 500 Stockholders’

EquityLand ……………………. 18,000 Common stock

……………….... 50,000Retained earnings

…………….. 3,700 Total stockholders’ equity

….. 53,700 Total liabilities and

Total assets ………….… $53,800 stockholders’ equity………….. $53,800

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Journal Page 1Date Accounts and

Explanation……..Debit Credit

Apr 2 Cash…………………. Common stock……..Issued common stock toowners

50,00050,000

Apr 3. Land ……………….. Cash ……………..Paid Cash for Land

40,00040,000

An Example of the Journal and A Ledger Account (cash):


An Example of the Journal and A Ledger Account (cash): (contd.)

Account: Cash

Date ItemJrnl. Ref.

Debit Credit Debit Credit

19x1 J.2 50,000 50,000Apr: 2 J.1 40,000 10,000 3

BalanceAccount No. 101

The Ledger: all individual accounts (assets, liability, and stockholder’s equity accounts) combined make up the ledger.


The Flows of Accounting Data

TransactionOccurs

SourceDocumentsPrepared

TransactionAnalysis

TakesPlace

TransactionEntered in

Journal

AmountsPosted to

Ledger


The Normal Balance of an Account

Assets DebitLiabilities CreditStockholder’s Equity Credit(overall)Common Stock CreditRetained Earnings CreditDividends DebitRevenues CreditExpenses Debit


Assets Liabilities Stockholder’sEquity

Revenues Expense

101 Cash 201 AccountsPayable

301 CommonStock

401 SalesRevenue

501 salaryExpense

102 AccountsReceivable

202 InterestPayable

302 PreferredStock

402 InterestRevenue

502 RentExpense

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191 Land

The Chart of Accounts