ACCT 100 Chapter 2 The Recording Process of Accounting Information
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- ACCT 100 Chapter 2 The Recording Process of Accounting Information
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- 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.
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- Processing Accounting Information 3 I. Definitions of Accounts on Financial Statements n Assets: economic resources that benefit the business in the future, including: n Cash: in all forms: (coins, currency, checking accounts,) n Account receivable: an oral promise for future cash receipt as a result of sales. n Inventory (or merchandise): goods for sale. n Note receivable: a written promissory note that the customer will pay a fixed amount by a certain date.
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- Processing Accounting Information 4 I. Definitions of Accounts on Financial Statements (contd.) n Prepaid expenses: expenses paid in advance. n Land: recorded at cost of land. n Buildings: record at cost, subject to depreciation. n Equipment, furniture and fixture: record at cost, subject to depreciation.
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- Processing Accounting Information 5 I. Definitions of Accounts on Financial Statements (contd.) n Liabilities: legal obligations. n Note Payable: a written promissory note that the business promises to pay. n Account payable: an oral promise to pay, arising from credit purchases of inventory and other goods. n Accrued liabilities: liabilities that have occurred but have not been paid. For example: salary payable, interest payable, etc.
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- Processing Accounting Information 6 I. Definitions of Accounts on Financial Statements (contd.) n Stockholders equity: the owners claims to the assets of a corporation including: n Common stock: represents the owners investment. n Retained earnings: the cumulative net income earned by the corporation over its lifetime, minus cumulative losses and dividends. n Dividends: distribution of earnings to stockholders.
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- Processing Accounting Information 7 I. Definitions of Accounts on Financial Statements (contd.) n Revenues: increase or inflow of assets; will eventually increase stockholders equity (i.e., sales revenue) n Expenses: decrease or outflow of assets; will eventually decrease stockholders equity. n Gains: increase in assets from incidental transactions not related to the major operation. n Losses: decrease in assets from incidental transactions.
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- Processing Accounting Information 8 II. Accounting Process and Preparation of Financial Statements n How do accountants prepare financial statements? u Identify, measure and record business transactions for business entities
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- Processing Accounting Information 9 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)
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- Processing Accounting Information 10 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.
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- Processing Accounting Information 11 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.
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- Processing Accounting Information 12 Using the Accounting Equation - Exhibit 2-1 (contd.) (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.
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- Processing Accounting Information 13 Using the Accounting Equation - Exhibit 2-1 (contd.) PANEL B - Analysis of transactions Statement of Cash Flows Data Income Statement Data Balance Sheet Data For Financial statements, see Exhibit 2-2. 13
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- Processing Accounting Information 14 b.Introduction of the Double-Entry System and Journal Entries A.Double-entry system B.Th e T- accounts C. Increases and decreases in the accounts D. Examples of journalizing and posting transactions
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- Processing Accounting Information 15 A. Double-Entry System n Each transaction affects at least two accounts and the balance of the accounting equation must be maintained. n Example: Purchases inventory and charges to accounts payable Assets = Liabilities + Equity Inventory Accounts Payable + +
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- Processing Accounting Information 16 A. Double-Entry System (contd.)
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- Processing Accounting Information 17 B. Introduction of the T- account Inventory Accounts Payable Debit CreditDebit Credit
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- Processing Accounting Information 18 Debit Credit Debit Credit Debit A L E Revenue Expense Credit Debit Credit C. Increases and Decreases in the Accounts
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- Processing Accounting Information 19 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: Cash50,000 Common Stock 50,000 Issued common stock to owners. Ledger Accounts: Cash Common Stock50,000
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- Processing Accounting Information 20 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: Land40,000 Cash 40,000 Paid cash for land. Ledger Accounts: Cash Land 50,000 40,000 40,000
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- Processing Accounting Information 21 D. Examples of Journalizing and Posting Transactions (contd.) 3. Transaction: The business purchased $500 office supplies on account. Journal Entry: Office Supplies 500 Accounts Payable500 Ledger Accounts: Office Supplies Accounts Payable 500 500
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- Processing Accounting Information 22 D. Examples of Journalizing and Posting Transactions (contd.) 4. Transaction: The business performed travel service for clients and received cash of $5,500. Journal Entry: Cash 5,500 Service Revenue5,500 Ledger Accounts: Cash Service Revenue 50,000 40,000 5,500 5,500
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- Processing Accounting Information 23 D. Examples of Journalizing and Posting Transactions (contd.) 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 Revenue3,000 Ledger Accounts: Accounts Receivable Service Revenue 3,000 5,500 3,000 8,500
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- Processing Accounting Information 24 D. Examples of Journalizing and Posting Transactions (contd.) 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 1,100 Salary Expense1,200 Utilities Expense 400 Cash2,700 Ledger Accounts: Cash Rent Expense 50,000 40,000 1,100 5,500 2,700 Salary Expense Utilities Expense 1,200 400 24
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- Processing Accounting Information 25 D. Examples of Journalizing and Posting Transactions (contd.) 7. Transaction: The business paid $400 on the account payable created in Transaction 3. Journal Entry: Accounts Payable 400 Cash400 Ledger Accounts: CashAccounts Payable 50,00040,000400500 5,500 2,700 400 100
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- Processing Accounting Information 26 D. Examples of Journalizing and Posting Transactions (contd.) 8. Transaction: The Lyons remodeled their personal residence. This is not a transaction of the travel agency, so no journal entry is made.
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- Processing Accounting Information 27 D. Examples of Journalizing and Posting Transactions (contd.) 9. Transaction: The business collected $1,000 cash on account from the clients in transaction 5. Journal Entry: Cash 1,000 Accounts Receivable1,000 Ledger Accounts: Cash Accounts Receivable 50,00040,0003,0001,000 5,500 2,700 1,000 400 2,000
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- Processing Accounting Information 28 D. Examples of Journalizing and Posting Transactions (contd.) 10.Transaction; The business sold land for its cost of $22,000, receiving cash Journal Entry: Cash 22,000 Land 22,000 Ledger Accounts: Cash Land 50,00040,000 40,00022,000 5,500 2,700 1,000 400 18,000 22,000
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- Processing Accounting Information 29 D. Examples of Journalizing and Posting Transactions (contd.) 11.Transaction: Air & Sea Travel, Inc., paid the Lyons cash dividends of $2,100. Journal Entry: Dividends2,100 Cash 2,100 Ledger Accounts: Cas
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