chapter 02 lecture

Chapter 02

The Accounting Information System

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Roles of Financial Accounting

o Measure business activities of the company.

o Communicate those measurements to external parties for decision-making purposes.

o Measure business activities of the company.

o Communicate those measurements to external parties for decision-making purposes.

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Part A

Measuring Business Activities

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LO1 Identify the Basic Steps in Measuring External Transactions

o Most business enterprises use a computerized accounting system due to the sheer volume of data they must process.

o Computerized data processing is fast, accurate, and affordable.

o Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programs.

o Most business enterprises use a computerized accounting system due to the sheer volume of data they must process.

o Computerized data processing is fast, accurate, and affordable.

o Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programs.

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Classification of Business Activities

EXTERNALTRANSACTIONS

EXTERNALTRANSACTIONS

TRANSACTIONSTRANSACTIONS

With a separateeconomic entity

With a separateeconomic entity

With in the company

INTERNALTRANSACTIONS

INTERNALTRANSACTIONS

Do not include a separateeconomic entity

Do not include a separateeconomic entity

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Measuring External Transactions

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LO2 Analyze the Impact of External Transactions on the Accounting Equation

= +

(resources) (claims to resources)

Assets Stockholders' EquityLiabilities

Each transaction will have a dual effect. If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount.

Each transaction will have a dual effect. If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount.

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Ask yourself these questions…

1. “What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?”

2. “What is a second account in the accounting equation affected by the transaction? Did that account increase or decrease?”

3. ”Do assets still equal liabilities plus stockholders’ equity?”

1. “What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?”

2. “What is a second account in the accounting equation affected by the transaction? Did that account increase or decrease?”

3. ”Do assets still equal liabilities plus stockholders’ equity?”

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External Transactions of Eagle Golf Academy

Transaction Date External Transactions in JanuaryType of Activity

(1) Jan. 1 Sell shares of common stock for $25,000 to obtain the funds necessary to start the business.

Financing

(2) Jan. 1 Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years.

Financing

(3) Jan. 1 Purchase equipment necessary for giving golf training, $24,000.

Investing

(4) Jan. 1 Pay one year of rent in advance, $6,000 ($500 per month).

Operating

(5) Jan. 6 Purchase supplies on account, $2,300. Operating

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External Transactions of Eagle Golf Academy (Contd.)

Transaction Date External Transactions in JanuaryType of Activity

(6) Jan. 12 Provide golf training to customers for cash, $3,600.

Operating

(7) Jan. 17 Provide golf training to customers on account, $2,500.

Operating

(8) Jan. 23 Receive cash in advance for 10 golf training sessions to be given in the future, $600.

Operating

(9) Jan. 28 Pay salaries to employees, $2,800. Operating(10) Jan. 30 Pay cash dividends of $200 to

shareholders.Financing

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Transaction(1): Issue Common Stock

Eagle Golf Academy InvestorsStock certificate

It’s time to ask the three questions we asked earlier:

o What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?

Answer: Cash. Cash is a resource owned by the company, which makes it an asset. The company receives cash from you, so cash and total assets increase by $25,000.

It’s time to ask the three questions we asked earlier:

o What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?

Answer: Cash. Cash is a resource owned by the company, which makes it an asset. The company receives cash from you, so cash and total assets increase by $25,000.

To generate cash from external sources, Eagle sells shares of common stock for $25,000.

To generate cash from external sources, Eagle sells shares of common stock for $25,000.

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2. What is a second account in the accounting equation affected by the transaction? Does that account increase or decrease?

Answer: Common stock. Common stock is a stockholders’ equity account. Issuing common stock to you in exchange for your $25,000 increases the amount of common stock owned by stockholders, so common stock and total stockholders’ equity both increase.

2. What is a second account in the accounting equation affected by the transaction? Does that account increase or decrease?

Answer: Common stock. Common stock is a stockholders’ equity account. Issuing common stock to you in exchange for your $25,000 increases the amount of common stock owned by stockholders, so common stock and total stockholders’ equity both increase.


Assets = Liabilities + Stockholders' Equity

Cash +$25,000 = Common Stock +$25,000

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3. Do assets equal liabilities plus stockholders’ equity?

Answer: Yes.

3. Do assets equal liabilities plus stockholders’ equity?

Answer: Yes.


Note: The accounting equation balances. If one side of the equation increases, so does the other side. We can use this same series of questions to understand the effect of any business transaction.


Cash +$25,000 = Common Stock +$25,000

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Transaction(2): Borrow from the Bank

Seeking cash from another external source, Eagle borrows $10,000 from the bank and signs a note for it.

Seeking cash from another external source, Eagle borrows $10,000 from the bank and signs a note for it.


Cash +$10,000 = Notes Payable +$10,000

Eagle Golf Academy Bank

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Summary of Initial Financing Transactions Eagle Gold Academy

The effects of the two financing activities we’ve analyzed are summarized below

The effects of the two financing activities we’ve analyzed are summarized below

Assets = Liabilities + Stockholders' EquityFinancing Activities:

(1) Cash +$25,000 Common Stock +$25,000(2) Cash +$10,000 Notes Payable +$10,000Total $35,000 = $10,000 + $25,000

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Transaction(3): Purchase Equipment

Eagle Golf Academy Supplier

Purchase equipment with cash, $24,000.Purchase equipment with cash, $24,000.


Equipment +$24,000Cash -$24,000

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Summary of Initial Financing and Investing Transactions of Eagle Golf Academy

Assets = Liabilities + Stockholders' EquityFinancing Activities:

(1) Cash +$25,000 Common Stock +$25,000(2) Cash +$10,000 Notes Payable +$10,000

$35,000 = $10,000 + $25,000

Investing Activities:

(3) Equipment +$24,000Cash -$24,000

Total $35,000 = $10,000 + $25,000

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Transactions(4) and(5): Incur Costs for Rent and Supplies

Pay one year of rent in advance, $6,000.Pay one year of rent in advance, $6,000.

Eagle Golf Academy Landlord

Rental space


Prepaid Rent +$6,000Cash -$6,000

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Transactions(4) and(5): Incur Costs for Rent and Supplies

Purchase of supplies on account, $2,300.Purchase of supplies on account, $2,300.

Eagle Golf Academy Supplier


Supplies +$2,300 = Account Payable +$2,300

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Effects of transactions on the Expanded Accounting Equation

BasicAssets = Liabilities + Accounting

Equation

Common Stock + Retained Earnings

Expanded

Revenues − Expenses – Dividends

Net Income

Stockholders' Equity

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Transations(6) and (7): Provide Services to Customers

Eagle Golf Academy CustomersTraining

Providing service to customers for cash causes both assets and stockholders’ equity to increase.

Providing service to customers for cash causes both assets and stockholders’ equity to increase.

Assets = Liabilities +

Cash +$3,600 = Common Stock + Retained Earnings+$3,600

Revenues − Expenses – DividendsService Revenue


RevenueRetained Earnings

Stockholders’ Equity

NetIncome

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Transations(6) and (7): Provide Services to Customers

Similarly, providing service to customers on account causes both assets and stockholders’ equity to increase

Similarly, providing service to customers on account causes both assets and stockholders’ equity to increase


Accounts +$2,500 = Common Stock + Retained EarningsRecievable +$2,500

Revenues − Expenses – DividendsService Revenue



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Transaction(8): Receive Cash in Advance from Customer

Receive cash in advance from customers, $600.Receive cash in advance from customers, $600.


Cash +$600 = Unearned Common Stock + Retained EarningsRevenue

+$600 Revenues − Expenses – Dividends



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Transaction(9): Incur Cost for Salaries

Eagle Golf Academy Employee

Labor

Pay salaries to workers, $2,800Pay salaries to workers, $2,800

ExpenseRetained Earnings


NetIncome


Cash -$2,800 = Common Stock + Retained Earnings-$2,800

Revenues − Expenses – DividendsSalaries Expense


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Transaction (10): Pay Dividends

Eagle Golf Academy Investors

Pay dividends to stockholders, $200Pay dividends to stockholders, $200

DividendsRetained Earnings



Cash -$200 = Common Stock + Retained Earnings-$200

Revenues − Expenses – Dividends

Dividends


Reduced Claims toCompany’s Resources

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Summary of All Ten External Transactions of Eagle Golf Academy

= +Financing Activities:

(1) Cash $25,000 Common Stock $25,000

(2) Cash $10,000 Notes Payable $10,000

Subtotal $35,000 = $10,000 + $25,000

Investing Activities:

(3) Equipment $24,000

Cash -$24,000Subtotal $35,000 = $10,000 + $25,000

Operating Activities:(4) Prepaid Rent $6,000

Cash -$6,000(5) Supplies $2,300 Accounts Payable $2,300(6) Cash $3,600 Service Revenue $3,600(7) Accounts Receivable $2,500 Service Revenue $2,500(8) Cash $600 Unearned Revenue $600(9) Cash -$2,800 Salaries Expense -$2,800

Subtotal $41,200 = $12,900 + $28,300

Financing Activity:

(10) Cash -$200 Dividends -$200Total $41,000 = $12,900 + $28,100

Stockholders’ EquityLiabilitiesAssets

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PART B

Debits and Credits

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LO3 Assess Whether the Impact of External Transactions Results in a Debit or Credit to an Account Balance

Debit and Credit Effects on Accounts in the Accounting Equation

Debit and Credit Effects on Accounts in the Accounting Equation

= +

Debit Credit Debit Credit Debit Credit

Assets Liabilities Stockholders' Equity

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Ask yourself these questions…

1. “Is there an increase or decrease in the first account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”

2. “Is there an increase or decrease in the second account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”

3. “Do total debits equal total credits?”

1. “Is there an increase or decrease in the first account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”

2. “Is there an increase or decrease in the second account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”

3. “Do total debits equal total credits?”

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Recall Our Example

Eagle issues common stock for cash of $25,000 in transaction (1).

Eagle issues common stock for cash of $25,000 in transaction (1).

= +

Cash +$25,000 = Common +$25,000Stock

Debit Credit Debit Credit25,000 25,000

Assets

Cash Common Stock

Stockholders' EquityLiabilities

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Recall Our Example

The bank borrowing of $10,000 in transaction (2) has the following effects:

The bank borrowing of $10,000 in transaction (2) has the following effects:

= +

Cash +$10,000 = Notes +$10,000Payable

Debit Credit Debit Credit10,000 10,000

Assets

Cash Notes Payable

Stockholders' EquityLiabilities

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Debit and Credit Effects on Accounts in the Expanded Accounting Equation

= +


+

Debit Credit Debit Credit

- -


Assets Liabilities Stockholders' Equity

Common Stock Retained Earnings

Expenses DividendsRevenues

Net Income 2-32

LO4 Record Transactions Using Debits and Credits

A journal provides a chronological record of all transactions affecting a firm.

A journal provides a chronological record of all transactions affecting a firm.

January 1 Debit Credit

Cash (+A ) ..................................................... 25,000Common Stock (+SE ) ........................... 25,000(Issue common stock for cash)


Cash (+A ) ..................................................... 10,000Notes Payable (+L ) ............................... 10,000(Borrow by signing long-term note)

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LO5 Post Transactions to T-accounts in the General Ledger

o The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting.

o A T-account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits.

o The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting.

o A T-account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits.

ACCOUNT TITLE

DEBIT CREDIT

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Post Transactions to T-accounts in the General Ledger

(1) 25,000Total (2) 10,000

Debits (3) 24,000(Increases) (4) 6,000 Total

$39,200 (6) 3,600 Credits(8) 600 (Decreases)

(9) 2,800 $33,000Ending (10) 200Balance Bal. 6,200

Cash

CreditDebit

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Summary of the Measurement Process

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Summary of External Transactions Recorded for Eagle Golf Academy


Cash (+A ) ..................................................... 25,000Common Stock (+SE ) ........................... 25,000(Issue common stock for cash)

January 1

Cash (+A ) ..................................................... 10,000Notes Payable (+L ) ............................... 10,000(Borrow by signing long-term note)

January 1

Equipment (+A ) ............................................ 24,000Cash (-A ) ............................................... 24,000(Purchase equipment for cash)

January 1

Prepaid Rent (+A ) ......................................... 6,000Cash (−A ) ................................................ 6,000(Prepay rent for cash)

January 6

Supplies (+A ) ................................................ 2,300Accounts Payable (+L ) ............................. 2,300(Purchase supplies on account)

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Summary of External Transactions Recorded for Eagle Golf Academy (Contd.)


Cash (+A ) ....................................................... 3,600Service Revenue (+R, +SE ) .................... 3,600(Provide training to customers for cash)

January 17

Accounts Receivable (+A ) .............................. 2,500Service Revenue (+R, +SE ) .................... 2,500(Provide training to customers on account)

January 23

Cash (+A ) ....................................................... 600Unearned Revenue (+L ) ........................... 600(Receive cash in advance from customers)

January 28

Salaries Expense (+E, −SE ) .......................... 2,800Cash (−A ) ................................................. 2,800(Pay workers’ salaries)

January 30

Dividends (+D, −SE ) ...................................... 200Cash (−A ) ................................................. 200(Pay cash dividends)

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Posting External Transactions of Eagle Golf Academy to General Ledger Accounts

= +

(1) 25,000 (3) 24,000 (7) 2,500 (5) 2,300 (1) 25,000 0(2) 10,000 (4) 6,000(6) 3,600 (9) 2,800

(8) 600 (10) 200

(5) 2,300 (4) 6,000 (8) 600 (6) 3,600 (9) 2,800(7) 2,500

(3) 24,000 (2) 10,000 (10) 200

Bal. 25,000 0

Accounts ReceivableCash

AccountsPayable

Supplies

Bal. 6,200

Bal. 2,500 Bal. 2,300

Assets

Bal. 24,000

Unearned Revenue

Bal. 600

NotesPayable

Bal. 10,000

Bal. 2,300

Prepaid Rent

Bal. 6,000

Equipment

Bal. 200

Salaries Expense

Bal. 2,800


Service Revenue

Bal. 6,100

Dividends

Common Stock

Retained Earnings

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LO6 Prepare a Trial Balance

o A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.

o Another purpose of the trial balance is to assist us in preparing adjusting entries (for internal transactions).

o It is not a published financial statement to be used by external parties, there is no required order for listing accounts in the trial balance.

o The trial balance is used for internal purposes only and provides a check on the equality of the debits and credits.

o A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.

o Another purpose of the trial balance is to assist us in preparing adjusting entries (for internal transactions).

o It is not a published financial statement to be used by external parties, there is no required order for listing accounts in the trial balance.

o The trial balance is used for internal purposes only and provides a check on the equality of the debits and credits.

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Trial Balance of Eagle Golf Academy

Account Title Debit CreditCash $6,200 Accounts Receivable 2,500Supplies 2,300Prepaid Rent 6,000Equipment 24,000Accounts Payable $2,300 Unearned Revenue 600Notes Payable 10,000Common Stock 25,000Retained Earnings 0Dividends 200Service Revenue 6,100Salaries Expense 2,800

Totals $44,000 $44,000

Eagle Golf AcademyTrial BalanceJanuary 31

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End of chapter 02

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chapter 02 lecture

Economy & Finance

eagle golf academy bank

account increase

stockholders equity

expanded accounting

accounting equation

effects of transactions

account balancedebit

equation increases