processing accounting information chapter 2 analyze business transactions

Processing Accounting

Information

Chapter 2

Analyze business

transactions.

The Account

Assets are the economic resources that benefit the business now and in the future

CashAccounts receivableInventoryNotes receivablePrepaid expenses

LandBuildingsEquipment, furniture, and fixtures

The Account

Liabilities are the debts of the company.

Notes payableAccounts payableAccrued liabilities (for expenses incurred but not paid)Long-term liabilities (bonds)

The Account

Stockholders’ (owners’) equity is theowners’ claims to the assets of a corporation.

A proprietorship uses a single account.

A partnership uses separate accounts for eachowner’s capital balance and withdrawals.

A corporation uses separate capital accounts for each source of capital.

Accounting for Business Transactions

A transaction is any event that both affectsthe financial position of the business entity

and can be reliably recorded.


The Lyons invest $50,000 to beginthe business, and Air & Sea Travel

issues common stock.

Stockholders’ Assets = Liabilities + Equity

(1) Cash + 50,000 = + 50,000*

*Common stock


Air & Sea purchases land for anoffice location, paying $40,000 in cash.

Balance + 50,000 = + 50,000*

*Common stock

(2) Cash – 40,000 Land + 40,000

50,000 = + 50,000*



The business buys stationery and otheroffice supplies, agreeing to pay $500

to the office-supply store within 30 days.

*Common stock

Balance + 50,000 = + 50,000*

(3) Supplies + 500 = + 500 50,500 = 500 + 50,000



Air & Sea Travel earns service revenueof $5,500 and collects this amount in cash.

*Common stock

Balance + 50,500 = 500 + 50,000*

(4) Cash + 5,500 = + 5,500 56,000 = 500 + 55,500



Air & Sea Travel performs services forcustomers on account for $3,000.

Balance + 56,000 = 500 + 55,500

(5) Receivable + 3,000 = + 3,000 59,000 = 500 + 58,500



Air & Sea Travel pays $2,700 for the followingcash expenses: office rent $1,100,

employee salary $1,200, and utilities $400.

Balance + 59,000 = 500 + 58,500

(6) Cash – 2,700 = – 2,700 56,300 = 500 + 55,800



Air & Sea Travel pays $400 to the store fromwhich it purchased $500 worth of office

supplies in Transaction 3.

Balance + 56,300 = 500 + 55,800

(7) Cash – 400 = – 400 55,900 = 100 + 55,800



The owners remodel their home at a cost of $30,000, paying cash from personal funds.

This event is a transaction of thepersonal entity, not the business entity.

No transaction is recorded for Air & Sea Travel.


The business collects $1,000from a customer on account.

Balance + 55,900 = 100 + 55,800

(9) Cash + 1,000 Receivable – 1,000

55,900 = 100 + 55,800



Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.

Balance + 55,900 = 100 + 55,800

(10) Cash + 22,000 Land – 22,000

55,900 = 100 + 55,800



The corporation declares a dividend and pays $2,100 cash to the stockholders.

Balance + 55,900 = 100 + 55,800

(11) Cash – 2,100 = – 2,100 + 53,800 = 100 + 53,700


Income Statement

Revenue:Service revenue $8,500

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

Net income $5,800

Month Ended April 30, 20x3

Statement of Retained Earnings

Retained earnings, April 1, 20x3 $ 0Add: Net income for the month 5,800

$5,800Less: Dividends (2,100)Retained earnings, April 30, 20x3 $3,700


Balance Sheet

April 30, 20x3

AssetsCash $ 33,300Accounts receivable 2,000Office supplies 500Land 18,000

Total assets $ 53,800

LiabilitiesAccounts Payable $ 100

Stockholders’ EquityCommon stock $50,000Retained earnings 3,700Total stockholders’ equity $53,700Total liabilities and stockholders’ equity $53,800

Statement of Cash Flows

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 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)


Statement of Cash Flows

Cash flows from operating activities: $ 3,400Cash flows 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, 20x3 0Cash balance, April 30, 20x3 $33,300


Understand how

accounting works.

Double-Entry Accounting

Double-entry bookkeeping means to recordthe dual effects of each business transaction.

The T-Account

Account Title

Debit

LEFT SIDE RIGHT SIDE

Credit

Increase-Decrease-Decrease-Increase

AccountingEquation: Assets = Liabilities +

Stockholders’Equity

Rules ofDebit andCredit: Debit

+Debit

–Debit

–Credit

–Credit

+Credit

+

Normal Balances of the Accounts

Assets DebitLiabilities CreditStockholders’ Equity – overall Credit

Common stock CreditRetained earnings CreditDividends DebitRevenues CreditExpenses Debit

Rules of Debit and Credit

Air & Sea received $50,000 and issued stock.

Assets = Liabilities +Stockholders’

Equity

Debitfor

Increase,50,000

Creditfor

Increase,50,000

Cash Common Stock

Rules of Debit and Credit

Air & Sea purchased land for $40,000 cash.

Common Stock

Bal. 50,000

CashCredit

forDecrease,

40,000

Bal. 50,000

LandDebit

forIncrease,

40,000

Assets = Liabilities +Stockholders’

Equity

Record business

transactions.

Recording Transactionsin the Journal

Date Accounts and Explanation Debit CreditJournal Page 1

April 2 Cash 50,000Common Stock 50,000

Issued common stock

Posting from Journal to Ledger

The ledger is a grouping of all theaccounts; it shows their balances.

Data must be copied to the ledger –a process called posting.

The journal is a chronological recordof all transactions listed by date.

LedgerLedger

All individualaccountscombinedmake up

the ledger.

Individual stockholders’ equity accounts

CommonStock

CommonStock

CashCash Individual asset accounts

AccountsPayable

AccountsPayable

Individual liability accounts



Accounts and Explanation Debit CreditCash 50,000 Common Stock 50,000Issued common stock

Posting to the Ledger

Cash Common Stock50,000

Journal Entry

50,000

Accounts After Posting

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

Accounts Receivable (5) 3,000 (9) 1,000Bal. 2,000

Office Supplies (3) 500Bal. 500

Land (2) 40,000 (10) 22,000Bal. 18,000

ASSETS Accounts Payable

(7) 400 (3) 500Bal. 100

LIABILITIES=

Accounts After Posting

Common Stock (1) 50,000

Bal. 50,000

STOCKHOLDERS’ EQUITY Dividends

(11) 2,100Bal. 2,100

+

Service Revenue (4) 5,500

(5) 3,000 Bal. 8,500

REVENUE Rent Expense

(6) 1,100Bal. 1,100

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

Utilities Expense (6) 400Bal. 400

EXPENSES

Use a trial balance.

Trial Balance

A trial balance lists all accounts withtheir balances – assets first, followed byliabilities, and then stockholders’ equity.

DEBITS CREDITS

Chart of Accounts

It is a listing of all accounts andaccount numbers used by a business.

Air & Sea TravelChart of Accounts

Assets Liabilities Stockholders’ Equity101 Cash 201 Accounts Payable 301 Common Stock111 Accounts Receivable 231 Notes Payable 311 Dividends141 Office Supplies 312 Retained Earnings151 Office Furniture191 Land

BALANCE SHEET ACCOUNTS:

INCOME STATEMENT ACCOUNTS(PART OF STOCKHOLDERS’ EQUITY):

Revenues Expenses401 Service Revenue 501 Rent Expense

502 Salary Expense503 Utilities Expense

Account in Four-Column Format

BalanceDate Item Debit Credit Debit Credit

20x1April 2 50,000 50,000

3 40,000 10,000

Account: Cash Account No. 101

processing accounting information chapter 2 analyze business transactions

Documents

liabilities equity slide

business entity

stockholders assets

common stock slide

account liabilities

account assets

business buys stationery

common stock balance