SB-BMGT310-sess02_ch3all_s

8/8/2019 SB-BMGT310-sess02_ch3all_s

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Chapter3-1

The Accounting InformationThe Accounting InformationSystemSystem

Chapter 3Chapter 3-- part 1part 1

Initially Prepared by Coby Harmon, University of California, Santa Barbara, modified by SB


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Chapter3-2

1.1. Understand basic accounting terminology.Understand basic accounting terminology.

2.2. Explain doubleExplain double--entry rules.entry rules.

3.3. Identify steps in the accounting cycleIdentify steps in the accounting cycle..

4.4. Record transactions in journals, post to ledgerRecord transactions in journals, post to ledgeraccounts, and prepare a trial balance.accounts, and prepare a trial balance.

5.5. Explain the reasons for preparing adjusting entries.Explain the reasons for preparing adjusting entries.

6.6. Prepare financial statement from the adjusted trialPrepare financial statement from the adjusted trialbalance.balance.

7.7. Prepare closing entries.Prepare closing entries.

Learning ObjectivesLearning Objectives


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Chapter3-3

Fundamental Accounting EquationFundamental Accounting Equation

LO 2 Explain doubleLO 2 Explain double--entry rules.entry rules.

Relationship among the assets, liabilities andRelationship among the assets, liabilities andowners equity of a business:owners equity of a business:

AssetsAssets LiabilitiesLiabilitiesOwnersOwners

EquityEquity= +


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Chapter3-4

Debits and CreditsDebits and Credits


DoubleDouble--entryentryaccounting system (two-sidedeffect).

Recording done by debiting at least one accountand crediting another.

DEBITS must equalmust equal CREDITS.


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Chapter3-5

Account Name

Debit / Dr. Credit / Cr.

T AccountsT Accounts

An AccountAccount shows the effect of transactions on agiven asset, liability, equity, revenue, or expenseaccount.If Debit entries are greater thangreater than Credit entries,

the account will have a debit balance.


$10,000 T ransaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1


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Chapter3-6

t a e

e it / r. Cre it / Cr.

Debits and CreditsDebits and Credits

If Credit entries aregreater thangreater thanDebit entries,the account will have a credit balance.


$10,000 T ransaction #2$3,000

$1,000$1,000

8,000 T ransaction #3

Balance

Transaction #1


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Chapter3-7

Basic Accounting EquationBasic Accounting Equation


Relationship among the assets, liabilities andRelationship among the assets, liabilities andstockholders equity of a business:stockholders equity of a business:

The equation must be in balance after everyThe equation must be in balance after everytransaction. For everytransaction. For every DebitDebitthere must be athere must be a CreditCredit..

Illustration 3-3


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Chapter3-8

Adebit is an asset orexpense

D: Debit

E: Expense

A: Asset

D: Dividend

Debits SummaryDebits Summary

LO 2 ExplaindoubleLO 2 Explaindouble--entry rules.entry rules.


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Chapter3-9

Balance SheetBalance Sheet Income StatementIncome Statement

= + =-Asset Liability Equity (Revenue Expense)

ADebit is an increase in anassetorexpense

A Credit is an increase in a liabilityorrevenue

A Credit is adecrease in anassetorexpense

ADebit is adecrease in a liabilityorrevenue

A Credit is an increase in acontra-asset (ornegative-expense)ADebit is an increase in acontra-liability (ornegative-

revenue)

Debitsand Credits SummaryDebitsand Credits Summary

LO 2 ExplaindoubleLO 2 Explaindouble--entryrules.entryrules.


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Chapter3-10

Balance SheetBalance Sheet Income StatementIncome Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit

Debitsand Credits SummaryDebitsand Credits Summary



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Chapter

3-11

DoubleDouble--Entry System ExerciseEntry System Exercise

AssetsAssets LiabilitiesLiabilitiesStockholdersStockholders

EquityEquity= +

1.1. Invested $32,000 cash and equipment valued atInvested $32,000 cash and equipment valued at$14,000 in the business.$14,000 in the business.

+ 32,000

+ 14,000

+ 46,000



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Chapter

3-12

Ownership structure dictates the types of accountsthat are part of the equity section.

ProprietorshipProprietorship

ororPartnershipPartnership

CorporationCorporation

CapitalAccount

DrawingAccount

Common Stock

Additional Paid-in

Capital DividendsDeclared

RetainedEarnings

Ownership StructureOwnership Structure



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Chapter

3-13

Corporation Ownership StructureCorporation Ownership Structure


Stockholders Equity

Balance Sheet

Statementof RetainedEarnings

Net income or Net loss(Revenueslessexpenses)(Revenueslessexpenses)

Income StatementIncome StatementDividends

Retained EarningsRetained Earnings(Net incomeretained inbusiness)(Net incomeretained inbusiness)

Common StockCommon Stock (Investment(Investmentbystockholders)bystockholders)

Illustration 3-4


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Chapter

3-14

The AccountingCycleThe AccountingCycle

LO 3 Identify steps in the accounting cycle.LO 3 Identify steps in the accounting cycle.

Transactions

1. Journalization

6. Financial Statements

7. Closing entries

8. Post-closing trail balance

9.Reversing entries

3.Trial balance

2. Posting

5. Adjusted trial balance

4. AdjustmentsWorkSheet

Illustration 3-6


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Chapter

3-15

Transactions and EventsTransactions and Events

What to Record?What to Record?

FASB states, transactions and other events andcircumstances that affect a business enterprise.


Types ofEvents:Types ofEvents:

External between a business and its environment.

Internal event occurring entirely within a business.


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Chapter

3-16

1. A supplier of a companys raw material is paidan amount owed on account.

External

Not Recorded

2. A customer pays its open account. External

3. A new chief executive officer is hired. Not Recorded

4. The biweekly payroll is paid.

5. Raw materials are entered into production. Internal

External

6. A new advertising agency is hired. Not Recorded

7. The accountant determines the federal incometaxes owed based on the income earned.

Internal

Review Transactions and EventsReview Transactions and Events


External Internal


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Chapter

3-17

General JournalGeneral Journal a chronological record of transactions.JournalEntries are recorded in the journal.

A ount itle Re . e it re it

an. 3 ash 100 100 000

o on stoc 300 100 000

10 uilding 130 150 000ote a a le 220 150 000

Date

1. Journalizing1. Journalizing

LO 4LO 4 Re or transa tions in journals, post toRe or transa tions in journals, post tole gera ounts, an preparea trial alan e.le gera ounts, an preparea trial alan e.

General ournal


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Chapter

3-18

2. Posting2. Posting

LO 4LO 4

Record transactions in journals, post to

Record transactions in journals, post toledger accounts, andprepare a trial balance.ledger accounts, andprepare a trial balance.


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Chapter

3-19

TrialBalanceTrialBalance a list of each account and its balance;used to prove equality of debit and credit balances.

Acct. No. Account Debit Credit

Cash 4$

ccounts receivablenventory

uildin

ccounts payable 6$

ote payable

Co on stoc

Retained earnin s4 ales 7

Cost of oods sold

8$ 8$

3. TrialBalance3. TrialBalance

L

O4L

O4 Record tr

ansa

ctions

injourn

als,post toRecord tr

ansa

ctions

injourn

als,post to

ledger accounts,and prepare atrialbalance.ledger accounts,and prepare atrialbalance.


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Chapter

3-20

4. Adjusting Entries4. Adjusting Entries

RevenuesRevenues-- recorded in the period in which theyrecorded in the period in which theyare earnedare earned.

ExpensesExpenses-- recognized in the period in which theyrecognized in the period in which they

are incurredare incurred.AdjustingentriesAdjustingentries -- needed to ensure that theneeded to ensure that therevenue recognitionrevenue recognition andand matching principlesmatching principles arearefollowed.followed.

LO 5LO 5 Explain thereasons for preparing adjustingentries.Explain thereasons for preparing adjustingentries.


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Chapter

3-21

Example:Example: On Jan.1On Jan.1stst, Phoenix Corp. paid $12,000 for 12, Phoenix Corp. paid $12,000 for 12months of insurance coverage. Show the journal entry tomonths of insurance coverage. Show the journal entry torecord the payment on Jan.1record the payment on Jan.1stst..

Adjusting EntriesAdjusting Entries Prepaid ExpensesPrepaid Expenses

Cash 12,000

Prepaid insurance 12,000Jan.1

LO 5LO 5 Explain the reasons forpreparing adjusting entries.Explain the reasons forpreparing adjusting entries.

Debit Credit

Prepaid Insurance

12,00012,000 12,00012,000

Debit Credit

Cash


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Chapter

3-22

Example:Example: On Jan.1On Jan.1stst, Phoenix Corp. paid $12,000 for 12, Phoenix Corp. paid $12,000 for 12months of insurance coverage. Show themonths of insurance coverage. Show the adjusting journaladjusting journalentryentry required at Jan.31required at Jan.31stst..


Prepaid insurance 1,000

Insurance expense 1,000Jan.31


Debit Credit

Prepaid Insurance

12,00012,000 1,0001,000

Debit Credit

Insurance expense

1,0001,000

11,00011,000


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Chapter

3-23

Example:Example: On Jan.1On Jan.1stst, Phoenix Corp. paid $12,000 for 12 months, Phoenix Corp. paid $12,000 for 12 monthsof insurance coverage. Show the journal entry to record theof insurance coverage. Show the journal entry to record thepayment on Jan.1payment on Jan.1stst. (Initial entry is to Insurance Expense.). (Initial entry is to Insurance Expense.)


Cash 12,000

Insurance expense 12,000Jan.1


Debit Credit

Insurance Expense

12,00012,000 12,00012,000

Debit Credit

Cash


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Chapter

3-24

Example:Example: On Jan.1On Jan.1stst, Phoenix Corp. paid $12,000 for 12, Phoenix Corp. paid $12,000 for 12months of insurance coverage. Show themonths of insurance coverage. Show the adjusting journaladjusting journalentryentry required at Jan.31required at Jan.31stst..


Insurance Expense 11,000

Prepaid Insurance 11,000Jan.31


Debit Credit

Prepaid Insurance

12,00012,00011,00011,000

Debit Credit

Insurance expense

11,00011,000

11,00011,000i/s 1,000i/s 1,000


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Chapter

3-25

Receipt of cash that is recorded as a liability becauseReceipt of cash that is recorded as a liability becausethe revenue has not been earned.the revenue has not been earned.

Adjusting EntriesAdjusting Entries UnearnedRevenuesUnearnedRevenues

rentrent

airline ticketsairline ticketsschool tuitionschool tuition

Cash Receipt Revenue RecordedBEFORE


magazine subscriptionsmagazine subscriptions

customer depositscustomer deposits

Unearned revenues often occur in regard to:Unearned revenues often occur in regard to:


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Chapter

3-26

Example:Example: On Nov.1On Nov.1stst, Phoenix Corp. received $24,000 from, Phoenix Corp. received $24,000 fromArcadia High School for 3 months rent in advance. ShowArcadia High School for 3 months rent in advance. Showthe journal entry to record the receipt on Nov.1the journal entry to record the receipt on Nov.1stst..

Unearned rent revenue 24,000

Cash 24,000Nov.1


Debit Credit

Cash

24,00024,000 24,00024,000

Debit Credit

Unearned Rent Revenue



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Chapter

3-27

Example:Example: On Nov.1On Nov.1stst, Phoenix Corp. received $24,000 from, Phoenix Corp. received $24,000 fromArcadia High School for 3 months rent in advance. ShowArcadia High School for 3 months rent in advance. Showthethe adjusting journal entryadjusting journal entry required on Nov.30required on Nov.30thth..

Rent revenue 8,000

Unearned rent revenue 8,000Nov.30


Debit Credit

Rent Revenue

8,0008,000 24,00024,000

Debit Credit

Unearned Rent Revenue


8,0008,000

16,00016,000


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Chapter

3-28

Shows the balance of all accounts, after adjustingentries, at the end of the accounting period.

5. Adjusted TrialBalance5. Adjusted TrialBalance


Adjusted TrialBalance

e

it

redit

Cash 140,000$Accounts receivable 35,000

Building 190,000

Note payable 150,000$

Common stock 100,000

Retained earnings 38,000

Dividends declared 10,000

Sales 185,000Interest income 17,000

Cost of goods sold 47,000

Salary expense 25,000

Depreciation expense 43,000

490,000$ 490,000$


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Chapter

3-29

6. PreparingFinancial Statements6. PreparingFinancial Statements

LO6 Prepare financial statement from the adjusted trial balance.LO6 Prepare financial statement from the adjusted trial balance.

Financial Statements are prepared directly from theAdjusted Trial Balance.

BalanceSheet

IncomeStatement

Statementof CashFlows

Statementof

Retained

Earnings


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Chapter

3-33

7. Closing Entries7. Closing Entries

LO7 Prepare closing entries.LO7 Prepare closing entries.

To reduce the balance of the income statementTo reduce the balance of the income statement((revenuerevenue andand expenseexpense) accounts to zero.) accounts to zero.

To transfer net income or net loss to ownersTo transfer net income or net loss to owners

equity.equity.Balance sheet (Balance sheet (assetasset,, liabilityliability, and, and equityequity))accounts are not closed.accounts are not closed.

Dividends are closed directly to the RetainedDividends are closed directly to the RetainedEarnings account.Earnings account.


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Chapter

3-34



ExampleExample: Assume the following Adjusted Trial Balance: Assume the following Adjusted Trial Balance

Acct. No. Accou t e it re it

Cash $

Accounts recei a le

Buildingote pa a le $

Common stocRetained earnings

i idends declared

Sales

nterest incomeCost of goods soldSalar expense

epreciation expense

$ $


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Chapter

3-35

Example:Example: Prepare thePrepare the Closing journal entryClosing journal entry from thefrom theadjusted trial balance on the previous slide.adjusted trial balance on the previous slide.



Sales 185,000

Income summary 202,000Interest income 17,000

Income summary 115,000Cost of goods sold 47,000Salary expense 25,000Depreciation expense 43,000

Income summary 87,000Retained earnings 87,000

Retained earnings 10,000Dividends declared 10,000


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Chapter

3-37

9. Reversing Entries9. Reversing Entries


Reversing entries areReversing entries are optionalstepsoptionalsteps thatthata company may perform at the beginninga company may perform at the beginning

of the next accounting period.of the next accounting period.They are typically required if initialThey are typically required if initialentries for insurance, rent etc are postedentries for insurance, rent etc are posted

to an I/S account rather than a B/Sto an I/S account rather than a B/Saccount.account.

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