Slide 1-1

Chapter 2Chapter 2Principles of AccountingPrinciples of Accounting

Analyzing Business Transactions

Slide 1-2

Measurement IssuesMeasurement IssuesMeasurement IssuesMeasurement Issues

Slide 1-3

Question:Question: Are the following events recorded in the accounting records?

Event

Purchased a

computer.

Criterion

Is the financial position (assets, liabilities, or stockholders’ equity) of the company

changed?

Pay rent.

Record/ Don’t Record

Discuss product

design with potential customer.

Measurement IssuesMeasurement IssuesMeasurement IssuesMeasurement Issues

Slide 1-4

Measurement IssuesMeasurement IssuesMeasurement IssuesMeasurement Issues

Note 1 - Summary of Significant Accounting Policies:

“We recognize sales for commercial airplane deliveries as each unit is completed and accepted by the customer.”Once Boeing reaches final agreements with customers, it receives deposits from them for the airplanes they have ordered.

Question: Is this event recorded in the accounting records of Boeing?

Recognition

Slide 1-5

Measurement IssuesMeasurement IssuesMeasurement IssuesMeasurement Issues

Ethics and Measurement Issues

Slide 1-6

Transaction Analysis

Accounting TransactionsAccounting TransactionsAccounting TransactionsAccounting Transactions

AssetsAssets LiabilitiesLiabilities= + Owners’ Equity

Capital

ExpenseRevenue

Withdrawal

Slide 1-7

Account Name

Debit / Dr. Credit / Cr.

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Debit = “Left”

Credit = “Right”

AccounAccountt

An Account can An Account can be illustrated be illustrated

in a T-Account in a T-Account form.form.

The AccountThe AccountThe AccountThe Account

Slide 1-8

Double-entry Double-entry accounting system

Each transaction must affect two or more accounts to keep the basic accounting equation in balance.

Recording done by debiting at least one account and crediting another.

DEBITS must equalmust equal CREDITS.

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

Slide 1-9

Account Name

Debit / Dr. Credit / Cr.

If Debits are greater thangreater than Credits, the account will have a debit balance.

$10,000 Transaction #2$3,000

$15,000$15,000

8,000Transaction #3

Balance

Transaction #1

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

Slide 1-10

Account Name

Debit / Dr. Credit / Cr.

If Credits are greater thangreater than Debits, the account will have a credit balance.

$10,000 Transaction #2$3,000

Balance

Transaction #1

$1,000$1,000

8,000 Transaction #3

Debit and Credit ProceduresDebit and Credit ProceduresDebit and Credit ProceduresDebit and Credit Procedures

Slide 1-11

Assets - Debits should exceed credits.

Liabilities – Credits should exceed debits.

The normal balance is on the increase side.

Dr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and LiabilitiesDr./Cr. Procedures for Assets and Liabilities

Chapter 3-23

AssetsAssets

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-24

LiabilitiesLiabilities

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Slide 1-12

Owner’s investments and revenues increase owners’ equity (credit).

Withdrawals and expenses decrease owners’ equity (debit).

Dr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ EquityDr./Cr. Procedures for Stockholders’ Equity

Chapter 3-25

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

CapitalCapital

Chapter 3-23

WithdrawalsWithdrawals

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-25

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

OwnersOwners’’ EquityEquity

Slide 1-13

The purpose of earning revenues is to benefit the owners.

The effect of debits and credits on revenue accounts is the same as their effect on owners’ equity.

Expenses have the opposite effect: expenses decrease owners’ equity.

Chapter 3-27

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

ExpenseExpense

Chapter 3-26

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

RevenueRevenue

Dr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and ExpenseDr./Cr. Procedures for Revenue and Expense

Slide 1-14

Chapter 3-23

AssetsAssets

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-27

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-25

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

OwnersOwners’’ EquityEquity

Chapter 3-26

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

Slide 1-15

Balance Sheet Balance Sheet Income StatementIncome Statement

= + =-Asset Liability

Equity Revenue

Expense

Debit

Credit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

Slide 1-16

Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Review Question

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

Slide 1-17

Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and withdrawals.

d. assets, withdrawals, and expenses.

Review Question

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

Slide 1-18

Slide 1-19

Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions

1. Analyze business transactions

2. Journalize the transactions

2. Journalize the transactions

6. 6.

7. Prepare financial statements

7. Prepare financial statements

8. 8.

9. 9.

4. Prepare a trial balance

4. Prepare a trial balance

3. Post to ledger accounts

3. Post to ledger accounts

5. 5.

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Accounting CycleAccounting CycleAccounting CycleAccounting Cycle

Slide 1-21

Accounting Accounting CycleCycleAccounting Accounting CycleCycle

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Accounting Accounting CycleCycleAccounting Accounting CycleCycle

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