ACCT 100 Chapter 2 The Recording Process of Accounting Information

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.

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.

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.

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.

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.

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.

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

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)

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.

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.

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.

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

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

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 + +

Processing Accounting Information 16 A. Double-Entry System (contd.)

Processing Accounting Information 17 B. Introduction of the T- account Inventory Accounts Payable Debit CreditDebit Credit

Processing Accounting Information 18 Debit Credit Debit Credit Debit A L E Revenue Expense Credit Debit Credit C. Increases and Decreases in the Accounts

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

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

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

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

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

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,

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, ,500 2,

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.

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

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 22,000

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: Cash Dividends 50,00040,000 2,100 5,500 2,700 1, ,000 2,100 33,300

Processing Accounting Information 30 D. Examples of Journalizing and Posting Transactions (contd.) n The followings are examples of T- accounts, trial balance and financial statements of the example in Exhibit 2.1.

Processing Accounting Information 31 Exhibit 2-2 (from Financial Accounting by Harrison and Horgren) ASSETS = LIABILITIES + STOCKHOLDERS EQUITY Cash (1)50,000(2)40,000 (4)5,500(6)2,700 (9)1,000(7)400 (10)22,000(11)2,100 Bal.33,300 A/P (7)400(3)500 Bal.100 Comm Stock (1)50,000 Bal.50,000 EXPENSES Rent Exp. (6)1,100 Bal.1,100 A/R (5)3,000(9)1,000 Bal.2,000 Office Supplies (3)500 Bal.500 Land (2)40,000(10)22,000 Bal.18,000 Dividends (11)2,100 Bal.2,100 REVENUE Service Rev. (4)5,500 (5)3,000 Bal.8,500 Salary Exp. (6)1,200 Bal.1,200 Utilities Exp. (6)400 Bal

Processing Accounting Information 32 Exhibit 2-3 (from Financial Accounting by Harrison and Horngren) Balance Account TitleDebit Credit Cash$33,300 Accounts receivable2,000 Office supplies500 Land 18,000 Accounts payable $ 100 Common Stock50,000 Dividends2,100 Service revenue8,500 Rent expense1,100 Salary expense 1,200 Utilities expense 400 Total$58,600$58,600 AIR & SEA TRAVEL, INC. Trail Balance 4/30/19x1 32

Processing Accounting Information 33 Exhibit 2-4 (from Financial Accounting by Harrison and Horngren) Revenue: Service revenue ($5,500+$3,000)...$ 8,500 Expenses: Salary expense ………………………$1,200 Rent expense ………………………..1,100 Utilities expense …………………… Total expenses ……………………… 2,700 Net income …………………………….. $5,800 AIR & SEA TRAVEL, INC. Income Statement Month Ended April 30, 19x1 Retained earnings, April 1, 19x1 ……...$ 0 Add: Net income for the month..……… 5,800 5,800 Less: Dividends …………………………. 2,100 Retained earnings, April 30, 19x1………$3,700 AIR & SEA TRAVEL, INC. Statement of Retained Earnings Month Ended April 30, 19x1 33

Processing Accounting Information 34 Exhibit 2-3 (contd.) Retained earnings, April 1, 19x1 ……...$ 0 Add: Net income for the month..……… 5,800 5,800 Less: Dividends …………………………. 2,100 Retained earnings, April 30, 19x1………$3,700 Statement of Retained Earnings Month Ended April 30, 19x1 AssetsLiabilities Cash …………...$33,300Accounts payable …...$ 100 A/R ……………..2,000 Office supplies..500Stockholders Equity Land …………...18,000Common stock ……….50,000 Retained earnings …... 3,700 Total stockholders equity ……………..53,700 Total liabilities and Total assets …….$53,800 stockholders equity...$53,800 AIR & SEA TRAVEL, INC. Balance Sheet April 30, 19x1 34

Processing Accounting Information 35 Exhibit 2-3 (contd.) Statement of Cash Flows, Month Ended April 30, 19x1 Cash flows from operating activities: Receipts: Collections fm customers ($5,500+1,000) ……..$ 6,500 Payments: To suppliers and employees ($ ) …….(3,100) Net cash inflow fm operating activities ……...3,400 Cash flows from investing activities: Acquisition of land …………………………………..$(40,000) Sale of land …………………………………………..22,000 Net cash outflow from investing activities…...(18,000) Cash flows from financing activities: Issuance (sale) of stock to owners ………………..$50,000 Dividends …………………………………………….(2,100) Net cash inflow from financing activities…….47,900 Net increase in cash …………………………………..$33,300 Cash balance, April 1, 19x1 ………………………….0 Cash balance, April 30, 19x1 ………………………...$33,300 Balance Sheet, April 30, 19x1 AssetsLiabilities Cash …………………….$33,300Accounts payable ……………...$ 100 A/R ……………………...2,000 Office supplies ………...500Stockholders Equity Land …………………….18,000Common stock ………………....50,000 Retained earnings …………….. 3,700 Total stockholders equity …..53,700 Total liabilities and Total assets ………….…$53,800 stockholders equity…………..$53,800 35

Processing Accounting Information 36 An Example of the Journal and A Ledger Account (cash):

Processing Accounting Information 37 An Example of the Journal and A Ledger Account (cash): (contd.) The Ledger: all individual accounts (assets, liability, and stockholders equity accounts) combined make up the ledger.

Processing Accounting Information 38 The Flows of Accounting Data Transaction Occurs Source Documents Prepared Transaction Analysis Takes Place Transaction Entered in Journal Amounts Posted to Ledger

Processing Accounting Information 39 The Normal Balance of an Account AssetsDebit LiabilitiesCredit Stockholders EquityCredit (overall) Common StockCredit Retained EarningsCredit DividendsDebit RevenuesCredit ExpensesDebit

Processing Accounting Information 40 The Chart of Accounts