chap 003

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

The Accounting Cycle:The Accounting Cycle:Capturing Economic EventsCapturing Economic Events

Chapter 3

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The Role of Accounting The Role of Accounting RecordsRecords

Establishes accountability for assets and transactions.

Keeps track of routine business activities.

Obtains detailed information about a particular transaction.

Evaluates efficiency and performance within company.

Maintains evidence of a company’s business activities.

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The LedgerThe Ledger

The entire group of accounts is kept

together in an accounting record

called a ledger.

Cash

Accounts Payable

ShareCapital

Accounts are individual records showing increases

and decreases.

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The Use of AccountsThe Use of Accounts

Increases are recorded on one

side of the T account, and decreases are

recorded on the other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

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Cash5/1 8,000 5/2 2,500

5/25 75 5/8 2,0005/29 750 5/28 150

5/31 50 5/31 4,125Bal.

Receipts are on the debit

side.

Payments are on the credit

side.

The balance is the difference between the debit and credit entries

in the account.

Debit and Credit EntriesDebit and Credit Entries

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AA = LL + EEASSETSASSETS

Debit for

Increase

Credit for

Decrease

EQUITIESEQUITIES

Debit for

Decrease

Credit for

Increase

LIABILITIESLIABILITIES

Debit for

Decrease

Credit for

Increase

Debits and credits affect accounts as follows:

Debit and Credit EntriesDebit and Credit Entries

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AA = LL + EEDebit Debit

balancesbalancesCredit Credit

balancesbalances=In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

Double Entry AccountingDouble Entry AccountingThe The Equality of Debits and CreditsEquality of Debits and Credits

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Let’s record selected

transactions for JJ’s Lawn

Care Service in the accounts.

1 May: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.

Will Cash increase or decrease?

Will Share Capital increase or decrease?

Share Capital1/5 8,000

Cash1/5 8,000

Cash increases $8,000 with a debit.

Share Capital increases $8,000

with a credit.

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2 May: JJ’s purchased a riding lawn mower for $2,500 cash.


Will Tools & Equipment increase

or decrease?

Tools & Equipment2/5 2,500

Cash1/5 8,000 2/5 2,500

Cash decreases $2,500 with a credit.

Tools & Equipment increases $2,500

with a debit.

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8 May: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 in cash and issued a note payable for the remaining $13,000.

Will Truck increase or decrease?

Will Cash and Notes Payable

increase or decrease?

Truck8/5 15,000

Cash1/5 8,000 2/5 2,500

8/5 2,000 Notes Payable

8/5 13,000

Truck increases $15,000 with a debit.

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11 May: JJ’s purchased some repair parts for $300 on account.


or decrease?

Will Accounts Payable increase or

decrease?

Tools & Equipment increases $300 with

a debit.

2/5 2,500 11/5 300

Accounts Payable11/5 300

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18 May: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.


or decrease?

Will Accounts Receivable increase

or decrease?

Tools & Equipment decreases $150 with

a credit.

Tools & Equipment2/5 2,500 18/5 150

11/5 300

Accounts Receivable18/5 150

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In an actual accounting system, transactions are initially recorded in the

journal.

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

20091 May Cash 8,000

Share Capital 8,000Owners invest cash in the business.

The JournalThe Journal

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Posting Journal Entries to Posting Journal Entries to the Ledger Accountsthe Ledger Accounts

Posting simply means updating the ledger accounts for

the effects of the transactions

recorded in the journal.

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GENERAL JOURNAL


20091 May Cash 8,000

Share Capital 8,000Owners invest cash in the business.General Ledger

CashDate Debit Credit Balance20091 May 8,000 8,000


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GENERAL JOURNAL


20091 May Cash 8,000

Share Capital 8,000Owners invest cash in the business.General Ledger

Share CapitalDate Debit Credit Balance20091 May 8,000 8,000


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GENERAL JOURNAL


20092 May Tools & Equipment 2,500

Cash 2,500Purchased lawn mower.

Let’s see what the cash account looks like after posting the cash portion of this

transaction for JJ’s Lawn Care Service.


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General LedgerCash

Date Debit Credit Balance20091 May 8,000 8,000 2 2,500 5,500

This ledger format is referred to as a running balance.

Ledger Accounts After Ledger Accounts After PostingPosting

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General LedgerCash

Date Debit Credit Balance20091 May 8,000 8,000 2 2,500 5,500

T accounts are simplified versions of the ledger account that only show the

debit and credit columns.

Ledger Accounts After Ledger Accounts After PostingPosting

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Profit is not an asset it’s an increase in equity from profits of the business.

A A = LL + EEIncrease Decrease

As income is earned, either an asset is

increased or a liability is decreased.

Increase

Profit always results in the increase of

Equity

What is Profit?What is Profit?

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A A = L L + EERetained EarningsRetained Earnings

ShareCapital

Retained Earnings

The balance in the Retained Earnings account represents the profit of the corporation over the entire lifetime of the business, less all amounts

which have been distributed to the shareholders as dividends.

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JJ's Lawn Care ServiceIncome Statement

For the Month Ended 31 May 2009

Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Profit 700$

The income statement summarizes the profitability of a business for a specified period

of time.

The Income Statement: A The Income Statement: A PreviewPreview

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Accounting PeriodsAccounting PeriodsTime Period PrincipleTo provide users of financial statements

with timely information, profit is measured for

relatively short accounting periods of

equal length.

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Revenue and ExpensesRevenue and ExpensesThe price for goods sold and services rendered during a given accounting period.

Increases equity.

The costs of goods and services used up in the process of earning revenue.

Decreases equity.

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The Matching Principle: The Matching Principle: When To Record RevenueWhen To Record Revenue

Matching PrincipleRevenue should be recognized at the

time goods are sold and services are

rendered.

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The Matching Principle: The Matching Principle: When To Record ExpensesWhen To Record Expenses

Matching PrincipleExpenses should be

recorded in the period in which they

are used up.

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The Accrual Basis of The Accrual Basis of AccountingAccounting

Current Accounting Period

FutureAccounting Period

1 Jan. 2009

1 Dec. 2009

1 Jan. 2010

1 Dec. 2010

Cash is received or paid here

The income statement reports

revenue or expense here

The income statement reports

revenue or expenses here

Cash is received or paid here

OROR

But . . .

But . . .

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Debit and Credit Rules for Debit and Credit Rules for Revenue and ExpensesRevenue and Expenses

EQUITIES

Debit for

Decrease

Credit for

Increase

Expenses decrease

equity.

Revenues increase equity.

EXPENSES

Credit for

Decrease

Debit for

Increase

REVENUES

Debit for

Decrease

Credit for

Increase

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EQUITIES

Debit for

Decrease

Credit for

Increase

Payments to owners

decrease equity.

Owners’ investments

increase equity.

DIVIDENDS

Credit for

Decrease

Debit for

Increase

DividendsDividends

SHARE CAPITAL

Debit for

Decrease

Credit for

Increase

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Let’s analyze the revenue and

expense transactions for JJ’s Lawn Care Service for the month of May.

We will also analyze a dividend

transaction.

29 May: JJ’s provided lawn care services for a client and received $750 in cash.


Will Sales Revenue increase or decrease?

Sales Revenue29/5 750

Cash increases $750 with a debit.

Cash1/5 8,000 2/5 2,500

29/5 750 8/5 2,000

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31 May: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.


Will Gasoline Expense increase or

decrease?

Gasoline Expense31/5 50

Cash decreases $50 with a credit.

Cash1/5 8,000 2/5 2,500

29/5 750 8/5 2,000 31/5 50

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31 May: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend.


Will Dividends increase or decrease?

Dividends31/5 200

Cash decreases $200 with a credit.

Cash1/5 8,000 2/5 2,500

29/5 750 8/5 2,000 31/5 50 31/5 200

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Now, let’s look at the Trial Balance

for JJ’s Lawn Care Service for

the month of May.

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JJ's Lawn Care Service Unadjusted Trial Balance

31 May 2009Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Truck 15,000 Notes payable 13,000$ Accounts payable 150 Share capital 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Total 21,900$ 21,900$

All balances are taken from the ledger accounts on 31 May after considering all of JJ’s transactions for the

month.

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The Accounting Cycle in The Accounting Cycle in PerspectivePerspective

Accountants spend much of their time

focusing on the more analytical aspects of their

discipline.

3-38

End of Chapter 3End of Chapter 3

chap 003

Documents

apage psheet1cash518

apage psheet1cash158

journal entries

ledger format

jjs cost

cash account

apa p3

jjs lawn care service