chapter 02 lecture
TRANSCRIPT
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Chapter 02
The Accounting Information System
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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Roles of Financial Accounting
o Measure business activities of the company.
o Communicate those measurements to external parties for decision-making purposes.
o Measure business activities of the company.
o Communicate those measurements to external parties for decision-making purposes.
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Part A
Measuring Business Activities
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LO1 Identify the Basic Steps in Measuring External Transactions
o Most business enterprises use a computerized accounting system due to the sheer volume of data they must process.
o Computerized data processing is fast, accurate, and affordable.
o Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programs.
o Most business enterprises use a computerized accounting system due to the sheer volume of data they must process.
o Computerized data processing is fast, accurate, and affordable.
o Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programs.
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Classification of Business Activities
EXTERNALTRANSACTIONS
EXTERNALTRANSACTIONS
TRANSACTIONSTRANSACTIONS
With a separateeconomic entity
With a separateeconomic entity
With in the company
INTERNALTRANSACTIONS
INTERNALTRANSACTIONS
Do not include a separateeconomic entity
Do not include a separateeconomic entity
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Measuring External Transactions
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LO2 Analyze the Impact of External Transactions on the Accounting Equation
= +
(resources) (claims to resources)
Assets Stockholders' EquityLiabilities
Each transaction will have a dual effect. If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount.
Each transaction will have a dual effect. If an economic event increases one side of the equation, then it also increases the other side of the equation by the same amount.
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Ask yourself these questions…
1. “What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?”
2. “What is a second account in the accounting equation affected by the transaction? Did that account increase or decrease?”
3. ”Do assets still equal liabilities plus stockholders’ equity?”
1. “What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?”
2. “What is a second account in the accounting equation affected by the transaction? Did that account increase or decrease?”
3. ”Do assets still equal liabilities plus stockholders’ equity?”
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External Transactions of Eagle Golf Academy
Transaction Date External Transactions in JanuaryType of Activity
(1) Jan. 1 Sell shares of common stock for $25,000 to obtain the funds necessary to start the business.
Financing
(2) Jan. 1 Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years.
Financing
(3) Jan. 1 Purchase equipment necessary for giving golf training, $24,000.
Investing
(4) Jan. 1 Pay one year of rent in advance, $6,000 ($500 per month).
Operating
(5) Jan. 6 Purchase supplies on account, $2,300. Operating
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External Transactions of Eagle Golf Academy (Contd.)
Transaction Date External Transactions in JanuaryType of Activity
(6) Jan. 12 Provide golf training to customers for cash, $3,600.
Operating
(7) Jan. 17 Provide golf training to customers on account, $2,500.
Operating
(8) Jan. 23 Receive cash in advance for 10 golf training sessions to be given in the future, $600.
Operating
(9) Jan. 28 Pay salaries to employees, $2,800. Operating(10) Jan. 30 Pay cash dividends of $200 to
shareholders.Financing
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Transaction(1): Issue Common Stock
Eagle Golf Academy InvestorsStock certificate
It’s time to ask the three questions we asked earlier:
o What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?
Answer: Cash. Cash is a resource owned by the company, which makes it an asset. The company receives cash from you, so cash and total assets increase by $25,000.
It’s time to ask the three questions we asked earlier:
o What is one account in the accounting equation affected by the transaction? Does that account increase or decrease?
Answer: Cash. Cash is a resource owned by the company, which makes it an asset. The company receives cash from you, so cash and total assets increase by $25,000.
To generate cash from external sources, Eagle sells shares of common stock for $25,000.
To generate cash from external sources, Eagle sells shares of common stock for $25,000.
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2. What is a second account in the accounting equation affected by the transaction? Does that account increase or decrease?
Answer: Common stock. Common stock is a stockholders’ equity account. Issuing common stock to you in exchange for your $25,000 increases the amount of common stock owned by stockholders, so common stock and total stockholders’ equity both increase.
2. What is a second account in the accounting equation affected by the transaction? Does that account increase or decrease?
Answer: Common stock. Common stock is a stockholders’ equity account. Issuing common stock to you in exchange for your $25,000 increases the amount of common stock owned by stockholders, so common stock and total stockholders’ equity both increase.
Transaction(1): Issue Common Stock
Assets = Liabilities + Stockholders' Equity
Cash +$25,000 = Common Stock +$25,000
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3. Do assets equal liabilities plus stockholders’ equity?
Answer: Yes.
3. Do assets equal liabilities plus stockholders’ equity?
Answer: Yes.
Transaction(1): Issue Common Stock
Note: The accounting equation balances. If one side of the equation increases, so does the other side. We can use this same series of questions to understand the effect of any business transaction.
Assets = Liabilities + Stockholders' Equity
Cash +$25,000 = Common Stock +$25,000
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Transaction(2): Borrow from the Bank
Seeking cash from another external source, Eagle borrows $10,000 from the bank and signs a note for it.
Seeking cash from another external source, Eagle borrows $10,000 from the bank and signs a note for it.
Assets = Liabilities + Stockholders' Equity
Cash +$10,000 = Notes Payable +$10,000
Eagle Golf Academy Bank
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Summary of Initial Financing Transactions Eagle Gold Academy
The effects of the two financing activities we’ve analyzed are summarized below
The effects of the two financing activities we’ve analyzed are summarized below
Assets = Liabilities + Stockholders' EquityFinancing Activities:
(1) Cash +$25,000 Common Stock +$25,000(2) Cash +$10,000 Notes Payable +$10,000Total $35,000 = $10,000 + $25,000
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Transaction(3): Purchase Equipment
Eagle Golf Academy Supplier
Purchase equipment with cash, $24,000.Purchase equipment with cash, $24,000.
Assets = Liabilities + Stockholders' Equity
Equipment +$24,000Cash -$24,000
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Summary of Initial Financing and Investing Transactions of Eagle Golf Academy
Assets = Liabilities + Stockholders' EquityFinancing Activities:
(1) Cash +$25,000 Common Stock +$25,000(2) Cash +$10,000 Notes Payable +$10,000
$35,000 = $10,000 + $25,000
Investing Activities:
(3) Equipment +$24,000Cash -$24,000
Total $35,000 = $10,000 + $25,000
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Transactions(4) and(5): Incur Costs for Rent and Supplies
Pay one year of rent in advance, $6,000.Pay one year of rent in advance, $6,000.
Eagle Golf Academy Landlord
Rental space
Assets = Liabilities + Stockholders' Equity
Prepaid Rent +$6,000Cash -$6,000
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Transactions(4) and(5): Incur Costs for Rent and Supplies
Purchase of supplies on account, $2,300.Purchase of supplies on account, $2,300.
Eagle Golf Academy Supplier
Assets = Liabilities + Stockholders' Equity
Supplies +$2,300 = Account Payable +$2,300
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Effects of transactions on the Expanded Accounting Equation
BasicAssets = Liabilities + Accounting
Equation
Common Stock + Retained Earnings
Expanded
Revenues − Expenses – Dividends
Net Income
Stockholders' Equity
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Transations(6) and (7): Provide Services to Customers
Eagle Golf Academy CustomersTraining
Providing service to customers for cash causes both assets and stockholders’ equity to increase.
Providing service to customers for cash causes both assets and stockholders’ equity to increase.
Assets = Liabilities +
Cash +$3,600 = Common Stock + Retained Earnings+$3,600
Revenues − Expenses – DividendsService Revenue
Stockholders' Equity
RevenueRetained Earnings
Stockholders’ Equity
NetIncome
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Transations(6) and (7): Provide Services to Customers
Similarly, providing service to customers on account causes both assets and stockholders’ equity to increase
Similarly, providing service to customers on account causes both assets and stockholders’ equity to increase
Assets = Liabilities +
Accounts +$2,500 = Common Stock + Retained EarningsRecievable +$2,500
Revenues − Expenses – DividendsService Revenue
Stockholders' Equity
Eagle Golf Academy CustomersTraining
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Transaction(8): Receive Cash in Advance from Customer
Receive cash in advance from customers, $600.Receive cash in advance from customers, $600.
Assets = Liabilities +
Cash +$600 = Unearned Common Stock + Retained EarningsRevenue
+$600 Revenues − Expenses – Dividends
Stockholders' Equity
Eagle Golf Academy CustomersTraining
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Transaction(9): Incur Cost for Salaries
Eagle Golf Academy Employee
Labor
Pay salaries to workers, $2,800Pay salaries to workers, $2,800
ExpenseRetained Earnings
Stockholders’ Equity
NetIncome
Assets = Liabilities +
Cash -$2,800 = Common Stock + Retained Earnings-$2,800
Revenues − Expenses – DividendsSalaries Expense
Stockholders' Equity
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Transaction (10): Pay Dividends
Eagle Golf Academy Investors
Pay dividends to stockholders, $200Pay dividends to stockholders, $200
DividendsRetained Earnings
Stockholders’ Equity
Assets = Liabilities +
Cash -$200 = Common Stock + Retained Earnings-$200
Revenues − Expenses – Dividends
Dividends
Stockholders' Equity
Reduced Claims toCompany’s Resources
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Summary of All Ten External Transactions of Eagle Golf Academy
= +Financing Activities:
(1) Cash $25,000 Common Stock $25,000
(2) Cash $10,000 Notes Payable $10,000
Subtotal $35,000 = $10,000 + $25,000
Investing Activities:
(3) Equipment $24,000
Cash -$24,000Subtotal $35,000 = $10,000 + $25,000
Operating Activities:(4) Prepaid Rent $6,000
Cash -$6,000(5) Supplies $2,300 Accounts Payable $2,300(6) Cash $3,600 Service Revenue $3,600(7) Accounts Receivable $2,500 Service Revenue $2,500(8) Cash $600 Unearned Revenue $600(9) Cash -$2,800 Salaries Expense -$2,800
Subtotal $41,200 = $12,900 + $28,300
Financing Activity:
(10) Cash -$200 Dividends -$200Total $41,000 = $12,900 + $28,100
Stockholders’ EquityLiabilitiesAssets
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PART B
Debits and Credits
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LO3 Assess Whether the Impact of External Transactions Results in a Debit or Credit to an Account Balance
Debit and Credit Effects on Accounts in the Accounting Equation
Debit and Credit Effects on Accounts in the Accounting Equation
= +
Debit Credit Debit Credit Debit Credit
Assets Liabilities Stockholders' Equity
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Ask yourself these questions…
1. “Is there an increase or decrease in the first account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”
2. “Is there an increase or decrease in the second account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”
3. “Do total debits equal total credits?”
1. “Is there an increase or decrease in the first account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”
2. “Is there an increase or decrease in the second account involved in the transaction? Should I record that increase or decrease with a debit or a credit?”
3. “Do total debits equal total credits?”
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Recall Our Example
Eagle issues common stock for cash of $25,000 in transaction (1).
Eagle issues common stock for cash of $25,000 in transaction (1).
= +
Cash +$25,000 = Common +$25,000Stock
Debit Credit Debit Credit25,000 25,000
Assets
Cash Common Stock
Stockholders' EquityLiabilities
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Recall Our Example
The bank borrowing of $10,000 in transaction (2) has the following effects:
The bank borrowing of $10,000 in transaction (2) has the following effects:
= +
Cash +$10,000 = Notes +$10,000Payable
Debit Credit Debit Credit10,000 10,000
Assets
Cash Notes Payable
Stockholders' EquityLiabilities
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Debit and Credit Effects on Accounts in the Expanded Accounting Equation
= +
Debit Credit Debit Credit Debit Credit
+
Debit Credit Debit Credit
- -
Debit Credit Debit Credit Debit Credit
Assets Liabilities Stockholders' Equity
Common Stock Retained Earnings
Expenses DividendsRevenues
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LO4 Record Transactions Using Debits and Credits
A journal provides a chronological record of all transactions affecting a firm.
A journal provides a chronological record of all transactions affecting a firm.
January 1 Debit Credit
Cash (+A ) ..................................................... 25,000Common Stock (+SE ) ........................... 25,000(Issue common stock for cash)
January 1 Debit Credit
Cash (+A ) ..................................................... 10,000Notes Payable (+L ) ............................... 10,000(Borrow by signing long-term note)
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LO5 Post Transactions to T-accounts in the General Ledger
o The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting.
o A T-account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits.
o The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting.
o A T-account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits.
ACCOUNT TITLE
DEBIT CREDIT
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Post Transactions to T-accounts in the General Ledger
(1) 25,000Total (2) 10,000
Debits (3) 24,000(Increases) (4) 6,000 Total
$39,200 (6) 3,600 Credits(8) 600 (Decreases)
(9) 2,800 $33,000Ending (10) 200Balance Bal. 6,200
Cash
CreditDebit
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Summary of the Measurement Process
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Summary of External Transactions Recorded for Eagle Golf Academy
January 1 Debit Credit
Cash (+A ) ..................................................... 25,000Common Stock (+SE ) ........................... 25,000(Issue common stock for cash)
January 1
Cash (+A ) ..................................................... 10,000Notes Payable (+L ) ............................... 10,000(Borrow by signing long-term note)
January 1
Equipment (+A ) ............................................ 24,000Cash (-A ) ............................................... 24,000(Purchase equipment for cash)
January 1
Prepaid Rent (+A ) ......................................... 6,000Cash (−A ) ................................................ 6,000(Prepay rent for cash)
January 6
Supplies (+A ) ................................................ 2,300Accounts Payable (+L ) ............................. 2,300(Purchase supplies on account)
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Summary of External Transactions Recorded for Eagle Golf Academy (Contd.)
January 12 Debit Credit
Cash (+A ) ....................................................... 3,600Service Revenue (+R, +SE ) .................... 3,600(Provide training to customers for cash)
January 17
Accounts Receivable (+A ) .............................. 2,500Service Revenue (+R, +SE ) .................... 2,500(Provide training to customers on account)
January 23
Cash (+A ) ....................................................... 600Unearned Revenue (+L ) ........................... 600(Receive cash in advance from customers)
January 28
Salaries Expense (+E, −SE ) .......................... 2,800Cash (−A ) ................................................. 2,800(Pay workers’ salaries)
January 30
Dividends (+D, −SE ) ...................................... 200Cash (−A ) ................................................. 200(Pay cash dividends)
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Posting External Transactions of Eagle Golf Academy to General Ledger Accounts
= +
(1) 25,000 (3) 24,000 (7) 2,500 (5) 2,300 (1) 25,000 0(2) 10,000 (4) 6,000(6) 3,600 (9) 2,800
(8) 600 (10) 200
(5) 2,300 (4) 6,000 (8) 600 (6) 3,600 (9) 2,800(7) 2,500
(3) 24,000 (2) 10,000 (10) 200
Bal. 25,000 0
Accounts ReceivableCash
AccountsPayable
Supplies
Bal. 6,200
Bal. 2,500 Bal. 2,300
Assets
Bal. 24,000
Unearned Revenue
Bal. 600
NotesPayable
Bal. 10,000
Bal. 2,300
Prepaid Rent
Bal. 6,000
Equipment
Bal. 200
Salaries Expense
Bal. 2,800
Stockholders' Equity
Service Revenue
Bal. 6,100
Dividends
Common Stock
Retained Earnings
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LO6 Prepare a Trial Balance
o A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.
o Another purpose of the trial balance is to assist us in preparing adjusting entries (for internal transactions).
o It is not a published financial statement to be used by external parties, there is no required order for listing accounts in the trial balance.
o The trial balance is used for internal purposes only and provides a check on the equality of the debits and credits.
o A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.
o Another purpose of the trial balance is to assist us in preparing adjusting entries (for internal transactions).
o It is not a published financial statement to be used by external parties, there is no required order for listing accounts in the trial balance.
o The trial balance is used for internal purposes only and provides a check on the equality of the debits and credits.
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Trial Balance of Eagle Golf Academy
Account Title Debit CreditCash $6,200 Accounts Receivable 2,500Supplies 2,300Prepaid Rent 6,000Equipment 24,000Accounts Payable $2,300 Unearned Revenue 600Notes Payable 10,000Common Stock 25,000Retained Earnings 0Dividends 200Service Revenue 6,100Salaries Expense 2,800
Totals $44,000 $44,000
Eagle Golf AcademyTrial BalanceJanuary 31
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End of chapter 02
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