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The Mechanics ofAccountingThe Mechanics ofAccounting
C H A P T E R 3
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Learning Objective 1
Understand the process of transforming transaction data into useful accounting information.
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What Are the Different Exchange Transactions?
ExchangeTransactions
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Business Documents
Examples: Sales invoice, purchase order, check stub.
Business documents are usedto confirm that an arm’s-length transaction has occurred.to establish the amounts to be recorded.to facilitate the analysis of business events.
These documents must be analyzed.
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What is the Sequence of the Accounting Cycle?
Step 1Step 2Step 3
Step 4
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Learning Objective 2
Analyze transactions and determine how those transactions affect the accounting equation (step one of the accounting cycle).
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Step 1: Analyze Transactions
• What accounts are involved?
• Did each account increase or decrease?
• By how much?
Transaction analysis framework
• Transaction analysis:
• breaks down complex transactions into manageable pieces.
• provides a self-checking mechanism.
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What Is the Accounting Equation?
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A = L + OE
Describe Effect of the Following Transactions on a Company
Borrow money
Invest in company
Pay off a note
Purchase equipment
Borrow funds to settle a debt
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What Is the Rule of Double-Entry Accounting?
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Accounts provide an efficient method to categorize transactions.
A T-account is a simplified depiction of an account.
Name of Account
Debit Credit
Using Accounts
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Using a T-Account
35 12
The cash account has a beginning balance of $35. A check for $12 is written to pay for supplies. Using a T-account, what is the ending balance of the cash account?
Cash
23
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Debits and Credits
Debits are simply entries
on the left.
Credits are simply entries on the right.
Remember:
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Explain How Debits and Credits Work
Assets = Liabilities + Owners’ Equity
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Revenues
Increases in a company’s resources from the sale of goods or the performance of services.
Expenses
Decreases in a company’s resources incurred in the normal course of business to generate revenues.
Dividends
Distributions to owners, which reduce Owners’ Equity.
Expanding the Equation
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Draw the Expanded Accounting Equation
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Learning Objective 3
Record the effects of transactions using journal entries (step two of the accounting cycle).
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Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
What is another name for the journal?
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Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
General Journal Entry Format:
Date Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
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Journal Entries
What is the three-step process?
12
3
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Supplies purchased for $25 are purchased “on account.”
Prepare the correct journal entry. What do we mean by purchased “on account?”
Example 1: Journal Entry
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Example 2: Journal Entry
A check for $100 is received in payment for services rendered.
Make the correct journal entry.
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Example 3: Journal EntryMerchandise is sold to a customer on account for $75. The cost of the product was $60.
Make the journal entries.
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DateDate TransactionTransaction Ref.Ref. DebitsDebits CreditsCredits
Jan. 1 Supplies 25
Accounts Payable 25 Purchased supplies on account.
Feb. 1 Cash 101 100
Revenue 100 Received cash for services.
Mar. 1 Accounts Receivable 75
Sales Revenue 75 Sold merchandise on account.
Journal 1 Page 1
Entered when posted to ledger.
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Learning Objective 4
Summarize the resulting journal entries through posting and prepare a trial balance (step three of the accounting cycle).
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Step 3: Posting Journal Entries and Preparing a Trial Balance
Define the Following Terms
Posting
Ledger
Posting reference
Chart of accounts
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General Ledger
Date Explanation Ref. Debits Credits Balance
Jan. 1 Balance 100
2 Issued 100 shares of capitalstock at $10 per share GJ1 1,000 1,100
3 Purchased equipment GJ1 300 800
4 Sold inventory GJ1 60 860
5 Monthly payment on loan GJ1 230 630
6 Revenue GJ1 2,500 3,130
ACCOUNT: Cash Account No. 101
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ASSETS (100-199):Current Assets (100-150):101 Cash105 Accounts Receivable107 Inventory
Long-Term Assets (151-199):151 Land152 Buildings
LIABILITIES (200-299):Current Liabilities (200-219):201 Notes Payable202 Accounts Payable
Long-Term Liabilities (220-239):222 Mortgage Payable
OWNERS’ EQUITY (300-399):301 Capital Stock330 Retained Earnings
SALES (400-499):400 Sales Revenue
EXPENSES (500-599):500 Cost of Goods Sold501 Sales Salaries and
Commissions523 Rent Expense528 Advertising Expense573 Utilities Expense579 Accounting and Legal Fees
Chart of Accounts
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Determining Account Balances
Name of Account
Debit Credit
Accounts with typical debit
balances are?
Accounts with typical credit balances are?
ExpensesAssets
Dividends
Owners’ EquityRevenues or
IncomeLiabilities
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
Do you see the mnemonic memory device, DEAD COIL?
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Define The Trial Balance
What is the Trial Balance used for?
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The Example Company Trial Balance December 31, 2006
Debits Credits Cash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses 15 ______
Total $ 1,123 $ 1,123
Sample Trial Balance
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Learning Objective 5
Describe how technology has affected the first three steps of the accounting cycle.
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List Advantages of Computers
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List Disadvantages of Computers
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End Chapter 3