Fa5 Horngren ch02

Processing Accounting
Information
Chapter 2
2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren
2-1
Learning Objective 1
Analyze business
transactions.
2-2
The Account
Accountings main summary device
is the account, the record of changes.
Accounts are grouped in three broad categories,
according to the accounting equation:
Cash
2-3
The Account
Assets are the economic resources that
benefit the business now and in the future
Cash
Accounts receivable
Inventory
Notes receivable
Prepaid expenses
Land
Buildings
Equipment,
furniture,
and fixtures
2-4
The Account
Liabilities are the debts of the company.
Notes payable
Accounts payable
Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)
2-5
The Account
Stockholders (owners) equity is the
owners claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each
owners capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
2-6
The Account
Common Stock
Dividends
Retained Earnings
Revenues
Expenses
2-7
Accounting for Business

Transactions
A transaction is any event that both affects

the financial position of the business entity
and can be reliably recorded.
2-8

Transactions
The Lyons invest $50,000 to begin
the business, and Air & Sea Travel
issues common stock.
(1) Cash
Assets
+ 50,000
= Liabilities
=
Stockholders
+ Equity
+ 50,000*
*Common stock
2-9

Transactions
Air & Sea purchases land for an
office location, paying $40,000 in cash.
Stockholders
Assets
= Liabilities + Equity
Balance
+ 50,000
=
+ 50,000*
(2) Cash
Land
40,000
+ 40,000
50,000
+ 50,000*
*Common stock
2 - 10

Transactions
The business buys stationery and other
office supplies, agreeing to pay $500
to the office-supply store within 30 days.
Stockholders
Assets
Balance
+ 50,000
=
+ 50,000*
(3) Supplies
+ 500
= + 500
50,500
=
500
+ 50,000
*Common stock
2 - 11

Transactions
Air & Sea Travel earns service revenue
of $5,500 and collects this amount in cash.
Balance
(4) Cash
Assets
+ 50,500
+ 5,500
56,000
=
=
=
=
Stockholders
Liabilities + Equity
500
+ 50,000*
+ 5,500
500
+ 55,500
*Common stock
2 - 12

Transactions
Air & Sea Travel performs services for
customers on account for $3,000.
Assets
Balance
+ 56,000
(5) Receivable + 3,000
59,000
= Liabilities
=
500
=
=
500
Stockholders
+ Equity
+ 55,500
+ 3,000
+ 58,500
2 - 13

Transactions
Air & Sea Travel pays $2,700 for the following
cash expenses: office rent $1,100,
employee salary $1,200, and utilities $400.
Stockholders
Assets
Balance
+ 59,000
=
500
+ 58,500
(6) Expenses 2,700
=
2,700
56,300
=
500
+ 55,800
2 - 14

Transactions
Air & Sea Travel pays $400 to the store from
which it purchased $500 worth of office
supplies in Transaction 3.
Stockholders
Assets
Balance
+ 56,300
=
500
+ 55,800
(7) Cash
400
= 400
55,900
=
100
+ 55,800
2 - 15

Transactions
The owners remodel their home at a cost of
$30,000, paying cash from personal funds.
This event is a transaction of the
personal entity, not the business entity.
No transaction is recorded for Air & Sea Travel.
2 - 16

Transactions
The business collects $1,000
from a customer on account.
Balance
Assets
+ 55,900
(9) Cash
+ 1,000
Receivable 1,000
55,900
= Liabilities
=
100
Stockholders
+ Equity
+ 55,800
+ 55,800
100
2 - 17

Transactions
Air & Sea Travel sells land for a price of $22,000,
which is equal to the amount it paid for the land.
Stockholders
Assets
Balance
+ 55,900
=
100
+ 55,800
(10) Cash
Land
+ 22,000
22,000
55,900
100
+ 55,800
2 - 18

Transactions
The corporation declares a dividend and pays
$2,100 cash to the stockholders.
Balance
(11) Cash
Assets
+ 55,900
2,100
53,800
= Liabilities
=
100
=
=
100
Stockholders
+ Equity
+ 55,800
2,100
+ 53,700
2 - 19

Transactions
Cash
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Bal.
Assets
Accounts
Receivable
+ 50,000
40,000
+ 5,500
Office
+ Supplies
+ 500
Land
+ 40,000
+ 3,000
1,100
1,200
400
400
Not a transaction of the business
+ 1,000
1,000
+ 22,000
2,100
33,300
2,000
22,000
500
18,000
2 - 20

Transactions
Liabilities
Accounts
Payable
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Bal.
+
+
Stockholders Equity
Common
Retained Type of Stockholders
Stock
+ Earnings Equity Transaction
+ 50,000
+ 500
400
100
50,000
Issued stock
+ 5,500
+ 3,000
1,100
1,200
400
Service revenue
Service revenue
Rent expense
Salary expense
Utilities expense
2,100
3,700
Dividends
2 - 21
Income Statement
Month Ended April 30, 20x3
Revenue:
Service revenue
Expenses:
Salary expense
Rent expense
Utilities expense
Total expenses
Net income
$8,500
$1,200
1,100
400
2,700
$5,800
2 - 22
Statement of Retained Earnings

Retained earnings, April 1, 20x3
Add: Net income for the month
Less: Dividends
Retained earnings, April 30, 20x3
0
5,800
$5,800
(2,100)
$3,700
2 - 23
Balance Sheet
April 30, 20x3
Assets
Cash
Accounts receivable
Office supplies
Land
$ 33,300
2,000
500
18,000
Total assets
$ 53,800
Liabilities
Accounts Payable
$ 100
Stockholders Equity
Common stock
$50,000
Retained earnings
3,700
Total stockholders
equity
$53,700
Total liabilities and
stockholders equity $53,800
2 - 24
Statement of Cash Flows

Cash flows from operating activities:
Collections from customers ($5,500 + $1,000)
Cash payments to suppliers and employees
($2,700 + $400)
Net cash inflow from from operating activities
Cash flows from investing activities:
Acquisition of land
$(40,000)
Sale of land
22,000
Net cash outflow from investing activities
$ 6,500
(3,100)
$ 3,400
(18,000)
2 - 25
Statement of Cash Flows

Cash flows from operating activities: $ 3,400
Cash flows from investing activities: (18,000)
Cash flows from financing activities:
Issuance (sale) of stock $50,000
Payment of dividends (2,100)
Net cash inflows from financing activities $47,900
Net increase (decrease) in cash $33,300
Cash balance, April 1, 20x3 0
Cash balance, April 30, 20x3$33,300
2 - 26
Understand how
accounting works.
2 - 27
Double-Entry Accounting
Double-entry bookkeeping means to record
the dual effects of each business transaction.
2 - 28
The T-Account
Account Title
Debit
LEFT SIDE
Credit
RIGHT SIDE
2 - 29
Increases and Decreases

in the Accounts
Accounting
Equation:
Rules of
Debit and
Credit:
Assets
Debit Credit
+
Liabilities
Debit Credit
Stockholders
+
Equity
Debit Credit
2 - 30
Rules of Debit and Credit

Air & Sea received $50,000 and issued stock.
Assets
Cash
Debit
for
Increase,
50,000
Liabilities
Stockholders
Equity
Common Stock
Credit
for
Increase,
50,000
2 - 31
Rules of Debit and Credit

Air & Sea purchased land for $40,000 cash.
Assets
Cash
Bal. 50,000
Credit
for
Decrease,
40,000
Land
Debit
for
Increase,
40,000
Liabilities
Stockholders
+
Equity
Common Stock
Bal. 50,000
2 - 32
Expansion of the
Accounting Equation
Assets
Liabilities
Stockholders
Equity
+
Common Stock
+
Retained Earnings
Dividends
+
Revenues
Expenses
2 - 33
Record business
transactions.
2 - 34
Recording Transactions
in the Journal
Identify the transaction and
specify each account affected.
Determine whether each account is
increased or decreased by the transaction.
Use the rules of debits and credits.
Enter the transaction in the journal,
including a brief explanation for the entry.
2 - 35
Recording Transactions
in the Journal
Journal
Date
Accounts and Explanation
April 2 Cash
Common Stock
Issued common stock
Debit
Page 1
Credit
50,000
50,000
2 - 36
Posting from Journal to Ledger

The journal is a chronological record
of all transactions listed by date.
The ledger is a grouping of all the
accounts; it shows their balances.
Data must be copied to the ledger
a process called posting.
2 - 37

Cash
Cash
Individual asset accounts
Accounts
Accounts
Payable
Payable
Common
Common
Stock
Stock
All individual
accounts
combined
make up
the ledger.
Ledger
Ledger
Individual liability accounts
Individual stockholders equity accounts
2 - 38

Journal Entry
Accounts and Explanation
Cash
Common Stock
Issued common stock
Debit
50,000
Credit
50,000
Posting to the Ledger

Cash
50,000
Common Stock
50,000
2 - 39
Flow of Accounting Data
Transaction
Occurs
Transaction
Analyzed
Transaction
Entered in
the Journal
Amounts
Posted to
the Ledger
2 - 40
Accounts After Posting

=
ASSETS
(1)
(4)
(9)
(10)
Bal.
(5)
Bal.
(3)
Bal.
(2)
Bal.
50,000
5,500
1,000
22,000
33,300
Cash
(2)
(6)
(7)
(11)
40,000
2,700
400
2,100
LIABILITIES
(7)
Accounts Payable
400
(3)
Bal.
500
100
Accounts Receivable
3,000
(9)
1,000
2,000
Office Supplies
500
500
Land
40,000
(10)
22,000
18,000
2 - 41
Accounts After Posting

+
STOCKHOLDERS EQUITY
Common Stock
(1)
Bal.
50,000
50,000
(11)
Bal.
Dividends
2,100
2,100
REVENUE
EXPENSES
Service Revenue
(4)
(5)
Bal.
(6)
Bal.
Rent Expense
1,100
1,100
(6)
Bal.
Salary Expense
1,200
1,200
(6)
Bal.
Utilities Expense
400
400
5,500
3,000
8,500
2 - 42
Use a trial balance.
2 - 43
Trial Balance
A trial balance lists all accounts with

their balances assets first, followed by
liabilities, and then stockholders equity.
DEBITS
CREDITS
2 - 44
Correcting Accounting Errors

Search the records for a missing amount.
Divide the out-of-balance amount by 2
(a debit treated as a credit or vice versa).
Divide the out-of-balance amount
by 9, which may indicate a slide
or a transposition.
2 - 45
Chart of Accounts
It is a listing of all accounts and
account numbers used by a business.
Assets are often numbered beginning with 1,
liabilities with 2, stockholders equity with 3,
revenues with 4, and expenses with 5.
2 - 46
Air & Sea Travel

Chart of Accounts
BALANCE SHEET ACCOUNTS:
Assets
101 Cash
111 Accounts Receivable
141 Office Supplies
151 Office Furniture
191 Land
Liabilities
201 Accounts Payable
231 Notes Payable
Stockholders Equity
301 Common Stock
311 Dividends
312 Retained Earnings
INCOME STATEMENT ACCOUNTS

(PART OF STOCKHOLDERS EQUITY):
Revenues
401 Service Revenue
Expenses
501 Rent Expense
502 Salary Expense
503 Utilities Expense
2 - 47
Normal Balances of the Accounts

Assets
Liabilities
Stockholders Equity overall
Common stock
Retained earnings
Dividends
Revenues
Expenses
Debit
Credit
Credit
Credit
Credit
Debit
Credit
Debit
2 - 48
Account in Four-Column Format

Account: Cash
Date
20x1
April 2
3
Item
Debit
Credit
Account No. 101

Balance
Debit
Credit
40,000
50,000
10,000
50,000
2 - 49
Analyze transactions for
quick decisions.
2 - 50
Quick Decision Making

The managers of PepsiCo may consider
buying equipment that costs $100,000.
PepsiCo will borrow the money.
Management can analyze the effects of the
transactions by going directly to T-accounts.
2 - 51
Quick Decision Making

Transaction a Borrow $100,000
Cash
(a) 100,000
Note Payable
(a) 100,000
Transaction b Purchase equipment

Cash
(a) 100,000 (b) 100,000
Equipment
(b) 100,000
Note Payable
(a) 100,000
2 - 52
End of Chapter 2
2 - 53

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Processing Accounting

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

A transaction is any event that both affects

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

Accounting for Business

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounting for Business

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Statement of Retained Earnings

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Statement of Cash Flows

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Statement of Cash Flows

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Increases and Decreases

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Rules of Debit and Credit

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Rules of Debit and Credit

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Posting from Journal to Ledger

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Posting from Journal to Ledger

Individual asset accounts

Individual liability accounts

Individual stockholders equity accounts

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Posting from Journal to Ledger

Posting to the Ledger

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Flow of Accounting Data

2004 Prentice Hall Business Publishing Financial Accounting, 5/e Harrison/Horngren

Accounts After Posting