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Slide 2-1

Accounting Information System

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Slide 2-2

Financial Statements, Auditing and Users


ICAI GAAP
Financial Statements

Preparers
Audit Report

Decision makers

Auditors

ASB
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GAAS
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Slide 2-3

Fundamental Principles of Accounting


Business Entity Principle Objectivity Principle Cost Principle Going-Concern Principle Monetary Unit Principle
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A business is accounted for separately from its owner or owners. Financial statement information is supported by independent, unbiased evidence. Financial statements are based on actual costs incurred in business transactions. A business continues operating instead of being closed or sold. Express transactions and events in monetary units.
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Slide 2-4

Exh. 2.2

The Accounting Process

Transaction or event

Source documents

Analysis

Reporting Trial balance


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Recording & posting

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Slide 2-5

Transactions and Events


Exchanges of economic consideration between two parties.

External Transactions occur between the organization and an outside party.


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Internal Transactions occur within the organization.


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Slide Example 2-6

Is the financial position (assets, liabilities, and stockholders equity) of the company changed?

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Slide 2-7

Source Documents
Checks Purchase Orders

Bank Statement Sales Invoices


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Slide 2-8

The Account
Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses.
Separate accounts are maintained for each item of importance.
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Slide 2-9

Exh. 2.4

Expanded Accounting Equation


Assets

Liabilities

+
+

Equity

+
Common Stock

+
Retained Earnings

Expenses

Revenues

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Slide 2-10

Asset Accounts
Prepaid Insurance Accounts Receivable Office Supplies Store Supplies
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Cash

Notes Receivable

Prepaid Expenses

ASSETS
Land

Equipment

Buildings
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Slide 2-11

LiabilityAccounts
Accounts Payable Notes Payable

LIABILITIES
Accrued Liabilities
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Unearned Revenues
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Slide 2-12

Equity Accounts
Common Stock Dividends

Equities
Revenues Retained Earnings
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Expenses

Slide 2-13

Analyzing Transactions
Analyze the transaction and its source. Identify the impact of the transaction on account balances.


Also identify the financial statements that are impacted by the transaction.

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Slide 2-14

Transaction Analysis
Buck Johnson forms a building consulting business. It is set up as a corporation called Build-Up, Inc.. Analyze the following transactions.

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Slide 2-15

Transaction Analysis
Buck Johnson invests $50,000 in the company in exchange for common stock.
Liabilities + Equity The accounts involved Accounts Notes are: Cash Supplies Equipment Equity Payable Payable (1) Cash (asset) (1) $ 50,000 $ 50,000 Assets =

(2) Owners Equity (equity)


$ 50,000 $ $ = $ $ $ 50,000

$ 50,000

$ 50,000

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Slide 2-16

Transaction Analysis
Build-Up, Inc. purchased supplies paying $4,800 cash.
Liabilities + Equity The accounts involved are: Accounts Notes Payable Payable Cash Supplies Equipment Equity (1) Cash (asset) (1) $ 50,000 $ 50,000 (2) (2) Supplies (asset) (4,800) $ 4,800 Assets =

$ 45,200 $ 4,800 $ $ 50,000

$ 50,000

$ 50,000

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Slide 2-17

Transaction Analysis
Build-Up, Inc. purchased equipment for $30,000 cash.
The accounts involved Cash Supplies Equipment (1) Cash (asset) (1) $ 50,000 (2) (4,800) $ 4,800 (2) Equipment (asset)
(3) (30,000) $ 30,000 $ 15,200 $ 4,800 $ $ 50,000 30,000 = Assets = Liabilities + are: Accounts Notes Payable Payable Equity Equity $ 50,000

$ 50,000

$ 50,000

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Slide 2-18

Transaction Analysis
Build-Up, Inc. purchased additional supplies of $9,400 on account.
The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)

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Slide 2-19

Transaction Analysis
Build-Up, Inc. purchased additional supplies of $9,400 on account.
Assets Cash Supplies Equipment (1) $ 50,000 (2) (4,800) $ 4,800 (3) (30,000) $ 30,000 (4) 9,400 $ 15,200 $ 14,200 $ 30,000 $ 59,400 = = Liabilities + Accounts Notes Payable Payable Equity Equity $ 50,000

$ 9,400 $ 9,400 $

$ 50,000

$ 59,400

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Slide 2-20

Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.

Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000

Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000

$ 15,200 $ 14,200 $

30,000

$ 9,400 $

59,400

$ 50,000

$ 59,400 = Now lets look at transactions $ involving revenues and expenses.


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Slide 2-21

Transaction Analysis
Rendered consulting services receiving $9,800 cash.
The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

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Slide 2-22

Transaction Analysis
Rendered consulting services receiving $9,800 cash.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800

$ 25,000 $ 14,200 $ $ 69,200

30,000 =

$ 9,400 $

$ 59,800

$ 69,200

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Slide 2-23

Transaction Analysis
Paid $2,800 rent to the landlord of the building where the business is located.
The accounts involved are: (1) Cash (asset) (2) Rent Expense (equity)

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Slide 2-24

Transaction Analysis
Paid $2,800 rent to the landlord of the building where the business is located.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 (6) (2,800) $ 22,200 $ 14,200 $ $ 66,400 30,000 = = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800 (2,800) $ 9,400 $ $ 57,000

$ 66,400

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Slide 2-25

Transaction Analysis
Paid Salaries of $2,300.
The accounts involved are: (1) Cash (asset) (2) Salary Expense (equity)

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Slide 2-26

Transaction Analysis
Paid Salaries of $2,300.
Assets Cash Supplies Equipment Bal $ 15,200 14,200 30,000 (5) 9,800 (6) (2,800) (7) (2,300) $ 19,900 $ 14,200 $ 30,000 $ 64,100 = = Liabilities + Equity Accounts Notes Equity Payable Payable 9,400 $ 50,000 9,800 (2,800) (2,300) $ 9,400 $ $ 54,700 $ 64,100

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Slide 2-27

Exh. 2.8

Chart of Accounts & the T-Account


Typically, a company keeps a listing of all the accounts is uses. This list is called the Chart of Accounts.
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Used as a simple tool for illustrating the balance in a given account. Account Name (Left Side) (Right Side)

Debit

Credit

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Slide 2-28

Learning Objective

Describe

a ledger and a chart of accounts.

Conceptual
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Slide 2-29

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ACCT 201 ACCT 201 ACCT 201


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Slide 2-30

Debits and Credits




The debit/credit convention or coding system is very simple. Do not make it difficult because you cannot accept its simplicity.

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Slide 2-31

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ACCT 201 ACCT 201 ACCT 201

Lets . . .

. . . At Debits
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Slide 2-32

Debits


Debit comes from Latin and merely means left, or the left-hand side of an account. Abbreviated DR.

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Slide 2-33

Account Title
Left Side
We need to stop here and change our way of thinking!

Debit Side
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Slide 2-34

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ACCT 201 ACCT 201 ACCT 201

Lets . . .

. . . At Credits
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Slide 2-35

Credits


Credit also comes from the Latin, and means right, or the right-hand side of an account. Abbreviated CR.

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Slide 2-36

Account Title
Right Side
Lets stop here and modify our thinking at least for this class!
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Credit Side
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Slide 2-37

So, how can we use this?

Thats a good question!


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Slide 2-38

Accounts actually provide two equalities or balances . . .

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Slide 2-39

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ACCT 201 ACCT 201 ACCT 201

Lets . . .

At the first equality


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Slide 2-40

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ACCT 201

Assets

The algebraic relationship in the fundamental accounting model.


Liabilities Owners Equity
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ACCT 201 ACCT 201

Slide 2-41

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ACCT 201 ACCT 201 ACCT 201

Account Title

Debit Credit

Always
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Slide 2-42

Assets
DR CR

Liabilities
DR CR

Owners Equity
DR CR

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Slide 2-43

McGraw-Hill/Irwin

ACCT 201 ACCT 201 ACCT 201

The Second Equality . . .

Debits

Credits

The algebraic relationship between account increases and decreases.


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Slide 2-44

Debit-Credit Rules . . .
Account
Assets Liabilities Owners Equity Revenue Expenses
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Inc. Debit Credit Credit Credit Debit

Dec. Credit Debit Debit Debit Credit


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Slide 2-45

Debit-Credit Rules . . .
Debits Increase Assets Expenses
Liabilities Equity Revenue

Credits
Liabilities Equity Revenue

Decrease
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Assets Expenses
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Slide 2-46

Basic Facts About Accounts

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Slide 2-47

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ACCT 201 ACCT 201 ACCT 201


The McGraw-Hill Companies, Inc., 2003

 For

every transaction there must be at least one debit and one credit;

Slide 2-48

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ACCT 201 ACCT 201 ACCT 201


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 Debits

must always equal credits for each transaction, and;

Slide 2-49

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ACCT 201 ACCT 201 ACCT 201


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 Debits

are always entered on the left side of an account and credits on the right side.

Slide 2-50

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ACCT 201 ACCT 201 ACCT 201


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Slide 2-51

ncrease ebits xpenses ssets


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Slide 2-52

evenues quity iabilities ncrease redits


McGraw-Hill/Irwin
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Slide 2-53

McGraw-Hill/Irwin

ACCT 201 ACCT 201 ACCT 201

After Eating Dinner


Accounts increased with a debit: Assets Expenses Dividends

Lets Read the Comics


Accounts increased with a credit: Liabilities Revenues Capital

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Slide 2-54

Account
Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side
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Slide 2-55

The T Account
TITLE DEBIT CREDIT

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Slide 2-56

Total the Entries to Each Side


TITLE Debit Credit

Total Debits Total Credits

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Slide 2-57

Normal Balances

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Slide 2-58

Normal Balances

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Slide 2-59

Normal Balances

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Slide 2-60

Total the Entries to Each Side


TITLE Debit Credit

Total Debits Total Credits

If the greater sum is on the left, the account has a Debit Balance
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The McGraw-Hill Companies, Inc., 2003

Slide 2-61

Total the Entries to Each Side


TITLE Debit Credit

Total Debits Total Credits

If the greater sum is on the right, the account has a Credit Balance
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2003

Slide 2-62

Exh. 2.9

Balance of an Account
An account balance is the difference between the increases and decreases in an account.
Cash T-Account for FastForward

Cash
Issuance of stock Consulting services revenues earned Collection of accounts receivable 30,000 Purchase of supplies 4,200 Purchase of equipment 1,900 Payment of rent Payment of salary Payment of note payable Payment of dividend 36,100 Total decreases (31,700) 4,400 2,500 26,000 1,000 700 900 600 31,700

Total increases Less decreases Balance

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Slide 2-63

Exh. 2.10

Double-Entry Accounting
Assets
ASSETS

Liabilities
LIABILITIES

Equity
EQUITIES

Debit

Credit

Debit

Credit

Debit

Credit

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Slide 2-64

Exh. 2.11

Double-Entry Accounting - Detail of Effects on Equity


Retained Earnings
Ret. Earnings

Dividends
Dividends

Revenues
Revenues

Expenses
Expenses

Debit Credit

Debit Credit

Debit Credit

Debit Credit

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The McGraw-Hill Companies, Inc., 2003

Slide 2-65

Illustration 3-15

Illustration 3-16

Analyze each transaction


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Enter each transaction in a journal

Transfer journal information to ledger accounts The McGraw-Hill Companies, Inc., 2003

Slide 2-66

Steps in Processing Transactions


Assets

=
(3)

Liabilities
Equipment 30,000

Equity

Step 1: Examine source documents.

Step 2: Analyze transactions. Remember these two steps? Now lets look at some additional steps.

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Slide 2-67

Steps in Processing Transactions


Assets

=
(3)

Liabilities
Equipment 30,000

Equity

Step 1: Examine source documents.

Step 2: Analyze transactions.


ACCOUNT NAME:
Date Description PR

ACCOUNT No.
Debit Credit Balance
Date

GENERAL JOURNAL
Description Post. Ref.

Page
Debit

123
Credit

Step 5: Prepare a trial balance.


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Step 4: Record the journal information in a ledger.

Step 3: Record transactions in a journal.


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Slide 2-68

General Journal for FastForward


Transaction Date Titles of Affected Accounts
Page 1
Debit 30,000 30,000 Credit

GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR

Common Stock Issuance of stock Dec. 2 Supplies Cash Transaction Purchased store supplies explanation for cash
McGraw-Hill/Irwin

2,500

Dollar amount of debits and credits

2,500

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Slide 2-69

Balance Column Ledger


T-accounts are useful illustrations, but balance column ledger accounts are used in practice.

CASH
Date 2001 Dec. 1 Dec. 2 Dec. 3 Dec. 10 Description PR G1 G1 G1 G1 Debit

ACCOUNT No.
Credit

101
Balance

Issuance of stock Purchased supplies Purchased equipment Collection from customer

30,000 2,500 26,000 1,900

30,000 27,500 1,500 3,400

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Slide 2-70

Balance Column Ledger


Note the the t-account tool is derived from the debit and credit columns of the ledger.

CASH
Date 2001 Dec. 1 Dec. 2 Dec. 3 Dec. 10 Description PR G1 G1 G1 G1 Debit

ACCOUNT No.
Credit

101
Balance

Issuance of stock Purchased supplies Purchased equipment Collection from customer

30,000 2,500 26,000 1,900

30,000 27,500 1,500 3,400

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Slide 2-71

Exh. 2.16

Balance Column Ledger


The last line in the balance column shows the current balance in the account.

CASH
Date 2001 Dec. 1 Dec. 2 Dec. 3 Dec. 10 Description PR G1 G1 G1 G1 Debit

ACCOUNT No.
Credit

101
Balance

Issuance of stock Purchased supplies Purchased equipment Collection from customer

30,000 2,500 26,000 1,900

30,000 27,500 1,500 3,400

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc., 2003

Slide 2-72

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock

1 Dec. 2 Identify the account. Supplies Cash CASH Purchased store supplies for cash Date Description
2001

2,500

ACCOUNT No.
PR Debit Credit

2,500

101

Balance

McGraw-Hill/Irwin Purchased Dec. 3

equipment

G1

The McGraw-Hill Companies, Inc., 2003

20,000.00

########

Slide 2-73

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock

Dec. 2 Supplies Enter the date. Cash CASH Purchased store supplies for cash Date Description

2,500

ACCOUNT No.
PR Debit Credit

2,500

101

Balance

2001 Dec. 1

Purchased Dec. 3 McGraw-Hill/Irwin

equipment

G1

The McGraw-Hill Companies, Inc., 2003

20,000.00

########

Slide 2-74

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock

3 Dec. 2 Supplies 2,500 Enter the amount. Cash CASH Purchased store supplies ACCOUNT No. for cash Date Description PR Debit Credit
2001 Dec. 1

2,500

101

Balance

Issuance of stock equipment


G1

30,000
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Dec. 3 Purchased McGraw-Hill/Irwin

20,000

(20,000)

Slide 2-75

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock Dec. 2 Supplies Enter the journal reference. Cash CASH Purchased store supplies for cash Date Description PR Debit

4 2,500

ACCOUNT No.
Credit

2,500

101

Balance

2001 Dec. 1

Issuance of stock equipment

G1 G1

30,000
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Dec. 3 Purchased McGraw-Hill/Irwin

20,000

(20,000)

Slide 2-76

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock Dec. 2 Supplies Compute Cash CASH Purchased store supplies for cash Date Description

the balance.

2,500

ACCOUNT No.
PR G1 G1 Debit Credit

2,500

101

Balance

2001 Dec. 1

Issuance of stock equipment

30,000 20,000

30,000 (20,000)

Dec. 3 Purchased McGraw-Hill/Irwin

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Slide 2-77

Posting Journal Entries - Example


GENERAL JOURNAL
Date 2001 Dec. 1 Cash Description PR 101 Debit 30,000 30,000

Page 1
Credit

Common Stock Issuance of stock Dec. 2 Supplies Enter the Cash CASH Purchased store supplies for cash Date Description PR

ledger

2,500 reference.

6
2,500

ACCOUNT No.
Debit Credit

101

Balance

2001 Dec. 1

Issuance of stock equipment

G1 G1

30,000 20,000

30,000
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Dec. 3 Purchased McGraw-Hill/Irwin

(20,000)

Slide 2-78

FastForward Trial Balance December 31, 2001 Cash Accounts receivable Supplies Prepaid Insurance Equipment Accounts payable Unearned consulting revenue Common Stock Dividends Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Total Debits $ 3,950 9,720 2,400 26,000 Credits

6,200 3,000 30,000 5,800 300

600

1,400 1,000 230 $ 45,300

A Trial Balance is a listing of all accounts and their balances at a point in time.

$ 45,300

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Slide 2-79

Exh. 2.19

Income Statement
Inflows of assets in exchange for products and services provided to customers.
FastForward Income Statement For Month Ended December 31, 2001 Revenues: Consulting revenue$ 5,800 Rental revenue 300 Total revenues Expenses: Rent expense 1,000 Salaries expense 1,400 Utilities expense 230 Total expenses Net income

$ 6,100

Outflows or the using up of assets that result from providing products and services to customers.
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2,630 $ 3,470

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Slide 2-80

Exh. 2.19

Statement of Retained Earnings


Beginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on the Income Statement.
FastForward Statement of Retained Earnings For Month Ended December 31, 2001 Retained Earnings, 12/1/01 Add: Net Income Total Less: Dividends Retained Earnings, 12/31/01 $ $ $ 3,470 3,470 (600) 2,870

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Slide 2-81

Exh. 2.19

Balance Sheet
Assets are economic resources owned by a business. They are expected to provide future benefits to the business.
FastForward Balance Sheet December 31, 2001 Assets
Cash Supplies Prepaid Ins. Equipment $ 3,950 9,720 2,400 26,000

Liabilities are obligations of the business. They are claims against the assets of the business. Equity is the owners claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.
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Liabilities
Accounts payable Unearned Revenue Total liabilities $ $ 6,200 3,000 9,200

Equity
Common Stock Retained Earnings Total liabilities and owners' equity $ 30,000 2,870 $ 42,070

Total assets

42,070

McGraw-Hill/Irwin

Slide 2-82

Exh. 2.19

FastForward Statement of Cash Flows For Month Ended December 31, 2001
Cash flows from operating activities: Cash received from clients $ 9,100 Cash paid for supplies (3,520) Cash paid for insurance (2,400) Cash paid for rent & utilities (1,230) Cash paid to employee (1,400) Net cash provided by operating acitivities Cash flows from investing activities: Purchase of equipment $ (26,000) Net cash used by investing activities Cash flows from financing activities: Investment by owner $ 30,000 Withdrawal by owner (600) Net cash provided by financing activities Net increase in cash Cash balance, December 1, 2001 Cash balance, December 31, 2001
McGraw-Hill/Irwin

550

Describes the sources and uses of cash for a reporting period.

(26,000)

29,400 $ 3,950 $ 3,950


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Slide 2-83

Formatting Conventions
GENERAL JOURNAL
Date Description Post. Ref.

Page
Debit

123
Credit

ACCOUNT NAME:
Date Description PR

ACCOUNT No.
Debit Credit Balance

Generally, dollar signs ($) are not used in the journals or ledgers. Round numbers in financial statements to the nearest dollar.
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Rounding
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Slide 2-84

Using the Information - Return on Equity




Describes the relationship between net income for the period and average equity.

Net Income Return on Equity = Average Equity




Helps an owner judge the compnays profitability compared to other business or personal opportunities.
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Slide 2-85

End of Chapter 2
Now, was that debits to the left or credits to the left? I sure wish I had paid more attention in class!

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