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Financial Accounting
Lecture No 2
1-2
Financial Accounting
Lectures Outlines Accounting Cycle
Revision of Last lecture
Recording of transactions Source Documents General Journal Posting to Ledgers Trial Balance
Special Thanks
1-3
Accounting Equation
Assets
Liabilities
Equity
Assets
1-4
Assets
Cash Accounts Receivable Notes Receivable
Vehicles
Land
Store Supplies
Buildings Equipment
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Liabilities
Accounts Payable Notes Payable
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Equity
Contributed Capital
Retained Earnings
Dividends
1-7
Assets
=
_
Liabilities
+
Revenues
Equity
Common Stock
Dividends
Expenses
Retained Earnings
1-8
Liabilities
+
+
Equity
+
Common Stock
Dividends
Expenses
Revenues
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Assets
Liabilities
Equity
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Transaction Analysis
J. Scott invests $20,000 cash to start the business in exchange for stock. The accounts involved are: (1) Cash (asset) (2) Common Stock (equity)
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Transaction Analysis
J. Scott invests $20,000 cash to start the business in return for stock.
Assets Cash Supplies Equipment (1) $ 20,000 = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000
$ 20,000 $
$ $
20,000
$ 20,000
$ 20,000
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Transaction Analysis
Purchased supplies paying $1,000 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset)
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Transaction Analysis
Purchased supplies paying $1,000 cash.
Assets Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000
$ $
20,000
$ 20,000
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Transaction Analysis
Purchased equipment for $15,000 cash.
The accounts involved are: (1) Cash (asset) (2) Equipment (asset)
1-15
Transaction Analysis
Purchased equipment for $15,000 cash.
Assets Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000
15,000 =
$ $
20,000
$ 20,000
1-16
Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability)
1-17
Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
Assets Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 $ 4,000 $ 1,200 $ $ 21,200 16,000 = = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000
1-18
Transaction Analysis
Borrowed $4,000 from 1st American Bank.
Assets Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 (5) 4,000 $ 8,000 $ 1,200 $ 16,000 $ 25,200 = = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000
1-19
Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock $ 20,000
16,000 =
1,200 $
4,000
$ 20,000
$ 25,200
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Transaction Analysis
1-21
Transaction Analysis
Provided consulting services receiving $3,000 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity)
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Transaction Analysis
Provided consulting services receiving $3,000 cash.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock Revenue $ 20,000 $ 3,000
$ 11,000 $
1,200 $
16,000 =
$ 20,000 $ 3,000
$ 28,200
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Transaction Analysis
Paid salaries of $800 to employees. The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity)
Remember that the balance in the salaries expense account actually increases.
1-24
Transaction Analysis
Paid salaries of $800 to employees.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 (7) (800) $ 10,200 $ 1,200 $ 16,000 = = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock Revenue Expenses $ 20,000 $ 3,000 $ (800) $ 20,000 $ 3,000 $ (800)
$ 1,200 $
4,000
$ 27,400
$ 27,400
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Transaction Analysis
Dividends of $500 are paid to shareholders. The accounts involved are: (1) Cash (asset) (2) Dividends (equity)
Remember that the Dividend account actually increases. But, equity decreases because dividends reduce equity.
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Transaction Analysis
Dividends of $500 are paid to shareholders.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 (7) (800) (8) (500) $ 9,700 $ 1,200 $ 16,000 $ 26,900 = = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock Dividends Revenue Expenses $ 20,000 $ 3,000 $ (800) $ (500) $ 20,000 $ (500) $ 3,000 $ (800)
$ 1,200 $
4,000
$ 26,900
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1-28
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Source Documents
Checks Employee Earnings Records Bills from Suppliers Purchase Orders
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The general ledger is a record containing all accounts used by the company.
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1-32
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Double-Entry Accounting
Assets
ASSETS
Liabilities
LIABILITIES
Equity
EQUITIES
Debit
Credit
Debit
Credit
Debit
Credit
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Dividends
Revenues
Revenues
Expenses
Dividends
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
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Double-Entry Accounting
An account balance is the difference between the increases and decreases in an account. Notice the T-Account
Cash
Investment by owner for 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 account payable Payment of cash dividend 36,100 Total decreases 4,800 2,500 26,000 1,000 700 900 200 31,300
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Liabilities
Equity
ACCOUNT No.
GENERAL JOURNAL
Debit Credit Balance
Date Description Post. Ref.
Page
Debit
123
Credit
1-37
Journalizing Transactions
Transaction Date Titles of Affected Accounts
GENERAL JOURNAL
Date Account Titles and Explanations PR 2007 Dec. 1 Cash Common stock Investment by shareholders
Transaction Dec. 2 Supplies explanation
Page 1
Debit 30,000 30,000 Credit
Cash
2,500
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1-39
Page 1
Credit
2,500
in ledger.
ACCOUNT No.
PR Debit Credit
2,500
CASH
101
Balance
Date 2007
Explanation
Dec. 3
Purchased equipment
G1
20,000.00
########
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Page 1
Credit
2,500 2,500
ACCOUNT No.
PR Debit Credit
101
Balance
Explanation
Purchased equipment
G1
20,000.00
########
1-41
Page 1
Debit 30,000 30,000 Credit
2,500 2,500
ACCOUNT No.
Credit
101
Balance
20,000
(20,000)
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Page 1
Credit
2,500 2,500
ACCOUNT No.
Debit Credit
101
Balance
Explanation
PR G1
30,000
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Page 1
Credit
2,500 2,500
ACCOUNT No.
PR G1 Debit Credit
101
Balance
Explanation
30,000 20,000
30,000 (20,000)
Purchased equipment
G1
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Page 1
Credit
2,500 2,500
ACCOUNT No.
Debit Credit
101
Balance
Explanation
PR G1
30,000 20,000
30,000 (20,000)
Purchased equipment
G1
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Analyzing Transactions
Transaction:
Cash 30,000
Analysis:
Assets = Liabilities + Equity Common Stock 30,000
Double entry:
(1) Cash Common stock 101 301
101
30,000 30,000
Common Stock (1)
301
Posting:
(1) Cash 30,000
30,000
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Analyzing Transactions
Transaction: FastForward purchases supplies by paying $2,500 cash.
Analysis:
Cash (2,500) Assets Supplies 2,500 = Liabilities + Equity Common Stock
Double entry:
(2) Supplies Cash 126 101 2,500 2,500
Cash 30,000
101
Posting:
(2) Supplies 2,500
126
(1)
(2)
2,500
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Analyzing Transactions
Transaction: FastForward purchases equipment by paying $26,000 cash.
Analysis:
Assets Cash Equipment (26,000) 26,000 = Liabilities + Equity Common Stock
Double entry:
(3) Equipment Cash 167 101 26,000 26,000
Cash 30,000
101
Posting:
(3) Equipment 26,000
167
(1)
(2) (3)
2,500 26,000
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Analyzing Transactions
Transaction: FastForward purchases $7,100 of supplies on credit.
Analysis:
Assets Supplies 7,100 = Liabilities Accounts Payable 7,100 + Equity Common Stock
Double entry:
(4) Supplies Accounts payable 126 201 7,100 7,100
Posting:
(2) (4) Supplies 26,000 7,100
126
201
7,100
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Analyzing Transactions
Transaction: FastForward provides consulting services and immediately collects $4,200 cash.
Analysis:
Assets Cash 4,200 = Liabilities + Equity Revenue 4,200
Double entry:
(5) Cash Consulting Revenue 101 403 4,200 4,200
Posting:
403 Consulting Revenue (5) 4,200
(1) (5)
101
(2) (3)
2,500 26,000
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After processing its remaining transactions for December, FastForwards Trial Balance is prepared.
FastForwar d Trial Balance December 31, 2007 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 $ 4,350 9,720 2,400 26,000 Credits
200
The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.
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Make sure account balances are correctly entered from the ledger. See if debit or credit accounts are mistakenly placed on the trial balance.
Verify that each journal entry is posted correctly. Verify that each original journal entry has equal debits and credits.
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Point in Time
Income Statement
Statement of Retained Earnings
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End of Lecture 02
Special Thanks