1 / 35

3 rd session : Balance Sheet Recording the Effects of Transactions and Events

3 rd session : Balance Sheet Recording the Effects of Transactions and Events. Goals of Today’s Class. Develop a better understanding of Balance Sheet Concepts Understand the Accounting Process and Transactional Analysis Understand Debits, Credits, and the use of T-accounts.

bastien
Télécharger la présentation

3 rd session : Balance Sheet Recording the Effects of Transactions and Events

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. 3rd session :Balance Sheet Recording the Effects of Transactions and Events

  2. Goals of Today’s Class • Develop a better understanding of Balance Sheet Concepts • Understand the Accounting Process and Transactional Analysis • Understand Debits, Credits, and the use of T-accounts

  3. Exercise II – Fill in the Gaps 9,366 e m 15,547 12,033 14,659 f b 25,535 24,935 h l 20,468 a n 8,040 p 8,663 7,312 g 1,292 c 1,017 k j o 6,149 7,433 i d 24,935 24,025 e. Current Assets – Current Liabilities = $1,724 j. Net loss = $656 and Dividends = $1,117 n. Current Assets – Current Liabilities = $1,948 o. Net income = $2,524 and Dividends = $1,240

  4. How do we get the numbers in the balance sheet? • Record financial effects of transactions in accounts • Calculate the ending balance • Report the ending balance on the balance sheet • Note: Balance sheet accounts are cumulative

  5. Accounting Process • Transaction analysis • Recording transactions • Deriving account balances • Prepare financial statements

  6. Dual Effects of Transactions on the Accounting Equation Assets = Liabilities + Equity Example #1: Receive $100 from bank loan + Increase Cash (an asset) + Increase Bank Loan (a liability) • Assets = Liabilities + Equity • 100 = 100 + 0

  7. Dual Effects of Transactions on the Accounting Equation Assets = Liabilities + Equity Example #2: Repay $20 of bank loan + Decrease Cash (an asset) + Decrease Bank Loan (a liability) • Assets = Liabilities + Equity • 100 = 100 + 0 • (20) = (20) + 0

  8. Dual Effects of Transactions on the Accounting Equation Assets = Liabilities + Equity Example #3: Purchase $10 of inventory with cash + Decrease Cash (an asset) + Increase Inventory (an asset) • Assets = Liabilities + Equity • 100 = 100 + 0 • (20) = (20) + 0 • +10 - 10 = 0 + 0

  9. Dual Effects of Transactions on the Accounting Equation Assets = Liabilities + Equity Example #4: Issue $50 of common stock to repay portion of bank loan + Increase Common Stock (equity) + Decrase Bank Loan (a liability) • Assets = Liabilities + Equity • 100 = 100 + 0 • (20) = (20) + 0 • +10 - 10 = 0 + 0 • 0 = (50) + 50 • 80 = 30 + 50

  10. All transactions will fit into one or a combination of two or more of the below Or vice versa!

  11. Transaction Analysis Indicate the effects of the following transactions on the balance sheet equation using this format: Trans. # Assets = Liabilities + Equity 1. The firm issues 3,000 share of $10 par value common stock at par for cash Trans. 1 30,000 = 0 + 30,000 Subtotal 30,000 = 0 + 30,000 2. The firm purchases merchandise costing $18,900 on account. Trans. 2 18,900 = 18,900 + 0 Subtotal 48,900 = 18,900 + 30,000

  12. Transaction Analysis 3. The firm acquires store equipment costing $12,700. It issues a check for $2,000 with the balance payable over 3 years under an installment contract. Trans. 3 12,700 -2,000 = 10,700 + 0 Subtotal 59,600 = 29,600 + 30,000 4. The firm issues a check for $1,800 covering two months’ rent in advance. Trans. 4 1,800 -1,800 = 0 + 0 Subtotal 59,600 = 29,600 + 30,000

  13. Transaction Analysis 5. Refer to transaction (3) above. The firm issues common stock with a market value of $10,700 in full settlement of the installment contract. Trans. 5 0 = -10,700 + 10,700 Subtotal 59,600 = 18,900 + 40,700 6. The firm pays the merchandise supplier in transaction (2) the amount due. Trans. 6 -18,900 = -18,900 + 0 Total 40,700 = 0 + 40,700

  14. Recording Transactions Using Ledger Accounts • Maintaining accounts using balance sheet equation is inefficient, especially as the number of accounts grow. Use Journal Entries and ledger accounts instead. • The increases and decreases in each asset, liability and equity item is tracked through its “T-account” Account Title Left Debit (Dr.) Right Credit (Cr.) • There can be no negative entries in T-Accounts • Note: Debitonly means “left” and Creditonly means “right” • One side of the T-account is used for increases and one for decrease. There is a beginning balance and an ending balance that appear on the financial statements (e.g., balance sheet).

  15. Credit = Right Debit = Left Assets = Liabilities + Equity Dr. Cr. Dr. Cr. Dr. Cr. T-Accounts BB BB BB Incr. Decr. Decr. Incr. Decr. Incr. EB EB EB

  16. T-Accounts • For Asset accounts: debit = left = increase credit = right = decrease • For Liability and Equity accounts: debit = left = decrease credit = right = increase

  17. T-Accounts Handy Trick of the Day: Whether debit (left) means increase or decrease depends on what side of the Balance Sheet equation the account sits. Assets=Liabilities+Equity That is, Assets are on the left side of the equation, thus debit (left) is an increase for assets [and credits are therefore decreases]. Liabilities and Equity are on the right side of the equation, thus credit (right) is an increase [and debits are therefore decreases].

  18. T- Accounts, Dual Effects of Transactions, and the Balance Sheet Equation • In our prior examples we used the equation to make sure that each transaction had two effects on the balance sheet and thus the equation always held. • Now that we have T-accounts, we can also make sure that: Debits = Credits This will also ensure that the Balance Sheet equation holds! Let’s check this…

  19. Debits = CreditsAssets = Liabilities + Equity Recall the 4 possible combinations of the dual effects of transactions: 1) Increase an asset and Increase a liability or equity DebitCredit 2) Decrease an asset and Decrease a liability or equity CreditDebit 3) Increase an asset and Decrease an asset DebitCredit 4) Increase a liab. or eq. and Decrease another liab or eq. CreditDebit

  20. Asset Liability or Owners’ Equity (Debit) (Credit) (Debit) (Credit) Expenses/Losses Revenues/Gains (Debit) (Credit) Debits and Credits Remember RE is an Owners’ Equity Account Retained Earnings + - - + Memorize this for Assets Flip it for Liabs + OE An increase in an Expense is a decrease in Retained Earnings. (We decrease Owners’ Equity accounts with a debit.) An increase in a Revenue is an increase in Retained Earnings. (We increase Owners’ Equity accounts with a credit.) + +

  21. credit Cash debit Accounts Payable (Chris) $850 $850 Debits and Credits, Some Intuition “Debit” card Suppose I open a checking account with BOA with $1,000. Bank of America Assets Liabilities $1,000 $1,000 $150 $150 I use my debit card to buy an iPod at Best Buy for $150. Using a debit card reduces the bank’s liability to you. The word “debit” in the term “debit card” is intuitive from the bank’s point of view.

  22. credit Accounts Payable (Visa) iPod debit Debits and Credits, Some Intuition “Credit” card Suppose I sign up for a Visa credit card. My Finances AssetsLiabilities $150 $150 I use my credit card to buy an iPod at Best Buy for $150. Using a credit card increases your liability to your credit card company (i.e., Visa) The word “credit” in the term “credit card” is intuitive from your point of view.

  23. Balance Sheet at the beginning of 2010 Injection Plastics Company Balance Sheet As of Dec. 31, 2010

  24. Cash Intangible Assets $21,000 $3,000 Accounts Payable Accrued Liabs. Payable $15,000 $2,000 Short Term Inv Accts Receivable $2,000 $3,000 Short Term Note Pybl Long Term Note Pybl $7,000 $48,000 Inventory Long Term Note Recv $1,000 $24,000 Equipment Factory Bldg Contributed Capital Retained Earnings $90,000 $90,000 $30,000 $48,000 P2-3 Assets Liabilities Equity

  25. Cash Long-term note rec $21,000 $1,000 P2-3 a. Lent $7,000 to a supplier who signed a two-year note Assets $7,000 $7,000 Journal Entry Long-term note receivable 7,000 Cash 7,000

  26. Assets Liabilities Equipment Cash Short Term Note Payable $48,000 $7,000 $21,000 $7,000 P2-3 Purchased Equipment that cost $18,000. Paid $6,000 cash and signed a one-year note for the balance. $18,000 $12,000 $6,000 Journal Entry Equipment 18,000 Cash 6,000 Short-term Note Payable 12,000

  27. Assets Equity Cash Contributed Capital $90,000 $21,000 $7,000 $6,000 P2-3 c. Issued an additional 2,000 shares of capital stock for $12,000 cash. $12,000 $12,000 Journal Entry Cash 12,000 Contributed Capital 12,000

  28. Assets Liabilities Cash Short-term note payable $7,000 $21,000 $7,000 $12,000 $12,000 $6,000 P2-3 d. Borrowed $12,000 cash from a local bank, payable in three months. $12,000 $12,000 Journal Entry Cash 12,000 Short-term note payable 12,000

  29. Cash Short-term investments $21,000 $2,000 $7,000 $12,000 $6,000 $12,000 P2-3 e. Purchased short-term investments for $9,000 cash Assets $9,000 $9,000 Journal Entry Short-term investments 9,000 Cash 9,000

  30. P2-3 Hired a new president at the end of the year. The contract was for $85,000 per year plus options to purchase company stock at a set price based on company performance. No Recordable Economic Effect Journal Entry No Journal Entry

  31. Cash Intangibles $3,000 $21,000 $7,000 $20,000 $6,000 $9,000 P2-3 g. Purchased a patent (an intangible asset) for $3,000 cash. Assets $3,000 $3,000 Journal Entry Intangibles (patent) 3,000 Cash 3,000

  32. Equipment Cash $48,000 $21,000 $18,000 $7,000 $12,000 $6,000 $12,000 $9,000 $3,000 P2-3 Returned defective equipment to the manufacturer and received a (full) refund of $1,000. Assets $1,000 $1,000 Journal Entry Cash 1,000 Equipment 1,000

  33. Assets Liabilities Factory Building Long Term Note Payable Cash $48,000 $7,000 $21,000 $90,000 $6,000 $12,000 $9,000 $12,000 $3,000 $1,000 P2-3 Built an addition to the factory for $25,000; paid $9,000 cash and signed a three-year note for the balance $16,000 $25,000 $9,000 $46,000 $34,000 How much cash is left? $12,000 Journal Entry Factory Building 25,000 Cash 9,000 Long-term Note Payable 16,000

  34. Balance Sheet at the beginning of 2010 Injection Plastics Company Balance Sheet As of Dec. 31, 2011

  35. Next Class • Income Statement • Cash versus Accrual Basis Accounting

More Related