Processing Accounting Information

1. Processing Accounting Information Chapter 2 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

2. Learning Objective 1 Analyze business transactions.

3. The Account • Basic summary device • Accounts - grouped in three broad categories • Assets • Liabilities • Stockholders’ Equity

4. The Account Assets - 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

5. The Account Liabilities - debts of the company • Notes payable • Accounts payable • Accrued liabilities • Long-term liabilities (bonds)

6. The Account Stockholders’ (owners’) equity - owners’ claims to the assets of a corporation • Common Stock • Retained Earnings • Revenues • Expenses

7. Accounting for Business Transactions Transaction - any event that both affects the financial position of the business entity and can be reliably recorded

8. Accounting for Business Transactions 1. The Lyons invest $50,000 to begin the business, and Air & Sea Travel issues common stock. (1) 50,000 50,000

9. Accounting for Business Transactions 2. Air & Sea purchases land for an office location, paying $40,000 in cash • (40,000) 40,000 Bal 10,000 40,000 50,000

10. Accounting for Business Transactions 3. The business buys office supplies, agreeing to pay $500 to the office-supply store within 30 days. (3) 500 500 Bal 10,000 500 40,000 500 50,000

11. Accounting for Business Transactions 4. Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash. (4) 5,500 5,500 Bal 15,500 500 40,000 500 50,000 5,500

12. Accounting for Business Transactions 5. Air & Sea Travel performs services for customers on account for $3,000. (5) 3,000 3,000 Bal 15,500 3,000 500 40,000 500 50,000 8,500

13. Accounting for Business Transactions 6. Air & Sea Travel pays $2,700 for cash expenses: office rent $1,100, employee salary $1,200, and utilities $400. (6) (2,700) (2,700) Bal 12,800 3,000 500 40,000 500 50,000 5,800 Bal 12,800 3,000 500 40,000 500 50,000 5,800

14. Accounting for Business Transactions 7. Air & Sea Travel pays $400 to the store from which it purchased office supplies in Transaction 3. (7) (400) (400) Bal 12,400 3,000 500 40,000 100 50,000 5,800

15. Accounting for Business Transactions 8. The owners remodel their home at a cost of $30,000, paying cash from personal funds. This is a personal transaction, not a business transaction!

16. Accounting for Business Transactions • The business collects $1,000 from a customer on account. (9) 1,000 (1,000) Bal 13,400 2,000 500 40,000 100 50,000 5,800

17. Accounting for Business Transactions 10. Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land. (10) 22,000 (22,000) Bal 35,400 2,000 500 18,000 100 50,000 5,800

18. Accounting for Business Transactions 11. The corporation declares a dividend and pays $2,100 cash to the stockholders. (11) (2,100) (2,100) Bal 33,300 2,000 500 18,000 100 50,000 3,700

19. Income Statement Air & Sea Travel Income Statement Month Ended April 30, 20x3 Revenue: Service revenue $8,500 Expenses: Salary expense $1,200 Rent expense 1,100 Utilities expense 400 Total expenses 2,700 Net income $5,800

20. Statement of Retained Earnings Air & Sea Travel Statement of Retained Earnings Month Ended April 30, 20x3 Retained earnings, April 1, 20x5 $ 0 Add: Net income for the month 5,800 Subtotal $5,800 Less: Dividends (2,100) Retained earnings, April 30, 20x5 $3,700

21. Assets Cash $ 33,300 Accounts receivable 2,000 Office supplies 500 Land 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 Balance Sheet Air & Sea Travel Balance Sheet April 30,20X3

22. Air & Sea TravelStatement of Cash FlowsMonth Ended April 30, 20x3 Cash flows from operating activities: Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees ($2,700 + $400) (3,100) Net cash inflow from operating activities $ 3,400 Cash flows from investing activities: Acquisition of land $(40,000) Sale of land 22,000 Net cash outflow 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, 20x5 0 Cash balance, April 30, 20x5 $33,300

23. Learning Objective 2 Understand how accounting works.

24. Double-Entry Accounting Record the dual effects of each business transaction.

25. Debit Credit The T-Account Account Title RIGHT SIDE LEFT SIDE

26. Accounting Equation: Assets = Liabilities + Stockholders’ Equity Rules of Debit and Credit: Debit + Credit – Debit – Credit + Debit – Credit + Increases and Decreasesin the Accounts

27. Assets = Liabilities + Stockholders’ Equity Rules of Debit and Credit Air & Sea received $50,000 and issued stock Common Stock Cash Debit for Increase, 50,000 Credit for Increase, 50,000

28. Assets = Liabilities + Stockholders’ Equity Rules of Debit and Credit Air & Sea purchased land for $40,000 cash. Common Stock Cash Bal. 50,000 Credit for Decrease, 40,000 Bal. 50,000 Land Debit for Increase, 40,000

29. Learning Objective 3 Record business transactions.

30. Journal Chronological record of all transactions listed by date.

31. Recording Transactionsin the Journal • Identify the transaction; specify each account affected. • Determine whether each account is increased or decreased. Use the rules of debits and credits • Enter transaction in the journal, including a brief explanation. April 2 Cash 50,000 Common Stock 50,000 Issued common stock

32. Posting from Journal to Ledger • Ledger - grouping of all the accounts; it shows their balances. • Posting – process of transferring debits and credits from journal to ledger

33. 50,000 Posting from Journal to Ledger Journal Entry April 2 Cash 50,000 Common Stock 50,000 Issued common stock Cash Common Stock 50,000

34. Transaction Occurs Transaction Analyzed Transaction Entered in the Journal Amounts Posted to the Ledger Flow of Accounting Data

35. Learning Objective 4 Use a trial balance. Trial Balance - lists all accounts with their debit or credit balances

36. Chart of Accounts Listing of all accounts and account numbers used by a business

37. Stockholder’s Equity Assets Liabilities Debit for Credit for Debit for Credit for Debit for Credit for + - - + - + = + Assets Liabilities Equity Normal Balance Normal Balance Normal Balance Normal Balances of the Accounts

38. Retained Earnings Revenues Common Stock Debit for Debit for Debit for Credit for Credit for Credit for - - - + + + Normal Balance Normal Balance Normal Balance Expenses Debit for Credit for + - Normal Balance Normal Balances of the Accounts Stockholders’ Equity Decreases Retained Earnings Increases Retained Earnings

39. Learning Objective 5 Analyze transactions for quick decisions.

40. Quick Decision Making The managers of PepsiCo may consider buying equipment that costs $100,000. PepsiCo will borrow the money.

41. Transaction b – Purchase equipment Cash Equipment Note Payable (a) 100,000 (b) 100,000 (a) 100,000 (b) 100,000 Quick Decision Making Transaction a – Borrow $100,000 Cash Note Payable (a) 100,000 (a) 100,000

42. End of Chapter 2 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren