Spiceland | Thomas | Herrmann

Financial Accounting
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The
Accounting
Cycle:
During the
Period
Chapter 2
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
Identify the basic steps in measuring external
transactions
Analyze the impact of external transactions on the
accounting equation
Assess whether the impact of external
transactions results in a debit or credit to an
account balance
Record transactions using debits and credits
Post transactions to T-accounts in the general
ledger
Prepare a trial balance
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Functions of Financial Accounting
Measure business activities of the company
Communicate measurements to external parties
for decision making
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Part A
Measuring Business Activities
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Identify the Basic Steps in Measuring External
Transactions.
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External Transactions
Transactions conducted with a separate economic
entity
Internal transaction: events that affect the
financial position of the company but do not
include an exchange with a separate economic
entity
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Capturing Transactions in Accounts
Account: Summary of all transactions related to
a particular item over a period of time.
Asset accounts: Cash, Supplies, and Equipment
Liability accounts: Accounts Payable, Salaries
Payable, Utilities Payable, and Taxes Payable
Stockholders equity accounts: Common Stock
and Retained Earnings
Chart of accounts: A list of all account names
used to record transactions
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Measuring External Transactions
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Learning Objective 2
Analyze the impact of external transactions on the
accounting equation.
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Effects on the Basic Accounting
Equation



Each transaction will have a dual effect
An increase on one side will increase the other
side
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Understanding Effects of
Transaction
Ask these questions:
What is one account affected by the transaction?
Does it increase or decrease?
What is a second account affected by the
transaction?
Does it increase or decrease?
Do assets still equal liabilities plus stockholders
equity?
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transactions of Eagle Golf Academy
Date External Transactions in January
(1) Dec. 1 Sell shares of common stock for $25,000 to obtain the
funds necessary to start the business
(2) Dec. 1 Borrow $10,000 from the local bank and sign a note
promising to repay the full amount of the debt in three
years
(3) Dec. 1 Purchase equipment necessary for giving golf training,
$24,000
(4) Dec. 1 Pay one year of rent in advance, $6,000 ($500 per month)
(5) Dec. 6 Purchase supplies on account, $2,300
(6) Dec. 12 Provide golf training to customers for cash, $4,300
(7) Dec. 17 Provide golf training to customers on account, $2,000
(8) Dec. 23 Receive cash in advance for 12 golf training sessions to be
given in the future, $600
(9) Dec. 28 Pay salaries to employees, $2,800
(10) Dec. 30 Pay cash dividends of $200 to shareholders
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Transaction 1Issue Common
Stock
Eagle sells shares of common stock for $25,000
What is one account affected by the transaction?
Cash
Does that account increase or decrease?
Increase by $25,000
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Transaction 1Issue Common
Stock
Eagle sells shares of common stock for $25,000
What is a second account affected by the transaction?
Common Stock
Does that account increase or decrease?
Increase by $25,000
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Transaction 1Issue Common
Stock
Eagle sells shares of common stock for $25,000
Do assets equal liabilities plus stockholders equity?
Yes, assets increase by $25,000 and stockholders equity increase
by $25,000
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Transaction 2Borrow from the
Bank
Eagle borrows $10,000 from the bank and signs a note for it
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Transaction 3Purchase
Equipment
Purchase equipment with cash, $24,000
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Transaction 4Incur Costs for Rent
Pay one year of rent in advance, $6,000
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Transaction 5Incur Costs for
Supplies
Purchase of supplies on account, $2,300
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The Expanded Accounting Equation
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Transaction 6Provide Services for
Cash
Provide service to customers for cash, $4,300
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Transaction 7Provide Services on
Account
Provide service to customers on account, $2,000
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Transaction 8Receive Cash in
Advance of Providing Services
Receive cash in advance from customers, $600
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Transaction 9Incur Cost for
Salaries
Pay salaries to workers, $2,800
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Transaction 10Pay Dividends
Pay dividends to stockholders, $200
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Part B
Debits and Credits
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Learning Objective 3
Assess Whether the Impact of External Transactions
Results in a Debit or Credit to an Account Balance.
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Effects on Account Balances
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Debit and Credit Effects on Accounts in
the Expanded Accounting Equation
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Debit and Credit Effects on Each
Account Type
A simple memory aid
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Learning Objective 4
Record transactions using debits and credits.
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Recording Transactions
Journal: provides a chronological record of all
transactions
Journal entry: format used for recording
transactions
Debits in a transaction must equal its credits
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Recording TransactionsExample
On December 1, Eagle Golf Academy sells shares
of common stock to investors for cash of $25,000.
Cash debited for $25,000
Common Stock credited for $25,000
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Learning Objective 5
Post transactions to T-accounts in the general
ledger.
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Posting
Posting: process of transferring the debit and
credit information from the journal to individual
accounts in the general ledger
General ledger: includes all accounts used to
record the companys transactions
Useful to calculate the account balances
T-account: a simplified form of a general ledger
account
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PostingExample
On December 1, Eagle Golf Academy sells shares
of common stock to investors for cash of $25,000.
Debit to Cash is transferred to the Cash account
Credit to Common Stock is transferred to the
Common Stock account
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Summary of External Transactions
Recorded for Eagle Golf Academy
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Summary of External Transactions
Recorded for Eagle Golf Academy
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Summary of External Transactions
Recorded for Eagle Golf Academy
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Learning Objective 6
Prepare a Trial Balance.
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Trial Balance
A list of all accounts and their balances at a
particular date
Shows that total debits equal total credits
Assists in preparing adjusting entries
Used for internal purposes only
Not published to external parties
Not required to follow an order of listing
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Trial BalanceExample
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End of Chapter 2
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