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Chapter 2’s Learning Objectives
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Learning Objective One
Learning Objective One
Describe common types of accounts
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Business Transactions
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Accounts
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Common Types of Accounts
A = L + SE
• Each asset (A), liability (L), and shareholders’ equity (SE) has its
own account used to record transactions affecting related A, L,
SE during an accounting period.
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Common Account Titles – Balance Sheet
• Assets: Economic resources that provide future benefit.
• Liabilities: debts/other obligations of the business that must be satisfied
in the future.
• Shareholders’ Equity: Owners’ claims on company’s assets.
Assets (A) Liabilities (L)
Cash Trade Payable
Short-Term Investment Accrued Liabilities(expense
Trade Receivables incurrer, but not occured yet.)
Notes Receivable(not day Notes Payable
to day) Taxes Payable
Inventory(raw, complete, Deferred Revenue (customer
uncomplete) pay cash, rervice not
Prepaid Expenses provided yet, get cash when
Long-Term Investments provide services)
Equipment Bonds Payable Shareholders’ Equity (SE)
Buildings Contributed Capital 7
Land(property, plant) Retained Earnings
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Shareholders’ Equity Accounts
Assets = Liabilities + SE
Assets = Liabilities + (Capital + RE)
Assets = Liabilities + (Capital + Beginning RE + Net Income - Dividends)
Expanded Accounting Equation SE
Expenses
Cost of Sales
Revenues
Wages Expense
Sales Revenue
Rent Expense
Fee Revenue
Interest Expense
Interest Revenue
Depreciation Expense
Rent Revenue
Insurance Expense
Income Tax Expense 10
Learning Objective Two
Learning Objective One
Illustrate the impact of business
transactions on the accounting equation
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Accounting for Business Transactions
A = L + SE
– i.e., The accounting equation must BALANCE after each
transaction is recorded.
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A = L + SE
$50K Balance $50K
Accounting for Business Transactions
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Accounting for Business Transactions
Transaction 1:
Booth, Savard and several fellow engineers invest $50,000
to begin Tara Inc., and the business
issues share capital.
TYPE OF
SHAREHOLDERS’ SHAREHOLDERS’
ASSETS LIABILITIES + EQUITY EQUITY TRANSACTION
Cash = Share Capital
(1) + 50,000 +50,000 Issued common shares
Left = Right
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Accounting for Business Transactions
Transaction 2:
Tara Inc. purchases land and
pays $40,000 in cash.
SHAREHOLDERS’
ASSETS LIABILITIES + EQUITY
Cash + Land Share Capital
Balance 50,000 = 50,000
(2) −40,000 + 40,000
Bal. 10,000 40,000 50,000
50,000 50,000
Left = Right
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Accounting for Business Transactions
Transaction 3:
The business buys stationery and other office
supplies on account agreeing to pay $3700 within 30 days.
SHAREHOLDERS’
ASSETS LIABILITIES + EQUITY
Cash + Office + Land Accounts Payable + Share Capital
Supplies
Bal. 10,000 40,000 = 50,000
(3) +3700 +3,700
Bal. 10,000 3,700 40,000 3,700 50,000
53,700 53,700
Left = Right
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Accounting for Business Transactions
Transaction 4:
Tara Inc. earns service revenue of
$7,000 and collects this amount in cash.
SHAREHOLDERS’
ASSETS LIABILITIES + EQUITY
Cash + Office + Land Accounts Share Retained
+ +
Supplies Payable Capital Earnings
Bal. 10,000 3,700 40,000 3,700 50,000
60,700 60,700
Left = Right
Credit Revenue, and Revenue on the Income statements goes into Net
Income, which goes to Retained Earning, which goes to Balance sheet18
Owner's Equity.
Accounting for Business Transactions
Transaction 5:
Tara Inc., performs service
and earns $3,000 on account.
63,700 63,700
Left = Right
On account: On credit.
Because the services is provided right away, so credit revenue rather than cred
recrrued revenue. 19
Accounting for Business Transactions
Transaction 6:
Tara Inc. pays $2,700 for the following expenses:
office rent $1,100, employee salary $1,200
and utilities $400
ASSETS LIABILITIES + SHAREHOLDERS’ EQUITY
Accounts Office Land Accounts Share Retained
Cash + + + + +
Receivable Supplies Payable Capital Earnings
Bal. 17,000 3,000 3,700 40,000 3,700 50,000 10,000
(6) –1,100 = –1,100
–1,200 –1,200
– 400 – 400
Bal. 14,300 3,000 3,700 40,000 3,700 50,000 7,300
61,000 61,000
Left = Right
Expenses----Net loss/income-----Retained Earning----Balance Sheet-SE
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Accounting for Business Transactions
Transaction 7:
Tara pays $1,900 on account for supplies purchased
in Transaction 3.
59,100 59,100
Left = Right
on account----on credit
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Accounting for Business Transactions
Transaction 8:
The owner pays for the re-modeling of
his home at a cost of $30,000.
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Accounting for Business Transactions
Transaction 9:
The business collects $1,000
from a customer on account.
59,100 59,100
Left = Right
收走了以前没收的钱-----recive on account
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Accounting for Business Transactions
Transaction 10:
Tara Inc. sells part of the land purchased in
Transaction 2 for $22,000 in cash.
59,100 59,100
Left = Right
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Accounting for Business Transactions
Transaction 11:
The corporation declares a dividend and pays
$2,100 cash to the shareholders.
57,000 57,000
Left = Right
• Exhibit 2-1 (page 65) shows the data needed for the financial
statements:
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Financial Statements
• Income statement
Revenues – Expenses = Net Income
Note: End. RE is
• Balance Sheet included in SE
Assets = Liabilities + Shareholders’ Equity
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Income Statement
Tara Inc.
Income Statement
Month Ended April 30, 2017
Revenues
Expenses
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Statement of Retained Earnings
Tara Inc.
Statement of Retained Earnings
Month Ended April 30, 2017
Retained earnings, April 1, 2017 $ 0
Subtotal 7,300
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Balance Sheet
Tara Inc.
Balance Sheet
April 30, 2017
Assets Liabilities
Cash $ 33,300 Accounts payable $ 1,800
Accounts receivable 2,000 Shareholders’ Equity
Office supplies 3,700 Common shares 50,000
Land 18,000 Retained earnings 5,200
Total shareholders’ equity 55,200
Total assets $ 57,000 Total liabilities and shareholders’ equity $ 57,000
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What “on account” means?
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Learning Objective Three
Learning Objective One
Analyze business transactions using T-
accounts
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Chart of Accounts
• Chart of accounts lists all the accounts and their account numbers.
Accounts are numbered beginning with assets, then labilities, shareholders’
equity, revenues, and finally expenses (Exhibit 2-3 p 69)
BALANCE SHEET ACCOUNTS
Assets Liabilities Shareholders’ Equity
101 Cash 201 Accounts Payable 301 Share Capital
111 Accounts Receivable 231 Notes Payable 311 Dividends
141 Office Supplies 312 Retained Earnings
151 Office Furniture
191 Land
INCOME STATEMENT ACCOUNTS
(PART OF SHAREHOLDERS’ EQUITY)
Revenues Expenses
401 Service Revenue 501 Rent Expense
502 Salary Expense
503 Utilities Expense
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Double-Entry Accounting
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The T-Account
Account Title
LEFT SIDE RIGHT SIDE
Debit Credit
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The Rule of Debit & Credit
Assets = Liabilities + SE
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Rules of Debit and Credit
Revenue
Debit Credit
− +
Dividends Expenses
Debit Credit Debit Credit
+ − + −
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Normal Balances of Accounts
Assets Debit
Liabilities Credit
Shareholders’ Equity—overall Credit
Share capital Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit
Normal Balances
Assets Liabilities
Expenses Revenues
Dividends Common Shares
Retained Earnings
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Rules of Debit and Credit - Example
Transaction 1
Transaction 2
Tara Inc. purchases land for $40,000 cash.
Land (A)
Debit
Paid on account: pay account payable
for Collect on Account: collect from account re
Increase,
40,000
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Learning Objective Four
Learning Objective One
Record business transactions in the
journal and post them to the ledger
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The Journal
JOURNAL
Date Accounts and explanation Debit Credit
Apr. 2 Cash 50,000
Share Capital 50,000
Issued common share
JOURNAL
Date Accounts and explanation Debit Credit Ledger
Apr. 2 Cash 50K
Post
Share Capital 50K
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Copying Information (Posting) from the Journal
to the Ledger
JOURNAL
Date Accounts and explanation Debit Credit Ledger
Apr. 2 Cash 50K
Post
Share Capital 50K
Posting
Cash Share Capital
50,000 50,000
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The Ledger
Cash
Ledger
Individual
asset Share
accounts Capital
Individual
equity
accounts
Accounts
Payable Individual
liability
accounts
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Flow of Accounting Data
• Exhibit 2-10 (page 74) shows the flow of accounting data from
business transaction to the ledger.
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Accounts After Posting
Exhibit 2-11 (page 78)
Assets = Liabilities + Shareholders’ Equity
Cash Accounts Payable Dividends
(1) 50,000 (2) 40,000 (11) 2,100
(7) 1,900 (3) 3,700
(4) 7,000 (6) 2,700 Bal. 2,100
(9) 1,000 (7) 1,900 Bal. 1,800
(10) 22,000 (11) 2,100
EXPENSES
Bal. 33,300 Share Capital Rent Expense
Accounts Receivable (1) 50,000 (6) 1,100
(5) 3,000 (9) 1,000 Bal. 50,000 Bal. 1,100
Bal. 2,000
REVENUE Salary Expense
Office Supplies Service Revenue (6) 1,200
(3) 3,700 (4) 7,000 Bal. 1,200
Bal. 3,700 (5) 3,000
Utilities Expense
Land Bal.
(6) 400
10,000
(2) 40,000 (10) 22,000 Bal. 400
Bal. 18,000
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Learning Objective Five
Learning Objective One
Prepare and use a trial balance
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unadjusted, adjusted
Trial Balance post-closed.
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Trial Balance
• Note the following:
1. Trial balance is NOT one of our four financial statements.
2. Types of errors detected by a trial balance (i.e., whether Total
Dr. = Total Cr.) are the kinds of errors made by humans but
not computers.
3. Equal trial balance totals proves only that debits posted to
accounts equal credits posted to accounts.
It does NOT prove that the trial balance does not have
errors and that it is correct.
In other words, errors in transactions that have equal
debits and credits will NOT be revealed by unequal totals!
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Trial Balance – Tara Inc.
Use Tara’s ledger accounts to prepare the Trial Balance
– Exhibit 2-12 (page 79)
Tara Inc.
Trial Balance
April 30, 2017
Balance
Account Title Debit Credit
Cash $33,300
Accounts receivable 2,000
Supplies
Assets 3,700
Land 18,000
Accounts payable Liability $1,800
Common shares 50,000
Dividends 2,100
Service revenue Shareholders’ 10,000
Rent expense Equity 1,100
Salary expense 1,200
Utilities expense 400
Total $61,800 = $61,80056