SB-BMGT310-sess02_ch3all_s

SB-BMGT310-sess02_ch3all_s - The Accounting Information The...

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Unformatted text preview: The Accounting Information The Accounting Information System System Chapter 3 - part 1 Chapter 3-1 Initially Prepared by Coby Harmon, University of California, Santa Barbara, modified by SB Learning Objectives Learning Objectives 1. 2. 3. 4. 5. 6. 7. Understand basic accounting terminology. Explain doubleentry rules. Identify steps in the accounting cycle. Record transactions in journals, post to ledger accounts, and prepare a trial balance. Explain the reasons for preparing adjusting entries. Prepare financial statement from the adjusted trial balance. Prepare closing entries. Chapter 3-2 Fundamental Accounting Equation Fundamental Accounting Equation Relationship among the assets, liabilities and owner's equity of a business: Assets Assets = Liabilities Liabilities + Owner's Equity Owner's Equity Chapter 3-3 LO 2 Explain double-entry rules. Debits and Credits Debits and Credits Double-entry a c c o un tin g s ys te m (two s id e d e ffe c t) . R e c o rd in g d o n e b y d e b iting a t le a s t o ne a c c o un t a nd c re d iting a no th e r. DEBITS must equal CREDITS. Chapter 3-4 LO 2 Explain double-entry rules. T Accounts T Accounts An Ac c o un t s h o ws th e e ffe c t o f tra ns a c tio n s o n a g ive n t a s s e t, lia b ility, e q uity, re ve n ue , o r e xp e ns e a c c o un t. If De b it e ntrie s a re g re a te r th a n C re d it e ntrie s , th e a c c o un t will h a ve a dAccount Name e b it b a la n c e . Debit / Dr. Credit / Cr. Transaction #1 Transaction #3 Balance $10,000 8,000 $15,000 $3,000 Transaction #2 Chapter 3-5 LO 2 Explain double-entry rules. Debits and Credits Debits and Credits If Credit entries are greater than Debit entries, the account will have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 8,000 Transaction #2 Transaction #3 Balance $1,000 Chapter 3-6 LO 2 Explain double-entry rules. Basic Accounting Equation Basic Accounting Equation Relationship among the assets, liabilities and stockholders' equity of a business: Illustration 33 The equation must be in balance after every transaction. For every Debit there must be a Credit. Chapter 3-7 LO 2 Explain double-entry rules. Debits Summary Debits Summary A debit is an asset or expense D: Debit E: Expense A: Asset D: Dividend Chapter 3-8 LO 2 Explain double-entry rules. Debits and Credits Summary Debits and Credits Summary Ba la nc e S h e e t In c o m e S ta te m e n t Asset = Liability + Equity A Debit is A Credit is A Credit is A Debit is A Credit is A Debit is (Revenue - Expense) = an increase in an asset or expense an increase in a liability or revenue a decrease in an asset or expense a decrease in a liability or revenue an increase in a contra-asset (or negative-expense) an increase in a contra-liability (or negativerevenue) Chapter 3-9 LO 2 Explain double-entry rules. Debits and Credits Summary Debits and Credits Summary Ba la n c e S h e e t Inc o m e S ta te m e nt Asset = Liability + Equity Debit Revenu - Expens = e e Credit Chapter 3-10 LO 2 Explain double-entry rules. Double-Entry System Exercise Double-Entry System Exercise 1. Invested $32,000 cash and equipment valued at $14,000 in the business. As s e ts As s e ts = Lia b ilitie s Lia b ilitie s + Stockholders' Stockholders' Equity Equity + 32,000 + 14,000 + 46,000 Chapter 3-11 LO 2 Explain double-entry rules. Ownership Structure Ownership Structure O wne rs h ip s truc tu re d ic ta te s th e typ e s o f a c c o u nts th a t a re p a rt o f th e e q uity s e c tio n . Proprietorship or Proprietorship or Partnership Partnership Capital Corporation Corporation Common Account Account Stock Paid-in Declared Drawing Additional Capital Dividends Retained Earnings Chapter 3-12 LO 2 Explain double-entry rules. Corporation Ownership Structure Corporation Ownership Structure Balance Sheet Stockholders' Equity Common Stock (Investment by Common Stock (Investment by stockholders) stockholders) Illustration 34 income retained in business) income retained in business) Retained Earnings (Net Retained Earnings (Net Dividends Net income or Net loss (Revenues (Revenues less expenses) less expenses) Income Statement Statement of Retained Earnings Chapter 3-13 LO 2 Explain double-entry rules. The Accounting Cycle The Accounting Cycle Transactions 9. Reversing entries 8. Postclosing trail balance 7. Closing entries 6. Financial Statements Work Sheet Illustration 36 1. Journalization 2. Posting 3. Trial balance 4. Adjustments 5. Adjusted trial balance Chapter 3-14 LO 3 Identify steps in the accounting cycle. Transactions and Events Transactions and Events What to Record? FAS B s ta te s , "tra ns a c tio n s a n d o th e r e ve nts a nd c irc u m s ta n c e s th a t a ffe c t a b u s ine s s e nte rp ris e ." Types of Events: External between a business and its environment. Internal event occurring entirely within a business. Chapter 3-15 LO 3 Identify steps in the accounting cycle. Review "Transactions and Events" Review "Transactions and Events" External 1. 2. 3. 4. 5. 6. 7. Internal Not Recorded External External Not Recorded External Internal Not Recorded Internal A supplier of a company`s raw material is paid an amount owed on account. A customer pays its open account. A new chief executive officer is hired. The biweekly payroll is paid. Raw materials are entered into production. A new advertising agency is hired. The accountant determines the federal income taxes owed based on the income earned. Chapter 3-16 LO 3 Identify steps in the accounting cycle. 1. Journalizing 1. Journalizing General Journal a chronological record of transactions. Journal Journal Entries are recorded in the journal. General Journal Dat e J a n. 3 Account Tit le Ca s h Co m m o n s t o c k 10 Build ing N o t e pa y a b le Ref . 10 0 300 13 0 220 0 ,0 0 0 15 0 ,0 0 0 15 Debit 0 ,0 0 0 10 0 ,0 0 0 10 Credit Chapter 3-17 LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. 2. Posting 2. Posting Chapter 3-18 LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. 3. Trial Balance 3. Trial Balance Trial Balance a list of each account and its balance; used to prove Balance equality of debit and credit balances. Acct . N o. 10 0 10 5 110 13 0 200 220 300 330 400 500 Account Ca s h A c c o unt s r e c e iva b le I nve nt o r y Build ing A c c o unt s pay a b le No t e pa y a b le Co m m o n s t o c k Re t a ine d e ar ning s S a le s Co s t o f g o o d s s o ld Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 3 0 ,0 0 0 0 ,0 0 0 15 Credit $ 6 0 ,0 0 0 15 0 ,0 0 0 10 0 ,0 0 0 7 5 ,0 0 0 $ 3 8 5 ,0 0 0 3 0 ,0 0 0 $ 8 5 ,0 0 0 3 Chapter 3-19 LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. 4. Adjusting Entries 4. Adjusting Entries Revenues re c o rd e d in th e p e rio d in wh ic h th e y a re e a rne d . Expenses re c o g n ize d in th e p e rio d in wh ic h th e y a re inc urre d . Adjusting entries ne e d e d to e ns u re th a t th e entries re ve nu e re c o g nitio n a nd m a tc h in g p rinc ip le s a re fo llo we d . Chapter 3-20 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Prepaid Expenses" Adjusting Entries "Prepaid Expenses" Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the payment on Jan. 1st. Jan. 1 Prepaid insurance Cash Prepaid Insurance Debit 12,000 Credit Debit Cash Credit 12,000 12,000 12,000 Chapter 3-21 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Prepaid Expenses" Adjusting Entries "Prepaid Expenses" Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the adjusting journal entry required at Jan. 31st. Jan. 31 Insurance expense Prepaid insurance Prepaid Insurance Debit 12,000 11,000 Chapter 3-22 1,000 1,000 Insurance expense Debit 1,000 Credit Credit 1,000 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Prepaid Expenses" Adjusting Entries "Prepaid Expenses" Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the payment on Jan. 1st. (Initial entry is to Insurance Expense.) Jan. 1 Insurance expense Cash Insurance Expense Debit 12,000 Credit Debit 12,000 12,000 Cash Credit 12,000 Chapter 3-23 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Prepaid Expenses" Adjusting Entries "Prepaid Expenses" Example: On Jan. 1st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the adjusting journal entry required at Jan. 31st. Jan. 31 Prepaid Insurance Insurance Expense Prepaid Insurance Debit 11,000 11,000 Chapter 3-24 11,000 11,000 Insurance expense Debit 12,000 Credit 11,000 i/s 1,000 Credit LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Unearned Revenues" Adjusting Entries "Unearned Revenues" Receipt of cash that is recorded as a liability because the revenue has not been earned. Cash Receipt BEFORE Revenue Recorded Unearned revenues often occur in regard to: rent airline tickets school tuition magazine subscriptions customer deposits Chapter 3-25 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Unearned Revenues" Adjusting Entries "Unearned Revenues" Example: On Nov. 1st, Phoenix Corp. received $24,000 from Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt on Nov. 1st. Nov. 1 Cash Unearned rent revenue Cash Debit 24,000 Credit 24,000 24,000 Unearned Rent Revenue Debit Credit 24,000 Chapter 3-26 LO 5 Explain the reasons for preparing adjusting entries. Adjusting Entries "Unearned Revenues" Adjusting Entries "Unearned Revenues" Example: On Nov. 1st, Phoenix Corp. received $24,000 from Arcadia High School for 3 months rent in advance. Show the adjusting journal entry required on Nov. 30th. Nov. 30 Unearned rent revenue Rent revenue Rent Revenue Debit Credit 8,000 Unearned Rent Revenue Debit 8,000 Credit 24,000 16,000 Chapter 3-27 8,000 8,000 LO 5 Explain the reasons for preparing adjusting entries. 5. Adjusted Trial Balance 5. Adjusted Trial Balance Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. Adj ust ed Trial Balance Cas h A c c o unt s r e c e iva b le Build ing No t e pa y a b le Co m m o n s t o c k Re t a ine d e a r ning s Divid e nd s d e c lar e d S a le s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S a la r y e x pe ns e De pr e c ia t io n e x pe ns e Chapter 3-28 Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit ,0 0 0 10 $ 0 ,0 0 0 15 10 0 ,0 0 0 3 8 ,0 0 0 18 5 ,0 0 0 17 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 $ 9 0 ,0 0 0 4 $ 4 9 0 ,0 0 0 LO 5 Explain the reasons for preparing adjusting entries. 6. Preparing Financial Statements 6. Preparing Financial Statements Fin aanc ia l S ta te m eents a re p re ppaare dd d ire cctly fro m th ee Fin nc ia l S ta te m nts a re p re re d ire tly fro m th Ad jus te dd T ria l Ba la n ccee. Ad jus te T ria l Ba la n . Ba la nc e S he e t Inc o m e S ta te m e n t S ta te m e n t o f R e ta in e d Ea rn in g s S ta te m e n t o f C a s h Flo ws Chapter 3-29 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cas h A c c o unt s r e c e iva b le Build ing No t e pa y a b le Co m m o n s t o c k Re t a ine d e a r ning s Divid e nd s d e c lar e d S a le s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S a la r y e x pe ns e De pr e c iat io n e x pe ns e Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit Income Statement I ncome St at ement Revenues: S ale s I nt e r e s t inc o m e T o t a l r e ve nue Expenses: Co s t o f g o o d s s o ld S ala r y e x pe ns e De pr e c iat io n e x pe ns e T o t a l e x pe ns e s Net income $ 18 5 ,0 0 0 ,0 0 0 17 2 0 2 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 115 ,0 0 0 $ 7 ,0 0 0 8 ,0 0 0 10 $ 0 ,0 0 0 15 10 0 ,0 0 0 3 8 ,0 0 0 18 5 ,0 0 0 17 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 $ 9 0 ,0 0 0 4 $ 4 9 0 ,0 0 0 Chapter 3-30 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cas h A c c o unt s r e c e iva b le Build ing No t e pa y a b le Co m m o n s t o c k Re t a ine d e a r ning s Divid e nd s d e c lar e d S a le s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S a la r y e x pe ns e De pr e c iat io n e x pe ns e Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit Statement of Retained Earnings St at ement of Ret ained Earnings Be g inning b a lanc e + Ne t inc o m e Divid e nd s End ing b ala nc e $ 8 ,0 0 0 3 8 7 ,0 0 0 (10 ,0 0 0 ) 115 ,0 0 0 ,0 0 0 10 $ 0 ,0 0 0 15 10 0 ,0 0 0 3 8 ,0 0 0 18 5 ,0 0 0 17 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 $ 9 0 ,0 0 0 4 $ 4 9 0 ,0 0 0 Chapter 3-31 LO 6 Prepare financial statement from the adjusted trial balance. 6. Preparing Financial Statements 6. Preparing Financial Statements Assume the following Adjusted Trial Balance Adj ust ed Trial Balance Cas h A c c o unt s r e c e iva b le Build ing No t e pa y a b le Co m m o n s t o c k Re t a ine d e a r ning s Divid e nd s d e c lar e d S a le s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S a la r y e x pe ns e De pr e c iat io n e x pe ns e Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit Balance Sheet Balance Sheet Asset s Cas h A c c o unt s r e c e ivab le Build ing T o t a l as s e t s Liabilit ies No t e pa y a b le St ockholders' equit y Co m m o n s t o c k Re t a ine d e a r ning s T o t a l lia b . & e q uit y $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 $ 6 5 ,0 0 0 3 0 ,0 0 0 15 0 ,0 0 0 10 115 ,0 0 0 $ 6 5 ,0 0 0 3 ,0 0 0 10 $ 0 ,0 0 0 15 10 0 ,0 0 0 3 8 ,0 0 0 18 5 ,0 0 0 17 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 $ 9 0 ,0 0 0 4 $ 4 9 0 ,0 0 0 Chapter 3-32 LO 6 Prepare financial statement from the adjusted trial balance. 7. Closing Entries 7. Closing Entries T o re d u c e th e b a la n c e o f th e in c o m e s ta te m e nt ( revenue a nd expense) a c c o u nts to ze ro . T o tra ns fe r n e t inc o m e o r n e t lo s s to o wne r's e q uity. Ba la n c e s h e e t ( asset, liability, a n d equity) a c c o u nts a re no t c lo s e d . Divid e n d s a re c lo s e d d ire c tly to th e R e ta ine d Ea rning s a c c o u nt. Chapter 3-33 LO 7 Prepare closing entries. 7. Closing Entries 7. Closing Entries Example: Assume the following Adjusted Trial Balance Acct . N o. 10 0 10 5 13 0 220 300 330 380 400 430 500 520 550 Account Cas h A c c o unt s r e c e ivab le Build ing No t e pay ab le Co m m o n s t o c k Re t aine d e ar ning s Divid e nd s d e c lar e d S ale s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S alar y e x pe ns e De pr e c iat io n e x pe ns e Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit ,0 0 0 10 $ 0 ,0 0 0 15 10 0 ,0 0 0 3 8 ,0 0 0 18 5 ,0 0 0 17 ,0 0 0 4 7 ,0 0 0 2 5 ,0 0 0 4 3 ,0 0 0 $ 9 0 ,0 0 0 4 $ 4 9 0 ,0 0 0 Chapter 3-34 LO 7 Prepare closing entries. 7. Closing Entries 7. Closing Entries Example: Prepare the Closing journal entry from the adjusted trial balance on the previous slide. Sales 185,000 Interest income 17,000 Income summary 202,000 Income summary 115,000 Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 Income summary 87,000 Retained earnings 87,000 Retained earnings 10,000 Dividends declared 10,000 Chapter 3-35 LO 7 Prepare closing entries. 8. Post-Closing Trial Balance 8. Post-Closing Trial Balance Example continued: Acct . N o. 10 0 10 5 13 0 220 300 330 380 400 430 500 520 550 Account Cas h A c c o unt s r e c e ivab le Build ing No t e pay ab le Co m m o n s t o c k Re t aine d e ar ning s Divid e nd s d e c lar e d S ale s I nt e r e s t inc o m e Co s t o f g o o d s s o ld S alar y e x pe ns e De pr e c iat io n e x pe ns e Debit $ 14 0 ,0 0 0 3 5 ,0 0 0 0 ,0 0 0 19 Credit $ 0 ,0 0 0 15 10 0 ,0 0 0 115 ,0 0 0 $ 6 5 ,0 0 0 3 $ 3 6 5 ,0 0 0 Chapter 3-36 LO 7 Prepare closing entries. 9. Reversing Entries 9. Reversing Entries Reversing entries are optional steps that a company may perform at the beginning of the next accounting period. They are typically required if initial entries for insurance, rent etc are posted to an I/S account rather than a B/S account. Chapter 3-37 LO 7 Prepare closing entries. ...
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This note was uploaded on 02/07/2012 for the course BMGT 310 taught by Professor Mckinney during the Fall '08 term at Maryland.

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