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Unformatted text preview: Introduction To Financial Accounting HKUST Chapter 3 Operating Decisions and the Income Statement
ACCT 101 Fall 2010 Allen Huang Chapter Three Slide 1 of 74 Transaction Analysis Process Accounts and effects Introduction To Financial Accounting HKUST 1. 1 Identify the accounts affected and classify them by type of account (A, L, SE). 2. Determine the direction of the effect (increase or decrease) on each account. Balancing 3. Verify that the accounting equation (A = L + SE) remains in balance. Chapter Three Slide 2 of 74 Direction of Transaction Effects Introduction To Financial Accounting HKUST For Assets: DR = Left = Increase; CR = Ri h = D Right Decrease For Liab and SE: CR = Right = Increase; DR = Left = Decrease
Chapter Three Slide 3 of 74 Double-Entry Bookkeeping
Assets + DR
Normal Balance Introduction To Financial Accounting HKUST Liabilities Shareholders' Equity - DR + CR
Normal Balance - CR - DR + CR
Normal Balance Contributed Capital - DR + CR
Normal Balance Retained Earnings - DR + CR
Normal Balance Expenses + DR
Chapter Three Revenues - DR + CR
Slide 4 of 74 - CR Why Debit Expenses? A Introduction To Financial Accounting HKUST = L + SE = L + Cont. Capital + RE End RE = Beg. RE + NI Dividend End. Beg Dividend. = Beg. RE + Rev Exp Dividend. $1 in Rev End. RE by $1 (recall increase of RE is Cr) Cr increase in Rev; $1 in Exp End. RE by $1 (recall decrease of RE is Dr) Dr increase in Exp.
Chapter Three Slide 5 of 74 Transaction Analysis Introduction To Financial Accounting HKUST Balance check: A = L + SE remains balance for each transaction. (I.e. A = L + SE) Equality check: Total Debits = Total Credits for each transaction. +A -L -SE L SE +Exp -Rev = -A +L A -Exp +SE +Rev Chapter Three Slide 6 of 74 Contract Exchange (Not Transaction) Introduction To Financial Accounting HKUST Most transactions with external parties involve an exchange where the business entity both gives up something and recei es something in ret rn receives return. Signing a contract is just an exchange of promises but not assets, service, which will change the financial position of the firm. Chapter Three Slide 7 of 74 Learning Objectives for Ch 3
1. 2. 3. 4. 5. Introduction To Financial Accounting HKUST Learn a typical business operating cycle and the necessity for the time period assumption. How business activities affect the elements of the income statement. Learn the accrual basis of accounting and apply the revenue and matching principles. Apply transaction analysis to examine and record the effects of operating activities. Prepare unadjusted financial statements. Chapter Three Slide 8 of 74 Business Background
How do business activities affect the income statement? How are these activities recognized and measured? How are these activities reported on the income statement? Introduction To Financial Accounting HKUST Chapter Three Slide 9 of 74 The Operating Cycle
Purchase inputs or products from suppliers on credit. Introduction To Financial Accounting HKUST Manufacture products.
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