Chapter 1

Chapter 1

3-1 Chapter 3 The Accounting Cycle Capturing Economic Events McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 3-2 The The Role Role of of Accounting Accounting Records Records McGraw-Hill/Irwin Establishes Establishesaccountability accountability for for assets assetsand andtransactions. transactions. Keeps Keepstrack trackof of routine routine business businessactivities. activities.

Obtains Obtainsdetailed detailedinformation information about about aaparticular particular transaction. transaction. Evaluates Evaluatesefficiency efficiencyand and performance performancewithin withincompany. company. Maintains Maintainsevidence evidenceof ofaa companys companysbusiness businessactivities. activities. The McGraw-Hill Companies, Inc., 20 3-3 The The Ledger Ledger Cash Accounts Payable Capital Stock

McGraw-Hill/Irwin Accounts Accounts are are individual individual records records showing showing increases increases and and decreases. decreases. The The entire entire group group of of accounts accounts is is kept kept together together in in an an accounting accounting record record called called aa ledger. ledger. The McGraw-Hill Companies, Inc., 20 3-4 The

The Use Use of of Accounts Accounts Increases are recorded on one side of the Taccount, and decreases are recorded on the other side. McGraw-Hill/Irwin Title of the Account Left or Debit Side Right or Credit Side The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin 3-5 Lets Lets see see how how debits debits and and credits credits

are are recorded recorded in in the the Cash Cash account account for for JJs JJs Lawn Lawn Care Care Service. Service. The McGraw-Hill Companies, Inc., 20 3-6 Debit Debit and and Credit Credit Entries Entries Receipts are on the debit side. McGraw-Hill/Irwin 5/1 5/1 5/25 5/25 5/29 5/29

5/31 5/31 Bal. Bal. Cash Cash 8,000 5/2 8,000 5/2 2,500 2,500 Payments 75 5/8 75 5/8 2,000 2,000 are on the credit 750 150 750 5/28 5/28 150 side. 5/31 50 5/31 50 4,125 4,125 The The balance balance is isthe the difference differencebetween between the

thedebit debitand andcredit credit entries entriesin inthe the account. account. The McGraw-Hill Companies, Inc., 20 3-7 Debit Debit and and Credit Credit Rules Rules Debits Debits and and credits credits affect affect accounts accounts as as follows: follows: A = L + OE ASSETS LIABILITIES EQUITIES Debit Credit for

for Increase Decrease Debit Credit for for Decrease Increase Debit Credit for for Decrease Increase McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 3-8 Double Double Entry Entry AccountingThe AccountingThe Equality Equality of of Debits Debits and and Credits Credits A = L + OE = Debit balances Credit

balances In In the the double-entry double-entry accounting accounting system, system, every every transaction transaction is is recorded recorded by by equal equal dollar dollar amounts amounts of of debits debits and and credits. credits. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin 3-9 Lets record selected transactions for JJs Lawn Care Service in the accounts. The McGraw-Hill Companies, Inc., 20

3-10 May May 1: 1: Jill Jill Jones Jones and and her her family family invested invested $8,000 $8,000 in in JJs JJs Lawn Lawn Care Care Service Service and and received received 800 800 shares shares of of stock. stock. Will Cash increase or decrease? McGraw-Hill/Irwin Will Capital Stock increase or decrease? The McGraw-Hill Companies, Inc., 20

3-11 May May 1: 1: Jill Jill Jones Jones and and her her family family invested invested $8,000 $8,000 in in JJs JJs Lawn Lawn Care Care Service Service and and received received 800 800 shares shares of of stock. stock. Cash increases $8,000 with a debit. Capital Stock increases $8,000 with a credit. Cash 5/1 8,000 Capital Stock 5/1 8,000

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 May May 2: 2: JJs JJs purchased purchased aa riding riding lawn lawn mower mower for for $2,500 $2,500 cash. cash. Will Cash increase or decrease? McGraw-Hill/Irwin 3-12 Will Tools & Equipment increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 2: 2: JJs JJs purchased purchased aa riding riding lawn

lawn mower mower for for $2,500 $2,500 cash. cash. Cash decreases $2,500 with a credit. Cash 5/1 8,000 5/2 2,500 McGraw-Hill/Irwin 3-13 Tools & Equipment increases $2,500 with a debit. Tools & Equipment 5/2 2,500 The McGraw-Hill Companies, Inc., 20 May May 8: 8: JJs JJs purchased purchased aa $15,000 $15,000 truck. truck. JJs JJs paid paid $2,000 $2,000 in in cash

cash and and issued issued aa note note payable payable for for the the remaining remaining $13,000. $13,000. Will Truck increase or decrease? McGraw-Hill/Irwin 3-14 Will Cash and Notes Payable increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 8: 8: JJs JJs purchased purchased aa $15,000 $15,000 truck. truck. JJs JJs paid paid $2,000 $2,000 in in cash cash and

and issued issued aa note note payable payable for for the the remaining remaining $13,000. $13,000. Truck increases $15,000 with a debit. Truck 5/8 15,000 McGraw-Hill/Irwin 3-15 Cash decreases $2,000 with a credit. Notes Payable increases $13,000 with a credit. Cash 5/1 8,000 5/2 2,500 5/8 2,000 Notes Payable 5/8 13,000 The McGraw-Hill Companies, Inc., 20 May May 11: 11: JJs JJs purchased

purchased some some repair repair parts parts for for $300 $300 on on account. account. Will Tools & Equipment increase or decrease? McGraw-Hill/Irwin 3-16 Will Accounts Payable increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 11: 11: JJs JJs purchased purchased some some repair repair parts parts for for $300 $300 on on account. account.

3-17 Tools & Equipment increases $300 with a debit. Accounts Payable increases $300 with a credit. Tools & Equipment 5/2 2,500 5/11 300 Accounts Payable 5/11 300 McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 May May 18: 18: JJs JJs sold sold half half of of the the repair repair parts parts to to ABC ABC Lawns Lawns for for $150,

$150, aa price price equal equal to to JJs JJs cost. cost. ABC ABC Lawns Lawns agrees agrees to to pay pay JJs JJs within within 30 30 days. days. Will Tools & Equipment increase or decrease? McGraw-Hill/Irwin 3-18 Will Accounts Receivable increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 18: 18: JJs JJs sold sold half half of of the the repair

repair parts parts to to ABC ABC Lawns Lawns for for $150, $150, aa price price equal equal to to JJs JJs cost. cost. ABC ABC Lawns Lawns agrees agrees to to pay pay JJs JJs within within 30 30 days. days. Tools & Equipment decreases $150 with a credit. Tools & Equipment 5/2 2,500 5/18 150 5/11 300 McGraw-Hill/Irwin 3-19 Accounts Receivable increases $150 with a debit.

Accounts Receivable 5/18 150 The McGraw-Hill Companies, Inc., 20 3-20 The The Journal Journal In In an an actual actual accounting accounting system, system, transactions transactions are are initially initially recorded recorded in in the the journal. journal. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2007 May 1 Cash Capital Stock

8,000 8,000 Owners invest cash in the business. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 3-21 Posting Posting Journal Journal Entries Entries to to the the Ledger Ledger Accounts Accounts Posting involves copying information from the journal to the ledger accounts. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 3-22 Posting Posting Journal Journal Entries

Entries to to the the Ledger Ledger Accounts Accounts GENERAL JOURNAL Date P R Debit Account Titles and Explanation Credit 2007 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business. General Ledger Date 2007 May 1 McGraw-Hill/Irwin Cash Debit Credit

8,000 Balance 8,000 The McGraw-Hill Companies, Inc., 20 3-23 Posting Posting Journal Journal Entries Entries to to the the Ledger Ledger Accounts Accounts GENERAL JOURNAL Date P R Debit Account Titles and Explanation Credit 2007 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business.

General Ledger Date 2007 May 1 McGraw-Hill/Irwin Capital Stock Debit Credit 8,000 Balance 8,000 The McGraw-Hill Companies, Inc., 20 3-24 Posting Posting Journal Journal Entries Entries to to the the Ledger Ledger Accounts Accounts GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit

2007 May 2 Tools & Equipment Cash 2,500 2,500 Purchased lawn mower. Lets Lets see see what what the the cash cash account account looks looks like like after after posting posting the the cash cash portion portion of of this this transaction transaction for for JJs JJs Lawn Lawn Care Care Service. Service. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20

3-25 Ledger Ledger Accounts Accounts After After Posting Posting Date 2007 May 1 2 General Ledger Cash Debit Credit 8,000 2,500 Balance 8,000 5,500 This This ledger ledger format format is is referred referred to to as as aa running running balance. balance. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20

3-26 Ledger Ledger Accounts Accounts After After Posting Posting Date 2007 May 1 2 General Ledger Cash Debit Credit 8,000 2,500 Balance 8,000 5,500 TT accounts accounts are are simplified simplified versions versions of of the the ledger ledger account account that that only only show show the the

debit debit and and credit credit columns. columns. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 3-27 What What is is Net Net Income? Income? Net Net income income is is not not an an asset asset its its an an increase increase in in owners owners equity equity from from profits profits of of the the business. business. A = L + OE

Increase Decrease Either (or both) of these effects occur as net income is earned . . . McGraw-Hill/Irwin Increase . . . but this is what net income really means. The McGraw-Hill Companies, Inc., 20 3-28 Retained Retained Earnings Earnings A = L + OE Capital Stock Retained Earnings The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20

3-29 The The Income Income Statement: Statement: A A Preview Preview JJ's Lawn Care Service Income Statement For the Month Ended May 31, 2007 Sales Revenue Operating Expense: Gasoline Expense Net Income $ 750 $ 50 700 The Theincome incomestatement statement summarizes summarizesthe theprofitability profitability of of aabusiness businessfor for aa specified specifiedperiod periodof

of time. time. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin 3-30 Accounting Accounting Periods Periods Time Period Principle To provide users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin 3-31 Revenue Revenue and and Expenses Expenses The price for goods sold and services rendered during a given accounting period.

Increases owners equity. The costs of goods and services used up in the process of earning revenue. Decreases owners equity. The McGraw-Hill Companies, Inc., 20 The The Realization Realization Principle: Principle: When When To To Record Record Revenue Revenue 3-32 Realization Principle Revenue should be recognized at the time goods are sold and services are rendered. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 The

The Matching Matching Principle: Principle: When When To To Record Record Expenses Expenses 3-33 Matching Principle Expenses should be recorded in the period in which they are used up. McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 20 Debits Debits and and Credits Credits for for Revenue Revenue and and Expense Expense Expenses decrease owners equity. EQUITIES Debit Credit for

for Decrease Increase Revenues increase owners equity. EXPENSES REVENUES Debit Credit for for Increase Decrease Debit Credit for for Decrease Increase McGraw-Hill/Irwin 3-34 The McGraw-Hill Companies, Inc., 20 3-35 Investments Investments by by and and Payments Payments to to Owners Owners

Payments to owners decrease owners equity. EQUITIES Debit Credit for for Decrease Increase DIVIDENDS Debit Credit for for Increase Decrease McGraw-Hill/Irwin Owners investments increase owners equity. CAPITAL STOCK Debit Credit for for Decrease Increase The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin

3-36 Lets Lets analyze analyze the the revenue revenue and and expense expense transactions transactions for for JJs JJs Lawn Lawn Care Care Service Service for for the the month month of of May. May. We We will will also also analyze analyze aa dividend dividend transaction. transaction. The McGraw-Hill Companies, Inc., 20

May May 29: 29: JJs JJs provided provided lawn lawn care care services services for for aa client client and and received received $750 $750 in in cash. cash. Will Cash increase or decrease? McGraw-Hill/Irwin 3-37 Will Sales Revenue increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 29: 29: JJs JJs provided provided lawn lawn care care services services for

for aa client client and and received received $750 $750 in in cash. cash. Cash increases $750 with a debit. Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 McGraw-Hill/Irwin 3-38 Sales Revenue increases $750 with a credit. Sales Revenue 5/29 750 The McGraw-Hill Companies, Inc., 20 May May 31: 31: JJs JJs purchased purchased gasoline gasoline for

for the the lawn lawn mower mower and and the the truck truck for for $50 $50 cash. cash. Will Cash increase or decrease? McGraw-Hill/Irwin 3-39 Will Gasoline Expense increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 31: 31: JJs JJs purchased purchased gasoline gasoline for for the the lawn lawn mower mower and and the the truck

truck for for $50 $50 cash. cash. Cash decreases $50 with a credit. Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 5/31 50 McGraw-Hill/Irwin 3-40 Gasoline Expense increases $50 with a debit. Gasoline Expense 5/31 50 The McGraw-Hill Companies, Inc., 20 May May 31: 31: JJs JJs Lawn Lawn Care Care paid paid Jill Jill Jones

Jones and and her her family family aa $200 $200 dividend. dividend. Will Cash increase or decrease? McGraw-Hill/Irwin 3-41 Will Dividends increase or decrease? The McGraw-Hill Companies, Inc., 20 May May 31: 31: JJs JJs Lawn Lawn Care Care paid paid Jill Jill Jones Jones and and her her family family aa $200 $200 dividend. dividend. Cash decreases

$200 with a credit. Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 5/31 50 5/31 200 McGraw-Hill/Irwin 3-42 Dividends increase $200 with a debit. 5/31 Dividends 200 The McGraw-Hill Companies, Inc., 20 McGraw-Hill/Irwin 3-43 Now, Now, lets lets look look at at the the Trial Trial Balance

Balance for for JJs JJs Lawn Lawn Care Care Service Service for for the the month month of of May. May. The McGraw-Hill Companies, Inc., 20 3-44 All balances JJ's Lawn Care Service are taken from Unadjusted Trial Balance the ledger May 31, 2007 accounts on Cash $ 3,925 May 31 after Accounts receivable 75 considering all Tools & equipment 2,650 Truck 15,000 of JJs Notes payable $ 13,000

transactions Accounts payable 150 for the month. Capital stock Dividends Sales revenue Gasoline expense Total McGraw-Hill/Irwin 8,000 200 750 50 $ 21,900 $ 21,900 Proves equality of debits and credits. The McGraw-Hill Companies, Inc., 20 The Accounting Cycle Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Prepare after-closing Journalize and post closing trial balance.

entries. McGraw-Hill/Irwin 3-45 Make end-ofyear adjustments. Prepare Prepare adjusted financial trial balance. The McGraw-Hill Companies, Inc., 20 statements.

Recently Viewed Presentations

  • ELECTRICAL CIRCUIT AIR EML 4501  GROUP COMPRESSOR 5

    ELECTRICAL CIRCUIT AIR EML 4501 GROUP COMPRESSOR 5

    EML 4501 - Group 5. How It Works. A rechargeable, 11.1 V, 1100 mAh battery powers an electric motor. The motor drives a gear train with a gear ratio of 3.5. The final gear of the gear train rotates the...
  • Strengthening Goat based livelihoods : New Paradigm and approach

    Strengthening Goat based livelihoods : New Paradigm and approach

    Community led selection and monitoring of service provider . ... Estimated Return through asset saving & productivity increase - Rs 50000 to 80000 per annum (Studied for 2 years impact only) ... Linkage with Live body wt marketing. Vaccination Deworming...
  • Multidisciplinary COllaboration: Why and How?

    Multidisciplinary COllaboration: Why and How?

    Order the probes by smallest to largest change (we use p-value, not fold change). Define a cutoff for "significance" (e.g., FDR p-value < .10). ... locations, and macromolecular complexes; examples include nucleus, telomere, and RNA polymerase II holoenzyme The 3...
  • Revision Guide for the Anthology Literature Exam Literature

    Revision Guide for the Anthology Literature Exam Literature

    All year the flax-dam festered in the heartOf the townland; green and heavy headedFlax had rotted there, weighted down by huge sods.Daily it sweltered in the punishing sun.Bubbles gargled delicately, bluebottlesWove a strong gauze of sound around the smell.There were...
  • Chapter 1 Geography, History, and the Social Sciences

    Chapter 1 Geography, History, and the Social Sciences

    Coast, Intermountain Region, Rocky Mountains, Interior Plains, Ozark Highlands, Appalachian Mountains, Canadian Shield, Coastal Plains, Hawaiian Islands American Rivers and Lakes The Mississippi and Missouri Rivers are very important to the U.S.
  • Chemistry test 1 review

    Chemistry test 1 review

    What is HHPS? Be able to recognize and name all symbols. Know the severity levels. matter. What is matter? What are examples? Know how matter is divided. What are pure substances? What are mixtures? Know examples of each. What is...
  • INTRO TO ARGUMENT AND RHETORIC - Mr. Jason Spitzer, English ...

    INTRO TO ARGUMENT AND RHETORIC - Mr. Jason Spitzer, English ...

    INTRO TO ARGUMENT AND RHETORIC . THE FOUNDATION OF AP LANGUAGE. ... explicit (clearly stated) or . ... 1C. A that clause containing a major claim (thesis of the work). 2. Explanation of . HOW. the author develops and supports...
  • The Life and Times of The Author  Over

    The Life and Times of The Author Over

    and Bradbury's Emmy-winning teleplay for . The Halloween Tree. But not all adaptations were so successful. For instance, Bradbury was seriously disappointed with a . Martian Chronicles. network miniseries, broadcast in 1979. Looking for more creative control, Bradbury turned to...