ACO 201 Chapter 3, Spring 2013

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. The Accounting Cycle: The Accounting Cycle: Capturing Economic Events Capturing Economic Events Chapter 3 3-2 The Role of Accounting The Role of Accounting Records Records Establishes accountability for assets and transactions. Establishes accountability for assets and transactions. Keeps track of routine business activities. Keeps track of routine business activities. Obtains detailed information about a particular transaction. Obtains detailed information about a particular transaction. Evaluates efficiency and performance within company. Evaluates efficiency and performance within company. Maintains evidence of a company’s business activities. Maintains evidence of a company’s business activities. 3-3 The Ledger The Ledger The entire group of accounts is kept together in an accounting record called a ledger. The entire group of accounts is kept together in an accounting record called a ledger. Cash Accounts Payable Capital Stock Accounts are individual records showing increases and decreases. Accounts are individual records showing increases and decreases. 3-4 The Use of Accounts The Use of Accounts Increases are recorded on one side of the T account, and decreases are recorded on the other side. Left or Debit Side Right or Credit Side Title of Account 3-5 Cash 5/1 8,000 5/2 2,500 5/25 75 5/8 2,000 5/29 750 5/28 150 5/31 50 5/31 4,125 Bal. Cash 5/1 8,000 5/2 2,500 5/25 75 5/8 2,000 5/29 750 5/28 150 5/31 50 5/31 4,125 Bal. Receipts are on the debit side. Payments are on the credit side. The balance is the difference between the debit and credit entries in the account. The balance is the difference between the debit and credit entries in the account. Debit and Credit Entries Debit and Credit Entries 3-6 AA = LL + OE OE ASSETS ASSETS Debit for Increase Credit for Decrease EQUITIES EQUITIES Debit for Decrease Credit for Increase LIABILITIES LIABILITIES Debit for Decrease Credit for Increase Debits and credits affect accounts as follows: Debits and credits affect accounts as follows: Debit and Credit Entries Debit and Credit Entries 3-7 AA = LL + OE OE Debit Debit balances balances Credit Credit balances balances = In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits. In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits. Double Entry Accounting Double Entry Accounting The The Equality of Debits and Credits Equality of Debits and Credits 3-8 Let’s record selected transactions for JJ’s Lawn Care Service in the accounts.  May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock.  May 1: Jill Jones and her family invested $8,000 in JJ’s Lawn Care Service and received 800 shares of stock. Will Cash increase or decrease? Will Capital Stock increase or decrease? Capital Stock 5/1 8,000 Cash 5/1 8,000 Cash increases $8,000 with a debit. Capital Stock increases $8,000 with a credit. 3-9  May 2: JJ’s purchased a riding lawn mower for $2,500 cash.  May 2: JJ’s purchased a riding lawn mower for $2,500 cash. Will Cash increase or decrease? Will Tools & Equipment increase or decrease? Tools & Equipment 5/2 2,500 Cash 5/1 8,000 5/2 2,500 Cash decreases $2,500 with a credit. Tools & Equipment increases $2,500 with a debit. 3-10  May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 in cash and issued a note payable for the remaining $13,000.  May 8: JJ’s purchased a $15,000 truck. JJ’s paid $2,000 in cash and issued a note payable for the remaining $13,000. Will Truck increase or decrease? Will Cash and Notes Payable increase or decrease? Truck 5/8 15,000 Cash 5/1 8,000 5/2 2,500 5/8 2,000 Notes Payable 5/8 13,000 Truck increases $15,000 with a debit. 3-11  May 11: JJ’s purchased some repair parts for $300 on account.  May 11: JJ’s purchased some repair parts for $300 on account. Will Tools & Equipment increase or decrease? Will Accounts Payable increase or decrease? Tools & Equipment increases $300 with a debit. Tools & Equipment 5/2 2,500 5/11 300 Accounts Payable 5/11 300 3-12  May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days.  May 18: JJ’s sold half of the repair parts to ABC Lawns for $150, a price equal to JJ’s cost. ABC Lawns agrees to pay JJ’s within 30 days. Will Tools & Equipment increase or decrease? Will Accounts Receivable increase or decrease? Tools & Equipment decreases $150 with a credit. Tools & Equipment 5/2 2,500 5/18 150 5/11 300 Accounts Receivable 5/18 150 3-13 3-14 In an actual accounting system, transactions are initially recorded in the journal. In an actual accounting system, transactions are initially recorded in the journal. GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business. The Journal The Journal 3-15 Posting Journal Entries to Posting Journal Entries to the Ledger Accounts the Ledger Accounts Posting simply means updating the ledger accounts for the effects of the transactions recorded in the journal. 3-16 GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business. General Ledger Cash Date Debit Credit Balance 2009 May 1 8,000 8,000 Posting Journal Entries to Posting Journal Entries to the Ledger Accounts the Ledger Accounts 3-17 GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 1 Cash 8,000 Capital Stock 8,000 Owners invest cash in the business. General Ledger Capital Stock Date Debit Credit Balance 2009 May 1 8,000 8,000 Posting Journal Entries to Posting Journal Entries to the Ledger Accounts the Ledger Accounts 3-18 GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit 2009 May 2 Tools & Equipment 2,500 Cash 2,500 Purchased lawn mower. Let’s see what the cash account looks like after posting the cash portion of this transaction for JJ’s Lawn Care Service. Let’s see what the cash account looks like after posting the cash portion of this transaction for JJ’s Lawn Care Service. Posting Journal Entries to the Posting Journal Entries to the Ledger Accounts Ledger Accounts 3-19 General Ledger Cash Date Debit Credit Balance 2009 May 1 8,000 8,000 2 2,500 5,500 This ledger format is referred to as a running balance. This ledger format is referred to as a running balance. Ledger Accounts After Ledger Accounts After Posting Posting 3-20 General Ledger Cash Date Debit Credit Balance 2009 May 1 8,000 8,000 2 2,500 5,500 T accounts are simplified versions of the ledger account that only show the debit and credit columns. T accounts are simplified versions of the ledger account that only show the debit and credit columns. Ledger Accounts After Ledger Accounts After Posting Posting 3-21 Net income is not an asset it’s an increase in owners’ equity from profits of the business. Net income is not an asset it’s an increase in owners’ equity from profits of the business. AA = LL + OE OE Increase Decrease As income is earned, either an asset is increased or a liability is decreased. Increase Net income always results in the increase of Owners’ Equity What is Net Income? What is Net Income? 3-22 AA = LL + OE OE Retained Earnings Retained Earnings 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. 3-23 JJ's Lawn Care Service Income Statement For the Month Ended May 31, 2009 Sales Revenue 750 $ Operating Expense: Gasoline Expense 50 Net Income 700 $ The income statement summarizes the profitability of a business for a specified period of time. The income statement summarizes the profitability of a business for a specified period of time. The Income Statement: A The Income Statement: A Preview Preview 3-24 Accounting Periods Accounting 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. Time Period Principle To provide users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. 3-25 Revenue and Expenses Revenue and 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 owner’s equity. 3-26 The Matching Principle: The Matching Principle: When To Record Revenue When To Record Revenue Matching Principle Revenue should be recognized at the time goods are sold and services are rendered. 3-27 The Matching Principle: The Matching Principle: When To Record Expenses When To Record Expenses Matching Principle Expenses should be recorded in the period in which they are used up. 3-28 The Accrual Basis of The Accrual Basis of Accounting Accounting Current Accounting Period Future Accounting Period Jan. 1, 2009 Jan. 1, 2009 Dec. 1, 2009 Dec. 1, 2009 Jan. 1, 2010 Jan. 1, 2010 Dec. 1, 2010 Dec. 1, 2010 Cash is received or paid here Cash is received or paid here The income statement reports revenue or expense here The income statement reports revenue or expense here The income statement reports revenue or expenses here The income statement reports revenue or expenses here Cash is received or paid here Cash is received or paid here OR OR But . . . But . . . 3-29 Debit and Credit Rules for Debit and Credit Rules for Revenue and Expenses Revenue and Expenses EQUITIES Debit for Decrease Credit for Increase Expenses decrease owners’ equity. Revenues increase owners’ equity. EXPENSES Credit for Decrease Debit for Increase REVENUES Debit for Decrease Credit for Increase 3-30 EQUITIES Debit for Decrease Credit for Increase Payments to owners decrease owners’ equity. Owners’ investments increase owners’ equity. DIVIDENDS Credit for Decrease Debit for Increase Dividends Dividends CAPITAL STOCK Debit for Decrease Credit for Increase 3-31 Let’s analyze the revenue and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction. Let’s analyze the revenue and expense transactions for JJ’s Lawn Care Service for the month of May. We will also analyze a dividend transaction.  May 29: JJ’s provided lawn care services for a client and received $750 in cash.  May 29: JJ’s provided lawn care services for a client and received $750 in cash. Will Cash increase or decrease? Will Sales Revenue increase or decrease? Sales Revenue 5/29 750 Cash increases $750 with a debit. Cash 5/1 8,000 5/2 2,500 5/29 750 5/8 2,000 3-32  May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash.  May 31: JJ’s purchased gasoline for the lawn mower and the truck for $50 cash. Will Cash increase or decrease? Will Gasoline Expense increase or decrease? Gasoline Expense 5/31 50 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 3-33  May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend.  May 31: JJ’s Lawn Care paid Jill Jones and her family a $200 dividend. Will Cash increase or decrease? Will Dividends increase or decrease? Dividends 5/31 200 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 3-34 3-35 Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May. Now, let’s look at the Trial Balance for JJ’s Lawn Care Service for the month of May. 3-36 JJ's Lawn Care Service Unadjusted Trial Balance May 31, 2009 Cash 3,925 $ Accounts receivable 75 Tools & equipment 2,650 Truck 15,000 Notes payable 13,000 $ Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Total 21,900 $ 21,900 $ All balances are taken from the ledger accounts on May 31 after considering all of JJ’s transactions for the month. 3-37 The Accounting Cycle in The Accounting Cycle in Perspective Perspective Accountants spend much of their time focusing on the more analytical aspects of their discipline. 3-38 End of Chapter 3 End of Chapter 3