business accounting chap3

8/21/2019 Business Accounting Chap3

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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

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THE ACCOUNTINGCYCLE: CAPTURING

ECONOMIC EVENTS

Chapter

3


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The Ledger

The Ledger

The entire group of

accounts is kepttogether in an

accounting recordcalled a ledger.

The entire group of

accounts is kepttogether in an

accounting recordcalled a ledger .

Cash

AccountsPayable

CapitalStock

Accounts areindividual records

showing increasesand decreases.

Accounts areindividual recordsshowing increases

and decreases.


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The Use of Accounts

The Use of Accounts

Increases are

recorded on oneside of the T-account, anddecreases are

recorded on theother side.

eftor

!ebit

Side

"ightor

Credit

Side

Title of the Account


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et#s see howdebits and credits

are recorded in theCash account for$$#s awn Care

Service.

et#s see howdebits and credits

are recorded in theCash account for$$#s awn Care

Service.


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Cash

%&' (,))) %&* *,%))

%&*% +% %&( *,)))

%&* +%) %&*( '%)

%&-' %)

%&-' ,'*%

/al.

Cash

%&' (,))) %&* *,%))

%&*% +% %&( *,)))

%&* +%) %&*( '%)

%&-' %)

%&-' ,'*%

/al.

"eceiptsare on

the debitside.

Pay0entsare on the

creditside.

The balance is thedifference betweenthe debit and credit

entries in theaccount.

The balance is thedifference betweenthe debit and credit

entries in theaccount.

Debit and Credit Entries

Debit and Credit Entries


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AA 1 2 3434ASS4TSASS4TS

!ebitfor

Increase

Creditfor

!ecrease

456ITI4S456ITI4S

!ebitfor

!ecrease

Creditfor

Increase

IA/IITI4SIA/IITI4S

!ebitfor

!ecrease

Creditfor

Increase

!ebits and credits affect accounts as follows7

!ebits and credits affect accounts as follows7

Debit and Credit Rules

Debit and Credit Rules


7/45© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

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AA 1 2 3434!ebit!ebit

balancesbalancesCreditCredit

balancesbalances1In the double-entry accounting syste0,every transaction is recorded by e8ualdollar a0ounts of debits and credits.

In the double-entry accounting syste0,every transaction is recorded by e8ualdollar a0ounts of debits and credits.

Double Entry Accounting The Equality ofDebits and Credits

Double Entry Accounting The Equality ofDebits and Credits



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et#s recordselected

transactions for$$#s awn CareService in the

accounts.



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9ay '7 $ill $ones and her fa0ily invested :(,)))in $$#s awn Care Service and received ()) sharesof stock.


;ill Cash increase

or decrease<

;ill Capital Stockincrease or

decrease<



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Capital Stock

%&' (,)))

Cash

%&' (,)))



Cash increases

:(,))) with a debit.

Capital Stockincreases :(,)))

with a credit.



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9ay *7 $$#s purchased a riding lawn 0owerfor :*,%)) cash.


;ill Cash increaseor decrease<

;ill Tools =48uip0ent increase

or decrease<



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Tools = 48uip0ent

%&* *,%))

Cash

%&' (,))) %&* *,%))

Cash decreases:*,%)) with a credit.

Tools = 48uip0entincreases :*,%))

with a debit.



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9ay (7 $$#s purchased a :'%,))) truck. $$#spaid :*,))) in cash and issued a note payablefor the re0aining :',))).


;ill Truck increase

or decrease<

;ill Cash and>otes Payable

increase ordecrease<



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Truck

%&( '%,)))

Cash

%&' (,))) %&* *,%))%&( *,)))

>otes Payable

%&( '-,)))

Truck increases

:'%,))) with a debit.

Cash decreases:*,))) with a credit.

>otes Payableincreases :',)))

with a credit.



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9ay ''7 $$#s purchased so0e repair parts for:)) on account.



or decrease<

;ill AccountsPayable increase or

decrease<


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Tools = 48uip0entincreases :)) with

a debit.

Accounts Payableincreases :)) with

a credit.

Tools = 48uip0ent

%&* *,%))

%&'' -))

Accounts Payable

%&'' -))


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9ay '(7 $$#s sold half of the repair parts toA/C awns for :'%), a price e8ual to $$#s cost.A/C awns agrees to pay $$#s within ) days.



or decrease<

;ill Accounts"eceivable increase

or decrease<


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Tools = 48uip0entdecreases :'%) with

a credit.

Accounts "eceivableincreases :'%) with

a debit.

Tools = 48uip0ent

%&* *,%)) %&'( '%)

%&'' -))

Accounts "eceivable

%&'( '%)


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In an actual accounting syste0, transactionsare initially recorded in the ?ournal.

In an actual accounting syste0, transactionsare initially recorded in the ?ournal.

@4>4"A $36">A

!ate Account Titles and 4planation !ebit Credit

*))%

9ay ' Cash (,)))

Capital Stock (,)))

3wners invest cash in the business.

The JournalThe Journal


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Posting involves

copyinginfor0ationfro0 the

?ournal to theledger

accounts.

Posting Journal Entries to the LedgerAccounts



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@4>4"A $36">A


*))%

9ay ' Cash (,)))

Capital Stock (,)))

3wners invest cash in the business.@eneral edger

Cash!ate !ebit Credit /alance

*))%

9ay ' (,))) (,)))




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@4>4"A $36">A


*))%

9ay ' Cash (,)))

Capital Stock (,)))

3wners invest cash in the business.@eneral edger

Capital Stock!ate !ebit Credit /alance

*))%

9ay ' (,))) (,)))




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@4>4"A $36">A


*))%

9ay * Tools = 48uip0ent *,%))

Cash *,%))

Purchased lawn 0ower.

et#s see what the cash account looks like afterposting the cash portion of this transaction for

$$#s awn Care Service.

et#s see what the cash account looks like afterposting the cash portion of this transaction for

$$#s awn Care Service.




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@eneral edger

Cash

!ate !ebit Credit /alance

*))%9ay ' (,))) (,)))

* *,%)) %,%))

This ledger for0at is referred to as arunning balance.

This ledger for0at is referred to as arunning balance.

Ledger Accounts After PostingLedger Accounts After Posting


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@eneral edger

Cash

!ate !ebit Credit /alance

*))%9ay ' (,))) (,)))

* *,%)) %,%))

T accounts are si0plified versions ofthe ledger account that only show the

debit and credit colu0ns.

T accounts are si0plified versions ofthe ledger account that only show the

debit and credit colu0ns.

Ledger Accounts After PostingLedger Accounts After Posting


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>et inco0e is not an asset it#s an increase inowners# e8uity fro0 profits of the business.

>et inco0e is not an asset it#s an increase inowners# e8uity fro0 profits of the business.

AA 1 2 3434Increase

This effects occur as netinco0e is earned . . .

Increase

. . . but this iswhat Bnet inco0e

really 0eans.

What is et !nco"e#What is et !nco"e#


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AA 1 2 3434

Retained EarningsRetained Earnings

CapitalStock

"etained4arnings

The balance in the "etained 4arnings account representsthe total net inco0e of the corporation over the entirelifeti0e of the business, less all a0ounts which have

been distributed to the stockholders as dividends.


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$$Ds awn Care ServiceInco0e State0ent

Eor the 9onth 4nded 9ay -', *))%

Sales "evenue +%):

3perating 4pense7

@asoline 4pense %)

>et Inco0e +)):

The inco0e state0ent su00ariFes the profitabilityof a business for a specified period of ti0e.

The inco0e state0ent su00ariFes the profitabilityof a business for a specified period of ti0e.

The !nco"e $tate"ent% A Pre&ie'The !nco"e $tate"ent% A Pre&ie'


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Accounting PeriodsAccounting Periods

Ti0e Period Principle

To provide users of financialstatements ith timel!

information" net income is

measured for relativel! short

accountin# periods of e$uallen#th%


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Re&enue and E()ensesRe&enue and E()enses

The price forgoods soldand servicesrendered during a

given accountingperiod.

Increasesowner#s e8uity.

The costs ofgoods andservices used upin the process ofearning revenue.

!ecreasesowner#s e8uity.


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The Reali*ation Princi)le% When ToRecord Re&enue

The Reali*ation Princi)le% When ToRecord Re&enue

"ealiFation Principle

"evenue should berecogniFed at the

ti0e goods are sold

and services arerendered.


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The +atching Princi)le% When ToRecord E()enses

The +atching Princi)le% When ToRecord E()enses

9atching Principle

4penses should berecorded in the

period in which they

are used up.


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Debits and Credits for Re&enue andE()ense

Debits and Credits for Re&enue andE()ense

456ITI4S456ITI4S

!ebit!ebit

forfor

!ecrease!ecrease

CreditCredit

forfor

IncreaseIncrease

4pensesdecreaseowner#s

e8uity.

"evenuesincreaseowner#s

e8uity.

4GP4>S4S4GP4>S4S

Creditfor

!ecrease

!ebitfor

Increase

"4H4>64S"4H4>64S

!ebit!ebit

forfor

!ecrease!ecrease

CreditCredit

forfor

IncreaseIncrease


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456ITI4S456ITI4S

!ebit!ebit

forfor

!ecrease!ecrease

CreditCredit

forfor

IncreaseIncrease

Pay0ents toowners

decreaseowners#e8uity.

3wners#invest0ents

increaseowners#e8uity.

!IHI!4>!S!IHI!4>!S

CreditCredit

forfor

!ecrease!ecrease

!ebit!ebit

forfor

IncreaseIncrease

!n&est"ents by and Pay"ents to ,'ners!n&est"ents by and Pay"ents to ,'ners

CAPITA ST3CCAPITA ST3C

!ebitfor

!ecrease

Creditfor

Increase


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et#s analyFe the

revenue andepense

transactions for

$$#s awn CareService for the0onth of 9ay.

;e will alsoanalyFe a dividend

transaction.

et#s analyFe the

revenue andepensetransactions for

$$#s awn CareService for the0onth of 9ay.

;e will alsoanalyFe a dividend

transaction.


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9ay *7 $$#s provided lawn care services fora client and received :+%) in cash.



;ill Sales "evenueincrease ordecrease<

9 * $$# id d l i f


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Sales "evenue

%&* +%)



Cash increases:+%) with a debit.

Sales "evenueincreases :+%) with

a credit.

Cash

%&' (,))) %&* *,%))

%&* +%) %&( *,)))

3 38

9 ' $$# h d li f th l


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9ay '7 $$#s purchased gasoline for the lawn0ower and the truck for :%) cash.



;ill @asoline4pense increase or

decrease<

3 39

9 ' $$# h d li f th l


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@asoline 4pense

%&-' %)



Cash decreases :%)with a credit.

@asoline 4penseincreases :%) with a

debit.

Cash

%&' (,))) %&* *,%))

%&* +%) %&( *,)))

%&-' %)

3 40

9 ' $$# C id $ill $ d


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9ay '7 $$#s awn Care paid $ill $ones andher fa0ily a :*)) dividend.



;ill !ividendsincrease or

decrease<

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9 ' $$# C id $ill $ d


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!ividends

%&-' *))



Cash decreases:*)) with a credit.

!ividends increase:*)) with a debit.

Cash

%&' (,))) %&* *,%))

%&* +%) %&( *,)))

%&-' %)

%&-' *))

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>ow, let#s look atthe Trial /alance

for $$#s awn CareService for the0onth of 9ay.

>ow, let#s look atthe Trial /alance

for $$#s awn CareService for the0onth of 9ay.

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$$Ds awn Care Service

6nad?usted Trial /alance

9ay ', *))%

Cash ,*%:

Accounts receivable +%

Tools = e8uip0ent *,J%)

Truck '%,))) >otes payable ',))):

Accounts payable '%)

Capital stock (,)))

!ividends *)) Sales revenue +%)

@asoline epense %)

Total *',)): *',)):

All balancesare taken fro0

the ledgeraccounts on9ay ' after

considering all

of $$#stransactions

for the 0onth.

Proves e8ualityof debits and

credits.

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Th A ti C l


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$ournaliFetransactions.

Post entries tothe ledgeraccounts.

Prepare trialbalance.

9ake end-of-year

ad?ust0ents.

Prepare ad?usted

trial balance.

Prepare

financialstate0ents.

Prepare after-closing

trial balance.

$ournaliFe and

post closingentries.

The Accounting Cycle

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End of Cha)ter 3End of Cha)ter 3

business accounting chap3

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