double entry
DESCRIPTION
Financial Accounting Notes- Double EntryTRANSCRIPT
4-1
LO 1
Explain the fundamental
concepts associated with
double-entry accounting systems.
Debit/Credit Terminology
4-2
T-accountDebit
Debit
Credit
Credit
Account Title
4-3
LO 2
Describe business events using debit/credit terminology.
Debits and Credits
4-4
= +Debit Credit Debit Credit Debit Credit
+ - - + - +
EquityAssets Liabilities
Debit = Left Credit = Right
Asset accounts increaseincrease on the left or
debitdebit side and decreasedecrease
on the right or creditcredit side.
Liability accounts increaseincrease on the right or creditcredit side and decreasedecrease
on the left or debitdebit side.
Equity accounts increaseincrease on the right
or creditcredit side and decreasedecrease on the left or
debitdebit side.
In every transaction, the total dollar value of all debits equals the total dollar value of all credits.
4-5
LO 3
Record transactions in T-
accounts.
Double-Entry Accounting
4-6
Let’s see how debits and
credits work by looking at
transactions for Collins
Consultants.
4-7
Event 1: Collins Consultants was established on January 1, 2008, when it acquired $15,000 cash from Collins.
1. Increase assets (cash).
2. Increase equity (common stock).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 15,000 = n/a + 15,000 n/a - n/a = n/a 15,000 FA
Cash Flow
= +
Debit Credit Debit Credit+ - - +15,000 15,000
Assets Liabilities EquityCash Common Stock
4-8
Event 2: On February 1, Collins Consultants issued a 12%, $10,000 note payable to the National Bank to borrow cash.
1. Increase assets (cash).
2. Increase liabilities (notes payable).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 10,000 = 10,000 + n/a n/a - n/a = n/a 10,000 FA
Cash Flow
= +
Debit Credit Debit Credit+ - - +10,000 10,000
EquityCash Notes Payable
Assets Liabilities
4-9
Event 3: On February 17, Collins Consultants purchased $850 of office supplies on account from Morris Supply Company.
1. Increase assets (supplies).
2. Increase liabilities (accounts payable).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 850 = 850 + n/a n/a - n/a = n/a n/a
Cash Flow
= +
Debit Credit Debit Credit+ - - +
850 850
Assets Liabilities EquitySupplies Accounts Payable
4-10
Event 4: On February 28, Collins Consultants signed a contract to evaluate the internal control system used by Kendall Food Stores. Kendall paid Collins $5,000 in advance for these future services.
1. Increase assets (cash).
2. Increase liabilities (unearned revenue).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 5,000 = 5,000 + n/a n/a - n/a = n/a 5,000 OA
Cash Flow
= +
Debit Credit Debit Credit+ - - +5,000 5,000
EquityCash Unearned Revenue
Assets Liabilities
4-11
Event 5: On March 1, Collins Consultants received $18,000 from signing a contract to provide professional advice to Harwood Corporation over a one-year period.
1. Increase assets (cash).
2. Increase liabilities (unearned revenue).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 18,000 = 18,000 + n/a n/a - n/a = n/a 18,000 OA
Cash Flow
= +
Debit Credit Debit Credit+ - - +18,000 18,000
Assets Liabilities EquityCash Unearned Revenue
4-12
Event 6: On April 10, Collins Consultants provided $2,000 of services to Rex Company on account.
1. Increase assets (accounts receivable).
2. Increase equity (consulting revenue).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 2,000 = n/a + 2,000 2,000 - n/a = 2,000 n/a
Cash Flow
= +
Debit Credit Debit Credit+ - - +2,000 2,000
EquityAccounts Receivable Consulting Revenue
Assets Liabilities
4-13
Event 7: On April 29, Collins Consultants performed services and received $8,400 cash.
1. Increase assets (cash).
2. Increase equity (consulting revenue).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 8,400 = n/a + 8,400 8,400 - n/a = 8,400 8,400 OA
Cash Flow
= +
Debit Credit Debit Credit+ - - +8,400 8,400
Assets Liabilities EquityCash Consulting Revenue
4-14
Event 8: On May 1, Collins Consultants loaned Reston Company $6,000. Reston issued a 9% note to Collins.
1. Increase assets (notes receivable).
2. Decrease assets (cash).
Asset Exchange
Transaction
= Liab. + Equity Revenue - Expenses = Net
Income (6,000) + 6,000 = n/a + n/a n/a - n/a = n/a (6,000) IA
Cash Flow Assets
= +
Debit Credit Debit Credit+ - + -
6,000 6,000
EquityNotes Receivable
AssetsCash
Liabilities
4-15
Event 9: On June 30, Collins purchased office equipment for $42,000 cash.
1. Increase assets (office equipment).
2. Decrease assets (cash).
Asset Exchange
Transaction
= Liab. + Equity Revenue - Expenses = Net
Income (42,000) + 42,000 = n/a + n/a n/a - n/a = n/a (42,000) IA
Cash Flow Assets
= +
Debit Credit Debit Credit+ - + -
42,000 42,000
Liabilities EquityOffice Equipment
AssetsCash
4-16
Event 10: On July 31, Collins paid $3,600 cash in advance for a one year lease to rent office space for a one-year period beginning August 1.
1. Increase assets (prepaid rent).
2. Decrease assets (cash).
Asset Exchange
Transaction
= Liab. + Equity Revenue - Expenses = Net
Income (3,600) + 3,600 = n/a + n/a n/a - n/a = n/a (3,600) OA
Cash Flow Assets
= +
Debit Credit Debit Credit+ - + -
3,600 3,600
EquityPrepaid Rent
AssetsCash
Liabilities
4-17
Event 11: On August 8, Collins Consultants collected $1,200 from Rex Company as partial payment of the accounts receivable (see Event 6).
1. Increase assets (cash).
2. Decrease assets (accounts receivable).
Asset Exchange
Transaction
= Liab. + Equity Revenue - Expenses = Net
Income 1,200 + (1,200) = n/a + n/a n/a - n/a = n/a 1,200 OA
Cash Flow Assets
= +
Debit Credit Debit Credit+ - + -1,200 1,200
Liabilities EquityAccounts Receivable
AssetsCash
4-18
Event 12: On September 4, Collins Consultants paid employees who worked for the company $2,400 in salaries.
1. Decrease assets (cash).
2. Decrease equity (salaries expense).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (2,400) = n/a + (2,400) n/a - 2,400 = (2,400) (2,400) OA
Cash Flow
= +
Debit Credit Debit Credit+ - + -
2,400 2,400
Assets Liabilities EquityCash Salaries Expense
4-19
Event 13: On September 20, Collins Consultants paid a $1,500 cash dividend to its owner.
1. Decrease assets (cash).
2. Decrease equity (dividends).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (1,500) = n/a + (1,500) n/a - n/a = n/a (1,500) FA
Cash Flow
= +
Debit Credit Debit Credit+ - + -
1,500 1,500
EquityCash Dividends
Assets Liabilities
4-20
Event 14: On October 10, Collins Consultants paid Morris Supply Company the $850 owed from purchasing office supplies on account (see Event 3).
1. Decrease assets (cash).
2. Decrease liabilities (accounts payable).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (850) = (850) + n/a n/a - n/a = n/a (850) OA
Cash Flow
= +
Debit Credit Debit Credit+ - - +
850 850
EquityCash Accounts Payable
Assets Liabilities
4-21
Event 15: On November 15, Collins completed its consulting evaluation of the internal control system used by Kendall Food Stores (see Event 4).
1. Decrease liabilities (unearned revenue).
2. Increase equity (consulting revenue).
Claims Exchange
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income n/a = (5,000) + 5,000 5,000 - n/a = 5,000 n/a
Cash Flow
= +
Debit Credit Debit Credit- + - +5,000 5,000
EquityConsulting RevenueUnearned Revenue
Assets Liabilities
4-22
Event 16: On December 18, Collins Consultants received a $900 bill from Creative Ads for advertisements which had appeared in regional magazines. Collins plans to pay the bill later.
1. Increase liabilities (accounts payable).
2. Decrease equity (advertising expense).
Claims Exchange
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income n/a = 900 + (900) n/a - 900 = (900) n/a
Cash Flow
= +
Debit Credit Debit Credit- + + -
900 900
EquityAdvertising ExpenseAccounts Payable
Assets Liabilities
4-23
LO 4
Identify the events that need adjusting entries and record them.
4-24
Adjustment 1: Collins Consultants recognized accrued interest on the $6,000 note receivable from Reston (see Event 8).
1. Increase assets (interest receivable).
2. Increase equity (interest revenue).
Asset Source
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income 360 = n/a + 360 360 - n/a = 360 n/a
Cash Flow
Principal
Annual interest
rate Time
outstanding = Interest revenue
6,000$ 0.09 8/12 = 360$
= +
Debit Credit Debit Credit
+ - - +
360 360
Assets Liabilities EquityInterest Receivable Interest Revenue
4-25
Adjustment 2: Collins Consultants recognized accrued interest expense on the $10,000 note payable it issued to National Bank (see Event 2).
1. Increase liabilities (interest payable).
2. Decrease equity (interest expense).
Claims Exchange
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income n/a = 1,100 + (1,100) n/a - 1,100 = (1,100) n/a
Cash Flow
Principal
Annual interest
rate Time
outstanding = Interest
expense
10,000$ 0.12 11/12 = 1,100$
= +
Debit Credit Debit Credit
- + + -
1,100 1,100
Equity
Interest ExpenseInterest Payable
Assets Liabilities
4-26
Adjustment 3: Collins Consultants recognized $800 of accrued but unpaid salaries.
1. Increase liabilities (salaries payable).
2. Decrease equity (salaries expense).
Claims Exchange
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income n/a = 800 + (800) n/a - 800 = (800) n/a
Cash Flow
= +
Debit Credit Debit Credit
- + + -
800 800
Assets Liabilities Equity
Salaries ExpenseSalaries Payable
4-27
Adjustment 4: Collins Consultants recognized $4,000 of depreciation on the office equipment it had purchased on June 30 (see Event 9).
1. Decrease assets (accumulated depreciation).
2. Decrease equity (depreciation expense).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (4,000) = n/a + (4,000) n/a - 4,000 = (4,000) n/a
Cash Flow
= +
Debit Credit Debit Credit
- + + -
4,000 4,000
Equity
Accumulated Depr. Depreciation Expense
Assets Liabilities
(Cost - Salvage Value) = Depreciation Expense($42,000 - $2,000) = $4,000
Useful Life 5 years x 6/12
4-28
Adjustment 5: Collins Consultants recognized rent expense for the portion of prepaid rent used up since entering the lease agreement on July 31 (see Event 10).
1. Decrease assets (prepaid rent).
2. Decrease equity (rent expense).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (1,500) = n/a + (1,500) n/a - 1,500 = (1,500) n/a
Cash Flow
= +
Debit Credit Debit Credit+ - + -
1,500 1,500
EquityPrepaid Rent Rent Expense
Assets Liabilities
$ 3,600 12 months 300$ 5 months
$300 per month $1,500 rent expense
4-29
Adjustment 6: A physical count at the end of the year indicates that $125 worth of the supplies purchased on February 17 are still on hand (see Event 3).
1. Decrease assets (supplies).
2. Decrease equity (supplies expense).
Asset Use Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income (725) = n/a + (725) n/a - 725 = (725) n/a
Cash Flow
= +
Debit Credit Debit Credit+ - + -
725 725
Assets Liabilities EquitySupplies Supplies Expense
Beginning Balance
+ Purchases =Asset
Available for Use
-Ending
Balance=
Asset Used
-$ + 850$ = 850$ - 125$ = 725$
4-30
Adjustment 7: Collins Consultants adjusted its accounting records to reflect revenue earned to date on the contract to provide services to Harwood Corporation for a one-year period beginning March 1 (see Event 5).
1. Decrease liabilities (unearned revenue).
2. Increase equity (consulting revenue).
Claims Exchange
Transaction
Assets = Liab. + Equity Revenue - Expenses = Net
Income n/a = (15,000) + 15,000 15,000 - n/a = 15,000 n/a
Cash Flow
= +
Debit Credit Debit Credit- + - +
15,000 15,000
Assets Liabilities EquityConsulting RevenueUnearned Revenue
$ 18,000 12 months 1,500$ 10 months
$1,500 per month $15,000 revenue
4-31
4-32
4-33
LO 7
Record transactions using
the general journal format.
The General Journal
4-34
Accountants initially record
data from source documents into a
journal.
Special Journals
General Journals
Date Account Title Debit CreditAug. 1 Cash 1,000
Service Revenue 1,000
4-35
4-36
4-37
4-38
4-39
4-40
LO 5
State the need for and record closing
entries.
The Closing Process
4-41
Let’s look at the closing entries for
Collins Consultants.
Establishes zero balances in all
revenue, expense, and dividend accounts.
4-42
4-43
LO 6
Prepare and interpret a trial
balance.
4-44
4-45
LO 8 Describe the components of an
annual report, including the management,
discussion, and analysis section
and the footnotes to financial statements.
Components of the Annual Report
4-46
Notes
Management’s Discussion
& Analysis
Audit Opinion
4-47
LO 9
Describe the role of the Securitiesand Exchange Commission in
financial reporting.
The Securities and Exchange Commission
4-48
Government Agency
Public Companies
SEC Rules
End of Topic
4-49