Financial Accounting:
Chapter 3
Tools for Business Decision Making, 4th Ed.
The Accounting Information System
Kimmel, Weygandt, Kieso
CHAPTER 3
Bob Anderson, UCSB 2004
Analyze the effect of business transactions on the basic accounting equation. Explain what an account is, then apply debits and credits to those accounts (journal entries)
3-1
External and Internal Events
Exercise – Types of Events
External Event – interaction between a business and
External
its environment.
1.
Internal Event – event occurring entirely within a business.
Internal
A supplier of a company‘s raw material is paid an amount owed on account.
2. A customer pays its open account.
Transaction – any event that is recognized in a set of
3. A new chief executive officer is hired.
financial statements.
RECOGNIZED- An accounting entry is recorded… it becomes reflected in the financial statements.
External External Not Recorded External
5. Raw materials are entered into production.
Internal
7. The accountant determines the federal income taxes owed based on the income earned. 3-3
Not Recorded
4. The biweekly payroll is paid.
6. A new advertising agency is hired.
REALIZED- regardless of whether it results in an accounting entry, the business actually receives or gives something. Bob Anderson, UCSB 2004
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Bob Anderson, UCSB 2004
Bob Anderson, UCSB 2004
Not Recorded Internal 3-4
Effect on the Accounting Equation
Source Documents Source Document – a piece of paper that is used as
Assets = Liabilities + Equity
evidence to record a transaction. Sales invoice
Assets - Liabilities = Equity
Payroll timecard
Assets - Liabilities = Net Assets
Utility bill Stock certificate Promissory note (note payable)
Net Assets = Equity
Payment terms are 2/10, n/30
The accounting equation is made up of “Accounts.” An account is a record used to accumulate amounts for each individual asset, liability, equity, revenue, and expense.
NOTE: Not all recordable events are supported by a standard source document. 3-5
Bob Anderson, UCSB 2004
Sara Lee Corp. – Assets Accounts Consolidated Balance Sheets Dollars in millions except share data
Assets Cash and equivalents Trade accounts receivable, less allowances of $184 in 2004, $181 in 2003 and $176 in 2002 Inventories Other current assets Net assets held for sale Total current assets Other noncurrent assets Deferred tax asset Property, plant, and equipment Land Buildings and improvements Machinery and equipment Construction in progress Accumulated depreciation Property, net Trademarks and other identifiable intangibles, net Goodwill Total assets
LO 2
$
638
June 28, 2003 $
942
June 29, 2002 $
1,857 2,704 378 1 5,882
1,768 2,509 341 7 4,923
153 275
284 437
192 4
155 2,052 5,087 283 7,577 4,306 3,271 2,024 3,414 14,883
202 1,915 4,917 291 7,325 3,975 3,350 2,110 3,387 15,450
176 1,744 4,299 320 6,539 3,384 3,155 2,106 3,314 13,694
$
$
Chart of Accounts Acct. No. 100 105 110 130 200 220 300 330 400 500
298
1,929 2,779 400 5,746
Describe the qualitative characteristics of accounting information.
Bob Anderson, UCSB 2004
3-6
Chart of Accounts
July 3, 2004
$
Bob Anderson, UCSB 2004
3-7
LO 3
Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold
Analyze the effects of transactions on the accounting equation.
Bob Anderson, UCSB 2004
3-8
FINALLY- DEBITS AND CREDITS
Graphic debits and credits (GENERALLY)
Rule number one: forget the concept of “credit” to your account that you are probably familiar with. If your bank charges you a late fee, you complain and they reverse it, you THINK that is a credit to your account. BUT, as you will see, on YOUR books, the adjustment is a DEBIT to your cash.
Balance Sheet Assets:
CRUTCH: ASSETS & LIABILITIES: DEBIT GOOD, CREDIT BAD EQUITY & INCOME: OPPOSITE (DEBIT BAD, CREDIT GOOD)
Income Statement 2004
DEBITS
2004
Revenues & Gains: CREDITS
Liabilities:
MORE: ASSETS AND EXPENSES ARE DEBITS
CREDITS
LIABILITIES, EQUITY AND REVENUES ARE CREDITS
Equity:
Expenses & Losses: DEBITS
CREDITS
OH YEAH, ONE OTHER THING: DEBITS ON THE LEFT, CREDITS ON THE RIGHT! REMEMBER FROM PRIOR CHAPTERS: “FOR EVERY ACTION THERE IS AN EQUAL AND OPPOSITE REACTION”… IN ACCOUNTING TERMS, FOR EVERY DEBIT, THERE IS A CREDIT. 3-9
Bob Anderson, UCSB 2004
ANOTHER CRUTCH
3-10
Review
“Debit” Card- comes from your checking account, which is an ASSET. “Credit” Card- creates a LIABILITY. DEBIT- ASSET CREDIT- LIABILITY Bob Anderson, UCSB 2004
Bob Anderson, UCSB 2004
3-11
What is the normal balance for the following accounts? Debit Cash Credit Accounts Payable Debit Accounts Receivable Credit Service Revenue Common Stock Credit Debit Salaries Expense Bob Anderson, UCSB 2004
3-12
Debits and Credits
Review
Balance Sheet
Asset = Liab. + Equity
What is the normal balance for the following accounts? Debit Dividends Debit Building Credit Taxes Payable Credit Unearned Revenus Prepaid Insurance Debit Debit Rent Expense Bob Anderson, UCSB 2004
Rev. - Exp. =
Debit
Credit
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DEBITS AND CREDITS- POSTING
Bob Anderson, UCSB 2004
3-14
ACCOUNTING EQUATION- JOURNAL ENTRIES
We need to write a transaction in a format that can be communicated / input. We use a journal entry:
On Jan. 3rd, sold common stock for $100,000 cash. What is the impact to common stock? INCREASE $100,000 What is the impact to cash? INCREASE $100,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Cash $100,000 Common Stock $100,000
DEBITS ON THE LEFT CREDITS ON THE RIGHT
Bob Anderson, UCSB 2004
Income Stmt.
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Bob Anderson, UCSB 2004
3-16
ACCOUNTING EQUATION- JOURNAL ENTRIES
HOW TO LEARN DEBITS AND CREDITS
On Jan. 10th, purchased a building by signing a $150,000 note payable.. What is the impact to Building (Fixed assets)? INCREASE $150,000 What is the impact to Notes Payable? INCREASE $150,000
There is no way to teach it and no way to learn it other than by:
PRACTICE!!!!! PRACTICE!!!!! PRACTICE!!!!! PRACTICE!!!!!
HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Building $150,000 Note payable $150,000
Bob Anderson, UCSB 2004
3-17
BY THE WAY
ACCOUNTING EQUATION- JOURNAL ENTRIES On Jan. 15th, purchased inventory on account for $60,000. What is the impact to Inventory? INCREASE $60,000 What is the impact to cash? NONE- PURCHASED ON ACCOUNT What is the impact to accounts payable? INCREASE $60,000
WHAT IS THE DIFFERENCE BETWEEN THESE ENTRIES: ACCOUNT DEBIT/ DR. CREDIT/ (CR) Inventory $60,000 Accounts payable $60,000 AND ACCOUNT Accounts payable Inventory
DEBIT/ DR.
CREDIT/ (CR) $60,000
$60,000 ANSWER:
HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Inventory $60,000 Accounts payable $60,000 Bob Anderson, UCSB 2004
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Bob Anderson, UCSB 2004
NOTHING- IT IS ONLY A CONVENTION TO LIST THE DEBITS FIRST! 3-19
Bob Anderson, UCSB 2004
3-20
ACCOUNTING EQUATION- JOURNAL ENTRIES
ACCOUNTING EQUATION- JOURNAL ENTRIES
On Jan. 20th, sold inventory costing $30,000, for $75,000 on account. Did we “earn” the revenue?
SHOULD THIS IMPACT THE INCOME STATEMENT?
Yes- SALES INCREASE $75,000
NO! WE RECORDED THE SALE WHEN IT WAS EARNED, THIS ONLY REFLECTS A CHANGE FROM AN ACCOUNT RECEIVABLE TO CASH. What is the impact to sales? NONE What is the impact to accounts receivable? DECREASE $40,000 What is the impact to cash? INCREASE $40,000
Sold for cash or “on account” “ON ACCOUNT” ACCOUNTS RECEIVABLE INCREASE $75,000 What is the impact to Inventory? DECREASE $30,000 When we “Squeeze” Inventory from the Balance sheet to the income statement, where does it go (HAVE WE RECEIVED THE BENEFIT)? COGS $30,000 ACCOUNT Accounts receivable Sales Cost of goods sold Inventory
On Jan. 29th, received $40,000 cash from customers who purchased goods on account.
HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) ACCOUNT Cash $40,000 Accounts receivable $40,000
HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) $75,000 $75,000 $30,000 $30,000 3-21
Bob Anderson, UCSB 2004
Bob Anderson, UCSB 2004
3-22
Additional Terms
Account Name General Ledger – a file that contains the activity of all the accounts.
T Account – a format
Debit / Dr.
Credit / Cr.
Account Name
used to illustrate the increases, decreases and resulting total balance for each account.
Debit / Dr.
Credit / Cr.
Slide JE-4 Copyright
Bob Anderson, UCSB 2004
©
2003 by Coby Harmon
3-23
(T Account illustration with excel) Bob Anderson, UCSB 2004
3-24
Assets Debit / Dr.
Liabilities
Credit / Cr.
Debit / Dr.
“NORMAL”- DEBIT
“NORMAL”- CREDIT
Bob Anderson, UCSB 2004
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Equity Debit / Dr.
Credit / Cr.
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Revenue
Credit / Cr.
Debit / Dr.
“NORMAL”- CREDIT
Bob Anderson, UCSB 2004
Bob Anderson, UCSB 2004
Credit / Cr.
“NORMAL”- CREDIT
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Bob Anderson, UCSB 2004
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REMEMBER THIS SLIDE FROM BEFORE?
Expense Debit / Dr.
On Jan. 3rd, sold common stock for $100,000 cash. What is the impact to common stock? INCREASE $100,000 What is the impact to cash? INCREASE $100,000
Credit / Cr.
HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) ACCOUNT Cash $100,000 Common Stock $100,000 “NORMAL”- DEBIT
WHAT WOULD THIS LOOK LIKE IN THE T-ACCOUNTS? 3-29
Bob Anderson, UCSB 2004
The Journal
ENTRY POSTED TO T-ACCOUNTS DEBIT/ DR. $100,000
ACCOUNT Cash Common Stock
CREDIT/ (CR) $100,000
General Journal – a chronological record of
transactions, also known as the book of original entry. What you record in the journal is known as a “Journal Entry.” Date
CASH DEBIT CREDIT
Jan.
COMMON STOCK DEBIT CREDIT
3
Account Title Cash Common stock
$100,000
$100,000
10
Building
Ref.
Debit
100
100,000
300 130
Note payable
$100,000
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Bob Anderson, UCSB 2004
Credit 100,000
150,000
220
150,000
$100,000 Bob Anderson, UCSB 2004
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Bob Anderson, UCSB 2004
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Trial Balance
Posting Posting – the process of transferring amounts from the
Trial Balance – a list of each account and its balance;
journal to the ledger accounts. General Journal Date Jan. 3
Account Title
Ref.
Cash
Debit
Date
GJ1
Acct. No.
Credit
100 105 110 130 200 220 300 330 400 500
100,000
Common stock
General Ledger
used to prove equality of debits and credits.
100,000
Cash
Explanation
Acct. No. 100 Ref.
Debit
Credit
Balance
Bob Anderson, UCSB 2004
4
Event 9 – Hiring of New Employees
11
Debit
Credit
140,000 35,000 30,000 150,000 60,000 150,000 100,000 75,000 30,000 385,000
385,000
Explain the purposes of a trial balance.
Bob Anderson, UCSB 2004
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Basic Steps in the Recording Process. 1.Analyze
Oct. 9 – Sierra hired four new employees to begin work on Oct. 15.
2.Journalize 3.Post
Accounting transaction has NOT occurred! Bob Anderson, UCSB 2004
LO 7
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Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold
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Bob Anderson, UCSB 2004
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