1619359495-Accounting Cycle: Capturing Economic Events.pdf

Accounting cycle: chapter 3

1. The Accounting Cycle:
Capturing Economic Events

Chapter 3

McGraw-Hill Irwin Copyright © 2010 by The McGraw-Hill Compas

mies, Inc, All rights reserved.

2. The Role of Accounting Records

| Establishes accountability for assets
and transactions.

Keeps track of routine business
activities.

| Obtains detailed information about a
particular transaction.

Evaluates efficiency and
performance within company.

Maintains evidence of a company’s
business activities.

3-2

3. The Ledger
EN

|

Accounts are
individual records
showing increases
and decreases.

The entire group of
accounts is kept
together in an
accounting record
called a ledger.

4. —

Ve
| The Use of Accounts

\

EE |

Increases are

recorded on one side Title of Account
of the T account, and Left Right
decreases are or or
Debit Credit
recorded on the Side Side

other side.

3-4

5. Increase [Decrease Decreaselincrease Decrease] Increase

3-6

6. Increase [Decrease Decreaselincrease Decrease] Increase

3-6

7. Double Entry Accounting [ The Equality of

Lo Debits and Credits
oY
A = L+E
| Debit Credit

balances — balances

| In the double-entry accounting system,
| every transaction is recorded by equal

dollar amounts of debits and credits.

8. Let’s record
selected
transactions
for JJ’s Lawn
Care Service in
the accounts.

9. 11 May: Jill Jones and her family invested $8,000
in JJ’s Lawn Care Service and received 800 shares
of stock.

Cash increases

$8,000 with a debit.

Cash Share Capital
1/5 8,000 1/5 8,000

10. 1118 May: 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.

Tools & Equipment

decreases $150 with
a credit.

Tools & Equipment

2/5 2,500 | 18/5 150
11/5 300

18/5 150

11. O 8 May: JJ’s purchased a $15,000 truck. JJ’s
paid $2,000 in cash and issued a note payable
for the remaining $13,000.

Truck increases

$15,000 with a debit.

Cash

Truck 1/5 8,000} 2/5 2,500

8/5 15,000 8/5 2,000
[ Notes Payable

| 8/5 13,000

3-11

12. 1118 May: 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.

Tools & Equipment

decreases $150 with
a credit.

Tools & Equipment

2/5 2,500 | 18/5 150
11/5 300

18/5 150

13. 1118 May: 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.

Tools & Equipment

decreases $150 with
a credit.

Tools & Equipment

2/5 2,500 | 18/5 150
11/5 300

18/5 150

14. The Journal

In an actual accounting system,
transactions are initially recorded in the
journal.

GENERAL JOURNAL

Share Capital 8,000
| Owners invest cash in the business.

15. Posting Journal Entries to the
| Ledger Accounts

GENERAL JOURNAL
a Tau fa

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.

16. Posting Journal Entries to the
| Ledger Accounts

GENERAL JOURNAL
a Tau fa

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.

17. Posting Journal Entries to the
| Ledger Accounts

GENERAL JOURNAL
a Tau fa

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.

18. Posting Journal Entries to the
| Ledger Accounts

GENERAL JOURNAL
a Tau fa

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.

19. Ledger Accounts After Posting

T accounts are simplified versions of
the ledger account that only show the
debit and credit columns.

20. Ledger Accounts After Posting

T accounts are simplified versions of
the ledger account that only show the
debit and credit columns.

21. What is Profit?

Profit is not an asset [it’s an increase in

equity from profits of the business.

A=L + E

Increase 7 in
As income is u Profit i
either an asset is results in the

increased or a liability is increase of

decreased. Equity aon

22. Retained Earnings

A=L+E

Share
Capital

Retained
Earnings

dividends.

The balance in the Retained Earnings account
represents the profit of the corporation over the
entire lifetime of the business, less all amounts

which have been distributed to the shareholders as

23. The Income Statement: A Preview

JJ's Lawn Care Service
SCA Income Statement
For the Month Ended 31 May 2009

Sales Revenue $ 750
Operating Expense:

Gasoline Expense 50
Profit $ 700

The income statement summarizes the
profitability of a business for a specified period
of time.

24. Accounting Periods

Time Period Principle
To provide users of
financial statements

with timely information,
profit is measured for
relatively short
accounting periods of
equal length.

25. Revenue and Expenses

u The price for
2 [goods sold

a and services
>|rendered during a
©\given accounting
period.

Increases
equity.

2 The costs of
e goods and

e Decreases
(py services used up

equity.

el in the process of
n earning revenue.

26. The Matching Principle: When
To Record Revenue

Matching Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.

27. The Matching Principle: When
To Record Expenses

Matching Principle
Expenses should be
recorded in the
period in which they
are used up.

28. —

ae
| The Accrual Basis of Accounting

as
En Current Future

4 Accounting Period Accounting Period

I Jan. 2009 1 Dec. 2009 En I Dec. 2010

The income statement
reports revenue or
expense here

Cash is received or paid [JUS

The income statement
reports revenue or
expenses here

Cash is received or paid
here

29. >

Debit and Credit Rules for

| Revenue and Expenses

—
| Expenses EQUITIES Revenues
decrease Debit | Credit increase
equity. for for equity.
Decrease] Increase

EXPENSES

Debit Credit
for for
Increase [Decrease

REVENUES

Debit Credit
for for
Decrease] Increase

30. Dividends

| Payments to

EQUITIES Dinan
1 owners investments
decrease increase
equity. Decrease] Increase equity.

DIVIDENDS

Credit
for
Increase | Decrease

SHARE CAPITAL

Credit
for
Decrease | Increase

31. Let’s analyze the
revenue and
expense
transactions for
JJ's Lawn Care

month of May.
We will also

analyze a dividend

transaction.

32. [| 29 May: JJ’s provided lawn care services for a
client and received $750 in cash.

Cash increases
$750 with a debit.

Sales Revenue
1/5 8,000 | 2/5 2,500 29/5 750
29/5 750 | 8/5 2,000 |

Cash

33. (1 31 May: JJ’s purchased gasoline for the lawn
mower and the truck for $50 cash.

Cash decreases $50
with a credit.

1/5 8,000| 2/5 2,500
29/5 750| 8/5 2,000
31/5 50 |

34. 1 31 May: JJ’s Lawn Care paid Jill Jones and
her family a $200 dividend.

Cash decreases
$200 with a credit.

Cash
1/5 8,000
29/5 750

200

35. __| Now, let's look at
‘ the Trial Balance

for JJ’s Lawn

. Care Service for

[the month of May.

36. JJ's Lawn Care Service
Unadjusted Trial Balance
31 May 2009
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Truck 15,000

Notes payable
Accounts payable
Share capital
Dividends

Sales revenue
Gasoline expense

Total 21,900 $ 21,900 |

All balances are taken from the ledger accounts on 31
May after considering all of JJ’s transactions for the
month.

37. The Accounting Cycle in
Perspective

Accountants spend
much of their time
focusing on the
more analytical
aspects of their
discipline.

38. —

a

| | End of Chapter 3