Financial accounting the impact on decision makers 9e chapter 3

External and Internal Events Event: a happening of consequence to an entity  External event: interaction between an entity and its environment  Internal event: occurs entirely within

Chapter 3

Processing Accounting

Information

External and Internal Events

 Event: a happening of consequence to an entity

 External event: interaction between an entity

and its environment

 Internal event: occurs entirely within an entity

 Transaction: any event, external or internal, that

is recognized in a set of financial statements

LO 1

Role of Source Documents in an

Analyze the Effects of Transactions

on the Accounting Equation

Accounting equation:

Assets =Liabilities + Stockholders’ Equity

Issuance of Capital Stock

 Glengarry Health Club is started when Karen

Bradley and Kathy Drake file articles of

incorporation with the state to obtain a charter Each invests $50,000 in the business In return, each receives 5,000 shares of capital stock

Acquisition of Property in

Exchange for a Note

 Company buys a piece of property for $200,000 The seller agrees to accept a five-year

promissory note The property consists of land valued at $50,000 and a newly constructed

building valued at $150,000

Sale of Monthly Memberships on

Sale of Court Time for Cash

 In addition to memberships, Glengarry sells court time Court fees are paid at the time of use and amount to $5,000 for the first month

Payment of Wages and Salaries

 Wages and salaries for the first month amount

to $10,000

Payment of Utilities

 Cost of utilities for the first month is $3,000 Glengarry pays this amount in cash

Collection of Accounts Receivable

 Amount received from members in payment of their accounts is $4,000

Cost Principle

 Requires assets such as equipment to be

recorded at cost to acquire and continue to report this amount on all balance sheets until the asset is disposed

 These assets are not carried at market value, but at original cost (with few exceptions)

 Account: record used to accumulate monetary

amounts for each asset, liability, revenue,

expense, and component of stockholders’

equity

 Chart of Accounts: numerical list of all of the

accounts an entity uses

LO 4

The General Ledger

 A book, a file, a hard drive, or another device containing all of the accounts

Identify and Analyze

 The accounting equation is the basis for

financial statements

 For every transaction, three questions must be answered:

1 What type of activity did the transaction reflect?

2 What accounts are affected by the transaction, and are they increased or decreased?

3 Which financial statements are affected by the

transaction?

Identify and Analyze

 Wages and salaries for the first month amount

to $10,000 for Glengarry

T account

 T Account: format for showing amounts coming

into and leaving an account

Example 3.2—Using a T Account

Debits and Credits

 Tools to record increases and decreases in

accounts

 Debits increase asset accounts, and credits

increase liability and stockholders’ equity

accounts

 Additionally, debits increase expense accounts, and credits increase revenue accounts

LO 5

Summary of the Rules for Increasing

and Decreasing Accounts

Example 3.3—Determining Normal

Account Balances

Debits and Credits Applied to

Debits and Credits Applied to

Debits and Credits Applied to

Debits and Credits Applied to

Debits and Credits Applied to

Transactions

T Accounts reflect current and previous postings to the account

for each period

(5) Sale of court time for cash

Debits and Credits Applied to

10,000 (6)

Debits and Credits Applied to

10,000 (6)

3,000 (7)

Debits and Credits Applied to

4,000

(6)(7)

Debits and Credits Applied to

4,000 2,000

(9) Payment of dividends

(6)(7)

 Chronological record of a company’s

transactions

 Book of original entry

 Transactions are periodically posted from the

journal to ledger accounts

 Journalizing: act of recording journal entries

LO 6

 Process of transferring amounts from a journal

to the ledger accounts

Example 3.6—Posting from the

Journal to the Ledger

Trial Balance

 List of each account and its balance at a specific point in time

 Used to prove the equality of debits and credits

 Normally prepared at the end of the accounting period

 Basis for preparation of financial statements

LO 7

Example 3.7—Preparing a Trial

Balance

End of Chapter 3