Intermediate accounting 13th kieso warfield chapter 03

Journalizing LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.. LO 4 Record transactions in journals, post to ledger accounts, and prepare a tr

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Chapter 3-1

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Chapter

3-3

accounts, and prepare a trial balance

balance

Learning Objectives Learning Objectives

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Closing Post-closing trial balance Reversing entries

Accounting Information System

The Accounting

Cycle

Financial Statements for Merchandisers

Balance sheet Closing entries

The Accounting Information System The Accounting Information System

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Chapter

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Collects and processes transaction data

Disseminates the information to interested parties

Accounting Information System Accounting Information System Accounting Information System ( AIS )

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Chapter

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How much and what kind of debt is outstanding?

Were sales higher this period than last?

What assets do we have?

What were our cash inflows and outflows?

Did we make a profit last period?

Are any of our product lines or divisions operating at a loss?

Can we safely increase our dividends to stockholders?

Is our rate of return on net assets increasing?

Accounting Information System Accounting Information System

Helps management answer such questions as:

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Chapter

3-7

Basic Terminology Basic Terminology

LO 1 Understand basic accounting terminology.

Event Transaction Account

Real Account Nominal Account Ledger

Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries

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Chapter

3-8

Debits and Credits Debits and Credits

LO 2 Explain double-entry rules.

given asset, liability, equity, revenue, or expense account.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account and crediting another.

DEBITS must equal must equal CREDITS.

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Chapter

3-9

Account Name

Debit / Dr Credit / Cr

Debits and Credits

An arrangement that shows the effect of transactions on

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Chapter

3-10

Account Name

If Debit entries are greater than greater than Credit entries,

the account will have a debit balance.

$10,000 $3,000 Transaction #2

$15,000

8,000 Transaction #3

Balance

Transaction #1

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Chapter

3-11

Account Name

If Credit entries are greater than greater than Debit entries,

the account will have a credit balance.

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Normal Balance

Expense

Chapter 3-24

Liabilities

Normal Balance

Chapter 3-25

Normal Balance

Equity

Chapter 3-26

Normal Balance

Revenue

Normal Balance

Credit

Normal Balance

Credit

Normal Balance

Debit

Normal Balance

Debit

Debits and Credits Summary

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Chapter

3-14

The Accounting Equation

Relationship among the assets, liabilities and

stockholders’ equity of a business:

The equation must be in balance after every transaction

For every

For every Debit Debit there must be a Creditthere must be a Credit.

Illustration 3-3

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Chapter

3-15

Double-Entry System Illustration

Assets = Liabilities + Stockholders’ Stockholders’ EquityEquity

1 Owners invest $40,000 in exchange for common

stock.

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Chapter

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2 Disburse $600 cash for secretarial wages.

(expense)

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Chapter

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3 Purchase office equipment priced at $5,200, giving

a 10 percent promissory note in exchange.

+ 5,200 + 5,200

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Chapter

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4 Received $4,000 cash for services rendered.

(revenue)

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Chapter

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5 Pay off a short-term liability of $7,000.

- 7,000 - 7,000

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Chapter

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6 Declared a cash dividend of $5,000.

+ 5,000 - 5,000

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Chapter

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7 Convert a long-term liability of $80,000 into

common stock.

- 80,000 + 80,000

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Chapter

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8 Pay cash of $16,000 for a delivery van.

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Chapter

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Ownership structure dictates the types of accounts

that are part of the equity section.

Proprietorship

or Partnership

Proprietorship

or Partnership Corporation

 Capital Account

 Drawing Account

 Common Stock

 Additional Paid-in Capital

 Dividends Declared

 Retained Earnings

Financial Statements and Ownership Structure

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Chapter

3-24

Financial Statements and Ownership Structure

Stockholders’ Equity

Balance Sheet

Statement of Retained Earnings

Net income or Net loss

(Revenues less expenses)

Income Statement

Net income or Net loss

(Revenues less expenses)

Income Statement

Dividends

Retained Earnings

(Net income retained in business)Retained Earnings

(Net income retained in business)

Common Stock (Investment

by stockholders)

Common Stock (Investment

by stockholders)

Illustration 3-4

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Illustration 3-6

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External – between a business and its environment

Internal – event occurring entirely within a business

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Chapter

3-27

1 A supplier of a company‘s raw material is paid

an amount owed on account. External

Not Recorded

2 A customer pays its open account External

3 A new chief executive officer is hired Not Recorded

4 The biweekly payroll is paid.

5 Raw materials are entered into production Internal

External

6 A new advertising agency is hired Not Recorded

7 The accountant determines the federal income

taxes owed based on the income earned. Internal

Review “Transactions and Events”

LO 3 Identify steps in the accounting cycle.

External Internal

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Chapter

3-28

General Journal – a chronological record of transactions

Journal Entries are recorded in the journal

1 Journalizing

LO 4 Record transactions in journals, post to

ledger accounts, and prepare a trial balance.

September 1: Stockholders invested $15,000 cash in the

corporation in exchange for shares of stock

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Chapter

3-31

Expanded Example

2 Posting

The purpose of transaction analysis is

(1) to identify the type of account involved, and (2) to determine whether a debit or a credit is required

Keep in mind that every journal entry affects one or more of the following items: assets, liabilities, stockholders’ equity, revenues,

or expense.

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Chapter

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1 October 1: Stockholders invest $100,000 cash in an

advertising venture to be known as Pioneer Advertising Agency Inc

2 Posting

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Chapter

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2 October 1: Pioneer Advertising purchases office

equipment costing $50,000 by signing a 3-month, 12%,

2 Posting

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Chapter

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3 October 2: Pioneer Advertising receives a $12,000 cash

advance from KC, a client, for advertising services that are expected to be completed by December 31

2 Posting

12,000

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Chapter

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4 October 3: Pioneer Advertising pays $9,000 office

rent, in cash, for October

2 Posting

12,000

9,000

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Chapter

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5 October 4: Pioneer Advertising pays $6,000 for a

one-year insurance policy that will expire next one-year on September 30

2 Posting

12,000

9,000 6,000

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Chapter

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6 October 5: Pioneer Advertising purchases, for $25,000

on account, an estimated 3-month supply of advertising materials from Aero Supply

2 Posting

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Chapter

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7 October 9: Pioneer Advertising signs a contract with a

local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November

Pioneer will start work on the content of the flyers in November Payment of $7,000 is due following delivery

of the Sunday papers containing the flyers

2 Posting

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Chapter

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8 October 20: Pioneer Advertising’s board of directors

declares and pays a $5,000 cash dividend to stockholders

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Chapter

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9 October 26: Employees are paid every four weeks The

total payroll is $2,000 per day The pay period ended on Friday, October 26, with salaries of $40,000 being paid

2 Posting

12,000

9,000 6,000 5,000 40,000

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Chapter

3-41

10 October 31: Pioneer Advertising receives $28,000 in

cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October

2 Posting

12,000

9,000 6,000 5,000 40,000

100,000 Debit Credit Service Revenue

28,000

80,000

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LO 5 Explain the reasons for preparing adjusting entries.

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Expenses paid in cash and

recorded as assets before

they are used or consumed.

Prepayments

Revenues earned but not yet received in cash or recorded

Revenues received in cash

and recorded as liabilities

before they are earned.

Accruals

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Chapter

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Payment of cash that is recorded as an asset because service or benefit will be received in the future.

Adjusting Entries for “Prepaid Expenses”

insurancesuppliesadvertising

rentmaintenance on equipmentfixed assets

Prepayments often occur in regard to:

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Chapter

3-47

Supplies Pioneer purchased advertising supplies costing

$25,000 on October 5 Prepare the journal entry to record the purchase of the supplies

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Chapter

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October 31 reveals that $10,000 of the advertising supplies are still on hand

10,000

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Chapter

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fire insurance policy, beginning October 1 Show the entry

to record the purchase of the insurance

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Chapter

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($6,000 / 12) of insurance expires each month Thus,

Pioneer makes the following adjusting entry

500 5,500

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Chapter

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its office equipment to be $400 per month Accordingly,

Pioneer recognizes depreciation for October by the

following adjusting entry

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magazine subscriptionscustomer deposits

Unearned revenues often occur in regard to:

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Chapter

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on October 2 from KC for advertising services expected to

be completed by December 31 Show the journal entry to

Adjusting Entries for “Unearned Revenues” Adjusting Entries for “Unearned Revenues”

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Adjusting Entries for “Unearned Revenues”

$4,000 of the advertising services in October Thus,

Pioneer makes the following adjusting entry

Oct 31

4,000

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Chapter

Adjusting Entries for “Unearned Revenues”

Statement Presentation

Unearned service revenue

identifies that portion of the

liability that has not been

earned

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Accrued revenues often occur in regard to:

Cash Receipt Revenue Recorded

Adjusting entry results in:

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Chapter

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advertising services that it did not bill to clients

before October 31 Thus, Pioneer makes the following

2,000 106,000 2,000

74,000

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Accrued expenses often occur in regard to:

Expense Recorded

salariesbad debts*

Adjusting entry results in:

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Chapter

3-67 LO 5 Explain the reasons for preparing adjusting entries.

Adjusting Entries for “Accrued Expenses”

Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1 The note

requires interest at an annual rate of 12 percent Three

factors determine the amount of the interest accumulation:

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Adjusting Entries for “Accrued Expenses”

Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1 Prepare the adjusting entry on Oct 31 to record the accrual of interest

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