Financial Accounting and Accounting Standards

FINANCIAL ACCOUNTINGChapter 4-#

Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.Debit = LeftCredit = RightAccountAn Account can be illustrated in a T-Account form.The AccountChapter 4-#

If Credits are greater than Debits, the account will have a credit balance.$10,000Transaction #2$3,000BalanceTransaction #1Debits and Credits$1,0008,000Transaction #3Chapter 4-# Balance Sheet Income Statement=+-AssetLiabilityEquityRevenueExpenseDebitCreditDebits and Credits Summary

Chapter 4-#Debits:increase both assets and liabilities.decrease both assets and liabilities.increase assets and decrease liabilities.decrease assets and increase liabilities.Review QuestionDebits and Credits SummaryChapter 4-#

Normal Balance CreditNormal Balance DebitDebits and Credits SummaryChapter 4-#Discussion QuestionMaria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is Maria correct? Discuss.

Debits and Credits SummaryChapter 4-#Question 2-4 (textbook) Maria is incorrect. A debit balance only means that debits amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.

Assets - Debits should exceed credits.Liabilities Credits should exceed debits. The normal balance is on the increase side.Assets and Liabilities

Chapter 4-#Owners investments and revenues increase owners equity (credit). Expenses decrease owners equity (debit).Owners Equity

Chapter 4-#The purpose of earning revenues is to benefit the owner(s).The effect of debits and credits on revenue accounts is the same as their effect on Owners Capital.Expenses have the opposite effect: expenses decrease owners equity.Revenue and Expense

Chapter 4-#Accounts that normally have debit balances are:assets, expenses, and revenues.assets, expenses, and owners capital.assets and liabilities.assets and expenses.Review QuestionDebits and Credits SummaryChapter 4-#

Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction.Steps in the Recording ProcessAnalyze each transactionEnter transaction in a journalTransfer journal information to ledger accountsChapter 4-#Book of original entry (General Ledger).Transactions recorded in chronological order.Contributions to the recording process:Discloses the complete effects of a transaction.Provides a chronological record of transactions.Helps to prevent or locate errors because the debit and credit amounts can be easily compared.The JournalChapter 4-#Journalizing - Entering transaction data in the journal.JournalizingE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.Oct. 1Purchases office furniture for $1,900, on account.3Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.6Pays $700 on balance related to transaction of Oct. 3. 27Pays the administrative assistant $2,500 salary for Oct.30Instructions - Journalize the transactions for E1.Chapter 4-#

JournalizingGeneral JournalE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Pete Hanshew begins business as a real estate agent with a cash investment of $15,000.Oct. 1Chapter 4-#

JournalizingGeneral JournalE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Purchases office furniture for $1,900, on account.Oct. 3Chapter 4-#

JournalizingGeneral JournalE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Sells a house and lot for B. Kidman; bills B. Kidman $3,200 for realty services provided.Oct. 6Chapter 4-#

JournalizingGeneral JournalE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Pays $700 on balance related to transaction of Oct. 3.Oct. 27Chapter 4-#

JournalizingGeneral JournalE1 (Facts) Presented below is information related to Hanshew Real Estate Agency.Pays the administrative assistant $2,500 salary for Oct.Oct. 30Chapter 4-#Simple Entry Two accounts, one debit and one credit.Compound Entry Three or more accounts.JournalizingExample On June 15, H. Burns, purchased equipment for $15,000 by paying cash of $10,000 and the balance on account (to be paid within 30 days).

General JournalChapter 4-#A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, owners equity, revenue and expense accounts. The LedgerChapter 4-#T-account form used in accounting textbooks.In practice, the account forms used in ledgers aremuch more structured.Standard Form of Account

Chapter 4-#Posting the process of transferring amounts from the journal to the ledger accounts.

General Ledger

General JournalOct. 1J115,00015,000101J1PostingChapter 4-#Posting:normally occurs before journalizing.transfers ledger transaction data to the journal.is an optional step in the recording process.transfers journal entries to ledger accounts.Review QuestionPostingChapter 4-#The Recording Process Illustrated

Follow these steps:1. Determine what type of account is involved.2. Determine what items increased or decreased and by how much.3. Translate the increases and decreases into debits and credits.Chapter 4-#A list of accounts and their balances at a given time.Purpose is to prove that debits equal credits.

The Trial Balance

Chapter 4-#Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows.Debits and credits posted to the ledger.Business transaction occurs. Information entered in the journal.Financial statements are prepared.Trial balance is prepared.Is Jim correct? If not, indicate to Jim the proper flow of the information.Recording ProcessDiscussion QuestionChapter 4-#Question 2-19 (textbook) No, Jim is not correct . The proper sequence is as follows :( b ) Business transaction occurs. ( c ) Information entered in the journal.( a ) Debits and credits are posted to the ledger. ( e ) Trial balance is prepared.( d ) Financial statements are prepared.

At the end of the accounting period, the company makes the accounts ready for the next period.Closing the Books

Chapter 4-#Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) to owners capital.Closing the BooksClosing entries are only at the end of the annual accounting period.Chapter 4-#Correcting entries are unnecessary if the records are error-free.are made whenever an error is discovered.must be posted before closing entries.Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry.Correcting EntriesAn Avoidable StepChapter 4-#Eg. At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.1. A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780.Correcting EntriesAn Avoidable StepCash780Incorrect entryService revenue 780Cash780Correct entryAccounts receivable 780Service revenue780Correcting entryAccounts receivable 780Chapter 4-#Eg. At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.2. The purchase of supplies on account for $1,570 was recorded as a debit to Store Supplies and a credit to Accounts Payable for $1,750.Correcting EntriesAn Avoidable StepStore Supplies1,750Incorrect entryAccounts payable 1,750Store Supplies1,570Correct entryAccounts payable 1,570Accounts payable180Correcting entryStore Supplies180 Chapter 4-#The Classified Balance SheetPresents a snapshot at a point in time.To improve understanding, companies group similar assets and similar liabilities together.AssetsLiabilities and Owners EquityCurrent assetsCurrent liabilitiesLong-term investmentsLong-term liabilitiesProperty, plant, and equipmentOwners equityIntangible assetsStandard ClassificationsChapter 4-#The Classified Balance SheetAssets that a company expects to convert to cash or use up within one year.Current AssetsChapter 4-#The Classified Balance SheetCompanies usually list current asset accounts in the order they expect to convert them into cash.

Current AssetsChapter 4-#Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:Current assets.Intangible assets.Long-term investments.Property, plant, and equipment.Review QuestionThe Classified Balance SheetChapter 4-#The Classified Balance SheetInvestments in stocks and bonds of other companies. Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.Long-Term Investments

Chapter 4-#The Classified Balance SheetLong useful lives.Currently used in operations.Depreciation - allocating the cost of assets to a number of years.Accumulated depreciation - total amount of depreciation expensed thus far in the assets life.Property, Plant, and EquipmentChapter 4-#The Classified Balance Sheet

Property, Plant, and EquipmentChapter 4-#The Classified Balance SheetAssets that do not have physical substance.Intangible Assets

Chapter 4-#Patents and copyrights areCurrent assets.Intangible assets.Long-term investments.Property, plant, and equipment.Review QuestionThe Classified Balance SheetChapter 4-#The Classified Balance SheetObligations the company is to pay within the coming year.Liquidity - ability to pay obligations expected to be due within the next year.Current LiabilitiesChapter 4-#The Classified Balance Sheet

Current LiabilitiesChapter 4-#The Classified Balance SheetObligations a company expects to pay after one year.Long-Term Liabilities

Chapter 4-#The Classified Balance SheetProprietorship - one capital account. Partnership - capital account for each partner. Corporation - Capital Stock and Retained Earnings.Owners Equity

Chapter 4-#

Account Name
Debit / Dr.
Credit / Cr.

Account Name
Debit / Dr.
Credit / Cr.

Account Name
Debit / Dr.
Credit / Cr.

Chapter 3-*

Assets
Debit / Dr.
Credit / Cr.
Normal Balance

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Expense

Chapter 3-*

Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Owners Equity

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Revenue

Chapter 3-*

Assets
Debit / Dr.
Credit / Cr.
Normal Balance

Chapter 3-*

Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Owners Equity

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Expense

Chapter 3-*

Debit / Dr.
Credit / Cr.
Normal Balance
Revenue

Sheet1DateAccount TitleRef.DebitCreditOct.1Cash15,000Hanshew, Capital15,000(Owners investment)

Sheet1DateAccount TitleRef.DebitCreditOct.3Office Furniture1,900Accounts Payable1,900(Purchase furniture)

Sheet1DateAccount TitleRef.DebitCreditOct.6Accounts Receivable3,200Service Revenue3,200(Realty services provided)

Sheet1DateAccount TitleRef.DebitCreditOct.27Accounts Payable700Cash700(Payment on account)

Sheet1DateAccount TitleRef.DebitCreditOct.30Salary Expense2,500Cash2,500(Payment for salaries)

Sheet1DateAccount TitleRef.DebitCreditJune15Equipment15,000Cash10,000Accounts Payable5,000(Purchased equipment)

Sheet2CashNo. 101DateExplanationRef.DebitCreditBalanceOct.115,00015,0002770014,300302,50011,800

Chart of AccountsChart of AccountsAcct. No.Account100Cash105Accounts receivable110Inventory130Building200Accounts payable220Note payable300Common stock330Retained earnings400Sales500Cost of goods sold

General LedgerGeneral JournalDateAccount TitleRef.DebitCreditJan.3Cash100100,000Common stock300100,00010Building130150,000Note payable220150,00015Inventory11060,000Accounts payable20060,00020Accounts receivable10575,000Sales40075,00020Cost of goods sold50030,000Inventory11030,00029Cash10040,000Accounts receivable10540,000General LedgerCashAcct. No. 100DateExplanationRef.DebitCreditBalanceJan.3Sale of common stockGJ100,000100,00020GJ40,000140,000Accounts ReceivableAcct. No. 105DateExplanationRef.DebitCreditBalanceJan.20GJ75,00075,000GJ40,00035,000InventoryAcct. No. 110DateExplanationRef.DebitCreditBalanceJan.15GJ60,00060,00020GJ30,00030,000BuildingAcct. No. 130DateExplanationRef.DebitCreditBalanceJan.10GJ150,000150,000Accounts payableAcct. No. 200DateExplanationRef.DebitCreditBalanceJan.15GJ60,000(60,000)Notes payableAcct. No. 220DateExplanationRef.DebitCreditBalanceJan.10GJ150,000(150,000)Common stockAcct. No. 300DateExplanationRef.DebitCreditBalanceJan.3Sale for cashGJ100,000(100,000)Retained EarningsAcct. No. 330DateExplanationRef.DebitCreditBalance0.0SalesAcct. No. 400DateExplanationRef.DebitCreditBalanceJan.20GJ75,000(75,000)Cost of Goods SoldAcct. No. 500DateExplanationRef.DebitCreditBalanceJan.20GJ30,00030,000

Trial BalanceTrial BalanceAcct. No.AccountDebitCredit100Cash140,000105Accounts receivable35,000110Inventory30,000130Building150,000200Accounts payable60,000220Note payable150,000300Common stock100,000330Retained earnings400Sales75,000500Cost of goods sold30,000385,000385,000

Journal EntryNo.AccountDebitCredit110,000

Class SolutionAssets=Liabilities+EquityAccountsAccountsNotesCommonRetainedCost ofCashReceivableInventoryBuildingPayablePayableStockEarningsSalesGoods Sold1.100,000100,0002.150,000150,0003.60,00060,0004.75,000(30,000)75,00030,000540,000(40,000)140,00035,00030,000150,000=60,000150,000+100,0000.075,00030,0000.0DebitCreditCashAccounts ReceivableCommon Stock1.Cash100,000100,00075,00040,000100,000Common stock100,00040,0002.Building150,000140,0000.035,0000.00.0100,000Notes payable150,0003.Inventory60,000BuildingAccounts PayableSalesAccounts payable60,000150,00060,00075,0004.Accounts receivable75,000Sales75,000150,0000.00.060,0000.075,000Cost of goods sold30,000Notes PayableInventoryCost of Goods SoldInventory30,000150,00060,00030,00030,0005Cash40,000Accounts receivable40,0000.0150,00030,0000.030,0000.0

Class Assets=Liabilities+EquityAccountsAccountsNotesCommonRetainedCost ofCashReceivableInventoryBuildingPayablePayableStockEarningsSalesGoods Sold1.2.3.4.50.00.00.00.0=0.00.0+0.00.00.00.00.0DebitCreditCashCommon stockAccounts receivable1.2.0.00.00.00.00.00.03.BuildingNotes payableSales4.0.00.00.00.00.00.0InventoryAccounts payableCost of goods sold50.00.00.00.00.00.06Retained earningsDebitCreditCashAAccounts receivableAInventoryA0.00.0BuildingAAccounts payableLNotes payableLCommon stockERetained earningsESalesRCost of goods soldE0.00.0

Accounting EquationAssets=Liabilities+Equity

T-AccountsCash0.00.0Inventory0.00.0

Sheet1DateAccount TitleRef.DebitCreditJan.3Cash100100,000Common stock300100,00010Building130150,000Note payable220150,000

Sheet1 (2)DateAccount TitleRef.DebitCreditJan.3Cash100100,000Common stock300100,000CashAcct. No. 101DateExplanationRef.DebitCreditBalance

Chart of AccountsChart of AccountsAcct. No.Account100Cash105Accounts receivable110Inventory130Building200Accounts payable220Note payable300Common stock330Retained earnings400Sales500Cost of goods sold

General LedgerGeneral JournalDateAccount TitleRef.DebitCreditJan.3Cash100100,000Common stock300100,00010Building130150,000Note payable220150,00015Inventory11060,000Accounts payable20060,00020Accounts receivable10575,000Sales40075,00020Cost of goods sold50030,000Inventory11030,00029Cash10040,000Accounts receivable10540,000General LedgerCashAcct. No. 100DateExplanationRef.DebitCreditBalanceJan.3Sale of common stockGJ100,000100,00020GJ40,000140,000Accounts ReceivableAcct. No. 105DateExplanationRef.DebitCreditBalanceJan.20GJ75,00075,000GJ40,00035,000InventoryAcct. No. 110DateExplanationRef.DebitCreditBalanceJan.15GJ60,00060,00020GJ30,00030,000BuildingAcct. No. 130DateExplanationRef.DebitCreditBalanceJan.10GJ150,000150,000Accounts payableAcct. No. 200DateExplanationRef.DebitCreditBalanceJan.15GJ60,000(60,000)Notes payableAcct. No. 220DateExplanationRef.DebitCreditBalanceJan.10GJ150,000(150,000)Common stockAcct. No. 300DateExplanationRef.DebitCreditBalanceJan.3Sale for cashGJ100,000(100,000)Retained EarningsAcct. No. 330DateExplanationRef.DebitCreditBalance0.0SalesAcct. No. 400DateExplanationRef.DebitCreditBalanceJan.20GJ75,000(75,000)Cost of Goods SoldAcct. No. 500DateExplanationRef.DebitCreditBalanceJan.20GJ30,00030,000

Trial BalanceTrial BalanceAcct. No.AccountDebitCredit100Cash140,000105Accounts receivable35,000110Inventory30,000130Building150,000200Accounts payable60,000220Note payable150,000300Common stock100,000330Retained earnings400Sales75,000500Cost of goods sold30,000385,000385,000

Journal EntryNo.AccountDebitCredit110,000

Class SolutionAssets=Liabilities+EquityAccountsAccountsNotesCommonRetainedCost ofCashReceivableInventoryBuildingPayablePayableStockEarningsSalesGoods Sold1.100,000100,0002.150,000150,0003.60,00060,0004.75,000(30,000)75,00030,000540,000(40,000)140,00035,00030,000150,000=60,000150,000+100,0000.075,00030,0000.0DebitCreditCashAccounts ReceivableCommon Stock1.Cash100,000100,00075,00040,000100,000Common stock100,00040,0002.Building150,000140,0000.035,0000.00.0100,000Notes payable150,0003.Inventory60,000BuildingAccounts PayableSalesAccounts payable60,000150,00060,00075,0004.Accounts receivable75,000Sales75,000150,0000.00.060,0000.075,000Cost of goods sold30,000Notes PayableInventoryCost of Goods SoldInventory30,000150,00060,00030,00030,0005Cash40,000Accounts receivable40,0000.0150,00030,0000.030,0000.0

Class Assets=Liabilities+EquityAccountsAccountsNotesCommonRetainedCost ofCashReceivableInventoryBuildingPayablePayableStockEarningsSalesGoods Sold1.2.3.4.50.00.00.00.0=0.00.0+0.00.00.00.00.0DebitCreditCashCommon stockAccounts receivable1.2.0.00.00.00.00.00.03.BuildingNotes payableSales4.0.00.00.00.00.00.0InventoryAccounts payableCost of goods sold50.00.00.00.00.00.06Retained earningsDebitCreditCashAAccounts receivableAInventoryA0.00.0BuildingAAccounts payableLNotes payableLCommon stockERetained earningsESalesRCost of goods soldE0.00.0

Accounting EquationAssets=Liabilities+Equity

T-AccountsCash0.00.0Inventory0.00.0

Sheet1DateAccount TitleRef.DebitCreditOct.1Cash15,000Hanshew, Capital15,000(Owner's investment in business)10Building130150,000Note payable220150,000

Sheet1 (2)DateAccount TitleRef.DebitCreditJan.3Cash100100,000Common stock300100,000CashAcct. No. 100DateExplanationRef.DebitCreditBalanceJan.3Sale of common stockGJ100,000100,000

Sheet1 (2)Hanshew Real Estate AgencyTrial BalanceOctober 31, 2008DebitCreditCash$11,800Accounts receivable3,200Office furniture1,900Accounts payable$1,200Hanshew, Capital15,000Service revenue3,200Salaries expense2,500$19,400$19,400