Processing Accounting
Information
Learning Objective 1 Analyze business
transactions.
The Account
Cash
Accounting’s main summary device is the account, the record of changes.
Accounts are grouped in three broad categories,
according to the accounting equation:
The Account
Assets are the economic resources that benefit the business now and in the future Cash
Accounts receivable Inventory
Notes receivable Prepaid expenses
Land
Buildings
Equipment,
furniture,
and fixtures
The Account
Liabilities are the debts of the company.
Notes payable
Accounts payable Accrued liabilities
(for expenses incurred but not paid)
Long-term liabilities (bonds)
The Account
Stockholders’ (owners’) equity is the
owners’ claims to the assets of a corporation.
A proprietorship uses a single account.
A partnership uses separate accounts for each owner’s capital balance and withdrawals.
A corporation uses separate capital
accounts for each source of capital.
The Account
Common Stock Retained Earnings
Dividends Revenues Expenses
Accounting for Business Transactions
A transaction is any event that both affects the financial position of the business entity
and can be reliably recorded.
Accounting for Business Transactions
The Lyons invest $50,000 to begin the business, and Air & Sea Travel
issues common stock.
Stockholders’
Assets = Liabilities + Equity
(1) Cash + 50,000 = + 50,000*
Accounting for Business Transactions
Air & Sea purchases land for an
office location, paying $40,000 in cash.
Balance + 50,000 = + 50,000*
(2) Cash – 40,000 Land + 40,000
50,000 = + 50,000*
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
The business buys stationery and other office supplies, agreeing to pay $500 to the office-supply store within 30 days.
Balance + 50,000 = + 50,000*
(3) Supplies + 500 = + 500
50,500 = 500 + 50,000
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel earns service revenue of $5,500 and collects this amount in cash.
Balance + 50,500 = 500 + 50,000*
(4) Cash + 5,500 = + 5,500
56,000 = 500 + 55,500
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel performs services for customers on account for $3,000.
Balance + 56,000 = 500 + 55,500
(5) Receivable + 3,000 = + 3,000 59,000 = 500 + 58,500
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel pays $2,700 for the following cash expenses: office rent $1,100,
employee salary $1,200, and utilities $400.
Balance + 59,000 = 500 + 58,500
(6) Expenses – 2,700 = – 2,700 56,300 = 500 + 55,800
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel pays $400 to the store from which it purchased $500 worth of office
supplies in Transaction 3.
Balance + 56,300 = 500 + 55,800
(7) Cash – 400 = – 400
55,900 = 100 + 55,800
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
The owners remodel their home at a cost of
$30,000, paying cash from personal funds.
This event is a transaction of the
personal entity, not the business entity.
No transaction is recorded for Air & Sea Travel.
Accounting for Business Transactions
The business collects $1,000 from a customer on account.
Balance + 55,900 = 100 + 55,800
(9) Cash + 1,000 Receivable – 1,000
55,900 = 100 + 55,800
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
Air & Sea Travel sells land for a price of $22,000, which is equal to the amount it paid for the land.
Balance + 55,900 = 100 + 55,800
(10) Cash + 22,000 Land – 22,000
55,900 = 100 + 55,800
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
The corporation declares a dividend and pays
$2,100 cash to the stockholders.
Balance + 55,900 = 100 + 55,800
(11) Cash – 2,100 = – 2,100
– 53,800 = 100 + 53,700
Stockholders’
Assets = Liabilities + Equity
Accounting for Business Transactions
(1) + 50,000
(2) – 40,000 + 40,000
(3) + 500
(4) + 5,500
(5) + 3,000
(6) – 1,100 – 1,200 – 400 (7) – 400
(8) Not a transaction of the business (9) + 1,000 – 1,000
(10) + 22,000 – 22,000
(11) – 2,100
Assets
Accounts Office
Cash + Receivable + Supplies + Land
Accounting for Business Transactions
(1) + 50,000 Issued stock
(2)
(3) + 500
(4) + 5,500 Service revenue
(5) + 3,000 Service revenue
(6) – 1,100 Rent expense
– 1,200 Salary expense – 400 Utilities expense (7) – 400
(8) (9)
(10)(11) – 2,100 Dividends
Liabilities + Stockholders’ Equity Accounts Common Retained
Payable + Stock + Earnings Type of Stockholders’
Equity Transaction
Income Statement
Revenue:
Service revenue $8,500
Expenses:
Salary expense $1,200 Rent expense 1,100 Utilities expense 400
Total expenses 2,700
Net income $5,800
Month Ended April 30, 20x3
Statement of Retained Earnings
Retained earnings, April 1, 20x3 $ 0 Add: Net income for the month 5,800
$5,800
Less: Dividends (2,100)
Retained earnings, April 30, 20x3 $3,700
Month Ended April 30, 20x3
Balance Sheet
April 30, 20x3
Assets
Cash $ 33,300
Accounts receivable 2,000 Office supplies 500
Land 18,000
Total assets $ 53,800
Liabilities
Accounts Payable $ 100 Stockholders’ Equity
Common stock $50,000 Retained earnings 3,700 Total stockholders’
equity $53,700
Total liabilities and
stockholders’ equity $53,800
Statement of Cash Flows
Cash flows from operating activities:
Collections from customers ($5,500 + $1,000) $ 6,500 Cash payments to suppliers and employees
($2,700 + $400) (3,100)
Net cash inflow from from operating activities $ 3,400 Cash flows from investing activities:
Acquisition of land $(40,000) Sale of land 22,000
Month Ended April 30, 20x3
Statement of Cash Flows
Cash flows from operating activities: $ 3,400 Cash flows from investing activities: (18,000) Cash flows from financing activities:
Issuance (sale) of stock $50,000 Payment of dividends (2,100)
Net cash inflows from financing activities $47,900 Net increase (decrease) in cash $33,300
Cash balance, April 1, 20x3 0
Cash balance, April 30, 20x3 $33,300
Month Ended April 30, 20x3
Learning Objective 2 Understand how
accounting works.
Double-Entry Accounting
Double-entry bookkeeping means to record
the dual effects of each business transaction.
The T-Account
Account Title Debit
LEFT SIDE RIGHT SIDE
Credit
Increases and Decreases in the Accounts
Accounting
Equation: Assets = Liabilities +
Stockholders’
Equity Rules of
Debit and
Credit: Debit +
Debit –
Debit – Credit
–
Credit +
Credit
+
Rules of Debit and Credit
Air & Sea received $50,000 and issued stock.
Assets = Liabilities +
Stockholders’
Equity
Debit for Increase,
50,000
Credit for Increase,
50,000
Cash Common Stock
Rules of Debit and Credit
Air & Sea purchased land for $40,000 cash.
Common Stock Bal. 50,000
Cash
Credit Decrease, for
40,000
Bal. 50,000
Land Debit
for
Assets = Liabilities +
Stockholders’
Equity
Expansion of the
Accounting Equation
Assets
Stockholders’
Equity Liabilities
Common Stock + Retained Earnings +
Dividends – Revenues +
Expenses –
Learning Objective 3 Record business
transactions.
Recording Transactions in the Journal
Identify the transaction and specify each account affected.
Determine whether each account is
increased or decreased by the transaction.
Use the rules of debits and credits.
Enter the transaction in the journal,
including a brief explanation for the entry.
Recording Transactions in the Journal
Date Accounts and Explanation Debit Credit
Journal Page 1
April 2 Cash 50,000
Common Stock 50,000
Issued common stock
Posting from Journal to Ledger
The ledger is a grouping of all the accounts; it shows their balances.
Data must be copied to the ledger – a process called posting.
The journal is a chronological record
of all transactions listed by date.
Ledger Ledger All individual
accounts combined
make up the ledger.
Individual stockholders’ equity accounts Common
Stock Common
Stock
CashCash Individual asset accounts
Accounts Payable Accounts
Payable
Individual liability accounts
Posting from Journal to Ledger
Posting from Journal to Ledger
Accounts and Explanation Debit Credit
Cash 50,000
Common Stock 50,000
Issued common stock Posting to the Ledger
Cash Common Stock
50,000 Journal Entry
50,000
Flow of Accounting Data
Transaction Occurs
Transaction Analyzed
Transaction Entered in the Journal
Amounts
Posted to
the Ledger
Accounts After Posting
Cash
(1) 50,000 (2) 40,000 (4) 5,500 (6) 2,700 (9) 1,000 (7) 400 (10) 22,000 (11) 2,100 Bal. 33,300
Accounts Receivable
(5) 3,000 (9) 1,000 Bal. 2,000
Office Supplies (3) 500
Bal. 500
Land
ASSETS
Accounts Payable
(7) 400 (3) 500
Bal. 100
LIABILITIES
=
Accounts After Posting
Common Stock
(1) 50,000
Bal. 50,000
STOCKHOLDERS’ EQUITY
Dividends
(11) 2,100
Bal. 2,100
+
Service Revenue
(4) 5,500
(5) 3,000 Bal. 8,500
REVENUE
Rent Expense
(6) 1,100
Bal. 1,100
Salary Expense
(6) 1,200
Bal. 1,200
Utilities Expense
(6) 400
EXPENSES
Learning Objective 4
Use a trial balance.
Trial Balance
A trial balance lists all accounts with
their balances – assets first, followed by
liabilities, and then stockholders’ equity.
Correcting Accounting Errors
Search the records for a missing amount.
Divide the out-of-balance amount by 2 (a debit treated as a credit or vice versa).
Divide the out-of-balance amount by 9, which may indicate a slide
or a transposition.
Chart of Accounts
It is a listing of all accounts and account numbers used by a business.
Assets are often numbered beginning with 1, liabilities with 2, stockholders’ equity with 3,
revenues with 4, and expenses with 5.
Air & Sea Travel Chart of Accounts
Assets Liabilities Stockholders’ Equity
101 Cash 201 Accounts Payable 301 Common Stock
111 Accounts Receivable 231 Notes Payable 311 Dividends
141 Office Supplies 312 Retained Earnings
151 Office Furniture 191 Land
BALANCE SHEET ACCOUNTS:
INCOME STATEMENT ACCOUNTS (PART OF STOCKHOLDERS’ EQUITY):
Revenues Expenses
401 Service Revenue 501 Rent Expense 502 Salary Expense
Normal Balances of the Accounts
Assets Debit
Liabilities Credit
Stockholders’ Equity – overall Credit
Common stock Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit
Account in Four-Column Format
Balance
Date Item Debit Credit Debit Credit 20x1
April 2 50,000 50,000
3 40,000 10,000
Account: Cash Account No. 101
Learning Objective 5 Analyze transactions for
quick decisions.
Quick Decision Making
The managers of PepsiCo may consider buying equipment that costs $100,000.
PepsiCo will borrow the money.
Management can analyze the effects of the
transactions by going directly to T-accounts.
Quick Decision Making
Note Payable Cash
(a) 100,000 (a) 100,000
Transaction a – Borrow $100,000
Cash
(a) 100,000 (b) 100,000
Equipment (b) 100,000
Note Payable
(a) 100,000
