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Spiceland | Thomas | Herrmann
Financial Accounting
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The
AccountingCycle:
During thePeriod
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
Identify the basic steps in measuring externaltransactions
Analyze the impact of external transactions on the
accounting equation Assess whether the impact of externaltransactions results in a debit or credit to anaccount balance
Record transactions using debits and credits Post transactions to T-accounts in the general
ledger
Prepare a trial balance
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Functions of Financial Accounting
Measure business activities of the company
Communicate measurements to external partiesfor decision making
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part A
Measuring Business Activities
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
Identify the Basic Steps in Measuring ExternalTransactions.
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
External Transactions
Transactions conducted with a separate economicentity
Internal transaction: events that affect the
financial position of the company but do notinclude an exchange with a separate economicentity
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Capturing Transactions in Accounts
Account: Summary of all transactions related toa particular item over a period of time.
Asset accounts: Cash, Supplies, and Equipment
Liability accounts: Accounts Payable, SalariesPayable, Utilities Payable, and Taxes Payable
Stockholders equity accounts: Common Stockand Retained Earnings
Chart of accounts: A list of all account namesused to record transactions
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Measuring External Transactions
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Learning Objective 2
Analyze the impact of external transactions on theaccounting equation.
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Effects on the Basic AccountingEquation
Each transaction will have a dual effect
An increase on one side will increase the otherside
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Understanding Effects ofTransaction
Ask these questions:
What is one account affected by the transaction?
Does it increase or decrease?
What is a second account affected by thetransaction?
Does it increase or decrease?
Do assets still equal liabilities plus stockholdersequity?
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Transactions of Eagle Golf Academy
Date External Transactions in January(1) Dec. 1 Sell shares of common stock for $25,000 to obtain thefunds necessary to start the business
(2) Dec. 1 Borrow $10,000 from the local bank and sign a notepromising to repay the full amount of the debt in threeyears
(3) Dec. 1 Purchase equipment necessary for giving golf training,$24,000
(4) Dec. 1 Pay one year of rent in advance, $6,000 ($500 per month)
(5) Dec. 6 Purchase supplies on account, $2,300
(6) Dec. 12 Provide golf training to customers for cash, $4,300
(7) Dec. 17 Provide golf training to customers on account, $2,000
(8) Dec. 23 Receive cash in advance for 12 golf training sessions to begiven in the future, $600
(9) Dec. 28 Pay salaries to employees, $2,800
(10) Dec. 30 Pay cash dividends of $200 to shareholders
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Transaction 1Issue CommonStock
Eagle sells shares of common stock for $25,000
What is one account affected by the transaction? Cash
Does that account increase or decrease? Increase by $25,000
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 1Issue CommonStock
Eagle sells shares of common stock for $25,000
What is a second account affected by the transaction? Common Stock
Does that account increase or decrease? Increase by $25,000
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 1Issue CommonStock
Eagle sells shares of common stock for $25,000
Do assets equal liabilities plus stockholders equity? Yes, assets increase by $25,000 and stockholders equity increase
by $25,000
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Transaction 2Borrow from theBank
Eagle borrows $10,000 from the bank and signs a note for it
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 3PurchaseEquipment
Purchase equipment with cash, $24,000
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 4Incur Costs for Rent
Pay one year of rent in advance, $6,000
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 5Incur Costs forSupplies
Purchase of supplies on account, $2,300
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Expanded Accounting Equation
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction 6Provide Services forCash
Provide service to customers for cash, $4,300
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Transaction 7Provide Services onAccount
Provide service to customers on account, $2,000
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Transaction 8Receive Cash inAdvance of Providing Services
Receive cash in advance from customers, $600
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Transaction 9Incur Cost forSalaries
Pay salaries to workers, $2,800
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Transaction 10Pay Dividends
Pay dividends to stockholders, $200
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Part B
Debits and Credits
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 3
Assess Whether the Impact of External TransactionsResults in a Debit or Credit to an Account Balance.
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Effects on Account Balances
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debit and Credit Effects on Accounts inthe Expanded Accounting Equation
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debit and Credit Effects on EachAccount Type
A simple memory aid
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Recording Transactions
Journal: provides a chronological record of alltransactions
Journal entry: format used for recording
transactions Debits in a transaction must equal its credits
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Recording TransactionsExample
On December 1, Eagle Golf Academy sells sharesof common stock to investors for cash of $25,000.
Cash debited for $25,000
Common Stock credited for $25,000
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 5
Post transactions to T-accounts in the generalledger.
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Posting
Posting: process of transferring the debit andcredit information from the journal to individualaccounts in the general ledger
General ledger: includes all accounts used torecord the companys transactions
Useful to calculate the account balances
T-account: a simplified form of a general ledgeraccount
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
PostingExample
On December 1, Eagle Golf Academy sells sharesof common stock to investors for cash of $25,000.
Debit to Cash is transferred to the Cash account
Credit to Common Stock is transferred to theCommon Stock account
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Summary of External TransactionsRecorded for Eagle Golf Academy
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Summary of External TransactionsRecorded for Eagle Golf Academy
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Summary of External TransactionsRecorded for Eagle Golf Academy
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 6
Prepare a Trial Balance.
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Trial Balance
A list of all accounts and their balances at aparticular date
Shows that total debits equal total credits
Assists in preparing adjusting entries Used for internal purposes only
Not published to external parties
Not required to follow an order of listing
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Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Trial BalanceExample
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End of Chapter 2
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