Tools for Business Decision Making, 4th Ed.

Kimmel, Weygandt, Kieso

Financial Accounting:

The Accounting Information System

Chapter 3

CHAPTER 3

Analyze the effect of business transactions on the basic accounting equation. Explain what an account is, then apply debits and credits to those accounts (journal entries)

Bob Anderson, UCSB 2004

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Bob Anderson, UCSB 2004

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External and Internal Events

External Event interaction between a business and
its environment. business.

Exercise Types of Events

External 1. Internal Not Recorded External External Not Recorded External Internal Not Recorded Internal
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Internal Event event occurring entirely within a Transaction any event that is recognized in a set of
financial statements. RECOGNIZED- An accounting entry is recorded it becomes reflected in the financial statements. REALIZED- regardless of whether it results in an accounting entry, the business actually receives or gives something.
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A supplier of a companys raw material is paid an amount owed on account.

2. A customer pays its open account. 3. A new chief executive officer is hired. 4. The biweekly payroll is paid. 5. Raw materials are entered into production. 6. A new advertising agency is hired. 7. The accountant determines the federal income taxes owed based on the income earned.
Bob Anderson, UCSB 2004

Source Documents
Source Document a piece of paper that is used as
evidence to record a transaction. Sales invoice Payroll timecard Utility bill Stock certificate Promissory note (note payable)
NOTE: Not all recordable events are supported by a standard source document.
Bob Anderson, UCSB 2004
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Effect on the Accounting Equation

Assets = Liabilities + Equity
Assets - Liabilities = Equity Assets - Liabilities = Net Assets
Payment terms are 2/10, n/30

Net Assets = Equity

The accounting equation is made up of Accounts. An account is a record used to accumulate amounts for each individual asset, liability, equity, revenue, and expense.
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Sara Lee Corp. Assets Accounts

Consolidated Balance Sheets Dollars in millions except share data July 3, 2004 Assets Cash and equivalents Trade accounts receivable, less allowances of $184 in 2004, $181 in 2003 and $176 in 2002 Inventories Other current assets Net assets held for sale Total current assets Other noncurrent assets Deferred tax asset Property, plant, and equipment Land Buildings and improvements Machinery and equipment Construction in progress Accumulated depreciation Property, net Trademarks and other identifiable intangibles, net Goodwill Total assets $ 638 1,929 2,779 400 5,746 153 275 155 2,052 5,087 283 7,577 4,306 3,271 2,024 3,414 14,883 $

Chart of Accounts
June 28, 2003 942 1,857 2,704 378 1 5,882 284 437 202 1,915 4,917 291 7,325 3,975 3,350 2,110 3,387 15,450 June 29, 2002 $ 298 1,768 2,509 341 7 4,923 192 4 176 1,744 4,299 320 6,539 3,384 3,155 2,106 3,314 13,694

Chart of Accounts
Acct. No. 100 105 110 130 200 220 300 330 400 500 Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold

LO 2

Describe the qualitative characteristics of accounting information.

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LO 3

Analyze the effects of transactions on the accounting equation.

Bob Anderson, UCSB 2004

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FINALLY- DEBITS AND CREDITS

Rule number one: forget the concept of credit to your account that you are probably familiar with. If your bank charges you a late fee, you complain and they reverse it, you THINK that is a credit to your account. BUT, as you will see, on YOUR books, the adjustment is a DEBIT to your cash. CRUTCH: ASSETS & LIABILITIES: DEBIT GOOD, CREDIT BAD EQUITY & INCOME: OPPOSITE (DEBIT BAD, CREDIT GOOD) MORE: ASSETS AND EXPENSES ARE DEBITS LIABILITIES, EQUITY AND REVENUES ARE CREDITS OH YEAH, ONE OTHER THING: DEBITS ON THE LEFT, CREDITS ON THE RIGHT! REMEMBER FROM PRIOR CHAPTERS: FOR EVERY ACTION THERE IS AN EQUAL AND OPPOSITE REACTION IN ACCOUNTING TERMS, FOR EVERY DEBIT, THERE IS A CREDIT.
Bob Anderson, UCSB 2004
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Graphic debits and credits (GENERALLY)

Balance Sheet
Assets:
DEBITS 2004

Income Statement
Revenues & Gains:
CREDITS 2004

Liabilities:
CREDITS

Equity:
CREDITS

Expenses & Losses:

DEBITS

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ANOTHER CRUTCH
Debit Card- comes from your checking account, which is an ASSET. Credit Card- creates a LIABILITY. DEBIT- ASSET CREDIT- LIABILITY
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Review
What is the normal balance for the following accounts? Debit Cash Credit Accounts Payable Debit Accounts Receivable Credit Service Revenue Common Stock Credit Debit Salaries Expense
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Debits and Credits

Review
What is the normal balance for the following accounts? Debit Dividends Debit Building Credit Taxes Payable Credit Unearned Revenus Prepaid Insurance Debit Debit Rent Expense
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Balance Sheet

Income Stmt.

Asset = Liab. + Equity Debit

Rev. - Exp. =

Credit

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DEBITS AND CREDITS- POSTING

We need to write a transaction in a format that can be communicated / input. We use a journal entry: DEBITS ON THE LEFT CREDITS ON THE RIGHT

ACCOUNTING EQUATION- JOURNAL ENTRIES

On Jan. 3rd, sold common stock for $100,000 cash. What is the impact to common stock? INCREASE $100,000 What is the impact to cash? INCREASE $100,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Cash $100,000 Common Stock $100,000

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ACCOUNTING EQUATION- JOURNAL ENTRIES

On Jan. 10th, purchased a building by signing a $150,000 note payable.. What is the impact to Building (Fixed assets)? INCREASE $150,000 What is the impact to Notes Payable? INCREASE $150,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Building $150,000 Note payable $150,000

HOW TO LEARN DEBITS AND CREDITS

There is no way to teach it and no way to learn it other than by:

PRACTICE!!!!! PRACTICE!!!!! PRACTICE!!!!! PRACTICE!!!!!

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Bob Anderson, UCSB 2004

Bob Anderson, UCSB 2004

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ACCOUNTING EQUATION- JOURNAL ENTRIES

On Jan. 15th, purchased inventory on account for $60,000. What is the impact to Inventory? INCREASE $60,000 What is the impact to cash? NONE- PURCHASED ON ACCOUNT What is the impact to accounts payable? INCREASE $60,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? ACCOUNT DEBIT/ DR. CREDIT/ (CR) Inventory $60,000 Accounts payable $60,000
Bob Anderson, UCSB 2004
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BY THE WAY
WHAT IS THE DIFFERENCE BETWEEN THESE ENTRIES: ACCOUNT DEBIT/ DR. CREDIT/ (CR) Inventory $60,000 Accounts payable $60,000 AND ACCOUNT Accounts payable Inventory DEBIT/ DR. $60,000 ANSWER: NOTHING- IT IS ONLY A CONVENTION TO LIST THE DEBITS FIRST!
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CREDIT/ (CR) $60,000

ACCOUNTING EQUATION- JOURNAL ENTRIES

On Jan. 20th, sold inventory costing $30,000, for $75,000 on account.
Did we earn the revenue? Yes- SALES INCREASE $75,000 Sold for cash or on account ON ACCOUNT ACCOUNTS RECEIVABLE INCREASE $75,000 What is the impact to Inventory? DECREASE $30,000 When we Squeeze Inventory from the Balance sheet to the income statement, where does it go (HAVE WE RECEIVED THE BENEFIT)? COGS $30,000 ACCOUNT Accounts receivable Sales Cost of goods sold Inventory HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) $75,000 $75,000 $30,000 $30,000 Bob Anderson, UCSB 2004
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ACCOUNTING EQUATION- JOURNAL ENTRIES

On Jan. 29th, received $40,000 cash from customers who purchased goods on account. SHOULD THIS IMPACT THE INCOME STATEMENT? NO! WE RECORDED THE SALE WHEN IT WAS EARNED, THIS ONLY REFLECTS A CHANGE FROM AN ACCOUNT RECEIVABLE TO CASH. What is the impact to sales? NONE What is the impact to accounts receivable? DECREASE $40,000 What is the impact to cash? INCREASE $40,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) ACCOUNT Cash $40,000 Accounts receivable $40,000

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Additional Terms

Account Name
General Ledger a file that contains the activity of all
the accounts.

Debit / Dr.

Credit / Cr.

T Account a format

Account Name
Debit / Dr. Credit / Cr.

used to illustrate the increases, decreases and resulting total balance for each account.

Slide JE-4 Copyright

2003 by Coby Harmon

(T Account illustration with excel)

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Assets
Debit / Dr. Credit / Cr.

Liabilities
Debit / Dr. Credit / Cr.

NORMAL- DEBIT

NORMAL- CREDIT

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Equity
Debit / Dr. Credit / Cr.

Revenue
Debit / Dr. Credit / Cr.

NORMAL- CREDIT

NORMAL- CREDIT

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REMEMBER THIS SLIDE FROM BEFORE?

Expense
Debit / Dr. Credit / Cr.

On Jan. 3rd, sold common stock for $100,000 cash. What is the impact to common stock? INCREASE $100,000 What is the impact to cash? INCREASE $100,000 HOW IS THIS EXPRESSED IN A JOURNAL ENTRY? DEBIT/ DR. CREDIT/ (CR) ACCOUNT Cash $100,000 Common Stock $100,000

NORMAL- DEBIT

WHAT WOULD THIS LOOK LIKE IN THE T-ACCOUNTS?

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Bob Anderson, UCSB 2004

Bob Anderson, UCSB 2004

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ENTRY POSTED TO T-ACCOUNTS

ACCOUNT Cash Common Stock DEBIT/ DR. $100,000 CREDIT/ (CR) $100,000

The Journal
General Journal a chronological record of
transactions, also known as the book of original entry. What you record in the journal is known as a Journal Entry.
Date Account Title Cash Common stock 10 Building Note payable Ref. 100 300 130 220 150,000 150,000 Debit 100,000 100,000 Credit

CASH DEBIT CREDIT

COMMON STOCK DEBIT CREDIT

Jan.

$100,000

$100,000

$100,000

$100,000
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Posting Posting the process of transferring amounts from the

journal to the ledger accounts.
General Journal
Date Jan. 3 Account Title Cash Common stock Ref. Debit 100,000 100,000

Trial Balance
Trial Balance a list of each account and its balance;
used to prove equality of debits and credits.
Acct. No. 100 105 110 130 200 220 300 330 400 500 Account Cash Accounts receivable Inventory Building Accounts payable Note payable Common stock Retained earnings Sales Cost of goods sold Debit 140,000 35,000 30,000 150,000 60,000 150,000 100,000 75,000 30,000 385,000 385,000

Credit

GJ1

Credit

General Ledger
Date

Cash
Ref. Debit

Acct. No. 100

Credit Balance

Explanation

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LO 7

Explain the purposes of a trial balance.

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Event 9 Hiring of New Employees

Oct. 9 Sierra hired four new employees to begin work on Oct. 15.

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Basic Steps in the Recording Process.

1.Analyze 2.Journalize 3.Post

Accounting transaction has NOT occurred!

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