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3 Information

PowerPoint Author: Catherine Lumbattis

COPYRIGHT © 2011 South-Western/Cengage Learning

External and Internal Events
External events: interaction between entity
and outside environment

Internal events:
Event occurs entirely
within the entity

Source Documents
Purchase Sales
Invoice Invoice
Evidence needed
in an accounting
system to record
transactions Checks

Payroll Shipping Receiving

Records Document Document

Issue Capital Stock for Cash
1/2010 Transactions for Glengarry Health Club

The accounting equation must always remain in balance

Purchase of Property in
Exchange for Note Payable

Increase on left has corresponding increase on right

Cost Principle
 requires assets such as equipment be recorded at
cost to acquire and continue to report this amount
until asset is sold
 these assets are not carried at market value (only
few exceptions)
Effect of Revenue and Expenses
on Retained Earnings
Statement of
Income Statement
Retained Earnings

Revenue Beg. R/E

– Expenses + Net Income
= Net Income OR ( – Net Loss)
or (Net Loss) – Dividends
= End. R/E
Identify and Analyze
What type of activity?
operating, financing or investing
What accounts are affected and are the
accounts increased or decreased?
at least two accounts are always affected
Which financial statements are affected?
just the balance sheet or balance sheet
and income statement
Sell Monthly Memberships
on Account
Payment of Wages
and Salaries
Payment of Wages and Salaries: Operating activity

Two accounts are affected: Cash is decreased and

Wage and Salary Expense is increased

This transaction affects both the Balance Sheet and

the Income Statement
Payment of Wages
and Salaries
Appendix: The T Account
Account Name

Debits are Credits are

entered on left entered on right

Representation of one account in the general ledger

The T Account
Account Name

400 dr. 900 cr.

Debits and credits

are netted to obtain 500 cr.
balance in account
Debits/Credits and
the Accounting Equation

Dr. Cr. Dr. Cr. Dr. Cr.

+ – – + – +

Opposite sides of the accounting equation are

increased/decreased in an opposite way
Link Between Revenues and
Retained Earnings
EARNINGS Both accounts
are increased

Dr. +
Cr. with credits

Revenues increase

Dr. Cr.
retained earnings
(part of owners’ equity)
Link Between Expenses and
Dividends and Retained Earnings
Retained earnings is
decreased with debits DR. CR.

– +
Expenses and dividends
decrease retained earnings EXPENSES AND
Use debits to record(increase) DR. CR.
expenses and dividends
+ –
Normal Account Balances
Debit Credit
Assets Liabilities
Expenses Stockholders’ Equity
Dividends Revenues

all increased all increased

with debits with credits
Determine the Balance
of the T Accounts

Cash Accounts Receivable

(1) 100,000 10,000 (6) (4) 15,000 4,000 (8)
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9)

94,000 11,000
The Journal: Chronological
Record of Transactions

 Book of Original Entry

 Transactions recorded in the journal
first and then posted to the ledger

Posting from Journal
Transactions are
entered in: And then posted to:
(via journal entries):
Ledger Accounts
• Cash
Dr. Cr.
• Capital Stock
Cash 100,000
Capital Stock 100,000
To record the issuance of 10,000 shares
Glengarry Health Club
Trial Balance
January 31, 2010 Debits Credits
Cash $ 94,000
Accounts Receivable 11,000
Equipment 20,000
Building 150,000
Land 50,000
Accounts Payable $ 20,000
Notes Payable 200,000
Capital Stock 100,000
Membership Revenue 15,000
Court Fee Revenue 5,000
Wage Expense 10,000
Utility Expense 3,000
Dividends 2,000
$340,000 $340,000

End of Chapter 3