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Lecture 4

Financial Statements

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Implications Of Debits And Credits
Debits and Credits are used to indicate
that something happened to an account.
Interpreting the implications requires an
analysis of the entire journal entry.

Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?

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Implications
Question 1
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?

ANSWER:
Notes Payable would increase.

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What event would cause us to record an increase in our long-term borrowings? 2-5 .Implications Question 2 Notes Payable is the account where we record long-term borrowings.

What event would cause us to record an increase in our long-term borrowings? ANSWER: Such an increase could imply that the company borrowed money. 2-6 .Implications Question 2 Notes Payable is the account where we record long-term borrowings.

Implications Question 3 If the company borrowed money. which account would also be affected and in what way? 2-7 .

Implications Question 3 If the company borrowed money. which account would also be affected and in what way? ANSWER: There would also be an equal-sized increase in the Cash account. 2-8 .

you find an increase to the Land account.Implications Question 4 Suppose instead of an increase to Cash. How do you interpret the increase in Notes Payable? 2-9 .

Implications Question 4 Suppose instead of an increase to Cash. 2-10 . How do you interpret the increase in Notes Payable? ANSWER: The company acquired land and gave a note that promised to pay for the land in the future. you find an increase to the Land account.

all transactions are recorded in the General Journal. Journal .2-11 Recording Transactions  Initially.

One account has a debit effect.   This methodology was named “double entry” accounting by whom? Pacioli . all transactions are recorded in the General Journal. Journal  Each transaction always affects at least two different accounts.  The second account has a credit effect.2-12 Recording Transactions  Initially.

2-13 General Journal Page GENERAL JOURNAL Page: Date Description PR Debit Credit .

Prepare the appropriate general journal entry for the above transaction. Caldwell Company borrows $10. 19X7.000 from the bank. 2-14 .Journal Entries Example 1 On January 1.

 Notes Payable is increased by $10.000.000.  2-15 .Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.

 GENERAL JOURNAL 1 Page: Date Description PR Debit Credit .000.2-16 Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.000.  Notes Payable is increased by $10.

000.  GENERAL JOURNAL 1 Page: Date Description 1-Jan Cash Notes Payable to record loan from bank PR Debit 100 201 10.000 Credit 10.000.  Notes Payable is increased by $10.000 .2-17 Journal Entries Solution 1  Two accounts are affected: Cash is increased by $10.

Caldwell Company purchases a truck for $19. 19X7. 2-18 . Prepare the appropriate journal entry for the above transaction.500 cash.Journal Entries Example 2 On January 15.

 2-19 .500.  Cash is decreased by $19.500.Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.

2-20 Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.  GENERAL JOURNAL 1 Page: Date Description PR Debit Credit .500.  Cash is decreased by $19.500.

 GENERAL JOURNAL 1 Page: Date Description PR 15-JanTrucks 150 Cash 100 to record purchase of truck Debit Credit 19.500 .500.500 19.  Cash is decreased by $19.500.2-21 Journal Entries Solution 2  Two accounts are affected: Trucks is increased by $19.

Journal Entries Example 3 On January 20. Prepare the appropriate journal entry for the above transaction. Caldwell Co. pays the $400 electric bill for January. 19X7. 2-22 .

Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.  2-23 .  Cash is decreased by $400.

 Cash is decreased by $400.2-24 Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.  GENERAL JOURNAL 1 Page: Date Description PR Debit Credit .

 Cash is decreased by $400.  GENERAL JOURNAL 1 Page: Date Description PR 20-JanUtility Expense 511 Cash 100 to record payment of January electric bill Debit Credit 400 400 .2-25 Journal Entries Solution 3  Two accounts are affected: Utility Expense is increased by $400.

2-26 More About The General Ledger  It is a complete collection of all the accounts of a company  Accounts are individually numbered for easy reference  It is used to collect the information about all of the transactions affecting a specific account .

BS BS accounts accounts Nominal Nominal AccountsAccounts.Categories of General Ledger Accounts The five types of accounts fall into one of two categories Real Real AccountsAccounts.IS IS accouts accouts 2-27 .

e.. . Liabilities. Balance Sheet accounts)  Accounts are permanent.2-28 Real Accounts  This category includes Assets. and Stockholders’ Equities (i.  Account balances are carried forward from one fiscal year to the next.

 Nominal accounts are temporary.2-29 Nominal Accounts  Nominal accounts include revenues and expenses.  Nominal account balances are closed out to zero at the end of the fiscal year. .  Closing Entries will be discussed in Chapter 4.

2-30 Posting to the GL Example GENERAL JOURNAL 1 Page: Date Description 1-Jan Cash Notes Payable to record loan from bank PR Debit Credit 10.000 10.000 Start with the journal entry from the General Journal. .

find the appropriate Description PR forDebit in the General Ledger Cash. Credit 1-Jan Cash Notes Payable to record loan from bank 10.000 ACCOUNT NAME: CASH Date Description Beginning Balance 1 ACCOUNT No. PR Debit Credit 0 100 Balance 0 .2-31 Posting to the GL Example GENERAL JOURNAL Date Page: page Next.000 10.

000 ACCOUNT No.000 1 Credit 10.2-32 Posting to the GL Example GENERAL JOURNAL Post the account referencePage: number. PR Debit Credit 0 100 Balance 0 . Date Description 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH Date Description Beginning Balance PR Debit 100 10.

000 Credit Post the transaction info to the GL.2-33 Posting to the GL Example GENERAL JOURNAL 1 Page: Date Description 1-Jan Cash Notes Payable to record loan from bank Description Beginning Balance 1-JanLoan Debit 100 10. 100 Balance 0 .000 Credit 10. PR Debit G1 0 10.000 ACCOUNT NAME: CASH Date PR ACCOUNT No.

2-34 Posting to the GL Example GENERAL JOURNAL Date Page: Next. find the Notes Payable PR Ledger. Debit pageDescription in the General 1-Jan Cash Notes Payable to record loan from bank 100 Description Beginning Balance Credit 10. PR Debit Credit 0 201 Balance 0 .000 10.000 ACCOUNT NAME: Notes Payable Date 1 ACCOUNT No.

000 1 Credit 10.000 ACCOUNT No. PR Debit Credit 0 201 Balance 0 . Date Description 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable Date Description Beginning Balance PR Debit 100 201 10.2-35 Posting to the GL Example GENERAL JOURNAL Post the account referencePage: number.

2-36 Posting to the GL Example GENERAL JOURNAL 1 Page: Date Description 1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable Date Description Beginning Balance 1-JanLoan PR Debit 100 201 10.000 Credit 10. PR G1 Debit Credit 0 10.000 ACCOUNT No. 201 Balance 0 .000 Post the transaction info to the GL.

Date Description PR Debit 15-Jan Trucks Cash to record purchase of truck Description Beginning Balance 1-JanLoan from bank Credit 9.000 Credit 100 Balance 0 10.500 9.2-37 Posting to the GL Example GENERAL JOURNAL Examine the next journalPage: entry.500 ACCOUNT NAME: CASH Date 1 ACCOUNT No. PR Debit G1 0 10.000 .

000 Credit 100 Balance 0 10.000 . PR Debit G1 0 10. Page: Date Description PR 15-Jan Trucks Cash to record purchase of truck Description Beginning Balance 1-JanLoan from bank Credit 9.500 ACCOUNT No.2-38 Posting to the GL Example GENERAL JOURNAL Record the account reference.500 100 ACCOUNT NAME: CASH Date Debit 1 9.

500 .2-39 Posting to the GL Example GENERAL JOURNAL 3 Page: Date Description PR 15-Jan Trucks Cash to record purchase of truck Description Beginning Balance 1-JanLoan from bank 15-JanPurchase of truck Credit 9.000 Post the entry to the GL. PR G1 G3 Debit Credit 0 10. 100 Balance 0 10.500 100 ACCOUNT NAME: CASH Date Debit 9.000 9.500 ACCOUNT No.

500 ACCOUNT No.500 Update the General Ledger balance.000 9.500 100 ACCOUNT NAME: CASH Date Debit 9. 100 Balance 0 10.2-40 Posting to the GL Example GENERAL JOURNAL 3 Page: Date Description PR 15-Jan Trucks Cash to record purchase of truck Description Beginning Balance 1-JanLoan from bank 15-JanPurchase of truck Credit 9. PR G1 G3 Debit Credit 0 10.000 500 .

 All Credit balances are in another column. All Debit balances are in one column.2-41 TRIAL BALANCE  Used to periodically test whether the General Ledger is in balance.  .  Consists of a listing of each account with its balance as of a specific date.

150 2-42 .400 $ 16.200 3.000 - 250 11. 79) First Company Trial Balance 12/31/X8 Cash Accounts Receivable Equipment Accounts Payable Notes Payable Capital Stock Retained Earnings .450 3.000 2.Trial Balance Illustration (Text example is on p.1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense Debits $ 500 1.800 Credits $ 700 1.000 5.150 $ 16.000 3.

800 Credits $ 700 1.400 $ 16.1/1/X8 Dividends Revenues Salary Expense Utility Expense Rent Expense Debits $ 500 1.000 3.000 2.150 $ 16. Credits.000 5.000 - 250 11.200 3. Retained Earnings .150 2-43 .Trial Balance Illustration (Text example is on p.450 3. 79) First Company Trial Balance 12/31/X8 Cash that Notice Notice that Accounts Receivable Total Debits Total Equipment Debits are are Accounts Payable equal to Total equal toPayable Total Notes Capital Stock Credits.

Therefore. itit is is affected affected by by debits debits and and credits credits as as follows: follows: DIVIDENDS Debit Credit for for Increase Decrease . Earnings.2-44 Dividends Account The The Dividends Dividends account account is is aa contra contra account account to to Retained Retained Earnings. Therefore.

2/4/2015 Sold good to Steve Co.22/4/2015 paid Telephone bill on credit 500 . 2015 with a capital of $100. .28/4/2015 Paid rent by cash 2. 2) Post all entries to ledgers.000 .000 in cash.(Credit) 38.On 1/4/ 2015 Bought equipment for cash 70.2-45 EXERSISE Mr.000 Required: 1) Make journal entries for the transactions. Johnson commenced business on 1st April.000 . During the month of April 2015 the following transactions took place: .