Chapter 3

Copyright © 2015 by McGraw-Hill Education (Asia).

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Establishes
Establishesaccountability
accountabilityfor
forassets
assets
and
andtransactions.
transactions.

Keeps
Keepstrack
trackof
ofroutine
routinebusiness
business
activities.
activities.

Obtains
Obtainsdetailed
detailedinformation
informationabout
aboutaa
particular
particulartransaction.
transaction.

Evaluates
Evaluatesefficiency
efficiencyand
and
performance
performancewithin
withincompany.
company.

Maintains
Maintainsevidence
evidenceof
ofaacompany’s
company’s
business
businessactivities.
activities.
3-2
 Accounts
Accounts are
are
Cash individual
individual records
records
showing
showing increases
increases
Accounts and
and decreases.
decreases.
Payable

The
The entire
entire group
group of
of
Share accounts
accounts is is kept
kept
Capital
together
together in in an
an
accounting
accounting record
record
called
called aa ledger.
ledger.
3-3
Increases are recorded
on one side of the T
account, and Title of Account
decreases are
recorded on the other Left Right
or or
side. Debit Credit
Side Side

3-4
 Cash
Cash
5/1
5/1 8,000
8,000 5/25/2 2,500
2,500
Receipts are 5/25
5/25 75
75 5/85/8 2,000
2,000 Payments are
on the debit on the credit
side. 5/29
5/29 750
750 5/28
5/28 150
150 side.

5/31
5/31 50
50
5/31
5/31 4,125
4,125
Bal.
Bal. The
Thebalance
balanceisisthe
the
difference
differencebetween
betweenthethe
debit
debitandandcredit
creditentries
entries
in
inthe
theaccount.
account.

3-5
 Debits and credits affect accounts as follows:

A = L + E
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

3-6
 A = L + E
=
Debit
balances
In
Credit
balances

In the
the double-entry
double-entry accounting
accounting system,
system,
every
every transaction
transaction is
is recorded
recorded by
by equal
equal
dollar
dollar amounts
amounts of
of debits
debits and
and credits.
credits.
3-7
 Let’s record
selected
transactions
for JJ’s Lawn
Care Service in
the accounts.

3-8
 11 May:
May: Jill
Jill Jones
Jones and
and her
her family
family invested
invested $8,000
$8,000
in
in JJ’s
JJ’s Lawn
Lawn Care
Care Service
Service and
and received
received 800
800 shares
shares
of
of stock.
stock.

Will
Share
Share
Capital
Capital
Will
Cash
Cash
increases
increase
increases
increase$8,000
or
$8,000
or decrease?
with a debit.
with
decrease?
a credit.

Cash Share Capital

5/1 8,000 5/1 8,000

3-9
 22 May:
May: JJ’s
JJ’s purchased
purchased aa riding
riding lawn
lawn mower
mower
for
for $2,500
$2,500 cash.
cash.

Tools
Will
& Tools
Equipment
&
Will
CashCash
decreases
increase
Equipment
increases increase
$2,500
$2,500
or decrease?
with a credit.
or
with
decrease?
a debit.

Cash Tools & Equipment

5/1 8,000 5/2 2,500 5/2 2,500

3-10
  88 May:
May: JJ’s
JJ’s purchased
purchased aa $15,000
$15,000 truck.
truck. JJ’s
JJ’s
paid
paid $2,000
$2,000 in
in cash
cash and
and issued
issued aa note
note payable
payable
for
for the
the remaining
remaining $13,000.
$13,000.

Will Cash and

Truck
Will increases
Truck increase Notes Payable
$15,000 with a debit.
or decrease? increase or
decrease?

Cash
5/1 8,000 5/2 2,500
Truck
5/8 2,000
5/8 15,000
Notes Payable
5/8 13,000

3-11
 11
11 May:
May: JJ’s
JJ’s purchased
purchased some
some repair
repair parts
parts
for
for $300
$300 on
on account.
account.

Tools
Will
& Tools
Equipment
& Will Accounts
Equipment
increases $300
increase
with Payable increase or
or decrease?
a debit. decrease?

Tools & Equipment Accounts Payable

5/2 2,500 5/11 300
5/11 300

3-12

 18
18 May:
May: JJ’s
JJ’s sold
sold half
half of
of the
the repair
repair parts
parts to
to
ABC
ABC Lawns
Lawns for
for $150,
$150, aa price
price equal
equal to
to JJ’s
JJ’s cost.
cost.
ABC
ABC Lawns
Lawns agrees
agrees to
to pay
pay JJ’s
JJ’s within
within 30
30 days.
days.

Tools
Will& Tools
Equipment
& Will Accounts
decreases
Equipment$150increase
with Receivable increase
or adecrease?
credit. or decrease?

Tools & Equipment Accounts Receivable

5/2 2,500 5/18 150 5/18 150
5/11 300

3-13
 In
In an
an actual
actual accounting
accounting system,
system,
transactions
transactions are
are initially
initially recorded
recorded in
in the
the
journal.
journal.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2013
May 1 Cash 8,000
Share Capital 8,000
Owners invest cash in the business.
3-14
Posting simply
means updating the
ledger accounts for
the effects of the
transactions
recorded in the
journal.
3-15
 GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2013
May 1 Cash 8,000
Share Capital 8,000
Owners invest cash in the business.
General Ledger
Cash
Date Debit Credit Balance
2013
May 1 8,000 8,000
3-16
 GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2013
May 1 Cash 8,000
Share Capital 8,000

General
Owners invest Ledger
cash in the business.

Share Capital
Date Debit Credit Balance
2013
May 1 8,000 8,000
3-17
 GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2013
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.

Let’s
Let’s see
see what
what the
the cash
cash account
account looks
looks like
like
after
after posting
posting the
the cash
cash portion
portion of
of this
this
transaction
transaction for
for JJ’s
JJ’s Lawn
Lawn Care
Care Service.
Service.
3-18
 General Ledger
Cash
Date Debit Credit Balance
2013
May 1 8,000 8,000
2 2,500 5,500

This ledger format is referred to as a

running balance.

3-19
 General Ledger
Cash
Date Debit Credit Balance
2013
May 1 8,000 8,000
2 2,500 5,500

TT accounts
accounts areare simplified
simplified versions
versions of
of
the
the ledger
ledger account
account that
that only
only show
show the
the
debit
debit and
and credit
credit columns.
columns.
3-20
 Profit
Profit is
is not
not an asset it’s
an asset it’s an
an increase
increase in
in
equity
equity from
from profits
profits of
of the
the business.
business.

A = L + E
Increase Decrease Increase

As income is earned, Profit always

either an asset is results in the
increased or a liability is increase of
decreased. Equity
3-21
A = L + E
Share Retained
Capital Earnings

The balance in the Retained Earnings account

represents the profit of the corporation over the
entire lifetime of the business, less all amounts
which have been distributed to the shareholders as
dividends.
3-22
 JJ's Lawn Care Service
Income Statement
For the Month Ended 31 May 2013

Sales Revenue $ 750

Operating Expense:
Gasoline Expense 50
Profit $ 700

The
Theincome
incomestatement
statementsummarizes
summarizesthetheprofitability
profitability
of
of aabusiness
businessfor
for aa specified
specifiedperiod
period of
of time.
time.
3-23
 Time Period Principle
To provide users of
financial statements
with timely information,
profit is measured for
relatively short
accounting periods of
equal length.

3-24
The price for
goods sold
and services Increases
rendered during a equity.
given accounting
period.

The costs of
goods and Decreases
services used up equity.
in the process of
earning revenue.

3-25
Matching Principle
Revenue should
be recognized at
the time goods are
sold and services
are rendered.

3-26
Matching Principle
Expenses should
be recorded in the
period in which
they are used up.

3-27
 Current Future
Accounting Period Accounting Period
1
1 Dec.
Dec.
1
1 Jan.
Jan. 2013
2013 11 Jan.
Jan. 2014
2014 1
1 Dec.
Dec. 2014
2014
2013
2013

The
The income
income statement
statement
Cash
Cash is
is received
received or
or But . . .
reports
reports revenue
revenue or
or
paid
paid here
here expense
expense here
here

OR
The
The income
income statement
statement But . . . Cash
Cash is
is received
received or
or
reports
reports revenue
revenue or
or paid
paid here
here
expenses
expenses here
here

3-28
 EQUITIES
Expenses Debit Credit Revenues
decrease for for increase
equity. Decrease Increase equity.

EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

3-29
Payments to Owners’
EQUITIES
owners investments
decrease Debit Credit increase
for for
equity. Decrease Increase equity.

DIVIDENDS SHARE CAPITAL

Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

3-30
 Let’s
Let’s analyze
analyze the
the
revenue
revenue and and expense
expense
transactions
transactions for for JJ’s
JJ’s
Lawn
Lawn CareCare Service
Service
for
for the
the month
month ofof May.
May.
We
We will
will also
also analyze
analyze aa
dividend
dividend transaction.
transaction.

3-31
 29
29 May:
May: JJ’s
JJ’s provided
provided lawn
lawn care
care services
services for
for
aa client
client and
and received
received $750
$750 in
in cash.
cash.

Will Sales Revenue

Will
CashCash
increases
increase
increase or
$750
or decrease?
with a debit.
decrease?

Cash Sales Revenue

5/1 8,000 5/2 2,500 5/29 750
5/29 750 5/8 2,000

3-32

 31
31 May:
May: JJ’s
JJ’s purchased
purchased gasoline
gasoline for
for the
the lawn
lawn
mower
mower and
and the
the truck
truck for
for $50
$50 cash.
cash.

Will Gasoline
Cash
Will Cash
decreases
increase
$50
Expense increase or
or
with
decrease?
a credit.
decrease?

Cash Gasoline Expense

5/1 8,000 5/2 2,500 5/31 50
5/29 750 5/8 2,000
5/31 50

3-33

 31
31 May:
May: JJ’s
JJ’s Lawn
Lawn Care
Care paid
paid Jill
Jill Jones
Jones and
and
her
her family
family aa $200
$200 dividend.
dividend.

Will Dividends
Will
CashCash
decreases
increase
increase or
$200
or decrease?
with a credit.
decrease?

Cash Dividends
5/1 8,000 5/2 2,500 5/31 200
5/29 750 5/8 2,000
5/31 50
5/31 200
3-34
 Now,
Now, let’s
let’s look
look at
at
the
the Trial
Trial Balance
Balance forfor
JJ’s
JJ’s Lawn
Lawn Care
Care
Service
Service for
for the
the
month
month of of May.
May.

3-35
 JJ's Lawn Care Service
Unadjusted Trial Balance
31 May 2013
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Truck 15,000
Notes payable $ 13,000
Accounts payable 150
Share capital 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Total $ 21,900 $ 21,900

All balances are taken from the ledger accounts on 31 May

after considering all of JJ’s transactions for the month.
3-36
Accountants spend
much of their time
focusing on the
more analytical
aspects of their
discipline.

3-37
3-38