Financial Accounting

Chapter 2
Learning Objectives

2.1 Explain what a business transaction is

2.2 Keep track of financial statement items
2.3 Analyze the impact of business transactions on accounts
2.4 Record (journalize and post) transactions in the books
2.5 Construct and use a trial balance
Transaction

A transaction is any event that has a financial impact on the

business and can be measured reliably.
• Provides objective information about the financial impact
on an exchange
– Gives something
– Receives something
• Accounting records both sides of the transaction
Account (1 of 2)

The accounting equation expresses the basic relationship of

accounting.

Assets = Liabilities + Owners’ (Shareholders’) Equity

Define Account (2 of 2)

• An account is the record of all the changes in a particular

asset, liability, or shareholders’ equity during a period.
– Basic summary device.
Different Types of Accounts (1 of 5)

Assets: economic resources that provide a future benefit.

• Cash
– Money including bank account balances, paper currency, coins,
certificates of deposits and checks.
• Accounts Receivable
– Promise for future cash for goods or service.
• Notes Receivable
– Promissory note, specifying an interest rate, signed by a customer to
pay on a certain day.
• Inventory
– Goods the company sells customers.
Different Types of Accounts (2 of 5)

Assets: economic resources that provide a future benefit.

• Prepaid expenses
– Expenses paid in advance, as insurance or rent.
• Property, plant and equipment (PPE)
– Cost of the land, buildings and equipment owner by a
company.
Different Types of Accounts (3 of 5)

Liabilities: a debt or payable.

• Accounts payable
– Promise to pay debt.
• Notes payable
– Signed notes promising to pay a future amount.
• Accrued liabilities
– Liability for an expense you have not yet paid.
Different Types of Accounts (4 of 5)

Equity: the owner’s claims to the assets of the company

• Share capital
– Owner’s investment in the corporation through shares.
• Retained earnings
– Cumulative net income minus net losses and dividends
over the company’s life.
• Dividends
– Distribution of the company’s earnings to its shareholders.
Different Types of Accounts (6 of 6)

Stockholders’ Equity: the stockholders’ claims to the assets of

the company.
• Income
– Increase in shareholder’s equity from delivering goods or
services to customers.
• Expenses
– Decrease in shareholder’s equity due to the cost of
operating a business.
Business Transactions

Example: RedLotus Travel, Inc.

To illustrate the accounting for transactions, we will
consider 11 transactions and analyze each in terms of its
effect on RedLotus Travel.
 Transaction 1

On, April 1, Starr Williams and a few friends invest $50,000 to

open RedLotus Travel, Inc., and the business issues common
stock to the stockholders.
 Transaction 2

RedLotus purchases land for a new location and pays cash of

$40,000.
 Transaction 3

The business buys supplies on account, agreeing to pay $3,700

within 30 days.
 Transaction 4

RedLotus earns $7,000 of service revenue by providing services

for customers.
 Transaction 5

RedLotus performs services on account, which means that

RedLotus lets some customers pay later.
 Transaction 6

During the month, RedLotus Travel, Inc., pays $2,700 for the
following expenses: rent $1,100; employee salaries, $1,200; and
utilities, $400.
 Transaction 7

RedLotus pays $1,900 on account, which means to make a

payment toward an account payable.
 Transaction 8

Starr Williams, the major stockholder of RedLotus Travel, paid

$30,000 out of his personal bank account to remodel his home.

No Entry
 Transaction 9

In transaction 5, RedLotus performed services for UPS on

account. The business now collects $1,000 from UPS.
 Transaction 10

RedLotus sells some land for $22,000, and makes a $2,000 gain.
 Transaction 11

RedLotus Travel, Inc., declares a dividend and pays the

stockholders $2,100 cash.
Transaction Analysis
Financial Statements
Financial Statements
Analyze the Impact of Business Transactions on
Accounts

Accounting:
• Double-entry system
• Records dual effects of each transaction
– At least two accounts in each transaction
Analyze the Impact of Business Transactions on
Accounts

The T-Account
• Record of increases and decreases in a specific asset,
liability, equity, revenue, or expense
• Left side = “Debit”
• Right side = “Credit”
the Rules of Debit and Credit

The type of account determines how to record increases and

decreases.
 股利 费用 收入
资产 = 负债 + 所有者权
益
借方记增加 贷方记增加
贷方记减少 借方记减少

Elements ： 资产、负债、所有者权益、收
入、
• 售价 100 ， 成本 80 ，
• 现金（应收账款）增加 100 ； 所有权者权
益增加 100
• 资产 inventory 减少 80 ，所有者权益减少
80
The Accounting Equation after First Transaction

To illustrate, RedLotus Travel, Inc., received $50,000 and issued

(gave) share. What is the effect on the accounts?
 The Accounting Equation after First TwoTransaction

RedLotus’ second transaction is a $40,000 cash purchase of land.

What is the effect on the accounts?
Income and Expenses

Two categories of income statement accounts:

• Income  increase shareholders’ equity
 result from delivering goods/services
• Expenses  decrease shareholders equity
 cost of operating the business
Expansion of the Accounting Equation
the Rules of Debit and Credit
Record (Journalize and Post) Transactions
in the Books

Ledger accounts 分类账

Journal ， general journal 日记账
• Chronological record of transactions
• Three steps:
1. Specify each account affected by the transaction and
classify by type
2. Determine if each account is increased or decreased
(debit or credit)
3. Record in the journal
Record (Journalize and Post) Transactions
in the Books

Steps to journalize the first transaction of RedLotus Travel, Inc.

Step 1 Business receives $50,000 cash and issues stock
Step 2 Both Cash and Common Stock increase
Step 3 Journalize the transaction:
The Ledger
Journal Entry and Posting to the Accounts
Flow of Accounting Data
Dr. Cash 50 000
Cr. Share capital 50 000

借：现金 50 000
贷： 实收资本 50 000
Transaction 1 Analysis

(1) Received $50,000 cash and issued stock to the owners

Transaction 2 Analysis

(2) Paid $40,000 cash for land

Transaction 3 Analysis

(3) Purchased supplies for $3,700 on account

Transaction 4 Analysis

(4) Performed services and received cash of $7,000

Transaction 5 Analysis

(5) Performed services for UPS on account, $3,000

Transaction 6 Analysis

(6) Paid cash expenses: rent, $1,100; employee salary, $1,200;

utilities, $400
Transaction 7 Analysis

(7) Paid $1,900 on the payable created in transaction 3

Transaction 8 Analysis

(8) Stockholder of RedLotus remodeled her home with personal

funds

No Entry
Transaction 9 Analysis

(9) Received $1,000 on account

Transaction 10 Analysis

(10) Sold land for cash at the land’s cost of $20,000 and a gain of
$2,000 is recognized
Transaction 11 Analysis

(11) Declared and paid a dividend of $2,100 to shareholders

Alladin Travel, Inc.’s, Ledger Accounts after Posting
Construct and Use a Trial Balance

Trial Balance
• Lists all accounts with their balances
• Assets listed first, then liabilities and shareholders’ equity
• Shows that debits equal credits
• Usually prepared at the end of the period
• Facilitates preparation of the financial statements
Trial Balance
Analyzing Accounts

Suppose RedLotus’ began May with cash of $33,000. During May,

RedLotus’ received cash of $8,000 and ended the month with a
cash balance of $35,000.
You can compute total cash payments by analyzing RedLotus’
Cash account:
Analyzing Accounts

You can compute either sales on account or cash collections on

account by analyzing the Accounts Receivable account (using
assumed amounts):
Analyzing Accounts

You can determine how much you paid on account by analyzing

Accounts Payable (using assumed amounts):
Correcting Accounting Errors

First compute the difference between debits and credits in

the trial balance.
• Search for missing accounts
• Divide the out-of-balance amount by 2
• Divide the out-of-balance amount by 9
– Slide
– Transposition
Chart of Accounts—RedLotus Travel, Inc.
Normal Balances of the Accounts
Account in Four-Column Format
10K inventory ------ 20K cash
1. 20K 现金增加 收入增加
Dr. Cash 20K
Cr. Sales Revenue 20K
2. 10K 存货减少，费用增加 营业成本
Dr. Cost of goods sold 10K
Cr. Inventory 10K
购入存货是资产 inventory – asset
成本 cost = 直接材料 + 直接人工 + 制造费用 ---- 资产
出售之后，资产转到费用，营业成本、 COGS
• Dr. Accounts Payable xxx
Cr. Cash xxx

• 54 debit
Dr. Supplies xxx
Cr. A/P xxx
• Provide service on account
Make a sale on account
完成收入赚取，但是没收到钱
收入增加，应收账款增加
• Purchase xxx on account 赊购
资产增加，应付账款增加
• Make a payment on account/ pay cash on account
偿还应付账款，应付账款减少，现金减少
• Collect cash on account
收回应收账款，现金增加，应收账款减少
• 会计分期假设，强制打破经济业务周期
• 收入和费用的核算就不能以现金为基础

• 收入以收入实现原则确认收入
• 费用以配比原则为基础确认费用

• 权责发生制 Accrual-based accounting

• 收付实现制 Cash-based accounting
• Accrued liab. – payable 负债
• Accrued 期末会计调整