McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
Reporting Investing and Financing
Results on the Balance Sheet
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Building a Balance Sheet
Assets
resources presently owned by a
business that generate future
economic benefit.
=
Liabilities
amounts presently owed by a
business to creditors.
+
Stockholders’
Equity
2-3
the amount invested and
reinvested in a company by its
shareholders.
Transactions and Other Activities
2-4
External
Exchanges
Exchanges involving assets,
liabilities, and stockholders’
equity that you can see
between the company and
someone else.
Internal
Events
Events occurring within the
company, for example, using
some assets to create an
inventory product.
Study the Accounting Methods
A systematic accounting process is used to
capture and report the financial effects of a
company’s transactions.
1 Analyze
2 Record
3 Summarize
A transaction is a business activity that affects the
basic accounting equation.
2-5
Duality of Effects
A = L+ SE
Every transaction has at least
two effects on the basic
accounting equation.
Assets must equal liabilities
plus stockholders’ equity for
every accounting transaction.
Step 1: Analyze Transactions
(a) Issue Stock to Owners.
Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues
stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,
which is deposited in the company’s bank account.
1. Pizza Aroma receives $50,000 Cash.
2. Pizza Aroma gives $50,000 Stock (Contributed Capital).
Assets
(a) Cash +$50,000
2-6
=
Liabilities
+ Stockholders' Equity
Contributed
Capital + $50,000
Step 1: Analyze Transactions
(b) Investment in Equipment.
Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.
1. Pizza Aroma receives $42,000 of Equipment.
2. Pizza Aroma gives $42,000 Cash.
Assets
=
(b) Equipment +$42,000
Cash -$42,000
2-7
Liabilities
+ Stockholders' Equity
Step 1: Analyze Transactions
(c) Obtain Loan from Bank.
Pizza Aroma borrows $20,000 from a bank depositing those funds in its bank
account and signing a formal agreement to repay the loan in two years.
1. Pizza Aroma receives $20,000 Cash.
2. Pizza Aroma gives a note, payable to the bank for $20,000.
Assets
(c) Cash +$20,000
2-8
=
Liabilities
+ Stockholders' Equity
= Note Payable +$20,000
Step 1: Analyze Transactions
(d) Investment in Equipment.
Pizza Aroma purchases $18,000 in pizza ovens and other restaurant
equipment, paying $16,000 in cash and giving an informal promise to pay
$2,000 at the end of the month.
1. Pizza Aroma receives $18,000 in equipment (pizza ovens).
2. Pizza Aroma gives a Cash of $16,000 and Accounts
Payable of $2,000.
Assets
=
Liabilities
+ Stockholders' Equity
(d) Cash -$16,000
= Accounts Payable +$2,000
Equipment +$18,000
2-9
Step 2 and 3: Record and Summarize
Most companies use computerized accounting systems, which
can handle a large number of transactions. These systems
follow a cycle, called the accounting cycle, which is repeated
day-after-day, month-after-month, and year-after-year.
2-10
The Debit/Credit Framework
ASSETS
+
ASSETS
Increase
Using
Debit
=
̶
Decrease
Using
Credit
Asset accounts
increase on the left or
debit side and
decrease on the right
or credit side.
2-11
LIABILITIES
+
STOCKHOLDERS’ EQUITY
̶
LIABILITIES
+
Decrease
Increase
Using
Using
Debit
Credit
Liability accounts
increase on the right
or credit side and
decrease on the left or
debit side.
̶ STOCKHOLDERS' EQUITY +
Decrease
Increase
Using
Using
Debit
Credit
Stockholders’ equity
accounts increase on the
right or credit side and
decrease on the left or
debit side.
Steps 2 & 3: Record and Summarize
1 Analyze
2
Record
General Journal
Date
2010
8/1
3
Account Title and Explanation
Page G1
Ref.
Cash
Contributed Capital
(Financing from stockholders)
50,000
50,000
General Ledger
Account: Cash
2-12
Credit
Summarize
General Ledger
Date
2010
8/1
101
301
Debit
Explanation
Acct. 101
Ref.
G1
Debit
50,000
Credit
Balance
50,000
Account: Contributed Capital
Date
2010
8/1
Explanation
Ref.
G1
Acct. 301
Debit
Credit
50,000
Balance
50,000
Pizza Aroma’s Accounting Records
(a) Issue Stock to Owners.
Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues
stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,
which is deposited in the company’s bank account.
1 Analyze
Assets
(a) Cash +$50,000
2
2-13
Liabilities
+ Stockholders' Equity
Contributed
Capital + $50,000
Record
(a)
3
=
dr Cash (+A)
cr Contributed Capital (+SE)
Summarize
50,000
50,000
Pizza Aroma’s Accounting Records
(b) Investment in Equipment.
Pizza Aroma pays $42,000 cash to buy restaurant booths and other equipment.
1 Analyze
Assets
=
(b) Cash -$42,000
Equipment + $42.000
2
2-14
+ Stockholders' Equity
Record
(b) dr Cash
Equipment
(+A) (+A)
cr Cash (-A)
3
Liabilities
Summarize
42,000
42,000
Classified Balance Sheet
Pizza Aroma, Inc.
Balance
At August 31, 2010
Current Assets:
Cash
Cookware
Total Current Assets
Property, Plant, and Equipment:
Equipment
Total Assets:
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable
Long-Term Liabilities:
Note Payable
Total Liabilities:
Stockholders' Equity
Contributed Capital
Total Liabilities and Stockholders' Equity
2-15
$ 10,000
630
10,630
60,000
$ 70,630
$
630
20,000
20,630
50,000
$ 70,630
Current assets will be used up
or converted into cash within
the next 12 months.
Long-term assets include
resources that will be used or
turned into cash more than 12
months after the balance sheet
date.
End of Chapter 2