7/e
Processing
Accounting
Information
3
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
LO1
Source Documents
Purchase
Invoice
Cash
Register
Tape
Payroll
Records
Evidence needed
in an accounting
system to record
transactions
Shipping
Document
Sales
Invoice
Checks
Receiving
Document
LO2
Issue Capital Stock for Cash
1/2010 Transactions for Glengarry Health Club
The accounting equation must always remain in balance
LO3
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
Income Statement
Revenue
– Expenses
= Net Income
or (Net Loss)
Statement of
Retained Earnings
Beg. R/E
+ Net Income
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
entered on left
Credits are
entered on right
Representation of one account in the general ledger
LO5
The T Account
Account Name
400 dr.
Debits and credits
are netted to obtain
balance in account
900 cr.
500 cr.
Debits/Credits and
the Accounting Equation
STOCKHOLDERS’
= LIABILITIES +
EQUITY
ASSETS
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
RETAINED
EARNINGS
Dr.
–
+
Cr.
REVENUES
Dr.
–
Cr.
+
Both accounts
are increased
with credits
Revenues increase
retained earnings
(part of owners’ equity)
Link Between Expenses and
Dividends and Retained Earnings
RETAINED
EARNINGS
Retained earnings is
decreased with debits
DR.
–
Expenses and dividends
decrease retained earnings
Use debits to record(increase)
expenses and dividends
CR.
+
EXPENSES AND
DIVIDENDS
DR.
CR.
+
–
Normal Account Balances
Debit
Assets
Expenses
Dividends
all increased
with debits
Credit
Liabilities
Stockholders’ Equity
Revenues
all increased
with credits
Determine the Balance
of the T Accounts
Cash
(1) 100,000
(5) 5,000
(8) 4,000
94,000
10,000 (6)
3,000 (7)
2,000 (9)
Accounts Receivable
(4) 15,000 4,000 (8)
11,000
The Journal: Chronological
Record of Transactions
 Book of Original Entry
 Transactions recorded in the journal
first and then posted to the ledger
LO6
Posting from Journal
Transactions are
entered in:
And then posted to:
Journal
(via journal entries):
Cash
Capital Stock
Dr.
100,000
Cr.
100,000
To record the issuance of 10,000 shares
Ledger Accounts
• Cash
• Capital Stock
Glengarry Health Club
Trial Balance
January 31, 2010
Cash
Accounts Receivable
Equipment
Building
Land
Accounts Payable
Notes Payable
Capital Stock
Membership Revenue
Court Fee Revenue
Wage Expense
Utility Expense
Dividends
Totals
Debits
Credits
$ 94,000
11,000
20,000
150,000
50,000
$ 20,000
200,000
100,000
15,000
5,000
10,000
3,000
2,000
$340,000
$340,000
LO7
End of Chapter 3