CHAPTER
3
The Mechanics of
Accounting
Learning Objective 1
Understand the
process of
transforming
transaction data
into useful
accounting
information.
What Are the Different Exchange
Transactions?
Borrow and
invest money.
Buy and sell
goods or
services.
Purchase land,
buildings, and
equipment.
Exchange
Transactions
Pay wages to
employees.
Pay taxes to the
government.
Distribute
earnings to
owners.
Business Documents

Examples: Sales invoice, purchase order,
check stub.

Business documents are used
to confirm that an arm’s-length transaction

has occurred.
to establish the amounts
to be recorded.
to facilitate the analysis
of business events.
These documents must be
analyzed.
What is the Sequence of the
Accounting Cycle?
Step
Step
Step
Step
1
2
3
4
Analyze transactions.
Record the effects of the transactions.
Summarize the effects of transactions.
1. Posting journal entries.
2. Preparing a trial balance.
Prepare reports.
1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
Learning Objective 2
Analyze transactions
and determine how
those transactions
affect the accounting
equation (step one
of the accounting
cycle).
Step 1: Analyze Transactions
Transaction analysis framework
 What accounts are
involved?
 Did each account
Transaction analysis:
increase or decrease?
 breaks down complex
 By how much?
transactions into
manageable pieces.
 provides a self-checking
mechanism.
What Is the Accounting
Equation?
Assets = Liabilities + Owners’ Equity
Resources
=
Creditors’
claims
against
resources
+
Owners’
claims
against
resources
Describe Effect of the Following
Transactions on a Company.
A
Borrow money
Invest in company
Pay off a note
Purchase
equipment
Borrow funds to
settle a debt
=
L
+
OE
What Is the Rule of Double-Entry
Accounting?
The debits must always equal the
credits.
Debits = Credits
Using Accounts
Accounts provide an efficient method to
categorize transactions.
 A T-account is a simplified depiction of
an account.

Name of Account
Debit
Credit
Using a T-Account
The cash account has a beginning balance
of $35. A check for $12 is written to pay for
supplies. Using a T-account, what is the
ending balance of the cash account?
Cash
35
23
12
Debits and Credits
Remember:
Debits are
simply
entries on
the left.
Credits are
simply
entries on
the right.
Debits and Credits
Assets = Liabilities + Owners’ Equity
DR
CR
DR
CR
DR
CR
(+)
(-)
(-)
(+)
(-)
(+)
Asset accounts:
Debit is an increase.
Credit is a decrease.
Liabilities and owners’
equity accounts:
Debit is a decrease.
Credit is an increase.
Expanding the Equation
Revenues
Increases in a company’s resources
from the sale of goods or the
performance of services.
Expenses
Decreases in a company’s resources
incurred in the normal course of
business to generate revenues.
Dividends
Distributions to owners, which reduce
Owners’ Equity.
Expanded Accounting Equation
Assets
=
DR
+
+
CR
–
DR
–
CR
+
Capital Stock
DR
–
Expenses
DR
+
Owners’ Equity
Liabilities
CR
–
DR
–
Retained Earnings
CR
+
DR
–
Dividends
DR
+
CR
+
CR
–
CR
+
Revenues
DR
–
CR
+
Learning Objective 3
Record the effects
of transactions
using journal
entries (step two
of the accounting
cycle).
Step 2: Record Transactions
Record the results of the transactions in
a journal.
 Journalizing provides a chronological
record of all business activities.

What is another name for the journal?
Journal -book of
original entry
Step 2: Record Transactions


Record the results of the transactions in a
journal.
Journalizing provides a chronological record
of all business activities.
General Journal Entry Format:
Date
Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . .
Explanation.
xx
Journal Entries
What is the three-step process?
1
Identify which accounts are involved.
2
For each account, determine if it is
increased or decreased.
3
For each account, determine by
how much it will change.
Example 1: Journal Entry
Supplies purchased for $25 are
purchased “on account.”
Prepare the correct journal entry. What
do we mean by purchased “on
account”?
Jan. 1
Supplies . . . . . . . . . . . . . . . . . . 25
Accounts Payable . . . . . . . .
25
Purchased supplies on account.
We purchase on credit and use accounts payable.
Example 2: Journal Entry
A check for $100 is received in
payment for services rendered.
Make the correct journal entry.
Feb. 1 Cash . . . . . . . . . . . . . . . . . . . . . 100
Revenue . . . . . . . . . . . . . . . .
Received cash for services.
100
Example 3: Journal Entry
Merchandise is sold to a customer on
account for $75. The cost of the product
was $60.
Make the journal entries.
Mar. 1
Accounts Receivable. . . . . . . . 75
Sales Revenue . . . . . . . . . . .
75
Sold merchandise on account.
Mar. 1
Cost of Goods Sold . . . . . . . . . 60
Inventory. . . . . . . . . . . . . . . .
60
To record cost and reduce inventory.
Journal 1
Date Transaction
Jan. 1 Supplies
Accounts Payable
Page 1
Ref. Debits Credits
25
25
Purchased supplies on account.
Feb. 1 Cash
101
100
Revenue
100
Received cash for services.
Mar. 1 Accounts Receivable
Sales Revenue
75
75
Sold merchandise on account.
Entered when posted to ledger.
Learning Objective 4
Summarize
the resulting
journal entries
through
posting and
prepare a trial
balance (step
three of the
accounting
cycle).
Step 3: Posting Journal Entries and
Preparing a Trial Balance
Posting
Define the Following Terms
transferring amounts from the journal to the ledger.
Ledger
a book of accounts where journal transactions are posted
and thereby summarized.
Posting reference
a cross-reference number between the general journal and
the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a company.
General Ledger
ACCOUNT: Cash
Date
Explanation
Account No. 101
Ref. Debits Credits
Jan. 1 Balance
Balance
100
2 Issued 100 shares of capital
stock at $10 per share
GJ1
3 Purchased equipment
GJ1
4 Sold inventory
GJ1
5 Monthly payment on loan
GJ1
6 Revenue
GJ1
1,000
1,100
300
60
860
230
2,500
800
630
3,130
Chart of Accounts
ASSETS (100-199):
Current Assets (100-150):
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets (151-199):
151 Land
152 Buildings
OWNERS’ EQUITY (300-399):
301 Capital Stock
330 Retained Earnings
SALES (400-499):
400 Sales Revenue
EXPENSES (500-599):
500 Cost of Goods Sold
501 Sales Salaries and
Commissions
LIABILITIES (200-299):
523 Rent Expense
Current Liabilities (200-219):
528 Advertising Expense
201 Notes Payable
573 Utilities Expense
202 Accounts Payable
579 Accounting and Legal
Long-Term Liabilities (220-239):
Fees
222 Mortgage Payable
Determining Account Balances
Name of Account
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
Debit
Credit
Accounts with Accounts with
typical debit
typical credit
balances are? balances are?
Expenses
Assets
Dividends
Owners’ Equity
Revenues or
Income
Liabilities
Do you see the mnemonic memory device, DEAD COIL?
Define The Trial Balance
What is the Trial Balance
used for?
From the data in the trial
balance, the balance sheet
and income statement can
be prepared.
A listing of all
account balances;
provides a means to
assure that debits
equal credits.
Sample Trial Balance
The Example Company
Trial Balance
December 31, 2003
Debits
Cash
$ 21
Accounts Receivable The trial
15
Inventory
12
balance
shows
Land
200
that debits
Accounts Payable
Capital Stock
equal credits.
Retained Earnings
Sales Revenue
Cost of Goods Sold
850
Advertising Expense
10
Miscellaneous Expenses
15
Total
$ 1,123
Credits
$
30
150
24
919
______
$ 1,123
Learning Objective 5
Describe how
technology has
affected the first
three steps of the
accounting cycle.
Advantages of Computers
Large amounts of
information can be quickly
processed without
mathematical errors.
More documents can be
produced than humanly
possible in the same
amount of time.
Common tasks can be
automated for increased
efficiency.
Disadvantages of Computers
– Computer hardware and
software require human
judgment and input.
– GIGO (garbage in, garbage
out).
– Once an error is identified,
fixing the problem may
require many adjustments.
End Chapter 3