CHAPTER
1
Setting
the Stage
With the number of transactions that occur on a daily
basis, the accounting for McDonald’s would be
impossible if not for a systematic method for analyzing
these transactions and collecting and recording
transaction related information.
How are millions of transactions summarized and
eventually reported as useful information in the
primary financial statements?
This transformation process is called the accounting
cycle.
CHAPTER
3
The Accounting Cycle:
The Mechanics of Accounting
LO1
LO3
LO2
How Can We
Collect All This
Information?
How Do
Transactions
Affect the
Accounting
Equation?
LO4
Posting Journal
Entries and
Preparing a
Trial Balance
How Do We
Record the
Effects of
Transactions?
LO5
Where Do
Computers
Fit in All
This?
How Can We Collect All This Information?
The Accounting Cycle
LO1
 The
procedure for analyzing, recording, summarizing, and
reporting the transactions of a business.
Analyze transactions.
Record the effects of
transactions.
1
Step
Exhibit 3.1 Sequence of the
Accounting Cycle
Step
2
Exchange Transactions
(Business enter into exchange transactions
signaling the beginning of the accounting cycle)
Summarize the effects of
transactions.
1 Posting journal entries.
2 Preparing a trial balance.
3
Step
Prepare reports.
1 Adjusting entries.
2 Preparing financial statements.
3 Closing the books.
Step
4
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4
How Do Transactions Affect the Accounting Equation?
LO2
Which Events Are to Be Reflected in The
Accounting Records?
Determining the Amount of a Transaction
► Events
that cannot be reliably measured in monetary
terms will not be reflected in the financial statements.
► Information
relating to the competitive environment,
product development, and marketing and sales efforts is
included in a company’s annual report to stockholders,
but not as part of the accounting information.
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5
LO2
Which Events Are to Be Reflected in The
Accounting Records?
Competitive attempts to gain
market share, like
developing a Big Mac clones,
could have a serious impact
on a company’s profitability,
but are not reported in the
financial statements.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
LO2
Which Events Are to Be Reflected in The
Accounting Records?
Determining If an Arm’s-length Transaction Has
Occurred
► Accounting
is concerned primarily with reflecting the
effects of transactions between two independent entities.
China Airlines signing a contract with Boeing to
purchase airplanes in the future.
► e.g.,
• It would not be reflected in the financial statements until
the airplanes are manufactured and delivers and China
Airline has agreed to pay for them.
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7
The Accounting Equation 會計恆等式
LO2
 The
accounting equation:
Assets 資產

Resources owned
or controlled by
the firm
 The
=
Liabilities 負債
Creditors’ claim against
the firm’s resources
 Requires repayment

Equity 權益
+
Owners’ claim against the
firm’s resources
 Requires no repayment but
represents ownership interest
in the firm

equation must always remain in balance.
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8
The Accounting Equation 會計恆等式
LO2
Business Activity (Transaction) #1:
Investment of €50,000 by owners.
Assets
Liabilities
=
Equity
+
Cash
Capital Stock
TRANSACTION #
ASSETS
=
Beginning Balance
€
=
1.
+50,000
Subtotal
€50,000
0
LIABILITIES + EQUITY
€
0
+
€
0
+50,000
=
€
0
+
€50,000
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9
The Accounting Equation 會計恆等式
LO2
Business Activity (Transaction) #2:
Borrowed €25,000 from bank. A note is signed to the bank.
Assets
Liabilities
=
Equity
+
Notes Payable
Cash
TRANSACTION #
ASSETS
=
Beginning Balance
€
=
1.
+50,000
Subtotal
€50,000
2.
+25,000
Subtotal
€75,000
0
LIABILITIES + EQUITY
€
0
+
€
0
+50,000
=
€
0
+
€50,000
+
€50,000
+25,000
=
€25,000
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10
The Accounting Equation 會計恆等式
LO2
Business Activity (Transaction) #3:
Purchased €14,000 worth of supplies on credit (will pay
later).
Assets
=
Supplies
Liabilities
+
Equity
Accounts Payable
TRANSACTION #
ASSETS
=
Subtotal
€75,000
=
3.
+14,000
Subtotal
€89,000
LIABILITIES + EQUITY
€25,000
+
€50,000
+
€50,000
+14,000
=
€39,000
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11
The Accounting Equation 會計恆等式
LO2
Business Activity (Transaction) #4:
Purchased equipment costing €15,000 for cash.
=
Assets
Equipment
Liabilities
Equity
+
Cash
TRANSACTION #
ASSETS
=
Subtotal
€75,000
=
3.
+14,000
Subtotal
€89,000
4.
+15,000
LIABILITIES + EQUITY
€25,000
+
€50,000
+14,000
=
€39,000
+
€50,000
=
€39,000
+
€50,000
–15,000
Total
€89,000
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12
Using Accounts to Categorize Transactions
LO2
Account
►
An accounting record in which the results of transactions are
accumulated.
►
Shows increases, decreases, and a balance.
►
You can think of an individual account as a summary of every
transaction affecting a certain item.
►
Asset account: Cash, Suppliers, Office Equipment
►
Liability account: Accounts Payable, Notes Payable
►
Equity account: Capital Stock, Retained Earnings
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13
LO2
Using Accounts to Categorize Transactions
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14
LO2
Using Accounts to Categorize Transactions
€89,000
€39,000
€50,000
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15
LO2
Using Accounts to Categorize Transactions
T-Account T字帳
► An
abbreviated representation of an actual account.
► Used
as a teaching and learning tool.
► Debit
► Credit
借方: the left side of a T-account.
貸方: the right side of a T-account.
► Debit
means left, credit means right—nothing more,
nothing less.
Cash
Debit (Dr)
Credit (Cr)
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16
Using Accounts to Categorize Transactions
LO2
T-Account T字帳
► By
convention, for asset accounts, debits refer to
increases and credits to decreases. Asset accounts
will usually have debit balances.
► Liability
and equity accounts are decreased by debits
and increased by credits. As a result, they will typically
have credit balances.
Assets
DR
(+)
=
CR
(–)
Liabilities
DR
(–)
+
CR
(+)
Equity
DR
(–)
CR
(+)
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17
LO2
Using Accounts to Categorize Transactions
Three basic facts regarding double-entry accounting:
► Debits
are always entered on the left side of an
account and credits on the right side.
► For
every transaction, there must be at least one
debit and one credit.
► Debits
must always equal credits for each
transaction.
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18
Using Accounts to Categorize Transactions
LO2
 To
make sure you understand the relationship between
debits and credits, the various accounts, and the
accounting equation, we need to examine further the
transactions.
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19
Using Accounts to Categorize Transactions
LO2
Self-Checking of Accounting Information
►
If debits do not equal credits, an error has been made in
analyzing and recording the entity’s activities.
Business Activity (Transaction)
Effect in Terms of the Accounting Equation
Assets
=
Liabilities
+
Equity
Capital
Stock
CR (+)
Cash
DR
(+)
1. Investment by owners
2. Borrowed money
from bank
Cash
DR (+)
Notes
Payable
CR (+)
3. Purchased
supplies on credit
Supplies
DR (+)
Accounts
Payable
CR (+)
4. Purchased equipment
for cash
Office
Equipment
DR (+)
Cash
CR (–)
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20
LO2
Using Accounts to Categorize Transactions
Debit-Credit Rule 借貸法則
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21
LO2
Expanding Accounting Equation for Revenue,
Expense, Dividends
Temporary Accounts that Affect Equity
Expenses
decrease
Equity
increase
Revenues
Dividends
Increased by debits
 Temporary
Increased by credits
accounts.
 They
are closed into the Retained Earnings account at the end
of the accounting cycle.
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22
Expanding Accounting Equation for Revenue,
Expense, Dividends
LO2
•
Revenues provide resource inflows
•
•
Expenses represent resource outflows
•
•
They are increases in resources from the sale of
goods or services.
They are costs incurred in generating revenues.
Note that revenues are not synonymous with
cash or other assets
•
They are a way of describing where the assets came
from
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23
LO2
Expanding Accounting Equation for Revenue,
Expense, Dividends
Exhibit 3.2
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24
How Do We Record the Effects of Transactions?
LO3
Journals and Journal Entries
Journal 日記簿
► Journal
is an accounting record in which transactions
are first entered.
► Provide
a chronological record of all transactions of a
business. [Journalizing]
► Journal
entry:
• A recording of a transactions where debits equals credits;
usually includes a date and an explanation of the
transaction.
• General journal 普通日記簿
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25
Journals and Journal Entries
LO3
Journal Entry 分錄
General Journal Entry Format
1
Date
2
Debit Entry …………………...………… XX
3
Credit Entry ………………….………..
4
Explanation.
XX
Dollar signs
usually are
omitted
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26
LO3
Journals and Journal Entries
General Journal
Exhibit 3.3
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27
LO3
Journal Entry Example
 Suppose
you decide to start your own landscaping
business. This business will involve mowing lawns, pulling
weeds, trimming shrubs, and so forth.
 These
transactions fit into the following four general
categories:
► Acquiring
cash
► Acquiring
assets other than cash
► Providing
services
► Collecting
cash and paying obligations
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28
LO3
Journal Entry Example
Acquiring Cash
Example 1: Acquiring Cash from Owners
Your parents offer to match any funds that you are going to
put into your business. You have €1,000 in savings, and
coupled with your parents’ matching funds, you decide to
issue 200 shares of stock at €10 per share on July 1, 2022.
Transaction
effect
Journal
entry
The asset-cash account increases by €2,000 and the
equity-capital stock account increases by €2,000.
July 1
Cash
Capital Stock
2,000
2,000
Issue 200 shares of capital stock at €10 per share.
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29
LO3
Journal Entry Example
Example 1: Acquiring Cash from Owners
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30
LO3
Journal Entry Example
Example 2: Acquiring Cash by Borrowings
Suppose that on top of the money from yourself and your
parents, you went to a bank on July 1, 2022 and convinced
the loan officer to lend you some additional money € 2,000
at 12% interest.
Transaction
effect
Journal
entry
The asset-cash account increases by €2,000 and the
liability-notes payable account increases by €2,000.
July 1
Cash
Notes Payable
2,000
2,000
Borrowed € 2,000 from First National Bank, signing
a 12-month note at 12% interest.
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31
LO3
Journal Entry Example
Example 2: Acquiring Cash by Borrowings
► A “note”
is a contract specifying an amount that one
party will repay to another, usually with interest along
the way. This particular account could also be called
“Loan Payable.”
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32
LO3
Journal Entry Example
Acquiring Assets Other than Cash
assets include supplies (like fertilizer), inventory
(perhaps shrubs that you will plant), and equipment
(like a lawnmower and a truck for hauling).
► Such
► These
assets may be purchased with cash or on credit.
Credit purchases require payment after a period of
time.
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33
LO3
Journal Entry Example
Example 3: Acquiring Noncash Assets
The first thing you need is a lawnmower and some form of
transportation. On July 5, 2022. You find an old 2010 pickup
truck for sale for €800, and you buy it paying cash.
Transaction
effect
Journal
entry
The asset-transportation equipment account increases
by €800 and the asset-cash account decreases by €800.
July 5
Transportation Equipment
Cash
800
800
Purchased a used truck.
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34
LO3
Journal Entry Example
Example 3: Acquiring Noncash Assets
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35
LO3
Journal Entry Example
Example 4: Acquiring Noncash Assets
Next, you drive to the local lawn-and-garden store and
purchase a lawnmower and gas can for €250 on July 5,
2022. Instead of paying for the mower with cash, you open a
charge account, which will allow you to pay for the mower in
30 days with no interest charge.
Transaction
effect
Journal
entry
The asset-machinery equipment account increases by €250
and the liability-accounts payable account increases by €250.
July 5
Machinery Equipment
250
Accounts Payable
250
Purchased a lawnmower and gas can on account.
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36
LO3
Journal Entry Example
Example 4: Acquiring Noncash Assets
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37
LO3
Journal Entry Example
Example 5: Acquiring Noncash Assets
Back you go to the lawn-and-garden store on July 5, 2022 to
purchase fertilizer, gloves, a rake, a shovel, and other
assorted supplies. The total cost is €180, which you pay in
cash.
Transaction
effect
Journal
entry
The asset-supplies account increases by €180 and the
asset-cash account decreases by €180.
July 5
Supplies
Cash
180
180
Purchased supplies for cash.
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38
LO3
Journal Entry Example
Example 5: Acquiring Noncash Assets
► An
increase in one asset (supplies) results in a
decrease in another asset (cash).
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39
LO3
Journal Entry Example
Example 6: Acquiring Noncash Assets
On your way home from the store, you drive past a
greenhouse and notice a big sign advertising a “50% off”
sale on shrubs. Since you anticipate that planting shrubs will
be part of your business on July 7, 2022, you stop and
purchase for cash €150 worth of shrubs as inventory.
Transaction
effect
Journal
entry
The asset-inventory account increases by €150 and the
asset-cash account decreases by €150 .
July 7
Inventory
Cash
150
150
Purchased inventory for cash.
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40
LO3
Journal Entry Example
Example 6: Acquiring Noncash Assets
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41
LO3
Journal Entry Example
Providing Services
► Sometimes
services and merchandise are sold for
cash; at other times they are sold on credit, and a
receivable is established for collection at a later date.
► Revenues
indicate the source not only of cash but of
other assets as well, all of which are received in
exchange for the merchandise or services provided.
expenses may be “charged” with a cash
payment to be made at a later date.
► Similarly,
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42
LO3
Journal Entry Example
Example 7: Providing Services
On July 9, 2022, you perform a lawn care service for €350. A
portion of your revenues is received immediately in cash
(€270), while the balance becomes receivables.
Transaction
effect
The asset-cash account increases by €270, the assetaccounts receivable account increases by €80
and the revenue account increases by €350; in turn,
equity increases by €350.
July 9
Journal
entry
Cash
Accounts Receivable
270
80
Lawn Care Revenue
350
To record revenue for lawn care services.
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43
Journal Entry Example
LO3
Example 7: Providing Services
►
Compound journal entry 複合分錄: The type of entry
which more than two accounts can be involved in
recording a transaction of entry.
► “Revenue”
Revenue
Capital Stock
is not an asset.
The label given to the source of assets
Assets
Liability
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44
LO3
Journal Entry Example
Example 7: Providing Services
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45
LO3
Journal Entry Example
Selling Goods
► Sales,
whether made on account or for cash, require
entries that reflect not only the sale, but also the cost of
the inventory sold.
“cost of goods sold” is an expense and, as such,
is subtracted from the sales revenue to determine the
profitability of sales transactions.
► The
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46
LO3
Journal Entry Example
Example 8: Selling Goods
On July 14, 2022, you charged your customer €90 for onehalf of the shrubs you purchased earlier.
Transaction
effect
The asset-cash account increases by € 90 and revenue
account increases by €90. At the same time, the cost of good
sold account increases by €75; in turn, equity decreases by
€75; and the asset-inventory account decreases by €75.
July 14
Cash
90
Sales Revenue
Journal
entry
Cost of Goods Sold
90
75
Inventory
75
To record the cost of inventory sold and to reduce
inventory for its cost.
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47
LO3
Journal Entry Example
Example 8: Selling Goods
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48
LO3
Journal Entry Example
Example 9: Providing Services
In addition to making a profit on the sale of shrubs on July
14, 2022, you also generated revenue of planting them. The
journal entry to record this revenue is:
Transaction
effect
Journal
entry
The asset-cash account increases by €45 and the
revenue account increases by €45; in turn, equity
increases by €45.
July 14
Cash
45
Landscaping Revenue
45
To record revenue for landscaping services.
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49
LO3
Journal Entry Example
Example 9: Providing Services
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50
LO3
Journal Entry Example
Example 10: Incurring Expenses Other Than Cost of Goods Sold
Expenses include gas (€50) for the lawnmower and the truck
on July 18, 2022 and the wages (€60) you agreed to pay
your little brother for working for you on July 23, 2022.
Transaction
effect
The gasoline expenses (wages expenses) account increases
by €50 (€60); in turn, equity decreases by €50 (€60); and the
asset-cash account decreases by €50 (€60).
July 18
Gasoline Expenses
50
Cash
Journal
entry
50
Paid cash for gas for the truck and the mower.
July 23
Wages Expenses
Cash
60
60
Paid wages expense.
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Journal Entry Example
LO3
Example 10: Incurring Expenses Other Than Cost of Goods Sold
►
The label “expenses” is used to explain how assets have been used.
►
“Expenses” is the label we give to the amount of assets consumed
in doing business.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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LO3
Journal Entry Example
Collecting Cash and Paying Obligations
Example 11: Collecting Accounts Receivable
The receivables €80 are collected on July 30, 2022.
Transaction
effect
Journal
entry
The asset-cash account increases by €80 and the
asset-accounts receivable account decreases by €80.
July 30
Cash
Accounts Receivable
80
80
Collected €80 of receivables.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
53
Journal Entry Example
LO3
Example 11: Collecting Accounts Receivable
►
The collection of receivables merely involves exchanging one asset
for another. No revenue is involved here.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
54
LO3
Journal Entry Example
Example 12: Paying Obligations
On July 31, 2022, you pay for the obligation with cash of
purchasing lawnmower and gas on account €250.
Transaction
effect
Journal
entry
The asset-cash account decreases by €250 and the
liability-accounts payable account decreases by €250.
July 31
Accounts Payable
250
Cash
250
Paid €250 for the lawnmower and gas can
previously purchased.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
55
LO3
Journal Entry Example
Example 12: Paying Obligations
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
56
LO3
Journal Entry Example
Example 13: Paying Obligations and Interest
In example 2, you borrowed €2,000 to be paid over 12 months.
Suppose you are required to make monthly loan payments of
€178 with a portion of each payment being attributed to interest
and a portion to reducing the liability on July 31, 2022.
Transaction
effect
The asset-cash account decreases by €178, the liability-notes
payable account decreases by €158 and the interest expense
account increases by €20 which in turn decreases equity by
€20.
July 31
Journal
entry
Notes Payable
Interest Expense
158
20
Cash
178
Paid first monthly payment on note with interest
(€2,000 × 0.12 × 1/12).
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
57
LO3
Journal Entry Example
Example 13: Paying Obligations and Interest
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
58
LO3
Journal Entry Example
Example 14: Payment of Dividends
Corporations that are profitable generally pay dividends to
their stockholders. The following entry illustrates the
payment of a cash dividend (€50) on July 31, 2022:
Transaction
effect
Journal
entry
The asset-cash account decreases by €50 and the
dividends account increases by €50 which in turn
decreases equity by €50.
July 31
Dividends
Cash
50
50
Paid a €50 cash dividends.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
59
LO3
Journal Entry Example
Example 14: Payment of Dividends
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
60
LO3
Summary of Transactions
Exhibit 3.4
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
61
LO3
A Note on Journal Entries
A Journal Entry Involves a Three-step Process:
► Identify
which accounts are involved.
► For
each account, determine if it is increased or
decreased: are to debited or credited.
► For
each account, determine by how much it has
changed.
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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