ACG2021
Financial Accounting
Processing Accounting
Information
1
The Accounting Information
System
1)
Inputs
Process
1.
2.
3.
4.
Outputs
2)
3)
Income
Statement
Balance Sheet
Cash Flow
Accounts
Journal
General
Ledger
Trial
Balance
2
Learning Objective 1
Analyze business transactions.
3
Accounting for Business
Transactions
Transaction - any event that both
affects the financial position of the
business entity and can be reliably
recorded
 Reliably
Recorded (2 accounting
principles, what are they?)
4
Transactions are Recorded in
The Account
 Basic summary device
Paper based
 Computer based
 ???? based
 Accounts - grouped into three broad categories
 Assets
 Liabilities
 Stockholders’ Equity
 Used to Accumulate $’s of every business transaction




How much cash did we receive/spend?
How much revenue did we earn?
How much was spent on rent for the year?
5
Chart of Accounts
 The chart of accounts lists all accounts
and their account numbers.
 Accounts can be grouped under the
financial statement headings:
 Balance
Sheet: Assets, Liabilities, and
Stockholders’ Equity
 Income Statement: Revenues and
Expenses
6
Example Chart of Accounts
7
Recording Transactions
(Processing)
 Journalizing process:
 Specify each account affected by the
transaction
 Classify each account as either asset, liability,
stockholders’ equity, revenue, or expense
 Determine whether each account is increased
or decreased (use rules of debit and credit)
 Record the transaction in a journal with a brief
explanation.
8
The Account
Assets - economic resources that
benefit the business now and in the
future
•Cash
•Accounts
•Land
receivable
•Inventory
•Notes
receivable
•Prepaid expenses
•Buildings
•Equipment,
furniture,
and fixtures
9
The Account
Liabilities - debts of the company
Notes payable
o Accounts payable
o Accrued liabilities
o Long-term liabilities (bonds)
o
10
The Account
Stockholders’ (owners’ or
shareholders’) equity - owners’
claims against the assets of a
corporation
Common Stock
o Retained Earnings
o Revenues
o Expenses
o
11
Accounting for Business
Transactions
1. The Lyons invest $50,000 to
begin the business, and Air & Sea
Travel issues common stock.
Analysis of Transactions
Assets=
Trans Cash
(1) 50,000
Accounts
Office
Receivable Supplies
Liabilities
Land
Stockholder's
Equity
Accounts Common Retained
payable
Stock Earnings
50,000
12
Accounting for Business
Transactions
2. Air & Sea purchases land for an
office location, paying $40,000 in
cash
Trans
(1)
(2)
Bal
Cash
50,000
(40,000)
10,000
Accounts
Office
Receivable Supplies
Land
40,000
40,000
Accounts Common Retained
payable
Stock Earnings
50,000
50,000
13
Accounting for Business
Transactions
3. The business buys office supplies,
agreeing to pay $500 to the officesupply store within 30 days.
Assets=
Trans
(1)
(2)
Bal
(3)
Bal
Cash
50,000
(40,000)
10,000
10,000
Liabilities
Accounts
Office
Receivable Supplies
Land
Accounts Common Retained
payable
Stock Earnings
50,000
40,000
40,000
500
500
40,000
Stockholder's
Equity
50,000
500
500
50,000
14
Accounting for Business
Transactions
4. Air & Sea Travel earns service
revenue of $5,500 and collects this
amount in cash.
Assets=
Trans
Bal
(3)
Bal
(4)
Bal
Cash
10,000
10,000
5,500
15,500
Liabilities
Accounts
Office
Receivable Supplies
500
500
500
Stockholder's
Equity
Accounts Common Retained
Land
payable
Stock Earnings
40,000
50,000
500
40,000
500
50,000
40,000
500
50,000
5,500
5,500
15
Accounting for Business
Transactions
5. Air & Sea Travel performs services
for customers on account for $3,000.
Trans
Bal
(3)
Bal
(4)
Bal
(5)
Bal
Cash
10,000
Accounts
Office
Receivable Supplies
500
500
10,000
5,500
15,500
15,500
500
3,000
3,000
500
Accounts Common Retained
Land
payable
Stock Earnings
40,000
50,000
500
40,000
500
50,000
5,500
40,000
500
50,000
5,500
40,000
500
50,000
3,000
8,500
16
Accounting for Business
Transactions
6. Air & Sea Travel pays $2,700 for cash
expenses: office rent $1,100, employee
salary $1,200, and utilities $400.
Trans
Bal
(4)
Bal
(5)
Bal
Accounts
Office
Cash Receivable Supplies
10,000
500
5,500
15,500
500
3,000
15,500
3,000
500
(6)
Bal
(2,700)
12,800
3,000
500
Accounts Common Retained
Land
payable
Stock Earnings
40,000
500
50,000
5,500
40,000
500
50,000
5,500
3,000
40,000
500
50,000
8,500
40,000
500
50,000
(2,700)
5,800
17
Accounting for Business
Transactions
7. Air & Sea Travel pays $400 to the
store from which it purchased office
supplies in Transaction 3.
Trans
Bal
(5)
Bal
(6)
Bal
(7)
Bal
Accounts
Office
Cash Receivable Supplies
15,500
500
3,000
15,500
3,000
500
(2,700)
12,800
3,000
500
(400)
12,400
3,000
500
Accounts Common Retained
Land
payable
Stock Earnings
40,000
500
50,000
5,500
3,000
40,000
500
50,000
8,500
(2,700)
40,000
500
50,000
5,800
40,000
(400)
100
50,000
5,800
18
Accounting for Business
Transactions
8. The owners remodel their home at
a cost of $30,000, paying cash
from personal funds.
Assets=
Trans
Bal
(6)
Bal
(7)
Bal
Accounts
Office
Cash Receivable Supplies
15,500
3,000
500
(2,700)
12,800
3,000
500
(400)
12,400
3,000
500
Liabilities
Stockholder's
Equity
Accounts Common Retained
Land
payable
Stock Earnings
40,000
500
50,000
8,500
(2,700)
40,000
500
50,000
5,800
(400)
40,000
100
50,000
5,800
This is a personal
transaction, not a
business transaction!
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Accounting for Business
Transactions
9. The business collects $1,000 from
a customer on account.
Assets=
Trans
Bal
(6)
Bal
(7)
Bal
(9)
Bal
Accounts
Office
Cash Receivable Supplies
15,500
3,000
500
(2,700)
12,800
3,000
500
(400)
12,400
3,000
500
1,000
(1,000)
13,400
2,000
500
Liabilities
Stockholder's
Equity
Accounts Common Retained
Land
payable
Stock Earnings
40,000
500
50,000
8,500
(2,700)
40,000
500
50,000
5,800
(400)
40,000
100
50,000
5,800
40,000
100
50,000
5,800
20
Accounting for Business
Transactions
10. Air & Sea Travel sells land for a
price of $22,000, which is equal to
the amount it paid for the land.
Assets=
Trans
Bal
(10)
Bal
Liabilities
Accounts
Office
Cash Receivable Supplies
13,400
2,000
500
22,000
35,400
2,000
500
Stockholder's
Equity
Accounts Common Retained
Land
payable
Stock Earnings
40,000
100
50,000
5,800
(22,000)
18,000
100
50,000
5,800
21
Accounting for Business
Transactions
11. The corporation declares a
dividend and pays $2,100 cash to the
stockholders.
Assets=
Trans
Bal
(10)
Bal
(11)
Bal
Liabilities
Accounts
Office
Cash Receivable Supplies
13,400
2,000
500
22,000
35,400
2,000
500
(2,100)
33,300
2,000
500
Stockholder's
Equity
Accounts Common Retained
Land
payable
Stock Earnings
40,000
100
50,000
5,800
(22,000)
18,000
100
50,000
5,800
18,000
100
50,000
(2,100)
3,700
22
Income Statement
Air and Sea Travel, Inc.
Income Statement
Month Ended April 30, 20X3
Revenue
Service Revenue.....................
$8,500
Expenses
Salary expense ....................... $1,200
Rent expense .......................... 1,100
Utilities expense..................... 400
Total expenses........................
Net Income...................................
2,700
$5,800
23
Statement of Retained Earnings
Air and Sea Travel, Inc.
Statement of Retained Earnings
Month Ended April 30, 20X3
Retained Earnings, April 1, 20X3 ....................
Add: Net Income for the month ......................
Less: Dividends..............................................
Retained Earnings, April 30, 20X3 ..................
$
0
5,800
5,800
(2,100)
$3,700
24
Balance Sheet
Air and Sea Travel, Inc.
Balance Sheet
April 30, 20X3
Assets
Cash................................... $33,300
Accounts receivable .......... 2,000
Office supplies ..................
500
Land .................................. 18,000
______
Total Assets....................... $53,800
Liabilities
Accounts payable....................$ 100
Stockholders’ Equity
Common stock ...................... 50,000
Retained earnings.................. 3,700
Total stockholders’ equity .. 53,700
Total liabilities and
______
Stockholders’ equity ......... $53,800
25
Air & Sea Travel
Statement of Cash Flows
Month Ended April 30, 20x3
Cash flows from operating activities:
Collections from customers ($5,500 + $1,000) $ 6,500
Cash payments to suppliers and employees
($2,700 + $400)
(3,100)
Net cash inflow from operating activities
$ 3,400
Cash flows from investing activities:
Acquisition of land
$(40,000)
Sale of land
22,000
Net cash outflow from investing activities
(18,000)
Cash flows from financing activities:
Issuance (sale) of stock
$50,000
Payment of dividends
(2,100)
Net cash inflows from financing activities
$47,900
Net increase (decrease) in cash
$33,300
Cash balance, April 1, 20x5
0
Cash balance, April 30, 20x5
$33,300
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Learning Objective 2
Understand how accounting works.
27
ACG2021
Financial Accounting
Double-Entry Accounting
Understanding Debits/Credits
28
Double-Entry Accounting
Record the dual effects of each
business transaction.
29
Double Entry Accounting
 Each accounting transaction affects at least
two accounts.
 T-accounts can be used to represent
accounts and their increases and decreases.
 Every business transactions involves both a
debit and a credit
Cash
(Left Side)
(Right Side)
Debit
Credit
30
Using T-Accounts
Assets = Liabilities + Stockholders Equity
Assets
Debit
+
Credit
-
Cash
Debit for
Increase,
$50,000
=
Liabilities
Debit
-
Credit
+
Stockholders’
Equity
Debit
-
Credit
+
Common
Stock
Credit for
increase,
$50,000
31
Stockholders’ Equity Accounts
Expanded Accounting Equation
Liabilities
Assets
=
Stockholders’
Equity
Common
Stock
+
Retained
Earnings
Dividends
+
Revenues
Expenses
32
Using T-Accounts Expanded
Assets
Debit
+
Dividends
Debit
+
Credit
-
Accounts that are
increased with debits and
have normal debit
balances
Credit
Expenses
Debit
+
Credit
33
Using T-Accounts Expanded
Accounts that are
increased with credits
and have normal
credit balances
Liabilities
Debit
-
Credit
+
Retained
Earnings
Debit
-
Credit
+
Stockholders’
Equity
Debit
-
Credit
+
Revenue
Debit
-
Credit
+
34
Using T-Accounts
Cash
50,000
Credit for
decrease,
40,000
Bal. 10,000
Land
Debit for
Increase,
40,000
Bal. 40,000
Common Stock
Bal. 50,000
The balance in an account is
the difference between the
sum of the debits and the
sum of the credits.
35
Recording Transactions
 Accounting transactions are
entered in chronological order in
the journal
 Lists the Sequence of Business
Events
 What
happened
 What Accounts were effected
 What $’s were exchanged
36
Recording Transactions
 Journalizing process:
 Specify each account affected by the
transaction
 Classify each account as either asset, liability,
stockholders’ equity, revenue, or expense
 Determine whether each account is increased
or decreased (use rules of debit and credit)
 Record the transaction in a journal with a brief
explanation. Debits are at the left margin and
credits are indented
37
Posting from Journal to Accounts /
General Ledger
DATE
ACCOUNTS AND EXPLANATION
Apr 2
Cash ………………………………. 50,000
Common Stock ………...…....
Issued common stock
Cash
50,000
DEBIT
CREDIT
50,000
Common
Stock
50,000
38
Posting to Accounts / General
Ledger
 Journal does not sort Business
Events by Account
 Thus, journal entries are
periodically Posted to their
respective Accounts
 The
Ledger
39
Flow of Accounting Data
 Transaction occurs
 Transaction analyzed
 Transaction entered in journal
 Amounts posted to the ledger
accounts
40
Trial Balance
 A trial balance lists all accounts with
their balances
 Accounts are listed with assets first,
then liabilities, then stockholders’ equity,
revenues, and finally expenses
 The trial balance
 summarizes
account balances
 shows whether total debits equal total
credits
41
Example Trial Balance
42
Finding Errors
 Find the difference between total debits
and total credits.
 Search
for a missing account with that
balance.
 Divide the difference by 2 and search for
a debit recorded as a credit or viceversa.
 Divide the difference by 9. If you get an
even amount, you may have either a
slide or a transposition.
43
End of Chapter 2
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