7/e
3
Financial
Statements and
the Annual Report
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning
External and Internal Events
External events: interaction between entity
and outside environment
Internal events:
Interaction within
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
1/10 Transactions for Glengarry Health Club
Assets = Liabilities + Owners’ Equity
Cash
+ $ 100,000 =
Capital Stock
+ $ 100,000
The accounting equation must always
remain in balance
LO3
Purchase of Property in
Exchange for Note Payable
Assets
Land
+ $50,000
=
Liabilities + Owners’ Equity
Note Payable
= + $200,000
Building
+ $150,000
Increase on left has
corresponding increase on right
Purchase of Equipment
on Account
Assets = Liabilities + Owners’ Equity
Equip.
Accts. Pay.
+ $20,000 = + $20,000
At least two accounts affected
by every transaction
Effect of Revenue and Expenses
on Retained Earnings
Income Statement
Revenue
– Expenses
= Net Income (Loss)
Statement of
Retained Earnings
Beg. R/E
+ Net Income
(or – Net Loss)
– Dividends
= End. R/E
Sell Monthly Memberships
on Account
Assets
= Liabilities + Owners’ Equity
Accts. Rec.
+ $15,000 =
Retained Earnings
+ $15,000
Revenues increase retained earnings
Sell Court Time for Cash
Assets = Liabilities + Owners’ Equity
Cash
+ $5,000
=
Retained Earnings
+ $5,000
Revenues increase retained earnings
Payment of Wages
and Salaries
Assets = Liabilities + Owners’ Equity
Cash
– $10,000 =
Retained Earnings
– $10,000
Expenses decrease retained earnings
Payment of Utilities
Assets = Liabilities + Owners’ Equity
Cash
– $3,000 =
Retained Earnings
– $3,000
Expenses also decrease assets
or increase liabilities
Collection of
Accounts Receivable
Assets
= Liabilities + Owners’ Equity
Cash
+ $4,000
= (no change in Liab. or R/E)
Accts. Rec.
– $4,000
Assets were traded:
accounts receivable for cash
Payment of Dividends
Assets = Liabilities + Owners’ Equity
Cash
– $2,000 =
Retained Earnings
– $2,000
Dividends directly reduce retained earnings
Cumulative Effect of Transactions for
Glengarry Health Club
Assets = Liabilities +
Sold stock
Bought prop.
with note
Bought equip.
on acct.
Sold
memberships
Sold court time
Paid wages
Paid utilities
Collected A/R
Paid dividends
+ $100,000
=
+ 200,000
= + $200,000
+ 20,000
= + 20,000
+
+
–
–
+
–
–
=
=
=
=
=
15,000
5,000
10,000
3,000
4,000
4,000
2,000
+
O/E
$100,000
+
15,000
+
5,000
–
10,000
–
3,000
(no change in Liabilities + OE)
=
+ $325,000 = + $220,000
–
2,000
+ $105,000
Glengarry Health Club
Balance Sheet
January 31, 2010
Assets
Cash
$ 94,000
Accts. Rec.
11,000
Equipment
20,000
Building
150,000
Land
50,000
Total assets $325,000
Liabilities and Owners’ Equity
Accounts payable
$ 20,000
Notes payable
200,000
Capital stock
100,000
Retained earnings
5,000
Total liabilities
and owners’ equity $325,000
Glengarry Health Club
Income Statement
For the Month Ended January 31, 2010
Revenues:
Memberships
Court fees
Expenses:
Salaries and wages
Utilities
Net income
$15,000
5,000
$10,000
3,000
$20,000
13,000
$ 7,000
Sample Chart of Accounts
100–199:
100–109:
101:
102:
110–119:
111:
ASSETS
Cash
Checking Account
Savings Account
Receivables
Accounts Receivable
120–129:
Prepaid Assets
121:
122:
130–139:
Cleaning Supplies
Prepaid Insurance
Property, Plant, and
Equipment
Land
Building
:
131:
132:
200–299
200–209:
201:
202:
300–399
301:
302:
303:
LIABILITIES
Short-Term Liabilities
Accounts Payable
Wages Payable
:
OWNERS’ EQUITY
Preferred Stock
Common Stock
Retained Earnings
400–499
REVENUES
500–599
EXPENSES
LO4
General Ledger
Cash
+100
– 50
A/R
+400
–100
File or book that contains one page
(or entry) for each account
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
ASSETS
=
LIABILITIES
+
OWNERS’
EQUITY
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
Expenses and dividends
decrease retained earnings
Use debits to record (increase)
expenses and dividends
DR.
–
CR.
+
EXPENSES AND
DIVIDENDS
DR.
CR.
+
–
Normal Account Balances
Debit
Credit
Assets
Expenses
Dividends
Liabilities
Owners’ Equity
Revenues
all increased
with debits
all increased
with credits
Transactions and T Accounts
Cash
(1) 100,000
Capital Stock
100,000 (1)
(1) Issue capital stock for cash
Transactions and T Accounts
Land
(2) 50,000
Note Payable
Building
200, 000 (2)
(2) 150,000
(2) Purchase property in exchange
for note payable
Transactions and T Accounts
Equipment
(3) 20,000
Accounts Payable
20,000 (3)
(3) Purchase equipment on account
Transactions and T Accounts
Accounts Receivable Membership Revenue
(4) 15,000
15,000 (4)
(4) Sell monthly memberships on account
Transactions and T Accounts
Cash
(1) 100,000
(5) 5,000
Court Fee Revenue
5,000 (4)
T Accounts reflect
current and previous
postings to the account
for each period
(5) Sell court time for cash
Transactions and T Accounts
Wage Expense
(6) 10,000
Cash
(1) 100,000 10,000 (6)
(5) 5,000 3,000 (7)
Utilities Expense
(7) 3,000
(6) Pay employees wages for the month
(7) Pay utilities for the month
Transactions and T Accounts
Cash
(1) 100,000 10,000 (6)
(5) 5,000 3,000 (7)
(8) 4,000
Accounts Receivable
(4) 15,000 4,000 (8)
(8) Collection of accounts receivable
Transactions and T Accounts
Cash
Dividends
(1) 100,000 10,000 (6)
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9)
(9) 2,000
(9) Pay dividends
Determine the Balance
of the T Accounts
Cash
Accounts Receivable
(1) 100,000 10,000 (6)
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9)
(4) 15,000 4,000 (8)
94,000
11,000
The Journal
A chronological record of transactions
The book of original entry
Each entry has a debit and a credit
that equals
 Transactions normally recorded in
general journal



Posting from Journal
Transactions are
entered in:
And then posted to:
Journal
(via journal entries):
Cash
Capital Stock
Dr.
100,000
Cr.
Ledger Accounts
• Cash
• Capital Stock
100,000
To record the issuance of 10,000 shares
LO6
Journal Entries
Dr.
150,000
50,000
Cr.
Building
Land
Notes Payable
200,000
To record acquisition of property in exchange for note
Equipment
20,000
Accounts Payable
20,000
To record the acquisition of equipment on open account
Accounts Receivable
15,000
Membership Revenue
15,000
To record sale of monthly memberships on account
Journal Entries
Cash
Court Fee Revenue
To record sale of court time
for cash.
Dr.
5,000
Cr.
5,000
Wage and Salary Expense
Cash
To record payment of wages
and salaries.
10,000
Utilities Expense
Cash
To record payment of utilities.
3,000
10,000
3,000
Journal Entries
Cash
Accounts Receivable
To record collection of accounts
receivable.
Dr.
4,000
Dividends
2,000
Cash
To record payment of dividends.
Cr.
4,000
2,000
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