Chapter 2 Financial Accounting Lecture Notes PDF

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Summary

These are Chapter 2 accounting notes from financial accounting 201 at xavier university from the 2020/2021 academic year....

Description

Chapter 2 The Accounting Cycle: During the Period Recall two primary functions of Financial Accounting are to (1) _________________ _______________________ and (2) _____________________________________ __________________________. _______________________ = Full set of procedures used to accomplish the measurement/communication process of financial accounting. LO2-1: Identify the basic steps in measuring external transactions. _______________________ = Transactions the firm conducts with a separate economic entity. Follow these steps to measure external transactions: Step 1 – Identify accounts affected by an external transaction  _________________ = A record of the business activities related to a particular item. o Examples: see below in chart of accounts (Cash, Accounts Receivable, etc.)  __________________ = A list of all account names used to record transactions of a company. o Example:

Accounts Payable

EAGLE GOLF ACADEMY CHART OF ACCOUNTS Equipment

Accounts Receivable

Notes Payable

Cash

Prepaid Rent

Common Stock

Salaries Expense

Dividends

Service Revenue

Deferred Revenue

Supplies 1

Account Information: Define each account and determine the type of account (Asset, Liability, Stockholders’ Equity, Revenue, Expense, or Dividend) and which financial statement the account is located (Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Stockholders’ Equity).

Account

Definition

Type

Accounts Payable

The amount of cash that the company owes to suppliers of merchandise or services it has bought on account. The amount of cash owed to the company by its customers from the sale of products or services on account. Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents (more info. in Ch.4)

L

Balance Sheet

A

Balance Sheet

A

1.Ending Balance Balance Sheet 2. Inflows /Outflows Statement of cash flows 1.Ending Balance Balance Sheet 1.Dividend s Statement of stockholde rs’ Equity

Accounts Receivable

Cash

Common Stock

Dividends

Represents ownership in a company

Distribution by a company to its stockholders.

SE

D

FS

2

Deferred Revenue

Equipment

Notes Payable

Prepaid (Rent)

(Salaries) Expense

(Service or Sales) Revenue

Supplies

When a company receives cash in advance from a customer for products or services to be provided in the future Machinery used in manufacturing, computers, and other office equipment, vehicles, furniture and fixtures. Written promises to repay amounts borrowed plus interest. (Loan from bank) The costs of assets acquired in one period that will be expensed in a future period. Expenses are costs of providing products and services (Salaries = cost of labor). Amounts recorded when the company sells products (sales revenue) or services (service revenue) to customers. General purpose consumable items (generally stocked for recurring use)

L

2. Dividends paid statement of cash flows Balance Sheet

A

Balance Sheet

L

Balance sheet

A

Balance Sheet

A

Balance Sheet

R

Income Statement

A

Balance Sheet

LO2-2: Analyze the impact of external transactions on the accounting equation (A=L+SE) Step 2 – Analyze the impact on accounting equation Each transaction will have a _______ effect on the accounting equation (i.e. the company will get and give something).

3

*Transactions are recorded from the company’s (not the owner’s) point of view* For each transaction, consider what the company is getting and what the company is giving up. Ensure that Assets = Liabilities + Stockholders’ Equity after each transaction. Recording the get and give will keep the accounting equation in balance: Assets Resources

=

Liabilities Creditors’ claims

+

Stockholders’ Equity Owners’ claims Revenue & Common Stock, + Expenses & Dividends, -

 If total assets_______________, then liabilities or stockholders’ equity _____________ by the same amount.  If total assets ________________, then liabilities or stockholders’ equity _____________ by the same amount.

Practice Steps 1 & 2. (1)Identify accounts (use chart of accounts above if you need assistance) and (2) analyze the impact of the following transactions on the accounting equation. Use the table below to analyze the impact of each transaction: Assets Cash

Other Assets

=

Liabilit ies

+

Shareholder’s Equity Common Stock

Retained Earnings

4

Assum e $0 beg. balanc es (1)

=

+

(2)

=

+

(3)

=

+

(4)

=

+

(5)

=

+

(6)

=

+

(7)

=

+

(8)

=

+

(9)

=

+

(10)

=

+

End of Period Balan ces

=

Transaction #1: Issue Common Stock Eagle Golf sells shares of common stock for $25,000 to obtain the funds necessary to start the business.

5

 What is one account affected by this transaction? Does that account increase or decrease?  What is a second account affected by this transaction? Does that account increase or decrease?  Do assets equal liabilities plus stockholders’ equity? Transaction #2: Borrow from the Bank Eagle Golf borrows $10,000 from a local bank and signs a note promising to repay the full amount of the debt in three years.

   Transaction #3: Purchase Equipment Eagle Golf purchases equipment necessary for giving golf training for $24,000 cash.

   Transaction #4: Pay Rent in Advance

6

Eagle Golf pays one year of rent in advance, $6,000 ($500 per month).

   Transaction #5: Purchase Supplies on Account Eagle Golf purchase supplies on account for $2,300.

   Transaction #6: Provide Services for Cash Eagle Golf provide golf training to customers for $4,300 cash.

   7

Transaction #7: Provide Services on Account Eagle Golf provide golf training to customers on account, $2,000.

   Transaction #8: Receive Cash in Advance from Customers Eagle Golf receives $600 cash in advance for 12 golf training sessions to be given in the future.

   Transaction #9: Pay Salaries to Employees Eagle Golf pays salaries to employees, $2,800.

  8

 Transaction #10: Pay Cash Dividends Eagle Golf pays cash dividends of $200 to stockholders.

   LO2-3: Assess whether the impact of external transactions results in a debit or credit to an account balance Step 3 – Assess whether the transaction results in a debit or credit? Debit and Credit Effects on Accounts in the Basic Accounting Equation (Illustration 2-5)

1. Left side – Assets _____________ with debits. 2. Right side – Liabilities and stockholders’ equity ______________ with credits. • The opposite is true to decrease the balance of any of these accounts. Expanded Equation (Illustration 2-6)

9

Memory Aid (Illustration 2-7) Note: This information will be provided on Exams

Dividends, Expenses, and Assets should have ending Debit balances. Liabilities, Owners’ Equity, and Revenue should have ending Credit balances.

LO2-4: Record transactions in a journal using debits and credits Step 4 – Record the transaction in a journal using debits and credits • ___________: provides a chronological record of all transactions • ___________: format used for recording transactions

10

Debit amount = Credit amount

ALWAYS!

Example: Transaction #1: Issue Common Stock Eagle Golf sells shares of common stock for $25,000 to obtain the funds necessary to start the business. Assets = Liabilities + Stockholders’ Equity (1 + $25,000 Cash NE + $25,000 Common ) Stock

LO2-5: Post transactions to the general ledger (GL) Step 5 – Post the transactions to the GL • Posting: process of transferring the debit and credit information from the journal to individual accounts in the general ledger • General ledger: provides in a single location the list of transactions affecting each account and the account’s balance

• T-account: Simplified version of general ledger account Example: Transaction #1: Issue Common Stock 11

Eagle Golf sells shares of common stock for $25,000 to obtain the funds necessary to start the business.

Post to accounts

A SE

=

L

+

Cash BB

Common Stock

0

0

BB

(1) 25,000

25,000 (1)

EB 25,000

25,000 EB

Practice Steps 3 – 5 for transactions #2 & #3. Transaction #2: Borrow from the Bank Eagle Golf borrows $10,000 from a local bank and signs a note promising to repay the full amount of the debt in three years.

(2 )

Assets = +$10,000 Cash

Liabilities +$10,000 Notes Payable

+ Stockholders’ Equity

Record journal entry below: December 1

Debit

Credit

12

Post to t-accounts below (continue from t-accounts above): A SE

=

Cash BB

L

+

Notes Payable

0 (1) 25,000

0

(2) EB

BB (2)

EB

Transaction #3: Purchase Equipment Eagle Golf purchases equipment necessary for giving golf training for $24,000 cash.

(3 )

Assets ($24,000) Cash $24,000 Equipment

=

Liabilities

+ Stockholders’ Equity

Record journal entry below: December 1

Debit

Credit

13

Post to t-accounts below: A = SE

L

+

Cash BB

0 (1) 25,000

(3)

(2) 10,000 EB

Equipment BB (3)

0

EB

LO2-6: Prepare a Trial Balance Step 6 – Prepare a Trial Balance • A list of all accounts and their balances at a particular date  Shows that total debits equal total credits • Used for internal purposes only  Not published to external parties Practice Step 6 Assets Cash

Other Assets

=

Liabilit ies

+

Shareholder’s Equity Common Stock

Retained Earnings

14

End of Period Balan ces

$6,900 Cash

$24,000 Equipmen t $6,000 Prepaid Rent $2,300 Supplies $2,000 Acct. Rec.

= $10,000 Notes Payable $2,300 Account s Payable $600 Deferre d Revenu e

$25,000 Common Stock

$6,300 Service Revenue ($2,800) Salaries Expense ($200) Dividends

Complete the trial balance below assuming the ending balances above:

Accounts Cash Accounts Receivable Supplies Prepaid Rent Equipment Accounts Payable Deferred Revenue Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Totals

EAGLE GOLF ACADEMY Trial Balance December 31 Debit

Credit

Remember Debits must equal Credits

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