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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 The Bookkeeping Process and Transaction Analysis PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. 23 LO 1 The Balance Sheet Equation— A Mechanical Key A = L + SE The basic accounting equation can be expanded to include revenues and expenses. A = L + PIC + RE + R - E BEG McGraw-Hill/Irwin 4-3 © 2008 The McGraw-Hill Companies, Inc., All Rights 24 The Balance Sheet Equation LO 2 Transaction a b c d e f Total Cash + 2,000 6,000 (2,000) Assets Accounts Receivable = + = + + Paid-in Capital 2,000 + Stockholders' Equity Retained Earnings + Revenues - Expenses 6,000 8,000 10,000 (3,000) 3,000 8,000 (2,000) 12,000 + Equipment Liabilities Notes Payable 8,000 3,000 + 7,000 = 14,000 + 2,000 + 0 + 8,000 - 2,000 2,000 6,000 Transactions a. The stockholders invested $2,000. b. The company borrowed $6,000 from a bank. c. Equipment costing $10,000 was purchased for $2,000 cash and signing a note payable for $8,000. d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will be received within 30 days. e. The company provided services for $8,000 and received cash. f. 4-4 Wages of $2,000 were paid in cash. © 2008 The McGraw-Hill Companies, Inc., All Rights McGraw-Hill/Irwin 25 LO 3 Transaction a b c d e f Total The Balance Sheet Equation Cash + 2,000 6,000 (2,000) Assets Accounts Receivable = + Equipment + + Paid-in Capital 2,000 + Stockholders' Equity Retained Earnings + Revenues - Expenses 6,000 8,000 10,000 (3,000) 3,000 8,000 (2,000) 12,000 + = Liabilities Notes Payable 8,000 3,000 + 7,000 = 14,000 + 2,000 + 0 + 8,000 - 2,000 2,000 6,000 Statement of Changes in Retained Earnings Beginning Balance $ Add: Net Income 6,000 Less: Dividends Ending Balance $ 6,000 Income Statement Revenues $ 8,000 Expenses 2,000 Net Income $ 6,000 Balance Sheet Assets Cash $ Accounts Receivable Equipment 12,000 3,000 7,000 Total Assets 22,000 McGraw-Hill/Irwin $ Liabilities Notes Payable $ 14,000 Stockholders' Equity Paid-in Capital 2,000 Retained Earnings 6,000 Total Liabilities & Stockholders' Equity $ 22,000 4-5 © 2008 The McGraw-Hill Companies, Inc., All Rights 26 Bookkeeping Jargon LO 4 Transactions are initially recorded in a journal. Cash Inventory McGraw-Hill/Irwin Equipment Notes Payable Transactions are then recorded— posted to—individual accounts in the ledger. Accounts are used to organize or group transactions to facilitate financial statement preparation. 4-6 © 2008 The McGraw-Hill Companies, Inc., All Rights 27 LO 4 T-Account The left side of the T-account is always the debit side. The right side of the T-account is always the credit side. Account Name McGraw-Hill/Irwin Left Right Debit Credit 4-7 © 2008 The McGraw-Hill Companies, Inc., All Rights 28 Debits and Credits LO 4 Debits Debits and and credits credits affect affect the the accounting accounting equation equation as as follows: follows: A = L + SE ASSETS LIABILITIES EQUITIES Debit Credit for for Increase Decrease Debit Credit for for DecreaseIncrease Debit Credit for for DecreaseIncrease McGraw-Hill/Irwin 4-8 © 2008 The McGraw-Hill Companies, Inc., All Rights 29 Debits and Credits LO 5 A = L + SE ASSETS LIABILITIES EQUITIES Debit Credit for for Increase Decrease Debit Credit for for DecreaseIncrease Debit Credit for for DecreaseIncrease Remember that stockholders' equity includes paid-in capital and retained earnings. McGraw-Hill/Irwin Paid-in capital Retained earnings 4-9 © 2008 The McGraw-Hill Companies, Inc., All Rights 210 LO 5 Revenue and Expenses McGraw-Hill/Irwin Increases in stockholders' equity. Increase with a credit. Decreases in stockholders' equity. Increase with a debit. 4-10 © 2008 The McGraw-Hill Companies, Inc., All Rights 211 LO 5 Debits and Credits A = L + SE McGraw-Hill/Irwin 4-11 © 2008 The McGraw-Hill Companies, Inc., All Rights 212 Journal Entry Format LO 5 A typical journal entry might look like this. Date 6/30 Description Debit 2,000 Cash Paid-in Capital To record an investment by the owners. McGraw-Hill/Irwin Credit 2,000 4-12 © 2008 The McGraw-Hill Companies, Inc., All Rights 213 Journal Entry Format LO 5 Provide a reference date for each transaction. Date 6/30 Debits are recorded first. Description Debit 2,000 Cash Paid-in Capital To record an investment by the owners. Credits are indented and recorded after debits. Credit 2,000 Total debits must equal total credits. A brief description of the transaction to explain the entry. McGraw-Hill/Irwin 4-13 © 2008 The McGraw-Hill Companies, Inc., All Rights 214 LO 5 The Bookkeeping Process Transactions Recorded in the Journal Date 6/30 Description Cash Debit 2,000 Paid-in Capital To record an investment by the owners. Credit 2,000 Source Documents Posted to the Ledger Account Name Debit McGraw-Hill/Irwin Credit 4-14 © 2008 The McGraw-Hill Companies, Inc., All Rights 215 LO 6 Types of Adjusting Entries Transactions for which cash has NOT yet been received or paid, but the effect of which must be recorded in the accounts in order to accomplish a matching of revenues and expenses. McGraw-Hill/Irwin The initial recording of a transaction does not result in assigning revenues to the period in which they were earned or expenses to the period in which they were incurred. 4-15 © 2008 The McGraw-Hill Companies, Inc., All Rights 216 Accruing Expenses LO 6 Hey, when do we get paid? Examples include: Wages and Salaries Interest Payable Property Taxes McGraw-Hill/Irwin 4-16 © 2008 The McGraw-Hill Companies, Inc., All Rights 217 Accruing Revenues LO 6 Examples Include: Interest Earned Work Completed But Not Yet Billed to Customer McGraw-Hill/Irwin 4-17 © 2008 The McGraw-Hill Companies, Inc., All Rights 218 LO 6 Reclassifying Assets to Expenses End of month adjusting entries Assets Expenses Adjusting entries: Prepaid Insurance Insurance Expense Supplies Supplies Expense McGraw-Hill/Irwin 4-18 © 2008 The McGraw-Hill Companies, Inc., All Rights 219 LO 6 Reclassify Liabilities to Revenues End of month adjusting entries Revenues Liabilities Unearned Revenue Revenue Unearned Rental Revenue Rental Revenue Airline Ticket Advanced Sales Ticket Revenue McGraw-Hill/Irwin 4-19 © 2008 The McGraw-Hill Companies, Inc., All Rights 220 Closing the Books LO 7 The closing process simply transfers the year-end balances of all income statement accounts (e.g., revenues, expenses, gains, and losses) to the retained earnings account. McGraw-Hill/Irwin 4-20 © 2008 The McGraw-Hill Companies, Inc., All Rights 221 LO 7 Closing Entries Expenses, losses, and dividends decrease retained earnings. McGraw-Hill/Irwin Revenues and gains increase retained earnings. 4-21 © 2008 The McGraw-Hill Companies, Inc., All Rights 222 End of Chapter 4 McGraw-Hill/Irwin 4-22 © 2008 The McGraw-Hill Companies, Inc., All Rights