# Chapter 3: Processing Accounting Information - PowerPoint

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```					     Chapter 3:
Processing
Accounting Information

1
Transaction Analysis

 The first step in the accounting process is
transaction analysis.
 This process examines relevant, objectively
measurable economic events through their
effect on the accounting equation:
Assets = Liabilities + Equity

2
Transaction Analysis
 All business transactions will have an effect
on at least 2 items in the accounting
equation.
 For example, if you buy a car with cash, you
decrease one asset (cash) and increase
another asset (auto).
 If you purchased a car by signing a note, you
would increase an asset (auto), and increase
a liability (notes payable).

3
Class Problem
 Using a spreadsheet approach, analyze
the transactions listed on the next slide.
 Note that effects may be on both sides of
the equation (in the same direction), or
effects may be on one side of the
equation with offsetting directions.
 Each transaction will affect at least 2
items in the accounting equation.
 The equation will still be in balance after
the transaction is posted.
4
Class Problem - Transactions
The following activities were during the first month of
operation of Cordova Repair Company:
1. The owners of Cordova Repair Company
contributed \$20,000 cash in exchange for stock
ownership in the company.
2. Cordova purchased equipment which cost
\$20,000. Cordova paid \$8,000 cash and
financed the balance at the bank.
3. Cordova completed repair services on a fleet of
automobiles for Collierville Corporation, and
billed Collierville \$8,000 for the services.
4. Cordova paid rent expense of \$5,000 for the
month.
5. Cordova collected \$4,000 from Collierville Co.
6. Cordova distributed a \$500 dividend to its
shareholders.                                        5

Cash + A/R + Equip. = N/P + CS +     RE
1.                      =
2.                      =
3.                      =
4.                      =
5.                      =
6.   _____ _____ _____= _____    _____    _____

6
Class Problem: Financial Statements
Income Statement
Revenues        \$8,000
Expenses         5,000
Net Income      \$3,000

Statement of Retained Earnings
RE (beginning)      \$ 0
Less: Dividends     (500)
RE (ending)       \$2,500
7
Class Problem: Financial Statements
Balance Sheet
Assets
Cash          \$10,500
A/R             4,000
Equipment     \$20,000
Total         \$34,500

Liabilities and S.E.
N/P             \$ 12,000
CS                 20,000
RE (ending)         2,500
Total            \$34,500
8
The Accounting Process
 The first step in the accounting process is
transaction analysis.
 The second step is the recording of transactions
and events (journal entries).
 The third step is the posting of the information to
the ledger accounts (general ledger).
 The fourth step is the preparation of the trial
balance (this is used to construct the financial
statements).

9
The Double Entry System
 Note that the transaction analysis was
relatively simple with a few transactions
and a few accounts. However, with
thousands of transactions and hundreds
of accounts, the spreadsheet program is
not sufficient.
 Therefore accountants use a “double
entry” system based on debits and
credits.

10
Double Entry Accounting

 Debit (dr) - means an entry to the left
hand side of an account.
 Credit (cr) - means an entry to the right
hand side of an account.
 Note that a debit or credit, per se, does not
indicate increase or decrease.
 To decide the effect of a debit or credit,
the type of account must be considered.

11
Effect of Debits and Credits
 Based on the accounting equation, we can
increase or decrease various accounts
depending on their classification:
Assets = Liabilities + Equity
Increase     DR =        CR          CR
Decrease CR =            DR          DR
 Note that we use debits and credits
 Note, also, that bank terminology is
reversed from the customer perspective.
12
The following rules can be derived from
the basic formula:
   Assets have normal debit balances and are
increased with a debit.
   Liabilities and equities have normal credit
balances and are increased with a credit.
   Revenues (a part of equity) have normal credit
balances and are increased with a credit.
   Expenses (which decrease equity) have normal
debit balances and are increased with a debit.
   Dividends (which decrease equity) have a
normal debit balance and are increased with a
debit.
13
The Format of a Journal Entry
To initially record transactions, we use a journal
entry to represent the debits and credits.
For example, in the Chapter 3 Class Problem,
Item 1:
Debit Credit
Cash                     20,000
Common Stock                  20,000

Note that the debit is to the left and the credit is
to the right. First we list the account (left hand
entry on top), then the amount.

14
Now back to the Class Problem and
prepare the other journal entries:
2: Purchased equip. costing \$20,000.

3: Billed customer \$8,000.

15
Now back to the Class Problem, and
prepare the other journal entries:
4: Paid \$5,000 cash for expenses.

5: Collected \$4,000 from customer.

16
Now back to the Class Problem, and
prepare the other journal entries:

6: Paid \$500 cash dividend to owners.

Note that dividends is a contra equity and
reduces retained earnings.

17
The Accounting Cycle
Components of the basic accounting cycle
include:
A. Preparation of Journal Entries (Chapter 3)
-Post to the General Ledger
B. Preparation of Adjusting Journal Entries
(Chapter 4)
-Post to the General Ledger
C. Financial Statements (Chapter 4)
D. Closing Journal Entries (Chapter 4)
-Post ClosingTrial Balance                   18
A. General Journal Entries (GJEs)
   The first step in the accounting process.
   Prepared for daily activity.
   Usually journalized in special journals for
efficiency, but we will record in “General Journal”
format.
   Identified through a document flow:
– cash receipt, record a cash sale
– charge receipt, record a sale on account
– bank note, record a notes payable
– employee time card, record wages
   The Journal Entries from the Class Problem are
GJEs.
19
The General Ledger (G/L)
   The G/L serves as a place to “total”
amounts by account titles.
   After GJEs (and later – adjusting journal
entries) are recorded, they are posted (by
account) to the G/L.
   We will use “T” accounts to represent G/L
accounts where needed.

20
Back to Class Problem: Posting to G/L
Now post transactions (for Cash) to “T” account:
Cash

21
   Trial balances are prepared throughout the
accounting cycle.
   The Unadjusted Trial Balance represents G/L
totals (by account) at a particular point in time.
   From the Chapter 3 Class Problem, the
Unadjusted Trial Balance would consist of a
list of all of the ending debit or credit balances
taken from the various “T” account totals
(illustrated on the next slide).
   The Unadjusted Trial Balance is a preliminary
total, and is a starting point for the Adjusting
Journal Entries (discussed in next chapter).

22
Unadjusted Trial Balance – Class Problem
(after posting and totaling G/L accounts)
Debit     Credit
Cash                   10,500
Accounts Receivable     4,000
Equipment              20,000
Notes Payable                    12,000
Common Stock                     20,000
Retained Earnings-Begin               0
Revenues                          8,000
Expenses                 5,000
Dividends                  500
Totals                  40,000   40,000
23

 The Unadjusted Trial Balance is the starting
point for the financials, but other analyses
must be performed and recorded before the
financial statements are complete.
 These analyses are discussed in Chapter 4.

24

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