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8/21/2019 Business Accounting Chap3
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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
3-1
THE ACCOUNTINGCYCLE: CAPTURING
ECONOMIC EVENTS
Chapter
3
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The Ledger
The Ledger
The entire group of
accounts is kepttogether in an
accounting recordcalled a ledger.
The entire group of
accounts is kepttogether in an
accounting recordcalled a ledger .
Cash
AccountsPayable
CapitalStock
Accounts areindividual records
showing increasesand decreases.
Accounts areindividual recordsshowing increases
and decreases.
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The Use of Accounts
The Use of Accounts
Increases are
recorded on oneside of the T-account, anddecreases are
recorded on theother side.
eftor
!ebit
Side
"ightor
Credit
Side
Title of the Account
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et#s see howdebits and credits
are recorded in theCash account for$$#s awn Care
Service.
et#s see howdebits and credits
are recorded in theCash account for$$#s awn Care
Service.
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Cash
%&' (,))) %&* *,%))
%&*% +% %&( *,)))
%&* +%) %&*( '%)
%&-' %)
%&-' ,'*%
/al.
Cash
%&' (,))) %&* *,%))
%&*% +% %&( *,)))
%&* +%) %&*( '%)
%&-' %)
%&-' ,'*%
/al.
"eceiptsare on
the debitside.
Pay0entsare on the
creditside.
The balance is thedifference betweenthe debit and credit
entries in theaccount.
The balance is thedifference betweenthe debit and credit
entries in theaccount.
Debit and Credit Entries
Debit and Credit Entries
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AA 1 2 3434ASS4TSASS4TS
!ebitfor
Increase
Creditfor
!ecrease
456ITI4S456ITI4S
!ebitfor
!ecrease
Creditfor
Increase
IA/IITI4SIA/IITI4S
!ebitfor
!ecrease
Creditfor
Increase
!ebits and credits affect accounts as follows7
!ebits and credits affect accounts as follows7
Debit and Credit Rules
Debit and Credit Rules
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AA 1 2 3434!ebit!ebit
balancesbalancesCreditCredit
balancesbalances1In the double-entry accounting syste0,every transaction is recorded by e8ualdollar a0ounts of debits and credits.
In the double-entry accounting syste0,every transaction is recorded by e8ualdollar a0ounts of debits and credits.
Double Entry Accounting The Equality ofDebits and Credits
Double Entry Accounting The Equality ofDebits and Credits
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et#s recordselected
transactions for$$#s awn CareService in the
accounts.
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9ay '7 $ill $ones and her fa0ily invested :(,)))in $$#s awn Care Service and received ()) sharesof stock.
9ay '7 $ill $ones and her fa0ily invested :(,)))in $$#s awn Care Service and received ()) sharesof stock.
;ill Cash increase
or decrease<
;ill Capital Stockincrease or
decrease<
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Capital Stock
%&' (,)))
Cash
%&' (,)))
9ay '7 $ill $ones and her fa0ily invested :(,)))in $$#s awn Care Service and received ()) sharesof stock.
9ay '7 $ill $ones and her fa0ily invested :(,)))in $$#s awn Care Service and received ()) sharesof stock.
Cash increases
:(,))) with a debit.
Capital Stockincreases :(,)))
with a credit.
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9ay *7 $$#s purchased a riding lawn 0owerfor :*,%)) cash.
9ay *7 $$#s purchased a riding lawn 0owerfor :*,%)) cash.
;ill Cash increaseor decrease<
;ill Tools =48uip0ent increase
or decrease<
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9ay *7 $$#s purchased a riding lawn 0owerfor :*,%)) cash.
9ay *7 $$#s purchased a riding lawn 0owerfor :*,%)) cash.
Tools = 48uip0ent
%&* *,%))
Cash
%&' (,))) %&* *,%))
Cash decreases:*,%)) with a credit.
Tools = 48uip0entincreases :*,%))
with a debit.
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9ay (7 $$#s purchased a :'%,))) truck. $$#spaid :*,))) in cash and issued a note payablefor the re0aining :',))).
9ay (7 $$#s purchased a :'%,))) truck. $$#spaid :*,))) in cash and issued a note payablefor the re0aining :',))).
;ill Truck increase
or decrease<
;ill Cash and>otes Payable
increase ordecrease<
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9ay (7 $$#s purchased a :'%,))) truck. $$#spaid :*,))) in cash and issued a note payablefor the re0aining :',))).
9ay (7 $$#s purchased a :'%,))) truck. $$#spaid :*,))) in cash and issued a note payablefor the re0aining :',))).
Truck
%&( '%,)))
Cash
%&' (,))) %&* *,%))%&( *,)))
>otes Payable
%&( '-,)))
Truck increases
:'%,))) with a debit.
Cash decreases:*,))) with a credit.
>otes Payableincreases :',)))
with a credit.
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9ay ''7 $$#s purchased so0e repair parts for:)) on account.
9ay ''7 $$#s purchased so0e repair parts for:)) on account.
;ill Tools =48uip0ent increase
or decrease<
;ill AccountsPayable increase or
decrease<
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9ay ''7 $$#s purchased so0e repair parts for:)) on account.
9ay ''7 $$#s purchased so0e repair parts for:)) on account.
Tools = 48uip0entincreases :)) with
a debit.
Accounts Payableincreases :)) with
a credit.
Tools = 48uip0ent
%&* *,%))
%&'' -))
Accounts Payable
%&'' -))
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9ay '(7 $$#s sold half of the repair parts toA/C awns for :'%), a price e8ual to $$#s cost.A/C awns agrees to pay $$#s within ) days.
9ay '(7 $$#s sold half of the repair parts toA/C awns for :'%), a price e8ual to $$#s cost.A/C awns agrees to pay $$#s within ) days.
;ill Tools =48uip0ent increase
or decrease<
;ill Accounts"eceivable increase
or decrease<
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9ay '(7 $$#s sold half of the repair parts toA/C awns for :'%), a price e8ual to $$#s cost.A/C awns agrees to pay $$#s within ) days.
9ay '(7 $$#s sold half of the repair parts toA/C awns for :'%), a price e8ual to $$#s cost.A/C awns agrees to pay $$#s within ) days.
Tools = 48uip0entdecreases :'%) with
a credit.
Accounts "eceivableincreases :'%) with
a debit.
Tools = 48uip0ent
%&* *,%)) %&'( '%)
%&'' -))
Accounts "eceivable
%&'( '%)
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In an actual accounting syste0, transactionsare initially recorded in the ?ournal.
In an actual accounting syste0, transactionsare initially recorded in the ?ournal.
@4>4"A $36">A
!ate Account Titles and 4planation !ebit Credit
*))%
9ay ' Cash (,)))
Capital Stock (,)))
3wners invest cash in the business.
The JournalThe Journal
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Posting involves
copyinginfor0ationfro0 the
?ournal to theledger
accounts.
Posting Journal Entries to the LedgerAccounts
Posting Journal Entries to the LedgerAccounts
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@4>4"A $36">A
!ate Account Titles and 4planation !ebit Credit
*))%
9ay ' Cash (,)))
Capital Stock (,)))
3wners invest cash in the business.@eneral edger
Cash!ate !ebit Credit /alance
*))%
9ay ' (,))) (,)))
Posting Journal Entries to the LedgerAccounts
Posting Journal Entries to the LedgerAccounts
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@4>4"A $36">A
!ate Account Titles and 4planation !ebit Credit
*))%
9ay ' Cash (,)))
Capital Stock (,)))
3wners invest cash in the business.@eneral edger
Capital Stock!ate !ebit Credit /alance
*))%
9ay ' (,))) (,)))
Posting Journal Entries to the LedgerAccounts
Posting Journal Entries to the LedgerAccounts
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@4>4"A $36">A
!ate Account Titles and 4planation !ebit Credit
*))%
9ay * Tools = 48uip0ent *,%))
Cash *,%))
Purchased lawn 0ower.
et#s see what the cash account looks like afterposting the cash portion of this transaction for
$$#s awn Care Service.
et#s see what the cash account looks like afterposting the cash portion of this transaction for
$$#s awn Care Service.
Posting Journal Entries to the LedgerAccounts
Posting Journal Entries to the LedgerAccounts
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@eneral edger
Cash
!ate !ebit Credit /alance
*))%9ay ' (,))) (,)))
* *,%)) %,%))
This ledger for0at is referred to as arunning balance.
This ledger for0at is referred to as arunning balance.
Ledger Accounts After PostingLedger Accounts After Posting
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@eneral edger
Cash
!ate !ebit Credit /alance
*))%9ay ' (,))) (,)))
* *,%)) %,%))
T accounts are si0plified versions ofthe ledger account that only show the
debit and credit colu0ns.
T accounts are si0plified versions ofthe ledger account that only show the
debit and credit colu0ns.
Ledger Accounts After PostingLedger Accounts After Posting
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>et inco0e is not an asset it#s an increase inowners# e8uity fro0 profits of the business.
>et inco0e is not an asset it#s an increase inowners# e8uity fro0 profits of the business.
AA 1 2 3434Increase
This effects occur as netinco0e is earned . . .
Increase
. . . but this iswhat Bnet inco0e
really 0eans.
What is et !nco"e#What is et !nco"e#
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AA 1 2 3434
Retained EarningsRetained Earnings
CapitalStock
"etained4arnings
The balance in the "etained 4arnings account representsthe total net inco0e of the corporation over the entirelifeti0e of the business, less all a0ounts which have
been distributed to the stockholders as dividends.
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$$Ds awn Care ServiceInco0e State0ent
Eor the 9onth 4nded 9ay -', *))%
Sales "evenue +%):
3perating 4pense7
@asoline 4pense %)
>et Inco0e +)):
The inco0e state0ent su00ariFes the profitabilityof a business for a specified period of ti0e.
The inco0e state0ent su00ariFes the profitabilityof a business for a specified period of ti0e.
The !nco"e $tate"ent% A Pre&ie'The !nco"e $tate"ent% A Pre&ie'
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Accounting PeriodsAccounting Periods
Ti0e Period Principle
To provide users of financialstatements ith timel!
information" net income is
measured for relativel! short
accountin# periods of e$uallen#th%
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Re&enue and E()ensesRe&enue and E()enses
The price forgoods soldand servicesrendered during a
given accountingperiod.
Increasesowner#s e8uity.
The costs ofgoods andservices used upin the process ofearning revenue.
!ecreasesowner#s e8uity.
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The Reali*ation Princi)le% When ToRecord Re&enue
The Reali*ation Princi)le% When ToRecord Re&enue
"ealiFation Principle
"evenue should berecogniFed at the
ti0e goods are sold
and services arerendered.
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The +atching Princi)le% When ToRecord E()enses
The +atching Princi)le% When ToRecord E()enses
9atching Principle
4penses should berecorded in the
period in which they
are used up.
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Debits and Credits for Re&enue andE()ense
Debits and Credits for Re&enue andE()ense
456ITI4S456ITI4S
!ebit!ebit
forfor
!ecrease!ecrease
CreditCredit
forfor
IncreaseIncrease
4pensesdecreaseowner#s
e8uity.
"evenuesincreaseowner#s
e8uity.
4GP4>S4S4GP4>S4S
Creditfor
!ecrease
!ebitfor
Increase
"4H4>64S"4H4>64S
!ebit!ebit
forfor
!ecrease!ecrease
CreditCredit
forfor
IncreaseIncrease
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456ITI4S456ITI4S
!ebit!ebit
forfor
!ecrease!ecrease
CreditCredit
forfor
IncreaseIncrease
Pay0ents toowners
decreaseowners#e8uity.
3wners#invest0ents
increaseowners#e8uity.
!IHI!4>!S!IHI!4>!S
CreditCredit
forfor
!ecrease!ecrease
!ebit!ebit
forfor
IncreaseIncrease
!n&est"ents by and Pay"ents to ,'ners!n&est"ents by and Pay"ents to ,'ners
CAPITA ST3CCAPITA ST3C
!ebitfor
!ecrease
Creditfor
Increase
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et#s analyFe the
revenue andepense
transactions for
$$#s awn CareService for the0onth of 9ay.
;e will alsoanalyFe a dividend
transaction.
et#s analyFe the
revenue andepensetransactions for
$$#s awn CareService for the0onth of 9ay.
;e will alsoanalyFe a dividend
transaction.
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9ay *7 $$#s provided lawn care services fora client and received :+%) in cash.
9ay *7 $$#s provided lawn care services fora client and received :+%) in cash.
;ill Cash increaseor decrease<
;ill Sales "evenueincrease ordecrease<
9 * $$# id d l i f
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Sales "evenue
%&* +%)
9ay *7 $$#s provided lawn care services fora client and received :+%) in cash.
9ay *7 $$#s provided lawn care services fora client and received :+%) in cash.
Cash increases:+%) with a debit.
Sales "evenueincreases :+%) with
a credit.
Cash
%&' (,))) %&* *,%))
%&* +%) %&( *,)))
3 38
9 ' $$# h d li f th l
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9ay '7 $$#s purchased gasoline for the lawn0ower and the truck for :%) cash.
9ay '7 $$#s purchased gasoline for the lawn0ower and the truck for :%) cash.
;ill Cash increaseor decrease<
;ill @asoline4pense increase or
decrease<
3 39
9 ' $$# h d li f th l
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@asoline 4pense
%&-' %)
9ay '7 $$#s purchased gasoline for the lawn0ower and the truck for :%) cash.
9ay '7 $$#s purchased gasoline for the lawn0ower and the truck for :%) cash.
Cash decreases :%)with a credit.
@asoline 4penseincreases :%) with a
debit.
Cash
%&' (,))) %&* *,%))
%&* +%) %&( *,)))
%&-' %)
3 40
9 ' $$# C id $ill $ d
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9ay '7 $$#s awn Care paid $ill $ones andher fa0ily a :*)) dividend.
9ay '7 $$#s awn Care paid $ill $ones andher fa0ily a :*)) dividend.
;ill Cash increaseor decrease<
;ill !ividendsincrease or
decrease<
3 41
9 ' $$# C id $ill $ d
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!ividends
%&-' *))
9ay '7 $$#s awn Care paid $ill $ones andher fa0ily a :*)) dividend.
9ay '7 $$#s awn Care paid $ill $ones andher fa0ily a :*)) dividend.
Cash decreases:*)) with a credit.
!ividends increase:*)) with a debit.
Cash
%&' (,))) %&* *,%))
%&* +%) %&( *,)))
%&-' %)
%&-' *))
3 42
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>ow, let#s look atthe Trial /alance
for $$#s awn CareService for the0onth of 9ay.
>ow, let#s look atthe Trial /alance
for $$#s awn CareService for the0onth of 9ay.
3 43
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$$Ds awn Care Service
6nad?usted Trial /alance
9ay ', *))%
Cash ,*%:
Accounts receivable +%
Tools = e8uip0ent *,J%)
Truck '%,))) >otes payable ',))):
Accounts payable '%)
Capital stock (,)))
!ividends *)) Sales revenue +%)
@asoline epense %)
Total *',)): *',)):
All balancesare taken fro0
the ledgeraccounts on9ay ' after
considering all
of $$#stransactions
for the 0onth.
Proves e8ualityof debits and
credits.
3-44
Th A ti C l
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$ournaliFetransactions.
Post entries tothe ledgeraccounts.
Prepare trialbalance.
9ake end-of-year
ad?ust0ents.
Prepare ad?usted
trial balance.
Prepare
financialstate0ents.
Prepare after-closing
trial balance.
$ournaliFe and
post closingentries.
The Accounting Cycle
3-45
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End of Cha)ter 3End of Cha)ter 3