Financial accounting the impact on decision makers 9e chapter 3

Chapter 3
Processing Accounting
Information


External and Internal Events
 Event: a happening

of consequence to an entity
 External event: interaction between an entity
and its environment
 Internal event: occurs entirely within an entity
 Transaction: any event, external or internal, that
is recognized in a set of financial statements

LO 1


Role of Source Documents in an
Accounting System
 Source

document: used as evidence to record a
transaction
 Different Forms:
 Purchase Invoice
 Sales Invoice
 Cash register tape
 Time cards
LO 2

Analyze the Effects of Transactions
on the Accounting Equation
 Accounting

equation:

Assets =Liabilities + Stockholders’ Equity


Issuance of Capital Stock
 Glengarry

Health Club is started when Karen
Bradley and Kathy Drake file articles of
incorporation with the state to obtain a charter.
Each invests $50,000 in the business. In return,
each receives 5,000 shares of capital stock


Acquisition of Property in
Exchange for a Note
 Company

buys a piece of property for $200,000.
The seller agrees to accept a five-year
promissory note. The property consists of land
valued at $50,000 and a newly constructed
building valued at $150,000

Acquisition of Equipment on an
Open Account
 Karen and

Kathy contact an equipment supplier
and buy $20,000 of exercise equipment:
treadmills, barbells, and stationary bicycles. The
supplier agrees to accept payment in full in 30
days


Sale of Monthly Memberships on
Account
 During

January, the owners sell 300 monthly
club memberships for $50 each, or a total of
$15,000. The members have until the 10th of
the following month to pay


Sale of Court Time for Cash
 In

addition to memberships, Glengarry sells
court time. Court fees are paid at the time of
use and amount to $5,000 for the first month

Payment of Wages and Salaries
 Wages

and salaries for the first month amount
to $10,000


Payment of Utilities
 Cost

of utilities for the first month is $3,000.
Glengarry pays this amount in cash


Collection of Accounts Receivable
 Amount

received from members in payment of
their accounts is $4,000


Payment of Dividends
 Karen and

Kathy, acting on behalf of Glengarry
Health Club, decide to pay a dividend of $1,000
on the shares of stock that each of them owns,
or $2,000 in total

Cost Principle
 Requires

assets such as equipment to be
recorded at cost to acquire and continue to
report this amount on all balance sheets until
the asset is disposed
 These assets are not carried at market value,
but at original cost (with few exceptions)


Accounts
 Account: record

used to accumulate monetary
amounts for each asset, liability, revenue,
expense, and component of stockholders’
equity
 Chart of Accounts: numerical list of all of the
accounts an entity uses

LO 4


The General Ledger
A

book, a file, a hard drive, or another device
containing all of the accounts

Identify and Analyze
 The

accounting equation is the basis for
financial statements
 For every transaction, three questions must be
answered:
1.
2.
3.

What type of activity did the transaction reflect?
What accounts are affected by the transaction, and
are they increased or decreased?
Which financial statements are affected by the
transaction?


Identify and Analyze
 Wages

and salaries for the first month amount
to $10,000 for Glengarry


T account
T

Account: format for showing amounts coming

into and leaving an account


Example 3.2—Using a T Account


Debits and Credits
 Tools

to record increases and decreases in
accounts
 Debits increase asset accounts, and credits
increase liability and stockholders’ equity
accounts
 Additionally, debits increase expense accounts,
and credits increase revenue accounts

LO 5


Summary of the Rules for Increasing
and Decreasing Accounts


Example 3.3—Determining Normal
Account Balances


Debits and Credits Applied to
Transactions

Cash
(1)100,000

Capital Stock
100,000 (1)


Debits and Credits Applied to
Transactions
(2) Acquisition of property in exchange for a note
Building
(2)150,000

Land
(2) 50,000

Notes Payable
200,000 (2)