Intermediate accounting 15e kieso warfield chapter 03

INTERMEDIATE

Intermediate
ACCOUNTING
Intermediate
Accounting
Accounting
F I F T E E N T H

3-1

E D I T I O N

Prepared
by
Prepared
by
Coby Harmon
Prepared by
Coby Harmon
Coby Harmon
University
of California
Santa Barbara
University
of California,
Santa Barbara
University of California, Santa Barbara
Westmont
College
Westmont

College

kieso
weygandt
warfield
team for success


PREVIEW OF CHAPTER

3

Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
3-2


3

The Accounting
Information System

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
1.

Understand basic accounting

terminology.

6.

Prepare financial statements from the
adjusted trial balance.

2.

Explain double-entry rules.

7.

Prepare closing entries.

3.

Identify steps in the accounting cycle.

8.

4.

Record transactions in journals, post to
ledger accounts, and prepare a trial
balance.

Prepare financial statements for a
merchandising company.

5.

Explain the reasons for preparing
adjusting entries and identify major types
of adjusting entries.

3-3


Accounting Information System
Accounting information system
Collects

and processes transaction data.

Disseminates

3-4

the financial information to interested parties.

LO 1 Understand basic accounting terminology.


Accounting Information System
Helps management answer such questions as:
How

Were

sales higher this period than last?

What

assets do we have?

What

were our cash inflows and outflows?

Did

we make a profit last period?

Are

any of our product lines or divisions operating at a loss?

Can
Is

3-5

much and what kind of debt is outstanding?

we safely increase our dividends to stockholders?

our rate of return on net assets increasing?

LO 1 Understand basic accounting terminology.

Accounting Information System
Basic Terminology

3-6



Event



Journal



Transaction



Posting



Account



Trial Balance



Real Account



Adjusting Entries



Nominal Account



Financial Statements



Ledger



Closing Entries

LO 1 Understand basic accounting terminology.


3

The Accounting
Information System

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
1.

Understand basic accounting
terminology.

6.

Prepare financial statements from the
adjusted trial balance.

2.

Explain double-entry rules.

7.

Prepare closing entries.

3.

Identify steps in the accounting cycle.

8.

4.

Record transactions in journals, post to
ledger accounts, and prepare a trial
balance.

Prepare financial statements for a
merchandising company.

5.

Explain the reasons for preparing
adjusting entries and identify major types
of adjusting entries.

3-7


Accounting Information System
Debits and Credits

3-8



An account shows the effect of transactions on a given
asset, liability, equity, revenue, or expense account.



Double-entry accounting system (two-sided effect).



Recording done by debiting at least one account and
crediting another.



DEBITS must equal CREDITS.

LO 2 Explain double-entry rules.


Debits and Credits
Account

An Account can
be illustrated in a
T-Account form.

3-9



An arrangement that shows the
effect of transactions on an
account.



Debit = “Left”



Credit = “Right”
Account Name
Debit / Dr.

Credit / Cr.

LO 2 Explain double-entry rules.


Debits and Credits
If the sum of Debit entries are greater than the sum of
Credit entries, the account will have a debit balance.
Account Name
Debit / Dr.

Credit / Cr.

Transaction #1

$10,000

$3,000

Transaction #3

8,000

Balance

3-10

Transaction #2

$15,000

LO 2 Explain double-entry rules.


Debits and Credits
If the sum of Credit entries are greater than the sum of
Debit entries, the account will have a credit balance.
Account Name
Transaction #1

Balance

3-11

Debit / Dr.

Credit / Cr.

$10,000

$3,000

Transaction #2

8,000

Transaction #3

$1,000

LO 2 Explain double-entry rules.


Debits and Credits Summary
Normal
Normal
Balance
Balance
Debit
Debit

3-12

Normal
Normal
Balance
Balance
Credit
Credit

LO 2 Explain double-entry rules.


Debits and Credits Summary
Balance Sheet

Income Statement

Asset = Liability + Equity Revenue - Expense
Debit

Credit

3-13

LO 2 Explain double-entry rules.


The Accounting Equation
Relationship among the assets, liabilities and stockholders’
equity accounts of a business:
Illustration 3-3

The equation must be in balance after every transaction. For
every Debit there must be a Credit.
3-14

LO 2 Explain double-entry rules.

Double-Entry System Illustration
1. Owners invest $40,000 in exchange for common
stock.

Assets

+ 40,000

3-15

=

Liabilities

+

Stockholders’
Equity

+ 40,000

LO 2 Explain double-entry rules.


Double-Entry System Illustration
2. Disburse $600 cash for secretarial wages.

Assets

- 600

=

Liabilities

+

Stockholders’
Equity

- 600
(expense)

3-16

LO 2 Explain double-entry rules.


Double-Entry System Illustration
3. Purchase office equipment priced at $5,200, giving a
10 percent promissory note in exchange.

Assets

+ 5,200

3-17

=

Liabilities

+

Stockholders’
Equity

+ 5,200

LO 2 Explain double-entry rules.


Double-Entry System Illustration
4. Received $4,000 cash for services performed.

Assets

+ 4,000

=

Liabilities

+

Stockholders’
Equity

+ 4,000
(revenue)

3-18

LO 2 Explain double-entry rules.


Double-Entry System Illustration
5. Pay off a short-term liability of $7,000.

Assets

- 7,000

3-19

=

Liabilities

+

Stockholders’
Equity

- 7,000

LO 2 Explain double-entry rules.


Double-Entry System Illustration

6. Declared a cash dividend of $5,000.

Assets

=

Liabilities

+ 5,000

3-20

+

Stockholders’
Equity

- 5,000

LO 2 Explain double-entry rules.


Double-Entry System Illustration
7. Convert a long-term liability of $80,000 into common
stock.

Assets

=

Liabilities

- 80,000

3-21

+

Stockholders’
Equity

+ 80,000

LO 2 Explain double-entry rules.


Double-Entry System Illustration
8. Pay cash of $16,000 for a delivery van.

Assets

=

Liabilities

+

Stockholders’
Equity

- 16,000
+ 16,000
Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
3-22

LO 2 Explain double-entry rules.


Financial Statements and Ownership Structure
Ownership structure dictates the types of accounts that are
part of or affect the equity section.
Proprietorship
Proprietorship or
or
Partnership
Partnership

3-23

Corporation
Corporation



Owner’s Capital



Common Stock



Owner’s Drawing



Paid-in Capital in
Excess of Par



Dividends



Retained Earnings

LO 2 Explain double-entry rules.

Financial Statements and Ownership Structure
Illustration 3-4

Balance Sheet
Stockholders’ Equity
Common Stock
(investments by stockholders)

Retained Earnings
(net income retained in business)

Net income or Net loss
Dividends

(revenues less expenses)

Income Statement

Statement of Retained Earnings
3-24

LO 2 Explain double-entry rules.


3

The Accounting
Information System

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
1.

Understand basic accounting
terminology.

6.

Prepare financial statements from the
adjusted trial balance.

2.

Explain double-entry rules.

7.

Prepare closing entries.

3.

Identify steps in the accounting cycle.

8.

4.

Record transactions in journals, post to
ledger accounts, and prepare a trial
balance.

Prepare financial statements for a
merchandising company.

5.

Explain the reasons for preparing
adjusting entries and identify major types
of adjusting entries.

3-25