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7/e

FinancialStatements and

the Annual Report

PowerPoint Author: Catherine Lumbattis

COPYRIGHT © 2011 South-Western/Cengage Learning

External and Internal EventsExternal events: interaction between entity

and outside environment

LO1

Internal events:Interaction within

entity

Source Documents

Evidence neededin an accountingsystem to record

transactions

PurchaseInvoice

CashRegister

Tape

SalesInvoice

ReceivingDocument

PayrollRecords

ShippingDocument

Checks

LO2

Assets = Liabilities + Owners’ Equity

Cash Capital Stock+ $ 100,000 = + $ 100,000

The accounting equation must always remain in balance

Issue Capital Stock for Cash

LO3

1/10 Transactions for Glengarry Health Club

Purchase of Property in Exchange for Note Payable

Increase on left has corresponding increase on right

Assets = Liabilities + Owners’ Equity

Land Note Payable + $50,000 = + $200,000

Building + $150,000

Assets = Liabilities + Owners’ Equity

Equip. Accts. Pay.+ $20,000 = + $20,000

Purchase of Equipment on Account

At least two accounts affected by every transaction

Revenue– Expenses= Net Income (Loss)

Income Statement Statement of

Retained Earnings

Beg. R/E+ Net Income (or – Net Loss)– Dividends= End. R/E

Effect of Revenue and Expenses on Retained Earnings

Sell Monthly Membershipson Account

Assets = Liabilities + Owners’ Equity

Accts. Rec. Retained Earnings+ $15,000 = + $15,000

Revenues increase retained earnings

Sell Court Time for Cash

Assets = Liabilities + Owners’ Equity

Cash Retained Earnings+ $5,000 = + $5,000

Revenues increase retained earnings

Assets = Liabilities + Owners’ Equity

Cash Retained Earnings – $10,000 = – $10,000

Expenses decrease retained earnings

Payment of Wages and Salaries

Assets = Liabilities + Owners’ Equity

Cash Retained Earnings– $3,000 = – $3,000

Payment of Utilities

Expenses also decrease assets or increase liabilities

Collection of Accounts Receivable

Assets = Liabilities + Owners’ Equity Cash + $4,000 = (no change in Liab. or R/E)

Accts. Rec. – $4,000

Assets were traded: accounts receivable for cash

Assets = Liabilities + Owners’ Equity Cash Retained Earnings – $2,000 = – $2,000

Payment of Dividends

Dividends directly reduce retained earnings

Assets = Liabilities + O/ESold stock + $100,000 = + $100,000Bought prop. with note + 200,000 = + $200,000Bought equip. on acct. + 20,000 = + 20,000Sold memberships + 15,000 = + 15,000Sold court time + 5,000 = + 5,000Paid wages – 10,000 = – 10,000Paid utilities – 3,000 = – 3,000Collected A/R + 4,000 = (no change in Liabilities + OE) – 4,000Paid dividends – 2,000 = – 2,000

Cumulative Effect of Transactions for Glengarry Health Club

+ $325,000 = + $220,000 + $105,000

Glengarry Health ClubBalance Sheet

January 31, 2010 Assets Cash $ 94,000Accts. Rec. 11,000Equipment 20,000Building 150,000Land 50,000Total assets $325,000

Liabilities and Owners’ EquityAccounts payable $ 20,000Notes payable 200,000Capital stock 100,000Retained earnings 5,000Total liabilities and owners’ equity $325,000

Glengarry Health ClubIncome Statement

For the Month Ended January 31, 2010Revenues: Memberships $15,000 Court fees 5,000 $20,000Expenses: Salaries and wages $10,000 Utilities 3,000 13,000Net income $ 7,000

Net increase to retained earnings

Sample Chart of Accounts 100–199: ASSETS

100–109: Cash

101: Checking Account102: Savings Account

110–119: Receivables

111: Accounts Receivable

120–129: Prepaid Assets

121: Cleaning Supplies122: Prepaid Insurance

130–139: Property, Plant, and Equipment131: Land132: Building

:

200–299 LIABILITIES 200–209: Short-Term Liabilities

201: Accounts Payable 202: Wages Payable

:300–399 OWNERS’ EQUITY

301: Preferred Stock 302: Common Stock 303: Retained Earnings

400–499 REVENUES

500–599 EXPENSES

LO4

General Ledger

File or book that contains one page (or entry) for each account

Cash+100 – 50

A/R +400 –100

The T Account

Account Name

Representation of one account in the general ledger

Debits are entered on left

Credits areentered on right

LO5

The T Account

900 cr.

Account Name

400 dr.

500 cr.Debits and credits

are netted to obtainbalance in account

Debits/Credits and the Accounting Equation

=ASSETS

Dr. Cr.

+ –

+LIABILITIES

Dr. Cr.

+–

OWNERS’EQUITY

Dr. Cr.

+–

Opposite sides of the accounting equation are increased/decreased in an opposite way

Link Between Revenues and Retained EarningsRETAINEDEARNINGS

Dr. Cr.

REVENUES

Dr. Cr.

Revenues increase retained earnings

(part of owners’ equity)

Both accounts are increased with credits–

–

+

+

Link Between Expenses and Dividends and Retained Earnings

RETAINEDEARNINGS

DR. CR.

+–

DR. CR.

EXPENSES ANDDIVIDENDS

+ –

Retained earnings is decreased with debits

Use debits to record (increase) expenses and dividends

Expenses and dividendsdecrease retained earnings

Normal Account Balances

AssetsExpensesDividends

LiabilitiesOwners’ EquityRevenues

Debit Credit

all increased with debits

all increased with credits

Cash Capital Stock(1) 100,000 100,000 (1)

Transactions and T Accounts

(1) Issue capital stock for cash

Transactions and T Accounts Land (2) 50,000

Note Payable Building 200, 000 (2)(2) 150,000

(2) Purchase property in exchange for note payable

Transactions and T Accounts

Equipment Accounts Payable(3) 20,000 20,000 (3)

(3) Purchase equipment on account

(4) Sell monthly memberships on account

15,000 (4)

Membership Revenue

Transactions and T Accounts Accounts Receivable(4) 15,000

(5) Sell court time for cash

5,000 (4)

Cash

(1) 100,000(5) 5,000

Court Fee Revenue

Transactions and T Accounts

T Accounts reflect current and previous

postings to the account for each period

(6) Pay employees wages for the month(7) Pay utilities for the month

(1) 100,000 (5) 5,000

Wage Expense (6) 10,000

Cash

Transactions and T Accounts

Utilities Expense (7) 3,000

10,000 (6) 3,000 (7)

(8) Collection of accounts receivable

Cash

(8) 4,000

(1) 100,000(5) 5,000

10,000 (6) 3,000 (7)

Accounts Receivable

4,000 (8)(4) 15,000

Transactions and T Accounts

(9) Pay dividends

Cash

(8) 4,000

(1) 100,000(5) 5,000

10,000 (6) 3,000 (7)

Dividends

(9) 2,000

Transactions and T Accounts

2,000 (9)

Determine the Balance of the T Accounts

Accounts Receivable4,000 (8)(4) 15,000

Cash

(8) 4,000

(1) 100,000(5) 5,000

10,000 (6) 3,000 (7) 2,000 (9)

94,000

11,000

The Journal

A chronological record of transactions The book of original entry Each entry has a debit and a credit that equals Transactions normally recorded in general journal

Posting from Journal

Journal(via journal entries):

Dr. Cr.Cash 100,000 Capital Stock 100,000To record the issuance of 10,000 shares

Journal(via journal entries):

Dr. Cr.Cash 100,000 Capital Stock 100,000To record the issuance of 10,000 shares

Transactions are entered in:

Ledger Accounts• Cash• Capital Stock

Ledger Accounts• Cash• Capital Stock

And then posted to:

LO6

Journal Entries Dr. Cr.Building 150,000Land 50,000 Notes Payable 200,000To record acquisition of property in exchange for note

Equipment 20,000 Accounts Payable 20,000To record the acquisition of equipment on open account

Accounts Receivable 15,000 Membership Revenue 15,000To record sale of monthly memberships on account

Journal Entries Dr. Cr.Cash 5,000 Court Fee Revenue 5,000To record sale of court timefor cash.

Wage and Salary Expense 10,000 Cash 10,000To record payment of wagesand salaries.

Utilities Expense 3,000 Cash 3,000To record payment of utilities.

Journal Entries Dr. Cr.Cash 4,000 Accounts Receivable 4,000To record collection of accountsreceivable.

Dividends 2,000 Cash 2,000To record payment of dividends.

CashAccounts ReceivableEquipmentBuildingLandAccounts PayableNotes PayableCapital StockMembership RevenueCourt Fee RevenueWage ExpenseUtility ExpenseDividends Totals

$ 94,000 11,000 20,000 150,000 50,000

$ 20,000 200,000

100,000 15,000 5,000 10,000 3,000 2,000

$340,000 $340,000

Debits Credits

Glengarry Health ClubTrial Balance

January 31, 2010

LO7

End of Chapter 3