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1. PRESENTATION
ON
GENERAL LEDGER
&
TRAIL BALANCE
Prepared by
HASHIBUL HASAN
h.hashibul@yahoo.com
2. General ledger
HASHIBUL HASAN
DEPARTMENT OF CSE
DAFFODIL INTERNATIONAL UNIVERSITY
DHAKA,BANGLADESH
3. Definition
The General Ledger contains all of the balance sheet
DAFFODIL INTERNATIONAL UNIVERSITY
accounts of an accounting system. The balance sheet
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
accounts are the assets, liabilities, and fund balance
accounts of the school district. Values in General Ledger are
expressed as debits or credits.
4. The ledger page is actually a T-account in a more detailed format. It has the
account title and its corresponding account number on top. It also has two
sides, namely, the debit side and the credit side. Each T-account or ledger
account has the following columns.
Date (debit side)- the date of the debit entry is entered in this
column.
DAFFODIL INTERNATIONAL UNIVERSITY
Explanation (debit side)- A brief explanation of the debit entry is
entered in this column.
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
“F” or folio (debit side)- The journal page number from where the
debit entry was taken is entered in this column.
Debit- The amount of the debit entry is entered in this column.
Date (credit side) - the date of the credit entry is entered in this
column.
Explanation (credit side) - A brief explanation of the credit entry
is entered in this column.
“F” or folio (credit side)- The journal page number from where the
credit entry was taken is entered in this column.
Credit - The amount of the credit entry is entered in this column
5. An example of a page from a ledger is as follows:-
Accounts receivable Account No: 2001
Date Explanation F Debit Date Explanation F Credit
DAFFODIL INTERNATIONAL UNIVERSITY
2008 2008
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
Sept-29 Service on credit 1 50, 000.00 Sept. 30 Collection 1 20,000.00
10 Collection 1 30,000.00
50,000.00
Balance 0.0
6. The posting procedure
Step 1- Locate the account title used by the journal entry in the general ledger.
Step 2- Determine if the journal entry is a debit entry or a credit. If it is a debit entry, it should be
posted on the debit side of the located ledger account. If it is credit entry, it should be posted on the
credit side of the located ledger account.
Step 3- Record the date of the journal entry in the date column. If the posting is to be done on a
fresh page, write the year on the first line. Then write the month and day of the journal entry on the
second line. For succeeding entries, only the day of the journal entry should be written. The month
DAFFODIL INTERNATIONAL UNIVERSITY
should be written only if it is different from the month of the last entry made.
DEPARTMENT OF CSE
DHAKA,BANGLADESH
Step 4- Write a brief explanation of the journal entry in the explanation column. It should be on the
HASHIBUL HASAN
same line as that of the date.
Step 5- Write the amount of the journal entry in the amount column. It should be on the same line as
that of the date and explanation.
Step 6- In the folio column, write the page number of the general journal page that contains the
posted journal entry. It should be on the same line as that of the date, the explanation, and the
amount.
Step 7- In the folio column of the general journal, write the account number of the page number of
the ledger account in which the journal entry was posted. The account number of the page number
should be on the same line as of the journal entry.
Step 8- Do not leave a blank line between entries in the general ledger.
7. Explain With A Example :-
HASHIBUL HASAN
DEPARTMENT OF CSE
DAFFODIL INTERNATIONAL UNIVERSITY
DHAKA,BANGLADESH
8. Selected transaction for tina cordero company during its first month in business are presenter below :-
st. 1. Invested $10000 cash in the business
Sept. 5. Purchased equipment for $12000 paying $5000 in cash and the balance on account.
Sept.25. Paid $3000 cash on balance owed for equipment.
Sept.30. Withdrew $500 cash for personal use.
General Journal General Ledger >>Equipment
Date Account Title & Ref Debit Credit Date Explanation Re Debit Credit Balance
Description f
Sept-1 Cash 10,000 Sept.5 J1 12,000 12,000
Tina 10,000
Cordero,capital
General Ledger >>Account Payable
DAFFODIL INTERNATIONAL UNIVERSITY
5 Equipment 12,000
Cash 5,000 Date Explanation Ref Debit Credit Balance
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
Account Payable 7,000
Sept.5 J1 7,000 7,000
25 Account Payable 3,000
25 J1 3,000 4,000
Cash 3,000
30 Drawings 500 General Ledger >>Tina Cordero,capital
Cash 500
Date Explanation Ref Debit Credit Balance
General Ledger>>cash Sept.1 J1 10,000 10,000
Date Explanation Ref Debit Credit Balance
Sept.1 J1 10,000 10,000 General Ledge >>Tina Cordero,drawing
5 J1 5,000 5,000
25 J1 3,000 2,000 Date Explanation Ref Debit Credit Balance
30 J1 500 1,500
Sept.30 J1 500 500
9. TRAIL BALANCE
HASHIBUL HASAN
DEPARTMENT OF CSE
DAFFODIL INTERNATIONAL UNIVERSITY
DHAKA,BANGLADESH
10. Trial Balance
Trial Balance Calculation
A basic rule of double-entry accounting Account Debits Credits
is that for every credit there must be
an equal debit amount. From this Account 1 xxxx.xx
concept, one can say that the sum of Account 2 xxxx.xx
DAFFODIL INTERNATIONAL UNIVERSITY
all debits must equal the sum of all
credits in the accounting system. If Account 3 xxxx.xx
DEPARTMENT OF CSE
DHAKA,BANGLADESH
debits do not equal credits, then an
HASHIBUL HASAN
.
error has been made. The trial
balance is a tool for detecting such .
errors. .
Account 4 xxxx.xx
The trial balance is calculated by
summing the balances of all the ledger Account 5 xxxx.xx
accounts. The account balances are Account 6 xxxx.xx
used because the balance
summarizes the net effect of all of the .
debits and credits in an account. To .
calculate the trial balance, construct a .
table in the following format :
Total xxxx.xx xxxx.xx
11. Steps to Prepare the Trial Balance
For each ledger account — Cash, Accounts Payable, etc. — total
your credits and debits.
If the credit total is larger, subtract the debit total from the credit total to
DAFFODIL INTERNATIONAL UNIVERSITY
get your ledger account total which goes in the credit column of the trial
DEPARTMENT OF CSE
DHAKA,BANGLADESH
balance
HASHIBUL HASAN
If the debit total is larger, subtract the credit total from the debit total to
get your ledger account total which goes in the debit column of the trial
balance
Put the ledger account total in the credit or debit column of your trial
balance (as identified above).
When you have debit or credit totals for each ledger account, add all
of your credit totals to get a credit grand total.
Add all of your debit totals to get a debit grand total. This is your trial
balance.
12. Unbalanced Trial Balance
If you have an unbalanced trial balance, then you have an error
somewhere in the accounting process. Examples of problems that can
unbalance a trial balance include:
DAFFODIL INTERNATIONAL UNIVERSITY
DEPARTMENT OF CSE
DHAKA,BANGLADESH
Adding the debits and credits for the trial balance incorrectly;
HASHIBUL HASAN
Forgetting to include a ledger account balance on the trial balance;
Putting the ledger account balances in the wrong debit/credit
column in the trial balance;
Writing the wrong ledger account balances in the trial balance
columns;
Miscalculating the ledger account totals;
Posting a journal entry incorrectly to the general ledger, whether
using the wrong number or getting your debits/credits mixed up;
Making an error in your journal entry, whether using the wrong
number or forgetting part of a compound journal entry.
13. Balanced Trial Balance
If all of your journal entries were posted properly (and error-free) in the
general ledger, your debit grand total and credit grand total should balance,
and you can move on in the accounting cycle. If the debit and credit grand
totals do not balance, then you have an error to find somewhere in your
DAFFODIL INTERNATIONAL UNIVERSITY
transaction posting process (journal to general ledger to trial balance).
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
It's possible to have a posting error even if the debits and credits do
balance, but that will get found and solved later in the accounting cycle.
Examples of problems that would not show up in the trial balance include:
* Putting the credit amount in the debit column and the debit amount in the credit
column for a particular transaction;
* Recording a transaction in an incorrect account;
* Forgetting to record a journal entry as a general ledger transaction;
* Neglecting to make a journal entry at all.
14. LIMITATIONS OF A TRIAL BALANCE
A trial balance does not prove that all transactions have been
recorded or that the ledger is correct.
Numerous errors may exist even though the trial balance columns
agree.
The trial balance may balance even when:
DAFFODIL INTERNATIONAL UNIVERSITY
* a transaction is not journalized,
DEPARTMENT OF CSE
DHAKA,BANGLADESH
HASHIBUL HASAN
* a correct journal entry is not posted,
* a journal entry is posted twice,
* incorrect accounts are used in journalizing or posting,
* offsetting errors are made in recording the amount of the
transaction.
16. CHAPTER 2
THE RECORDING
PROCESS
After studying this chapter, you should be able to:
1 Explain what an account is and how it
helps in the recording process
2 Define debits and credits and explain
how they are used to record business
transactions
3 Identify the basic steps in the recording
process
4 Explain what a journal is and how it
helps in the recording process
17. CHAPTER 2
THE RECORDING
After studying PROCESS
this chapter, you should be able to:
5 Explain what a ledger is and how it helps
in the recording process
6 Explain what posting is and how it helps
in the recording process
7 Prepare a trial balance and explain its
purpose
18. THE ACCOUNT
STUDY OBJECTIVE 1
An account is an individual
accounting record of increases
and decreases in a specific asset,
liability, or owner’s equity item.
There are separate accounts for
the items we used in transactions
such as cash, salaries expense,
accounts payable, etc.
19. BASIC FORM OF ACCOUNT
STUDY OBJECTIVE 2
The simplest form an account consists of
1 the title of the account
2 a left or debit side
3 a right or credit side
The alignment of these parts resembles the
letter T = T account
Title of Account
Left or debit side Right or credit
side
Debit balance Credit balance
20. DEBITS AND CREDITS
Debit indicates left and Credit indicates right
Recording $s on the left side of an account is
debiting the account
Recording $s on the right side is crediting the
account
If the total of debit amounts is bigger than credits,
the account has a debit balance
If the total of credit amounts is bigger than debits,
the account has a credit balance
22. DEBITING AN ACCOUNT
Cash
Debits Credits
15,000
Example: The owner makes an initial
investment of $15,000 to start
the business. Cash is debited
as the owner’s Capital is
credited.
23. CREDITING AN ACCOUNT
Cash
Debits Credits
7,000
Example: Monthly rent of $7,000 is paid.
Cash is credited as Rent
Expense is debited.
24. DEBITING / CREDITING AN
ACCOUNT
Cash
Debits Credits
15,000 7,000
8,000
Example: Cash is debited for $15,000 and
credited for $7,000, leaving a
debit balance of $8,000.
25. DOUBLE-ENTRY SYSTEM
equal debits and credits made
accounts for each transaction
total debits always equal the total
credits
accounting equation always stays
in balance
Assets Liabilities Equity
26. DEBIT AND CREDIT EFFECTS
— ASSETS AND LIABILITIES
Debits Credits
Increase assets Decrease assets
Decrease liabilities Increase liabilities
27. NORMAL BALANCE
everyaccount has a
designated normal balance.
It is either a debit or credit.
accountsrarely have an
abnormal balance.
28. NORMAL BALANCES —
ASSETS AND LIABILITIES
Assets
Increase Decrease
Normal
Liabilities
Balance
Decrease Debit
Increase
Credit
Normal
Balance
29. DEBIT AND CREDIT EFFECTS
— OWNER’S CAPITAL
Debits Credits
Decrease owner’s capital Increase owner’s capital
30. NORMAL BALANCE — OWNER’S
CAPITAL
Owner’s Capital
Decrease Increase
Normal
Balance
Debit
Credit
31. DEBIT AND CREDIT EFFECTS
— OWNER’S DRAWING
Debits Credits
Increase owner’s drawing Decrease owner’s
drawing
Remember, Drawing is a contra-account – an account that is
backwards from the account it accompanies (the Capital
account).
32. NORMAL BALANCE —
OWNER’S DRAWING
Owner’s Drawing
Decrease Increase
Normal
Balance
Debit
Credit
33. DEBIT AND CREDIT EFFECTS
— REVENUES AND EXPENSES
Debits Credits
Decrease revenues Increase revenues
Increase expenses Decrease expenses
34. NORMAL BALANCES —
REVENUES AND EXPENSES
Revenues
Decrease Increase
Normal
Balance
Expenses
Increase Debit
Decrease
Credit
Normal
Balance
35. EXPANDED BASIC EQUATION
AND DEBIT/CREDIT RULES
AND EFFECTS
Asset = Liabilities + Owner’s Equity
s
Owner’s Owner’s
Assets = Liabilities + -
Capital Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -
+ Revenues - Expense
s
Dr. Cr. Dr. Cr.
- + + -
36. Which of the following is not true of the
terms debit and credit.
a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and
decrease.
c. They can be used to describe the balance of an
account.
d. They can be interpreted to mean left and right.
Chapter 2
37. THE RECORDING
PROCESS
STUDY OBJECTIVE 3
1 analyze each transaction (+, -)
2 enter transaction in a journal
3 transfer journal information to
ledger accounts
38. THE JOURNAL
STUDY OBJECTIVE 4
Transactions
Are initially recorded in chronological
order before they are transferred to the
ledger accounts.
A general journal has
1 spaces for dates
2 account titles and explanations
3 references
4 two amount columns
39. THE JOURNAL
A journal makes several contributions to
recording process:
1 discloses in one place the complete effect of a
transaction
2 provides a chronological record of transactions
3 helps to prevent or locate errors as debit and
credit amounts for each entry can be compared
40. JOURNALIZING
Entering transaction data in the journal
is known as journalizing.
Separate journal entries are made for
each transaction.
A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be
debited and credited,
3 a brief explanation of transaction.
41. TECHNIQUE OF
JOURNALIZING
The date of the transaction is entered into the
date column.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)
1 Computer Equipment 7,000
Cash 7,000
(Purchased equipment for
cash)
42. TECHNIQUE OF
JOURNALIZING
The debit account title is entered at the extreme
left margin of the Account Titles and Explanation
column. The credit account title is indented on
the next line.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)
1 Computer Equipment 7,000
Cash 7,000
(Purchased equipment for
cash)
43. TECHNIQUE OF
JOURNALIZING
The amounts for the debits are recorded in the
Debit column and the amounts for the credits
are recorded in the Credit column.
44. TECHNIQUE OF
JOURNALIZING
A brief explanation of the transaction is given.
45. TECHNIQUE OF
JOURNALIZING
A space is left between journal entries. The
blank space separates individual journal entries
and makes the entire journal easier to read.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)
1 Computer Equipment 7,000
Cash 7,000
(Purchased equipment for
cash)
46. TECHNIQUE OF
JOURNALIZING
The column entitled Ref. is left blank at the time
journal entry is made and is used later when the
journal entries are transferred to the ledger
accounts.
47. SIMPLE AND COMPOUND
JOURNAL ENTRIES
If an entry involves only two accounts, one debit
and one credit, it is considered a simple entry.
48. COMPOUND JOURNAL
ENTRY
When three or more accounts are required in
one journal entry, the entry is referred to as a
compound entry.
1
2
3
49. COMPOUND JOURNAL
ENTRY
This is the wrong format; all debits must be listed
before the credits are listed.
50. THE LEDGER
STUDY OBJECTIVE 5
A Group of accounts maintained by a
company is called the ledger.
A general ledger contains all the
assets, liabilities, and owner’s
equity accounts
51. POSTING A JOURNAL ENTRY
STUDY OBJECTIVE 6
In the ledger, enter in the appropriate columns of the account(s) debited
the date, journal page, and debit amount shown in the journal.
52. POSTING A JOURNAL ENTRY
In the ledger, enter in the appropriate columns of the account(s) debited
the date, journal page, and debit amount shown in the journal.
53. POSTING A JOURNAL
ENTRY
In the reference column of the journal, write the account
number to which the debit amount was posted.
54. POSTING A JOURNAL
ENTRY
GENERAL LEDGER
CASH NO. 10
Date Explanation Ref. Debit Credit Balance
2005
Sept. 1 J1 15,000 15,000
In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and
credit amount shown in the journal.
55. POSTING A JOURNAL
ENTRY
In the reference column of the journal, write the account number to which the
credit amount was posted.
56. CHART OF ACCOUNTS
A Chart of Accounts lists the accounts and the
account numbers which identify their location in
the ledger.
57. INVESTMENT OF CASH BY
OWNER
October 1, C.R. Byrd invests $10,000 cash in an
Transaction advertising business known as:
The Pioneer Advertising Agency.
Basic •The asset Cash is increased $10,000
Analysis •Owner’s equity, C. R. Byrd, Capital is increased
$10,000.
Debits increase assets: debit Cash $10,000.
Debit-Credit
Credits increase owner’s equity: credit C.R. Byrd,
Analysis Capital $10,000.
59. RECEIPT OF CASH FOR
FUTURE SERVICE
October 2, a $1,200 cash advance is received from a
Transaction client, for advertising services expected to be
completed by December 31.
Asset Cash is increased $1,200
Liability Unearned Fees is increased $1,200
Basic •Service has not been rendered yet.
Analysis
Liabilities often have the word “payable” in their
title, Unearned fees are a liability.
Debits increase assets: debit Cash $1,200.
Debit-Credit
Credits increase liabilities: credit Unearned Fees
Analysis $1,200.
61. PAYMENT OF
MONTHLY RENT
October 3, office rent for October is paid in cash,
Transaction $900.
Basic The expense Rent is increased $900
Analysis Payment pertains only to the current month
Asset Cash is decreased $900.
Debit-Credit Debits increase expenses: debit Rent Expense $900.
Analysis Credits decrease assets: credit Cash $900.
63. PAYMENT FOR INSURANCE
October 4, $600 Paid one-year insurance policy-
Transaction expires next year on September 30.
-Asset Prepaid Insurance increases $600
-Payment extends to more than the current month
Basic -Asset Cash is decreased $600.
Analysis -Payments of expenses benefiting more than one
period are prepaid expenses or prepayments.
Debit-Credit Debits increase assets: debit Prepaid Insurance
Analysis $600. Credits decrease assets: credit Cash $600.
65. PURCHASE OF
SUPPLIES ON CREDIT
October 5, an estimated 3-month supply of
Transaction advertising materials is purchased on account from
Aero Supply for $2,500.
Basic The asset Advertising Supplies is increased $2,500;
Analysis the liability Accounts Payable is increased $2,500.
Debits increase assets: debit Advertising Supplies
Debit-Credit
$2,500. Credits increase liabilities: credit
Analysis Accounts Payable $2,500.
67. HIRING OF EMPLOYEES
October 9, hire four employees to begin work on
October 15. Each employee is to receive a weekly
Transaction salary of $500 for a 5-day work week, payable every
2 weeks -- first payment made on October 26.
A business transaction has not occurred only an
Basic agreement between the employer and the
Analysis employees to enter into a business transaction
beginning on October 15.
Debit-Credit A debit-credit analysis is not needed because there is
Analysis no accounting entry.
68. WITHDRAWAL OF CASH
BY OWNER
October 20, C. R. Byrd withdraws $500 cash for
Transaction personal use.
Basic The owner’s equity account C. R. Byrd, Drawing is
Analysis increased $50
The asset Cash is decreased $500.
Debits increase drawings: debit C. R. Byrd,
Debit-Credit
Drawing $500. Credits decrease assets: credit
Analysis Cash $500.
70. PAYMENT OF SALARIES
October 26, employee salaries of $4,000 are owed
Transaction and paid in cash. (See October 9 transaction.)
Basic The expense account Salaries Expense is increased
Analysis $4,000; the asset Cash is decreased $4,000.
Debit-Credit Debits increase expenses: debit Salaries Expense
Analysis $4,000. Credits decrease assets: credit Cash $4,000.
72. RECEIPT OF CASH FOR FEES
EARNED
October 31, received $10,000 in cash from Copa
Transaction Company for advertising services rendered in
October.
Basic The asset Cash is increased $10,000; the revenue
Analysis Fees Earned is increased $10,000.
Debit-Credit Debits increase assets: debit Cash $10,000. Credits
Analysis increase revenues: credit Fees Earned $10,000.
74. THE TRIAL BALANCE
STUDY OBJECTIVE 7
The trial balance is a list of accounts and
their balances at a given time.
The primary purpose of a trial balance is
to prove debits = credits after posting.
If debits and credits do not agree, the
trial balance can be used to uncover
errors in journalizing and posting.
75. THE TRIAL BALANCE
The Steps in preparing the Trial Balance are:
1. List the account titles and balances
2. Total the debit and credit columns
3. Prove the equality of the two columns
76. A TRIAL BALANCE
The total debits
must equal the
total credits.
77. LIMITATIONS OF A TRIAL
BALANCE
A trial balance does not prove all transactions
have been recorded or the ledger is correct.
Numerouserrors may exist even though the trial
balance columns agree. For example, the trial
balance may balance even when:
a transaction is not journalized
a correct journal entry is not posted
a journal entry is posted twice
incorrect accounts used in journalizing or
posting
offsetting errors are made in recording
78. Which one of the following represents the expanded
basic accounting equation?
a. Assets = Liabilities + Owner’s Capital + Owner’s
Drawings – Revenue - Expenses.
b. Assets + Owner’s Drawings + Expenses = Liabilities
+ Owner’s Capital + Revenue.
c. Assets – Liabilities – Owner’s Drawings = Owner’s
Capital + Revenue – Expenses.
d. Assets = Revenue + Expenses – Liabilities.
Chapter 2
79. Stockholders’ Equity
Fundamentals of Corporate
Finance
by Robert Parrino and David S.
Kidwell
John Wiley & Sons, Inc.. (c) 2009.
Copying Prohibited
80. Fundamentals of Corporate Finance
by Robert Parrino and David S. Kidwell
John Wiley & Sons, Inc.. (c) 2010. Copying
Prohibited.
Reprinted for Sai Chakrala, Bank of
America
Reprinted with permission as a
subscription benefit of Books24x7,
81. Learning Objectives
• Explain the advantages and disadvantages of a
corporation
• Measure the effect of issuing stock on a
company’s financial position
• Describe how treasury stock transactions affect
a company
• Account for dividends and measure their impact
on a company
• Use different stock values in decision making
• Evaluate a company’s return on assets and
return on common equity
82. Characteristics of Corporate Form
• Separate legal entity
• Continuous life and transferability of
ownership
• Limited liability for stockholders
• Separation of ownership and management
• Corporate taxation – income is taxed at
the corporate level; dividends are taxed at
the shareholder level
• Government regulation
83. Organizing a Corporation
• Obtain a charter from the state
• Bylaws
• Stockholders elect Board of Directors
• Board of Directors sets policy and
appoints officers
• Board elects a chairperson
• Board selects the president
84. Stockholders’ Rights
• Vote – one vote for each share of stock
• Dividends –right to participate in dividend
distributions
• Liquidation – right to receive proportionate
share of assets remaining after creditors
have been paid
• Preemption – right to maintain one’s
proportionate share of ownership in the
corporation
85. Stockholders’ Equity
• Paid-in capital (contributed capital)
• Retained earnings
• Classes of stock
– Common and Preferred
– Par or No-Par
86. Issuing Stock
Issue 6.2 million shares of $10 par value stock at par.
Cash 62,000,000
Common Stock 62,000,000
To issue common stock
Issue 6.2 million shares of $0.01 par value stock at $10 per
share.
Cash 62,000,000
Common Stock 62,000
Paid-in Capital in Excess of Par – Common
(6,200,000 x 9.99) 61,938,000
To issue common stock
87. Issuing Stock
Issue 3,000 shares of no-par stock for $20 per share.
Cash 60,000
Common Stock 60,000
To issue common stock
Issued 3,000 shares of no-par stock with a stated value of $1
for $20 per share
Cash 60,000
Common Stock (3,000 x $1 stated value) 3,000
Paid-in Capital in Excess of Stated Value
– Common (3,000 x 19) 57,000
To issue common stock
88. Common Stock Issued for Other Assets
• Value the exchange at the current market
value of the assets received.
Issued 15,000 shares of $1 par common for equipment worth
$4,000 and a building worth $120,000.
Equipment 4,000
Building 120,000
Common Stock (15,000 x $1 par) 15,000
Paid-in Capital in Excess of Par
– Common (124,000 – 15,000) 109,000
To issue common stock
89. Ethical Issues
• When shares are issued for assets other
than cash, care should be taken to not
over-value those assets and thus inflate
values on the balance sheet.
90. Treasury Stock
• A company’s own stock that it has issued
and later reacquired is treasury stock.
• Reasons companies have treasury stock
– to use for employee stock purchase plans
– to increase net assets by buying shares at a
low price and selling at a higher price
– to avoid takeover by outside parties
• Treasury Stock is a contra stockholders’
equity account
91. Preferred Stock
• Entries are similar to entries for common
stock.
• Paid-in Capital in Excess of Par –
Preferred is a separate equity account.
92. Treasury Stock
Purchased shares of treasury stock for $19,000.
Treasury Stock 19,000
Cash 19,000
To purchase treasury stock
Sold treasury stock for $25,000 that was previously
purchased for $19,000.
Cash 25,000
Treasury Stock 19,000
Paid-in Capital in from Treasury Stock 6,000
Sold treasury stock
93. Other Stock-Related Issues
• If treasury stock is sold below its cost,
retained earnings is debited for the
difference between cost and selling price.
• Stock retirement involves purchasing
stock and removing it from “issued” status.
• To retire stock, remove the stock account,
any related paid-in capital accounts, and
increase cash.
94. Dividends
• To pay dividends, a company must have
– enough retained earnings to declare the
dividend
– enough cash to pay the dividend
• Relevant dates related to dividends
– Declaration date
– Date of record
– Payment date
95. Dividends
Declaration date – a liability is created.
Retained Earnings 50,000
Dividends Payable 50,000
Declared a cash dividend
Date of record – no entry required
Date of payment – a liability is settled
Dividends Payable 50,000
Cash 50,000
Paid cash dividend
96. Computing Dividends
• Dividends on preferred stock are either
– percentage rate
– dollar amount
• Preferred stock may be
– cumulative (dividends in arrears must be paid
before other stockholders receive a dividend)
– non-cumulative – dividends not paid in one
year are not made up later.
97. Stock Dividend
• A proportional distribution by a corporation
of its own stock to the stockholders
• Increase stock account and decrease
retained earnings.
• Total equity is unchanged, and assets and
liabilities are unaffected.
• Reasons for stock dividends:
– to conserve cash
– to reduce the per-share market price of the
stock
98. Stock Dividend
• Small stock dividend (less that 25%)
reduces retained earnings for the current
market value of the stock
• Large stock dividend (greater than 25%)
reduces retained earnings for par value of
the stock.
99. Stock Dividend
10% stock dividend declared when 20,000,000 shares of
common stock are outstanding. Market price of the stock is
$15.
20,000,000 shares of common outstanding
x .10 stock dividend
x $15 market value per share of common
Retained Earnings 30,000,000
Common Stock 20,000
Paid-in Capital in Excess of Par –
Common 29,980,000
Distributed a 10% stock dividend
20,000,000 x 0.10 x $.01 par
value per share
100. Stock Split
• An increase in the number of authorized,
issued, and outstanding shares of stock,
coupled with a proportionate reduction in
the stock’s par value.
• Total equity does not change. Only par
value, number of shares issued, and
number of shares authorized are affected.