Ch03

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  • 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Ch03

    1. 2. <ul><li>The Accounting </li></ul><ul><li>Information System </li></ul>Accounting, Third Edition
    2. 3. <ul><li>Analyze the effect of business transactions on the basic accounting equation. </li></ul><ul><li>Explain what an account is and how it helps in the recording process. </li></ul><ul><li>Define debits and credits and explain how they are used to record business transactions. </li></ul><ul><li>Identify the basic steps in the recording process. </li></ul><ul><li>Explain what a journal is and how it helps in the recording process. </li></ul><ul><li>Explain what a ledger is and how it helps in the recording process. </li></ul><ul><li>Explain what posting is and how it helps in the recording process. </li></ul><ul><li>Explain the purposes of a trial balance. </li></ul><ul><li>Classify cash activities as operating, investing, or financing. </li></ul>Study Objectives
    3. 4. <ul><li>Debits and credits </li></ul><ul><li>Debit and credit procedures </li></ul><ul><li>Stockholders’ equity relationships </li></ul><ul><li>Summary of debit/credit rules </li></ul>Accounting Transactions The Account Steps in the Recording Process The Recording Process Illustrated The Trial Balance <ul><li>Analyzing transactions </li></ul><ul><li>Summary of transactions </li></ul><ul><li>The journal </li></ul><ul><li>The ledger </li></ul><ul><li>Chart of accounts </li></ul><ul><li>Posting </li></ul><ul><li>Summary illustration of journalizing and posting </li></ul><ul><li>Limitations of a trial balance </li></ul>The Accounting Information System
    4. 5. The Accounting Information System The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.
    5. 6. Accounting Transactions <ul><li>Transactions are economic events that require recording in the financial statements . </li></ul><ul><ul><li>May be external or internal. </li></ul></ul><ul><ul><li>Not all activities represent transactions. </li></ul></ul><ul><ul><li>Each transaction has a dual effect on the accounting equation. </li></ul></ul>
    6. 7. Accounting Transactions Question: Are the following events recorded in the accounting records? Event Purchased a computer. Criterion Is the financial position (assets, liabilities, or stockholders’ equity) of the company changed? Pay rent. Record/ Don’t Record Discuss product design with potential customer.
    7. 8. Accounting Transactions Assets Liabilities Stockholders’ Equity = + Transaction Analysis The process of identifying the specific effects of economic events on the accounting equation. SO 1 Analyze the effect of business transactions on the basic accounting equation. Basic Accounting Equation
    8. 9. Accounting Transactions Transaction Analysis SO 1 Analyze the effect of business transactions on the basic accounting equation. Illustration 3-2 Expanded accounting equation
    9. 10. Accounting Transactions Illustration: 1. On October 1, cash of $10,000 is invested in Sierra Corporation by investors in exchange for $10,000 of common stock. 1. +10,000 +10,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    10. 11. Accounting Transactions 2. On October 1, Sierra borrowed $5,000 from Castle Bank by signing a 3-month, 12%, $5,000 note payable. 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    11. 12. Accounting Transactions 3. On October 2, Sierra purchased office equipment by paying $5,000 cash to Superior Equipment Sales Co. 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    12. 13. Accounting Transactions 4. On October 2, Sierra received a $1,200 cash advance from R. Knox, a client. 4. +1,200 +1,200 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    13. 14. Accounting Transactions 5. On October 3, Sierra received $10,000 in cash from Copa Company for advertising services performed. 4. +1,200 +1,200 5. +10,000 +10,000 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    14. 15. Accounting Transactions 6. On October 3, Sierra Corporation paid its office rent for the month of October in cash, $900. 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    15. 16. Accounting Transactions 7. On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30. 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    16. 17. Accounting Transactions 8. On October 5, Sierra purchased a three-month supply of advertising materials on account from Aero Supply for $2,500. 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    17. 18. Accounting Transactions 10. On October 20, Sierra paid a $500 dividend. 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 10. -500 -500 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000 SO 1 Analyze the effect of business transactions on the basic accounting equation.
    18. 19. Accounting Transactions 11. Employees have worked two weeks, earning $4,000 in salaries, which were paid on October 26. 4. +1,200 +1,200 5. +10,000 +10,000 6. -900 -900 7. -600 +600 8. +2,500 +2,500 10. -500 -500 11. -4,000 -4,000 3. -5,000 +5,000 1. +10,000 +10,000 2. +5,000 +5,000
    19. 21. The Account <ul><li>Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. </li></ul><ul><li>Debit = “Left” </li></ul><ul><li>Credit = “Right” </li></ul>Account An Account can be illustrated in a T-Account form. SO 2 Explain what an account is and how it helps in the recording process.
    20. 22. Debit and Credit Procedures <ul><li>Double-entry accounting system </li></ul><ul><li>Each transaction must affect two or more accounts to keep the basic accounting equation in balance. </li></ul><ul><li>Recording done by debiting at least one account and crediting another. </li></ul><ul><li>DEBITS must equal CREDITS . </li></ul>SO 3 Define debits and credits and explain their use in recording business transactions.
    21. 23. Debit and Credit Procedures If Debits are greater than Credits, the account will have a debit balance. $10,000 Transaction #2 $3,000 $15,000 8,000 Transaction #3 Balance Transaction #1 SO 3 Define debits and credits and explain their use in recording business transactions.
    22. 24. Debit and Credit Procedures If Credits are greater than Debits, the account will have a credit balance. $10,000 Transaction #2 $3,000 Balance Transaction #1 $1,000 8,000 Transaction #3 SO 3 Define debits and credits and explain their use in recording business transactions.
    23. 25. Dr./Cr. Procedures for Assets and Liabilities <ul><li>Assets - Debits should exceed credits. </li></ul><ul><li>Liabilities – Credits should exceed debits. </li></ul><ul><li>The normal balance is on the increase side. </li></ul>SO 3 Define debits and credits and explain their use in recording business transactions.
    24. 26. Dr./Cr. Procedures for Stockholders’ Equity <ul><li>Owner’s investments and revenues increase stockholder’s equity (credit). </li></ul><ul><li>Dividends and expenses decrease stockholder’s equity (debit). </li></ul>SO 3 Define debits and credits and explain their use in recording business transactions.
    25. 27. Dr./Cr. Procedures for Revenue and Expense <ul><li>The purpose of earning revenues is to benefit the stockholders. </li></ul><ul><li>The effect of debits and credits on revenue accounts is the same as their effect on stockholders’ equity. </li></ul><ul><li>Expenses have the opposite effect: expenses decrease stockholders’ equity. </li></ul>SO 3 Define debits and credits and explain their use in recording business transactions.
    26. 28. Debits and Credits Summary Normal Balance Credit Normal Balance Debit SO 3 Define debits and credits and explain their use in recording business transactions.
    27. 29. Debits and Credits Summary Balance Sheet Income Statement = + = - Asset Liability Equity Revenue Expense Debit Credit SO 3 Define debits and credits and explain their use in recording business transactions.
    28. 30. Debits and Credits Summary <ul><li>Debits: </li></ul><ul><ul><li>increase both assets and liabilities. </li></ul></ul><ul><ul><li>decrease both assets and liabilities. </li></ul></ul><ul><ul><li>increase assets and decrease liabilities. </li></ul></ul><ul><ul><li>decrease assets and increase liabilities. </li></ul></ul>Review Question SO 3 Define debits and credits and explain their use in recording business transactions.
    29. 31. Debits and Credits Summary <ul><li>Accounts that normally have debit balances are: </li></ul><ul><ul><li>assets, expenses, and revenues. </li></ul></ul><ul><ul><li>assets, expenses, and equity. </li></ul></ul><ul><ul><li>assets, liabilities, and dividends. </li></ul></ul><ul><ul><li>assets, dividends, and expenses. </li></ul></ul>Review Question SO 3 Define debits and credits and explain their use in recording business transactions.
    30. 33. Stockholders’ Equity Relationships Illustration 3-15 SO 3 Define debits and credits and explain their use in recording business transactions.
    31. 34. Summary of Debit/Credit Rules <ul><li>Relationship among the assets, liabilities and stockholders’ equity of a business: </li></ul>The equation must be in balance after every transaction. For every Debit there must be a Credit . Illustration 3-16 Assets Liabilities = Stockholders’ Equity Basic Equation Expanded Basic Equation + SO 3 Define debits and credits and explain their use in recording business transactions.
    32. 35. Steps in the Recording Process Business documents , such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. SO 4 Identify the basic steps in the recording process. Illustration 3-17 Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts
    33. 36. The Journal <ul><li>Book of original entry. </li></ul><ul><li>Transactions recorded in chronological order. </li></ul><ul><li>Contributions to the recording process: </li></ul><ul><ul><li>Discloses the complete effects of a transaction . </li></ul></ul><ul><ul><li>Provides a chronological record of transactions. </li></ul></ul><ul><ul><li>Helps to prevent or locate errors because the debit and credit amounts can be easily compared. </li></ul></ul>SO 5 Explain what a journal is and how it helps in the recording process.
    34. 37. The Journal Journalizing - Entering transaction data in the journal. Illustration: Presented below is information related to Sierra Corporation. SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Sierra borrowed $5,000 by signing a note. 1 Sierra purchased office equipment for $5,000. 2 Instructions - Journalize these transactions.
    35. 38. Journalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra issued common stock in exchange for $10,000 cash. Oct. 1 Cash Common stock 10,000 10,000
    36. 39. Journalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra borrowed $5,000 by signing a note. Oct. 1 Cash Notes payable 5,000 5,000
    37. 40. Journalizing General Journal SO 4 Explain what a journal is and how it helps in the recording process. Sierra purchased office equipment for $5,000. Oct. 2 Office equipment Cash 5,000 5,000
    38. 42. The Ledger Ledger contains the entire group of accounts maintained by a company. SO 6 Explain what a ledger is and how it helps in the recording process. Illustration 3-19
    39. 43. Chart of Accounts Accounts arranged in sequence in which they are presented in the financial statements. SO 6 Explain what a ledger is and how it helps in the recording process.
    40. 44. Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Oct. 1 Owner investment J1 10,000 10,000 101 J1 SO 7 Explain what posting is and how it helps in the recording process.
    41. 45. Posting <ul><li>Posting: </li></ul><ul><ul><li>normally occurs before journalizing. </li></ul></ul><ul><ul><li>transfers ledger transaction data to the journal. </li></ul></ul><ul><ul><li>is an optional step in the recording process. </li></ul></ul><ul><ul><li>transfers journal entries to ledger accounts. </li></ul></ul>Review Question SO 7 Explain what posting is and how it helps in the recording process.
    42. 46. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Follow these steps: 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. Illustration 3-21
    43. 47. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Follow these steps: 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. Illustration 3-22
    44. 48. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Follow these steps: 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. Illustration 3-23
    45. 49. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-24 Additional Transactions
    46. 50. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-25 Additional Transactions
    47. 51. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-26 Additional Transactions
    48. 52. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-27 Additional Transactions ,
    49. 53. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-28 Additional Transactions
    50. 54. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Additional Transactions Illustration 3-29
    51. 55. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-30 Additional Transactions
    52. 56. The Recording Process Illustrated SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-31 Additional Transactions
    53. 57. Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32
    54. 58. Summary Illustration of Journalizing SO 7 Explain what posting is and how it helps in the recording process. Illustration 3-32
    55. 59. Summary Illustration of Posting Illustration 3-33
    56. 60. The Trial Balance <ul><li>A list of accounts and their balances at a given time. </li></ul><ul><li>Purpose is to prove that debits equal credits. </li></ul>Illustration 3-34
    57. 61. The Trial Balance <ul><li>The trial balance may balance even when </li></ul><ul><ul><li>a transaction is not journalized, </li></ul></ul><ul><ul><li>a correct journal entry is not posted, </li></ul></ul><ul><ul><li>a journal entry is posted twice, </li></ul></ul><ul><ul><li>incorrect accounts are used in journalizing or posting, or </li></ul></ul><ul><ul><li>offsetting errors are made in recording the amount of a transaction. </li></ul></ul>SO 8 Explain the purposes of a trial balance. Limitations of a Trial Balance
    58. 62. The Trial Balance <ul><li>A trial balance will not balance if: </li></ul><ul><ul><li>a correct journal entry is posted twice. </li></ul></ul><ul><ul><li>the purchase of supplies on account is debited to Supplies and credited to Cash. </li></ul></ul><ul><ul><li>a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100. </li></ul></ul><ul><ul><li>a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. </li></ul></ul>Review Question SO 8 Explain the purposes of a trial balance.
    59. 63. Copyright Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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