Basic

Basic Accounting
Accounting
Principles
Principles

Chapter
3-1
 Basic
Basic Accounting
Accounting Equation
Equation

Relationship among the assets, liabilities and

stockholders’ equity of a business:
Illustration 3-3

The equation must be in balance after every

transaction. For every Debit there must be a Credit.

Chapter
3-2 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

1. Owner Invest $32,000 cash and equipment

valued at $14,000 in the business.

Stockholders
Assets = Liabilities + ’ Equity

+ 32,000 + 46,000

+ 14,000

Chapter
3-3 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

2. Paid office rent of $600 for the month.

Stockholders
Assets = Liabilities + ’ Equity

- 600 - 600
(expense)

Chapter
3-4 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

3. Received $3,200 advance on a management

consulting engagement.

Stockholders
Assets = Liabilities + ’ Equity

+ 3,200 + 3,200

Chapter
3-5 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

4. Received cash of $2,300 for services completed

for Shuler Co.

Stockholders
Assets = Liabilities + ’ Equity

+ 2,300 + 2,300
(revenue)

Chapter
3-6 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

5. Purchased a computer for $6,100. (cash)

Stockholders
Assets = Liabilities + ’ Equity

+ 6,100

- 6,100

Chapter
3-7 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

6. Paid off liabilities of $7,000.

Stockholders
Assets = Liabilities + ’ Equity

- 7,000 - 7,000

Chapter
3-8 LO 2 Explain double-entry rules.
 Double-Entry
Double-Entry System
System Exercise
Exercise

7. Declared a cash dividend of $10,000.

Stockholders
Assets = Liabilities + ’ Equity

+ 10,000 - 10,000

Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.

Chapter
3-9 LO 2 Explain double-entry rules.
 Ownership
Ownership Structure
Structure

Ownership structure dictates the types of accounts

that are part of the equity section.

Proprietorship
Proprietorship
or
or Corporation
Corporation
Partnership
Partnership
 Capital Account  Common Stock
 Drawing  Additional Paid-
Account in Capital
 Dividends
Declared
 Retained
Earnings

Chapter
3-10 LO 2 Explain double-entry rules.
 Corporation
Corporation Ownership
Ownership Structure
Structure
Illustration 3-4
Balance Sheet
Stockholders’ Equity

Common Stock Retained Earnings (Net

(Net
(Investment
(Investment by
by stockholders)
stockholders) income
income retained
retained in
in business)
business)

Net income or Net loss

Dividends (Revenues
(Revenues less
less expenses)
expenses)
Income Statement

Statement of Retained
Chapter
Earnings
3-11 LO 2 Explain double-entry rules.
 The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6
Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail
2. Posting
balance

7. Closing entries 3. Trial balance

Work
Work
6. Financial Statements Sheet
Sheet 4. Adjustments
optional
optional

5. Adjusted trial balance

Chapter
3-12 LO 3 Identify steps in the accounting
 Transactions
Transactions and
and Events
Events

What to Record?
FASB states, “transactions and other events
and circumstances that affect a business
enterprise.”
Types of Events:
External – between a business and its environment.
Internal – event occurring entirely within a business.

Chapter
3-13 LO 3 Identify steps in the accounting
 Review
Review “Transactions
“Transactions and
and Events”
Events”
External Internal Not Recorded

1. A supplier of a company‘s raw material is

External
paid an amount owed on account.
2. A customer pays its open account. External

3. A new chief executive officer is hired. Not Recorded

4. The biweekly payroll is paid. External

5. Raw materials are entered into production. Internal

6. A new advertising agency is hired. Not Recorded

7. The accountant determines the federal

Internal
income taxes owed based on the income
earned.
Chapter
3-14 LO 3 Identify steps in the accounting
 1.
1. Journalizing
Journalizing

General Journal – a chronological record of

transactions. Journal Entries are recorded in the
journal.
General Journal
Date Account Title Ref. Debit Credit
J an. 3 Cash 100 100,000
Common stock 300 100,000

10 Building 130 150,000

Note payable 220 150,000

Chapter LO 4 Record transactions in journals, post

3-15 to ledger accounts, and prepare a trial
 2.
2. Posting
Posting
Posting – the process of transferring amounts from
the journal to the ledger accounts.

General GJ1
Date Account Title Journal
Ref. Debit Credit
J an. 3 Cash 100 100,000
Common stock 100,000

General
Cash
Ledger Acct. No. 100
Date Explanation Ref. Debit Credit Balance

Jan. 3 Sale of stock GJ1 100,000 100,000

Chapter LO 4 Record transactions in journals, post

3-16 to ledger accounts, and prepare a trial
 3.
3. Trial
Trial Balance
Balance
Trial Balance – a list of each account and its
balance; used to prove equality of debit and credit
balances.
Acct. No. Account Debit Credit
100 Cash $ 140,000
105 Accounts receivable 35,000
110 I nventory 30,000
130 Building 150,000
200 Accounts payable $ 60,000
220 Note payable 150,000
300 Common stock 100,000
330 Retained earnings
400 Sales 75,000
500 Cost of goods sold 30,000
$ 385,000 $ 385,000

Chapter LO 4 Record transactions in journals, post

3-17 to ledger accounts, and prepare a trial
 4.
4. Adjusting
Adjusting Entries
Entries

Revenues - recorded in the period in which

they are earned.
earned
Expenses - recognized in the period in which
they are incurred.
incurred
Adjusting entries - needed to ensure that
the revenue recognition and matching
principles are followed.

Chapter
3-18 LO 5 Explain the reasons for preparing adjusting
 Classes
Classes of
of Adjusting
Adjusting Entries
Entries
Illustration 3-20

Prepayments Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not
recorded as assets before yet received in cash or
they are used or consumed. recorded.

2. Unearned Revenues. 4. Accrued Expenses.

Revenues received in cash Expenses incurred but
and recorded as liabilities not yet paid in cash or
before they are earned. recorded.

Chapter
3-19 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Prepaid
“Prepaid
Expenses”
Expenses”
Payment of cash that is recorded as an asset because
service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

insurance rent
supplies maintenance on
advertising equipment
fixed assets

Chapter
3-20 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Prepaid
“Prepaid
Expenses”
Expenses”
Example: On Jan. 1 , Phoenix Corp. paid $12,000 for
st

12 months of insurance coverage. Show the journal

entry to record the payment on Jan. 1st.

Jan. 1 Prepaid insurance 12,00

Cash 0 12,00
0
Prepaid Insurance Cash
Debit Credit Debit Credit
12,000 12,000

Chapter
3-21 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Prepaid
“Prepaid
Expenses”
Expenses”
Example: On Jan. 1 , Phoenix Corp. paid $12,000 for
st

12 months of insurance coverage. Show the adjusting

journal entry required at Jan. 31st.

Jan. 31 Insurance expense 1,000

Prepaid insurance 1,000

Prepaid Insurance Insurance expense

Debit Credit Debit Credit
12,000 1,000 1,000

11,000
Chapter
3-22 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Unearned
“Unearned
Revenues”
Revenues”
Receipt of cash that is recorded as a liability
because the revenue has not been earned.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

rent magazine subscriptions
airline tickets customer deposits
school tuition

Chapter
3-23 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Unearned
“Unearned
Revenues”
Revenues”
Example: On Nov. 1 , Phoenix Corp. received $24,000
st

from Arcadia High School for 3 months rent in advance.

Show the journal entry to record the receipt on Nov. 1st.

Nov. 1 Cash 24,00

Unearned rent 0 24,00
revenue 0
Cash Unearned Rent
Debit Credit DebitRevenue
Credit
24,000 24,000

Chapter
3-24 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Unearned
“Unearned
Revenues”
Revenues”
Example: On Nov. 1 , Phoenix Corp. received $24,000
st

from Arcadia High School for 3 months rent in advance.

Show the adjusting journal entry required on Nov. 30th.

Nov. 30 Unearned rent revenue 8,000

Rent revenue 8,000

Rent Revenue Unearned Rent

Debit Credit DebitRevenue
Credit
8,000 8,000 24,000

16,000
Chapter
3-25 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Revenues”
Revenues”
Revenues earned but not yet received in cash or
recorded.

Adjusting entry results in:

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

rent
interest
services performed

Chapter
3-26 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Revenues”
Revenues”
Example: On July 1 , Phoenix Corp. invested $300,000
st

in securities that return 5% interest per year. Show the

journal entry to record the investment on July 1st.

July 1 Investments 300,00

Cash 0 300,000

Investments Cash
Debit Credit Debit Credit
300,000 300,000

Chapter
3-27 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Revenues”
Revenues”
Example: On July 1 , Phoenix Corp. invested $300,000
st

in securities that return 5% interest per year. Show the

adjusting journal entry required on July 31st.

July 31 Interest receivable 1,250

Interest revenue 1,250

Interest Receivable Interest Revenue

Debit Credit Debit Credit
1,250 1,250

Chapter
3-28 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Expenses”
Expenses”
Expenses incurred but not yet paid in cash or
recorded.

Adjusting entry results in:

Expense Recorded BEFORE Cash Payment, if

any*

Accrued expenses often occur in regard to:

rent salaries
interest bad debts*
taxes

Chapter
3-29 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Expenses”
Expenses”
Example: On Feb. 2 , Phoenix Corp. borrowed $200,000
nd

at a rate of 9% per year. Interest is due on first of each

month. Show the journal entry to record the borrowing on
Feb. 2nd.
Feb. 2 Cash 200,00
Notes payable 0 200,000

Cash Notes Payable

Debit Credit Debit Credit
200,000 200,000

Chapter
3-30 LO 5 Explain the reasons for preparing adjusting
 Adjusting
Adjusting Entries
Entries –– “Accrued
“Accrued
Expenses”
Expenses”
Example: On Feb. 2 , Phoenix Corp. borrowed $200,000
nd

at a rate of 9% per year. Interest is due on first of each

month. Show the adjusting journal entry required on Feb.
28th.
Feb. 28 Interest expense 1,500
Interest payable 1,500

Interest Expense Interest Payable

Debit Credit Debit Credit
1,500 1,500

Chapter
3-31 LO 5 Explain the reasons for preparing adjusting
 5.
5. Adjusted
Adjusted Trial
Trial Balance
Balance

Shows the balance of all accounts, after adjusting

entries, at the end of the accounting period.

Chapter
3-32 LO 5 Explain the reasons for preparing adjusting
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements

Financial
Financial Statements
Statements are
are prepared
prepared directly
directly from
from
the
the Adjusted
Adjusted Trial
Trial Balance.
Balance.

Statemen
Income Statemen
Balance t of
Statemen t of Cash
Sheet Retained
t Flows
Earnings

Chapter
3-33 LO 6 Prepare financial statement from the adjusted trial
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following
Adjusted Trial Balance Balance Sheet

Adjusted Trial Balance Debit Credit Balance Sheet

Cash $ 140,000 Assets
Accounts receivable 35,000
Cash $ 140,000
Building 190,000
Note payable $ 150,000
Accounts receivable 35,000
Common stock 100,000 Building 190,000
Retained earnings 38,000 Total assets $ 365,000
Dividends declared 10,000 Liabilities
Sales 185,000 Note payable 150,000
I nterest income 17,000
Stockholders' equity
Cost of goods sold 47,000
Common stock 100,000
Salary expense 25,000
Depreciation expense 43,000 Retained earnings 115,000
$ 490,000 $ 490,000 Total liab. & equity $ 365,000

Chapter
3-34 LO 6 Prepare financial statement from the adjusted trial
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following
Adjusted Trial Balance
Income
Statement
Adjusted Trial Balance Debit Credit I ncome Statement
Cash $ 140,000
Revenues:
Accounts receivable 35,000
Sales $ 185,000
Building 190,000
Note payable $ 150,000 I nterest income 17,000
Common stock 100,000 Total revenue 202,000
Retained earnings 38,000 Expenses:
Dividends declared 10,000 Cost of goods sold 47,000
Sales 185,000 Salary expense 25,000
I nterest income 17,000
Depreciation expense 43,000
Cost of goods sold 47,000
Total expenses 115,000
Salary expense 25,000
Depreciation expense 43,000 Net income $ 87,000
$ 490,000 $ 490,000

Chapter
3-35 LO 6 Prepare financial statement from the adjusted trial
 6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Assume the following Statement of
Adjusted Trial Balance Retained Earnings

Adjusted Trial Balance Debit Credit Statement of Retained Earnings

Cash $ 140,000
Accounts receivable 35,000
Beginning balance $ 38,000
Building 190,000
Note payable $ 150,000 +Net income 87,000
Common stock 100,000 - Dividends (10,000)
Retained earnings 38,000 Ending balance 115,000
Dividends declared 10,000
Sales 185,000
I nterest income 17,000
Cost of goods sold 47,000
Salary expense 25,000
Depreciation expense 43,000
$ 490,000 $ 490,000

Chapter
3-36 LO 6 Prepare financial statement from the adjusted trial
 7.
7. Closing
Closing Entries
Entries

To reduce the balance of the income

statement (revenue and expense) accounts
to zero.
To transfer net income or net loss to owner’s
equity.
Balance sheet (asset, liability, and equity)
accounts are not closed.
Dividends are closed directly to the Retained
Earnings account.

Chapter
3-37 LO 7 Prepare closing
 7.
7. Closing
Closing Entries
Entries
Example: Assume the following Adjusted Trial
Balance
Acct. No. Account Debit Credit
100 Cash $ 140,000
105 Accounts receivable 35,000
130 Building 190,000
220 Note payable $ 150,000
300 Common stock 100,000
330 Retained earnings 38,000
380 Dividends declared 10,000
400 Sales 185,000
430 I nterest income 17,000
500 Cost of goods sold 47,000
520 Salary expense 25,000
550 Depreciation expense 43,000
$ 490,000 $ 490,000

Chapter
3-38 LO 7 Prepare closing
 7.
7. Closing
Closing Entries
Entries
Example: Prepare the Closing journal entry from the
adjusted trial balance on the previous slide.
Sales 185,000
Interest income 17,000
Income summary 202,000

Income summary 115,000

Cost of goods sold 47,000
Salary expense 25,000
Depreciation expense 43,000

Income summary 87,000

Retained earnings 87,000

Retained earnings 10,000

Dividends declared 10,000
Chapter
3-39 LO 7 Prepare closing