Accounting Assignment

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Financial Accounting

John J. Wild

Sixth Edition

McGraw-Hill/Irwin

In presentations for each chapter in this text, we will provide you with sound to go along with the material on your screen. There will be sound on every slide you view. Please make sure your computer speakers are set up properly when viewing the material. Good luck and we hope you enjoy this new format.

Chapter 02

Analyzing and Recording Transactions

In this chapter, we are going to discuss in-depth the proper procedures to follow in using the double-entry accounting process. You will find this in-depth look a little confusing as you go through the chapter. By the time we get to the last screen, we think you will see just how the system works. The material discussed in this chapter will be used continuously in the remaining chapters devoted to financial accounting. It is a great idea to go slowly though this chapter material. Let’s start the process with a little review.

Conceptual Learning Objectives

C1: Explain the steps in processing
transactions.

C2: Describe an account and its use in
recording transactions.

C3: Describe a ledger and a chart of accounts.

C4: Define debits and credits and explain
double-entry accounting.

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Conceptual Learning Objectives:

C1: Explain the steps in processing transactions.

C2: Describe an account and its use in recording transactions.

C3: Describe a ledger and a chart of accounts.

C4: Define debits and credits and explain double-entry accounting.

Analytical Learning Objectives

A1: Analyze the impact of transactions on accounts and financial statements.

A2: Compute the debt ratio and describe
its use in analyzing financial
condition.

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Analytical Learning Objectives:

A1: Analyze the impact of transactions on accounts and financial statements.

A2: Compute the debt ratio and describe its use in analyzing financial condition.

Procedural Learning Objectives

P1: Record transactions in a journal and
post entries to a ledger.

P2: Prepare and explain the use of a trial
balance.

P3: Prepare financial statements from
business transactions.

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Procedural Learning Objectives:

P1: Record transactions in a journal and post entries to a ledger.

P2: Prepare and explain the use of a trial balance.

P3: Prepare financial statements from business transactions.

External Transactions occur between the organization and an outside party.

Internal Transactions occur within the organization.

Analyzing and Recording Process

Exchanges of economic consideration between two parties.

C 1

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In accounting we generally record transactions involving exchanges of economic consideration between two parties. We have many transactions with external parties like creditors, customers, financial institutions, and owners. In addition, we must also look at internal transactions. These types of transactions may involve exchanges between divisions within a company or payments to employees.

Analyzing and Recording Process

C 1

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Analyze each transaction and event from source documents

Record relevant transactions and events in a journal

Post journal information to ledger accounts

Prepare and analyze the trial balance

We begin the accounting process by analyzing source documents. For example, you usually receive a receipt when you pay cash for something. Think about the last time you went to a fast food restaurant. When you received your order you were given a receipt, a source document. If you wanted a company to reimburse you for the meal because you were traveling on company business, you must present evidence of your expenditure. This evidence takes the form of a source document, the receipt.

Once we identify a business transaction, we record it in a journal. A journal is arranged in chronological order. Transactions are recorded by date of occurrence.

At the end of the accounting period, usually a month, transactions in the journal are posted to a ledger account. Posting is the systematic process of transferring information from the journal to the ledger. The ledger groups transactions by the accounts impacted. For example, we will have a ledger account for cash. All transactions that result in increases or decreases in the cash account will be posted to the cash ledger account.

Once all transactions have been posted, we prepare a trial balance. The purpose of the trial balance is to make sure that all information has been transferred properly. The trial balance is a listing of all account balances.

Sales Tickets

Bank Statements

Purchase Orders

Checks

Source Documents

Bills from Suppliers

Employee Earnings
Records

C 1

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Almost all businesses use sales orders, purchase orders, statements from suppliers, canceled checks, bank statements, shipping notices, packing slips, and the like to support the existence of a transaction. In today’s highly computerized environment, many source documents are stored digitally. Knowing how to access these digital source documents is an important part of accounting.

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

The Account and its Analysis

The general ledger is a record containing all accounts used by the company.

C 2

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Here are more complete definitions of account balances and ledger accounts.

The Account and Its Analysis

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Assets
Accounts

Asset
Accounts

Liability
Accounts

Equity
Accounts

Recall the basic accounting equation from Chapter 1. It should look familiar.

Land

Equipment

Buildings

Cash

Notes Receivable

Supplies

Prepaid Accounts

Accounts Receivable

Asset
Accounts

Asset Accounts

C 3

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Here is a listing of common assets accounts we are likely to find in all businesses. Prepaid accounts may be new to you. Think about your auto insurance. Many of us pay our auto insurance semiannually or annually. The payment is made in advance and is referred to as a prepaid amount.

Accrued Liabilities

Unearned Revenue

Notes Payable

Accounts Payable

Liability
Accounts

Liability Accounts

C 3

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This is a listing of common liability accounts we are likely to see in the general ledger. An unearned revenue is one in which the cash has been received but the product or service has not been delivered. If you subscribe to a magazine, you generally pay a one-year subscription in advance. For the publishing company, cash is received but nothing has been done to earn the revenue. As the magazine is delivered to you, the publishing company recognizes a portion of the money received as revenue. At the end of the year, all the revenue will be earned and the liability no longer exists.

Equity
Accounts

Revenues

Common
Stock

Dividends

Expenses

Equity Accounts

C 3

Retained

Earnings

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Here is review of the equity accounts we discussed in the last chapter.

Liabilities

Equity

Assets

The Account and Its Analysis

C 3

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Common
Stock

Dividends

Revenues

Expenses

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Do you remember the expanded accounting equation we used to record transactions in Chapter 1? Remember that revenues increase the equity side of the equation and expenses decrease equity.

Ledger and Chart of Accounts

The ledger is a collection of all accounts for

an information system. A company’s size and
diversity of operations affect the number
of accounts needed.

The chart of accounts is a list of all accounts and
includes an identifying number for each account.

C 3

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A chart of accounts is a listing of all accounts in the ledger. Notice that all assets accounts begin with an account number of 1, all liabilities with 2, equities with 3, revenues with 4, and expenses with 6.

Larson

General Ledger

T- Account

Barton, Co.

Jun. 30

Cash

30,000

Webster, Co.

Account Number

Account Name

Accounting Number

Accounting Name

Partial Balance Sheet

Interest Revenue

30,000

Date

Debit

Credit

Balance

101

Cash

319

Dividends

December 31, 2004

To record receipt on interest on bonds

Jul. 30

3,000

106

Accounts receivable

403

Consulting revenues

Cash

126

Supplies

406

Rental revenue

Accounts receivable

$ 278,000

128

Prepaid insurance

622

Salaries expense

Less: Allowance for doubtful accounts

3,000

$ 275,000

167

Equipment

637

Insurance expense

Inventory

201

Accounts payable

640

Rent expense

Matrix, Inc.

236

Unearned revenue

652

Supplies expense

Date

Debit

Credit

Balance

307

Common stock

690

Utilities expense

Jul. 16

1,000

318

Retained earnings

Annual

$ 174,000

Investment by Johnson

60,000

Total partnership equity

234,000

Johson's owership percent

20%

Johnson's equity balance

$ 46,800

Days in March

Minus the date of the note

Days remaining in March

Days in April

Days in May to maturity

Period of the note in days

A T-account represents a ledger account and is a tool used to understand the effects of one or more transactions.

Debits and Credits

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Accountants often use a T-account to represent a general ledger account. It is a quick way to analyze a transaction before we enter the information in the journal. The left side of a T-account is always called the debit side, and the right side is always called the credit side. This terminology comes from the time when the first double-entry system was first developed. We still use the terms as a convention. The words do not have any significant meaning other than that they stand for the left and right side of a ledger.

Larson

T- Account

Company Name

Dec. 31

Barton, capital . . . . . . . . . . . . .

4,000

(Left side)

(Right side)

Financial Statement

Barton, withdrawals . . . .

4,000

Debit

Credit

Date

To close the withdrawals account

Double-Entry Accounting

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Liabilities

Equity

Assets

Debit Credit

ASSETS

+ -

LIABILITIES

- +

EQUITIES

- +

After we decide on the terms to use for the left and right side of a ledger account, we must establish the mathematics of the double-entry system. Liabilities and equity have the opposite sign of assets. If we were to move the liabilities to the left side of the equation, it would read assets minus liabilities equal equity. As a convention of double-entry accounting we have decided that a debit, or left side, to an asset account will represent an increase in the asset account balance. Once this decision is made all the remaining math is determined. Because liabilities and equity have the opposite sign of assets, a debit to a liability or equity account must mean a decrease and a credit means an increase. Instead of using the terms increase and decrease we use the terms debit and credit. It is important to remember whether we are talking about an asset, liability, or equity account for the meaning of a debit or a credit.

It will take you a short while to become accustomed to using the terms debit and credit, but with practice you will master the concept easily.

Double-Entry Accounting

Equity

C 4

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Revenues

Expenses

Common
Stock

Dividends

Debit Credit

Stock

- +

Debit Credit

Dividends

+ -

Debit Credit

Expenses

+ -

Debit Credit

Revenues

- +

Here is the expanded accounting equation showing the equity section. Because revenues increase equity, a revenue account must be recorded just like the common stock account. A credit is an increase in revenues and a debit is an increase in expenses. The common stock and revenue accounts are both increased with a credit and decreased with a debit. Dividends and expenses have an opposite sign, so these accounts are increased with a debit and decreased with a credit.

Double-Entry Accounting

An account balance is the difference between the increases and decreases in an account.

Notice the T-Account

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We have determined the balance in accounts in the last chapter, but in this chapter we will look at a more comprehensive way to determine an account balance.

The Cash account is an asset, so increases, or receipts, are shown on the debit, or left, side and decreases, or payments, are shown on the credit, or right, side. To determine if an account has a debit or credit balance, we total the right and left sides and place the balance on the larger side. In this example, our increases in cash amount to $36,100 and the decreases total $31,300 so the Cash account has a debit, or positive, balance of $4,800.

Sheet1


Cash T-Account for FastForward
Cash
Investment by owner for stock	30,000	Purchase of supplies	2,500
Consulting services revenues earned	4,200	Purchase of equipment	26,000
Collection of accounts receivable	1,900	Payment of rent	1,000
		Payment of salary	700
		Payment of accounts payable	900
		Payment of cash dividend	200
Total increases	36,100	Total decreases	31,300
Balance	4,800

Page &P

Journalizing and
Posting Transactions

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Step 1: Analyze transactions and source documents.

Liabilities

Equity

Assets

Step 2: Apply double-entry accounting

Step 4: Post entry to ledger

Step 3: Record journal entry

In the accounting process we first analyze a transaction by looking at proper source documentation. Next, we apply the rules of double-entry accounting and record a general journal entry. The general journal is a chronological listing of the transactions. At the end of the accounting period, we post the information from the general journal to the proper general ledger account. The general ledger groups all transaction that impact a particular account. That is, all the transactions that increase or decrease the cash account are posted to the cash general ledger account.

Dollar amount of debits and credits

Journalizing Transactions

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Transaction Date

Transaction explanation

Titles of Affected Accounts

Here is an example of the proper recording of a general journal transaction. We have seen a similar transaction before. In this case, the owner of the business contributes $30,000 cash to start the business and receives shares of common stock. Let’s see how we get the various pieces.

Part I

The transaction occurred on December 1, 2011. The date is important when recording general journal transactions and is recorded on the left side of the journal.

Part II

Next we identify the accounts affected by the transactions. The Cash account is an asset that has increased. We show increases in accounts with a debit to that account. The common stock account also increased and we show increases in equity accounts with a credit. Debits are always listed first in the journal followed by credits that are slightly indented below the debits.

Part III

The dollar amount is placed in the appropriate debit or credit column. In this case, the Cash account was debited for $30,000, so we place that amount in the debit column.

Part IV

Finally, we prepare a brief description of the transaction so that other people who view our work will understand the nature of the transaction. This explanation is indented about as far as the credited account titles to avoid confusing it with accounts and it is italicized.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles and Explanations		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased supplies for cash

Page &P

T-accounts are useful illustrations, but balance column accounts are used in practice.

Balance Column Account

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Here is the balance column account for Cash. It looks similar to your checkbook. We have a debit, or increase column; a credit, or decrease column; and a running balance. You can see the cash receipts and payments. The current balance in the Cash account at December 10, 2011, is $5,700.

In the upper right corner of the ledger account, we assign an account number to the Cash account. In computer processing of information, numbers are more efficient to use than alpha characters. When we speak of account number one-zero-one, we are referring to the Cash account.

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1	Initial investment		30,000		30,000
Dec. 2	Purchased supplies			2,500	27,500
Dec. 3	Purchased equipment			26,000	1,500
Dec. 10	Collection from customer		4,200		5,700
GENERAL LEDGER

Identify the debit account in ledger.

Posting Journal Entries

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Let’s look at the posting process. We will transfer, or “post,” the information from the general journal to the proper ledger account. This process is called posting.

First, we find the proper account in the general ledger. In our example we used the Cash account.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles and Explanation		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 3	Purchased equipment	G1		20,000.00	(20,000.00)
Dec. 10	Collection from customer	G1	2,200.00		(17,800.00)
GENERAL LEDGER

Enter the date.

Posting Journal Entries

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We transfer the date, December 1, to the date column in the general ledger.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles and Explanation		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1
Dec. 3	Purchased equipment	G1		20,000.00	(20,000.00)
Dec. 10	Collection from customer	G1	2,200.00		(17,800.00)
GENERAL LEDGER

Enter the amount and description.

Posting Journal Entries

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We place a description into the description column and place the debit amount of $30,000 in the debit column of the cash general ledger account.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles & Elxplanations		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1			30,000
Dec. 3	Purchased equipment	G1		20,000	(20,000)
Dec. 10	Collection from customer	G1	2,200		(17,800)
GENERAL LEDGER

Enter the journal reference.

Posting Journal Entries

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Next, we indicate where you can find the journal entry. In our case, it is on the first page of the general journal. We use the letter “G” to indicate general journal.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles and Explanation		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1		G1	30,000
Dec. 3	Purchased equipment	G1		20,000	(20,000)
Dec. 10	Collection from customer	G1	2,200		(17,800)
GENERAL LEDGER

Compute the balance.

Posting Journal Entries

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Now, we update the running balance in the Cash account.

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1		G1	30,000		30,000
Dec. 3	Purchased equipment	G1		20,000	(20,000)
Dec. 10	Collection from customer	G1	2,200		(17,800)
GENERAL LEDGER

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles & Elxplanations		PR	Debit	Credit
2011
Dec.	1	Cash			30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

Enter the ledger reference.

Posting Journal Entries

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Back in the general journal, we enter a posting reference of the account number in the proper column. This tells the accountant that the amount has been posted to account number one-zero-one. Now we can go back and forth between the general journal and the general ledger. This is known as a cross-reference. We would follow the same procedures for the common stock account. Let’s begin using the double-entry accounting system.

General Journal


			GENERAL JOURNAL			Page 1
Date		Account Titles and Explanation		PR	Debit	Credit
2011
Dec.	1	Cash		101	30,000
			Common stock			30,000
		Investment by shareholders
Dec.	2	Supplies			2,500
			Cash			2,500
		Purchased store supplies
		for cash

Page &P

JAB


CASH				ACCOUNT No.	101
Date	Explanation	PR	Debit	Credit	Balance
2011
Dec. 1		G1	30,000		30,000
Dec. 3	Purchased equipment	G1		20,000	(20,000)
Dec. 10	Collection from customer	G1	2,200		(17,800)
GENERAL LEDGER

Analyzing Transactions

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Analysis:

Double entry:

101

301

Posting:

Let’s see if we can analyze transactions and get them into the proper form for double-entry accounting. This will be helpful when you turn to your homework.

In the first transaction, on December first, Chas Taylor invests $30,000 to start a company called FastForward. From our previous work we know that the Cash account and the Common Stock account will increase.

We record this information in the general journal with a debit, increase, to Cash, and a credit, increase, to Common Stock. Notice that the account number for the Cash account is one-zero-one and Common Stock is three-zero-one. We are going to post the information in the journal to the general ledger. We will use T-accounts to accomplish this.

We place the $30,000 on the left, or debit, side of the Cash account and on the right, or credit, side of the Common Stock account. Our books are in balance because total assets are equal to total liabilities plus equity. Let’s move to another transaction.

Sheet1


	Transaction:	Shareholder invested $30,000 in FastForward on Dec. 1.

Page &P

Analyzing Transactions

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Analysis:

Double entry:

126

101

Posting:

In our second transaction, FastForward purchases office supplies paying $2,500 cash. We have exchanged one asset, cash, for another asset, supplies. The Cash account will decrease and the Supplies account will increase. Can you make the general journal entry to record this transaction?

We increase the Supplies account with a debit and decrease the asset account, Cash, with a credit. Let’s post the amounts.

The general ledger account for Supplies increased by $2,500 so the amount is placed on the debit side of the account. The Cash account, an asset, decreased by $2,500, so the amount is placed on the credit side of the general ledger account. Let’s move on to another transaction.

Sheet1


	Transaction:	FastForward purchases supplies by paying $2,500 cash.

Page &P

Analyzing Transactions

Analysis:

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Double entry:

167

101

Posting:

In our third transaction, FastForward purchases equipment paying $26,000 cash. Once again, we have exchanged one asset, cash, for another asset, equipment. The Cash account will decrease and the Equipment account will increase. This general journal entry will look similar to the one we just completed.

We increase the Equipment account with a debit and decrease the asset account, Cash, with a credit. Let’s post the amounts.

The general ledger account for Equipment increased by $26,000 so it is placed on the debit side of the account. The Cash account, an asset, decreased by $26,000, so the amount is placed on the credit side of the general ledger account. Let’s look at another transaction.

Sheet1


	Transaction:	FastForward purchases equipment by paying $26,000 cash.

Page &P

Sheet1


Assets		=	Liabilities	+	Equity
Cash	Equipment				Common
					Stock
(26,000)	26,000

Page &P

Analyzing Transactions

Analysis:

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Double entry:

126

201

Posting:

In this transaction, FastForward purchases $7,100 of office supplies on account. The asset account, Supplies, will increase and the liability account, Accounts Payable, will increase. Let’s make the general journal entry to record this transaction.

We increase the Supplies account with a debit and increase the liability account, Accounts Payable, with a credit. It’s time to post the transaction.

The general ledger account for Supplies increased by $7,100 so the amount is placed on the debit side of the account. The Accounts Payable account, a liability, increased by the same amount, so we place it on the credit side of the general ledger account. Let’s analyze another transaction.

Sheet1


	Transaction:	FastForward purchases $7,100 of supplies on credit.

Page &P

Sheet1


Assets	=	Liabilities	+	Equity
Supplies		Accounts Payable		Common
				Stock
7,100		7,100

Page &P

Analyzing Transactions

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Analysis:

Double entry:

403

101

Posting:

FastForward provided consulting services and collected $4,200 cash. The asset account, cash, increased by $4,200 and the equity account, consulting revenue, increased by the same amount. See if you can make the general journal entry to record this transaction before moving to the next slide.

We increase the cash account with a debit and increase the revenue account, consulting revenue, with a credit. Let’s post the amounts.

The general ledger account for cash increased by $4,200 so the amount is placed on the debit side of the account. The consulting revenue account increased by the same amount, so it is placed on the credit side of the general ledger account. We could continue on with more transactions, but your homework will help reinforce what we have done here. Let’s take a look at the trial balance of FastForward at the end of December.

Sheet1


	Transaction:	FastForward provides consulting services and immediately collects $4,200 cash.

Page &P

After processing its remaining transactions for December, FastForward’s trial balance is prepared.

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Trial Balance

Debits

Credits

Cash

4,350

Accounts receivable

Supplies

9,720

Prepaid Insurance

2,400

Equipment

26,000

Accounts payable

6,200

Unearned consulting revenue

3,000

Common stock

30,000

Dividends

200

Consulting revenue

5,800

Rental revenue

300

Salaries expense

1,400

Rent expense

1,000

Utilities expense

230

Total

45,300

FastFoward

December 31, 2011

The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits.

On the trial balance we list all the accounts in our general ledger and their related balances. The total of all our debit account balances must equal all our credit account balances. If this is not the case, we may have made an error posting the journal entry into the ledger. We cannot prepare the financial statements until the books are in balance as determined by the trial balance.

Six Steps for Searching for and Correcting Errors

If the trial balance does not balance, the error(s) must be found and corrected.

Verify that the trial balance columns are correctly added.

Verify that account balances are correctly entered from the ledger.

See whether a debit (or credit) balance is mistakenly listed as a credit (or debit).

Recompute each account balance in the ledger.

Verify that each journal entry is properly posted.

Verify that each original journal entry has equal debits and credits.

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You may want to refer back to this screen if you run into trouble with your homework. We have listed six steps to follow when your trial balance is out of balance.

Using a Trial Balance to Prepare Financial Statements

Statement of Cash Flows

Income Statement

Statement of Retained Earnings

Beginning Balance Sheet

Ending Balance Sheet

Period of Time

Point in
Time

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As we have seen in the last chapter, after the trial balance has been prepared we begin preparing the financial statements. We always begin with the income statement because net income appears on the statement of retained earnings. After the income statement, we prepare the statement of retained earnings because the ending balance in retained earnings appears on the balance sheet. Next, we prepare the balance sheet and finally we prepare the statement of cash flows.

Income Statement

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Here is the information for FastForward for the month ended December 31, 2011. The company had total revenues of $6,100 and total expenses of $2,630. For the month FastForward generated $3,470 in net income. Look back at the trial balance to verify the amounts shown on the income statement.

Larson


C. Taylor, Capital		FASTFORWARD			(1)	Cash		101	30,000
	(1) 30,000	Income Statement					C. Taylor, Capital	301		30,000
		For the Month Ended December 31, 2011
		Revenues:
		Consulting revenue	$ 5,800
		Rental revenue	300
		Total revenues		$ 6,100
		Expenses:
		Salaries expense	1,400
		Rent expense	1,000
		Utilities expense	230
		Total expenses		2,630
		Net income		$ 3,470

Statement of Retained Earnings

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The beginning balance in retained earnings was zero because the company was started on December 1, 2011. It earned income of $3,470. During the month dividends of $200 were paid. The ending balance in retained earnings is $3,270. This amount will appear on the equity section of the balance sheet. Let’s look at the balance sheet now.

Larson


C. Taylor, Capital		FASTFORWARD		(1)	Cash		101	30,000
	(1) 30,000	Statement of Retained Earnings				C. Taylor, Capital	301		30,000
		For the Month Ended December 31, 2011
		Balance, 12/1/11	$ - 0
		Net income for December	3,470
			3,470
		Less: Dividends	(200)
		Balance, 12/31/11	$ 3,270

Balance Sheet

2-*

Total assets equal 442,470. Total liabilities are $9,200 and our equity balance is $33,270. The accounting equation is in balance because assets are equal to liabilities plus equity.

Larson


C. Taylor, Capital		FASTFORWARD		(1)	Cash		101	30,000
	(1) 30,000	Balance Sheet				C. Taylor, Capital	301		30,000
		December 31, 2011
		Assets
		Cash	$ 4,350
		Supplies	9,720
		Prepaid insurance	2,400
		Equipment	26,000
		Total assets	$ 42,470
		Liabilities
		Accounts payable	$ 6,200
		Unearned revenue	3,000
		Total liabilities	9,200
		Equity
		Common stock	30,000
		Retained earnings	3,270
		Total equity	33,270
		Total liabilities and equity	$ 42,470

Describes the relationship between the amounts of the company’s liabilities and assets.

Helps to assess the risk that a company will fail to pay its debts.

Debt Ratio

2-*

The debt ratio tells us about the relationship between liabilities and assets of the company. It shows us how many dollars of debt exist for each dollar of assets owned by the company. We can use this measure to assess the risk associated with the future operations of the company.

Sheet1


	Debt Ratio	=	Total Liabilities Total Assets

Page &P

End of Chapter 02

2-*

Wow! We covered a great deal of material in this chapter. The new terms and their meaning will be reinforced by your homework. It is probably a good idea to start on your homework while this presentation is still fresh. Good luck.

101

Cash

319

Dividends

106

Accounts receivable

403

Consulting revenues

126

Supplies

406

Rental revenue

128

Prepaid insurance

622

Salaries expense

167

Equipment

637

Insurance expense

201

Accounts payable

640

Rent expense

236

Unearned revenue

652

Supplies expense

307

Common stock

690

Utilities expense

318

Retained earnings

(Left side)(Right side)

DebitCredit

T- Account

Investment by owner for stock30,000 Purchase of supplies2,500

Consulting services revenues earned4,200 Purchase of equipment26,000

Collection of accounts receivable1,900 Payment of rent1,000

Payment of salary700

Payment of accounts payable900

Payment of cash dividend200

Total increases36,100 Total decreases31,300

Balance4,800

Cash

GENERAL JOURNAL

Page

123

Date

Description

Post.

Ref.

Debit

Credit

ACCOUNT NAME:

ACCOUNT No.

Date

Description

Debit

Credit

Balance

(Left side)(Right side)

DebitCredit

T- Account

GENERAL JOURNAL

Page 1

DateAccount Titles and ExplanationsPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased supplies for cash

CASHACCOUNT No.101

Date ExplanationPRDebitCreditBalance

2011

Dec. 1

Initial investment30,000 30,000

Dec. 2

Purchased supplies2,500 27,500

Dec. 3

Purchased equipment26,000 1,500

Dec. 10

Collection from customer4,200 5,700

GENERAL JOURNAL

Page 1

DateAccount Titles and ExplanationPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 3

Purchased equipment

20,000.00 ########

Dec. 10

Collection from customer

2,200.00 ########

GENERAL JOURNAL

Page 1

DateAccount Titles and ExplanationPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 1

Dec. 3

Purchased equipment

20,000.00 ########

Dec. 10

Collection from customer

2,200.00 ########

GENERAL JOURNAL

Page 1

DateAccount Titles & ElxplanationsPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 1

30,000

Dec. 3

Purchased equipment

20,000 (20,000)

Dec. 10

Collection from customer

2,200 (17,800)

GENERAL JOURNAL

Page 1

DateAccount Titles and ExplanationPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 1G1

30,000

Dec. 3

Purchased equipment

20,000 (20,000)

Dec. 10

Collection from customer

2,200 (17,800)

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 1

30,000 30,000

Dec. 3

Purchased equipment

20,000 (20,000)

Dec. 10

Collection from customer

2,200 (17,800)

GENERAL JOURNAL

Page 1

DateAccount Titles & ElxplanationsPRDebitCredit

2011

Dec.1Cash30,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

GENERAL JOURNAL

Page 1

DateAccount Titles and ExplanationPRDebitCredit

2011

Dec.1Cash10130,000

Common stock30,000

Investment by shareholders

Dec.2Supplies2,500

Cash2,500

Purchased store supplies

for cash

CASHACCOUNT No.101

DateExplanationPRDebitCreditBalance

2011

Dec. 1

30,000 30,000

Dec. 3

Purchased equipment

20,000 (20,000)

Dec. 10

Collection from customer

2,200 (17,800)

Transaction:

Shareholder invested $30,000 in FastForward on Dec.

(1) 30,000

Common Stock

(1) 30,000

Cash

(1)Cash101 30,000

Common stock301 30,000

Assets=+

Equity

CashCommon

Stock

30,000 30,000

Liabilities

Transaction:

FastForward purchases supplies by paying $2,500

cash.

(2) 2,500

Supplies

(1) 30,000 (2) 2,500

Cash

(2)Supplies126 2,500

Cash101 2,500

Assets=+

Equity

Cash SuppliesCommon

Stock

(2,500) 2,500

Liabilities

Transaction:

FastForward purchases equipment by paying $26,000

cash.

Assets=+

Equity

CashEquipmentCommon

Stock

(26,000) 26,000

Liabilities

(1) 30,000 (2) 2,500

(3) 26,000

Cash

(3) 26,000

Equipment

(3)Equipment167 26,000

Cash101 26,000

Transaction:

FastForward purchases $7,100 of supplies on credit.

Assets=+

Equity

SuppliesAccounts PayableCommon

Stock

7,100 7,100

Liabilities

(2) 26,000

(4) 7,100

Supplies

(4) 7,100

Accounts Payable

(4)Supplies126 7,100

Accounts payable201 7,100

Transaction:

FastForward provides consulting services and

immediately collects $4,200 cash.

(1) 30,000 (2) 2,500

(5) 4,200(3) 26,000

Cash

(5) 4,200

Consulting Revenue

(5)Cash101 4,200

Consulting Revenue403 4,200

Assets=+

Equity

CashRevenue

4,200 4,200

Liabilities

Revenues:

Consulting revenue5,800$

Rental revenue300

Total revenues6,100$

Expenses:

Salaries expense1,400

Rent expense1,000

Utilities expense230

Total expenses2,630

Net income3,470$

FASTFORWARD

Income Statement

For the Month Ended December 31, 2011

Balance, 12/1/11-$

Net income for December3,470

3,470

Less: Dividends(200)

Balance, 12/31/113,270$

FASTFORWARD

Statement of Retained Earnings

For the Month Ended December 31, 2011

Revenues:

Consulting revenue5,800$

Rental revenue300

Total revenues6,100$

Expenses:

Rent expense1,000

Salaries expense1,400

Utilities expense230

Total expenses2,630

Net income3,470$

FASTFORWARD

Income Statement

For the Month Ended December 31, 2011

Assets

Cash4,350$

Supplies9,720

Prepaid insurance2,400

Equipment26,000

Total assets42,470$

Liabilities

Accounts payable6,200$

Unearned revenue3,000

Total liabilities9,200

Equity

Common stock30,000

Retained earnings3,270

Total equity33,270

Total liabilities and equity42,470$

FASTFORWARD

Balance Sheet

December 31, 2011

Balance, 12/1/11-$

Net income for December3,470

3,470

Less: Dividends200

Balance, 12/31/113,270$

FASTFORWARD

Statement of Retained Earnings

For the Month Ended December 31, 2011

Debt Ratio

Total Liabilities

Total Assets