ACCT 2113 1st Edition Lecture 2 Outline of Last Lecture II Accounting as a measurement communication process A Definition of Accounting managerial and financial B Investors and creditors III 3 Business activities to measure A Financial Investing Operating B How to measure the activities C Defining assets liabilities stockholders equity D Accounting Equation E Defining revenues expenses net income dividends IV Forms of Business Organizations A Defining sole proprietorship partnership corporation V Communicating through financial statements A Four Primary Financial Statements VI Financial Accounting Information and rules A Definitions B Role of the Auditor VII Objectives of Financial Accounting A 3 objectives B Roles of the auditor VIII Careers in Accounting A Defining Public and private IX Conceptual Framework A Defining decision usefulness B Qualitative characteristics C Assumptions that underlie the GAAP Outline of Current Lecture II The Accounting Information System A Roles III Measuring External Transactions A Classification B Six Steps in measuring These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute C Ask three questions IV 10 Transaction Examples V Debits and Credits A Ask three questions VI Recording Transactions A Define general ledger posting and T account VII Prepare a Trial Balance A Define and preparation Current Lecture Chapter 2 The Accounting Information System Roles measure business activities of the company and communicate those measurements to external parties for decision making purposes Measuring External Transactions Most business enterprises use a computerized accounting system due to the sheer volume of data they must process Computerized data processing is fast accurate and affordable Knowledge of manual accounting information system will provide an essential understanding of the basic model that underlies the computerized programs Classification of business activities Transactions external transactions are with a separate economic entity Internal transactions do not include a separate economic entity Page 55 Six Steps in Measuring 1 2 3 4 5 6 Use source documents to identify accounts affected by an external transaction Analyze the impact of the transaction on the accounting equation Assess whether the transaction results in a debit or credit to the account balance Record the transaction Post the transaction to the T account in the general ledger Prepare the trial balance Each transaction will have a dual effect If an economic event increases one side of the equation then it also increases the other side of the equation by the same amount Assets Liabilities Stockholders equity Page 56 Ask yourself these questions 1 What is one account in the accounting equation affected by the transaction Does that account increase or decrease 2 What is a second account in the accounting equation affected by the transaction Did that account increase or decrease 3 Do assets still equal liabilities plus stockholders equity Transaction 1 Issue Common Stock To generate cash from external sources Eagle example in book sells shares of common stock for 25 000 It s time to ask the three questions we asked earlier What is one account in the accounting equation affected by the transaction Does that account increase or decrease Answer Cash Cash is a resource owned by the company which makes it an asset The company receives cash from you so cash and total assets increase by 25 000 What is a second account in the accounting equation affected by the transaction Does that account increase or decrease Answer Common stock Common stock is a stockholders equity account Issuing common stock to you in exchange for your 25 000 increases the amount of common stock owned by stockholders so common stock and total stockholders equity both increase Assets Liabilities Stockholders Equity Cash 25 000 Common stock 25 000 Do assets equal liabilities plus stockholders equity Answer Yes The accounting equation balances Transaction 2 Borrow from the Bank Seeking cash from another external source Eagle borrows 10 000 from the bank and signs a note for it Assets Liabilities stockholders equity Cash 10 000 Notes Payable 10 000 Transaction 3 Purchase Equipment Purchase Equipment with cash 24 000 Assets Liabilities stockholders equity Equipment 24 000 Cash 24 000 Transactions 4 and 5 Incur Costs for Rent and Supplies Pay one year of rent in advance 6 000 Assets Liabilities stockholders equity Prepaid rent 6 000 Cash 6 000 Purchase of supplies on account 2 300 Assets Liabilities stockholders equity Supplies 2 300 Accounts payable 2 300 Transactions 6 and 7 Provide services to customers Providing service to customers for cash causes both assets and stockholders equity to increase revenue net income retained earnings stockholders equity Similarly providing service to customers on account causes both assets and stockholders equity to increase Transaction 8 Receive cash in advance from customer Transaction 9 Incur cost for salaries Pay salaries to workers expenses goes up while net income retained earnings and stockholders equity goes down Transaction 10 Pay Dividends Pay dividends to stockholders dividends go up while retained earnings and stockholders equity goes down Page 65 See summary of transactions below Debits and Credits Debit and Credit Effects on Accounts in the Accounting Equation Page 67 Ask yourself these 3 questions 1 Is there an increase or decrease in the first account involved in the transaction Should I record that increase or decrease with a debit or a credit 2 Is there an increase or decrease in the second account involved in the transaction Should I record that increase or decrease with a debit or a credit 3 Do total debits equal total credits Recall the examples in the transaction processes here is the debit and credit affects on accounts in the expanded accounting equation Page 70 Recording Transactions A journal provides a chronological record of all transactions affecting a firm Posting transactions to T accounts in the General Ledger o o The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called posting A T account is a simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits ACCOUNT TITLE The general ledger includes all the accounts used