ACCT 209 1nd Edition Lecture 3 Outline of Last Lecture I What is accounting II What is a Business A Classifications B Forms C Organization III Generally accepted accounting principles IV Objectives and characteristics of accounting V Recognition and measurement criteria VI Financial statements VII Other elements of 10 k Annual reports VIII Analyzing Financial statements IX How Transactions affect the accounting equation Outline of Current Lecture X Filling in a transaction grid XI Transaction Analysis XII Rules of Debit Credit XIII Steps in the Recording Process Current Lecture Analyzing transactions and the Financial Statements Continued Example 3 Inovera Research Services Inovera Research Services began operating on July 1 2013 Company founder Marge Inovera spent several years as a business analyst in the commercial banking industry when she decided to open her own business research and consulting company The following transactions relate to the company s first month of operations 1 Marge Inovera invested 20 000 of her personal funds in exchange for stock in the new company Inovera Research Services Inc IRS Inc 2 IRS borrowed 15 000 by signing a Note payable at the bank 3 IRS acquired office furniture and equipment costing 8 400 by paying 2 000 in cash and agreeing to pay the balance in 30 days account payable 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 4 5 6 7 IRS purchased office supplies on account 700 IRS paid 500 for the current month s rent on a temporary office space IRS completed its first consulting project and received 3 600 cash from the client IRS completed a consulting project and billed the client 6 000 Terms of the invoice require the client to pay 25 of the invoice amount due on receipt of the invoice with the balance due in 30 days 8 IRS paid 3 300 in wages to employees 9 IRS received 25 of the amount due from client billed previously 10 IRS received and paid 2 800 in gas water and electricity bills 11 IRS received 5 000 in advance from a client for research to be performed over the next two months 12 IRS paid a dividend to company owner Marge Inovera 1 000 Required a Using the transactions grid record the transactions for Inovera Research Services showing the effect of each on the accounting equation b Use the information from the IRS transaction grid to prepare an income statement and statement of Retained earnings for the month of July and a balance sheet as of July 31 2013 a ASSETS LIABILITIES STOCKHOLDERS EQUITY Cont Cap Cash 1 20 000 2 15 000 3 2 000 Accts Rec Supplie s Furn Eq 6 3 600 7 Un Rev Com Stk 8 40 0 3 300 9 1 500 1 0 2 800 1 1 5 000 1 2 1 000 Expens e Dividend s 6 40 0 700 500 3 600 6 000 8 Revenue 15 00 0 700 500 Note Pble 20 000 0 4 5 Acct Pble Retained earnings 6 000 3 300 1 500 2 800 5 00 0 1 000 Total 35 500 4 800 700 8 40 0 7 10 0 15 00 0 5 00 0 20 000 9 600 6 600 1 000 Accounts Receivable Money that is owed to the company for work done Account payable Usually a recurring expense Open ended Un Revenue Money received but the work not done yet Note Something is marked as Revenue when the work is done Note Expense and Dividends are negative because they reduce Retained Earnings b Income Statement Revenue 9 600 Expense 6 600 Net Income 3 000 Statement of Retained Earnings Beginning Balance 0 Net Income 3 000 Dividend 1000 End Balance 2 000 Balance Sheet Assets Liabilities Capital Stock Retained Earnings 49 100 27 000 20 000 2 0000 Note Total of last three add up to the first RECORDING BUSINESS TRANSACTIONS AND ADJUSTING ENTRIES Transaction analysis using the accounting equation shows the effect of each transaction on the company s balance sheet However because of the number of accounts and the number of transactions most companies must record recording transactions using the accounting equation method demonstrated earlier is too cumbersome for most companies to use Instead most companies use a system of journals and ledgers to collect and process information The system may be maintained manually but most companies use a computerized system Account Summary device for recording increases decreases to each element of financial statements Chart of accounts List of all accounts used by a company Accounts can be added as needed Think of these as categories General Journal Book of original entry Chronological record showing effects of each transaction Shows accounts affected and the amount of the increase or decrease General Ledger Collection of all the accounts used by a firm Shows account and increase decrease in each T accounts Simplified format for an accountAccount Title Debit Credit Debit Credit Debit Left Credit Right Trial balance List of all accounts with their balances used to prove that accounts equation is in balance Rules of Debit Credit Type of account Debit Credit Asset Increase Decrease Liability Decrease Increase Stock Decrease Increase Retained earnings Decrease Increase Revenue or gain Decrease Increase Expense or loss Increase Decrease Dividends Increase Decrease Easy way to remember Debits increase Expenses Assets Dividends All of these increase with debit while everything else increases with credit Steps in the recording process Analyze transaction record in journal post to ledger trial balance Since the journal and the ledger contain the same information why do we need both They are the same information but different format Journal is organized by transitions chronologically Ledger is organized by account