ACCT 209 1nd Edition Lecture 3 Outline of Last Lecture I. What is accounting?II. What is a Business?A. ClassificationsB. FormsC. OrganizationIII. Generally accepted accounting principlesIV. Objectives and characteristics of accountingV. Recognition and measurement criteriaVI. Financial statementsVII. Other elements of 10-k (Annual reports)VIII. Analyzing Financial statementsIX. How Transactions affect the accounting equationOutline of Current Lecture X. Filling in a transaction gridXI. Transaction AnalysisXII. Rules of Debit/CreditXIII. Steps in the Recording ProcessCurrent LectureAnalyzing transactions and the Financial Statements ContinuedExample #3 Inovera Research ServicesInovera 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) IRS purchased office supplies on account, $700(5) IRS paid $500 for the current month’s rent on a temporary office space.(6) IRS completed its first consulting project and received $3,600 cash from the client.(7) 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, $1,000Required: 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’ EQUITYCont CapRetained earningsCash Accts RecSuppliesFurn & EqAcct PbleNote PbleUn RevCom StkRevenue ExpenseDividends1 20,000 20,00002 15,000 15,0003 (2,000)8,4006,4004 700 7005 (500) (500)6 3,600 3,6007 6,000 6,0008 (3,300)(3,300)9 1,500 (1,500)10(2,800)(2,800)115,000 5,00012(1,000)(1,000)Total:35,500 4,800 700 8,4007,10015,0005,00020,000 9,600 (6,600) (1,000)Accounts Receivable: Money that is owed to the company for work doneAccount payable: Usually a recurring expense (Open ended)Un Revenue: Money received but the work not done yetNote: Something is marked as Revenue when the work is doneNote: Expense and Dividends are negative because they reduce Retained Earningsb. Income StatementRevenue 9,600Expense - 6,600 Net Income 3,000Statement of Retained EarningsBeginning Balance 0Net Income 3,000Dividend - 1000End Balance 2,000Balance SheetAssets 49,100Liabilities 27,000 Note: Total of last three add up to the firstCapital Stock 20,000Retained Earnings 2,0000RECORDING BUSINESS TRANSACTIONS AND ADJUSTING ENTRIESTransaction 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 equationmethod 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 statementsChart 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 decreaseGeneral Ledger – Collection of all the accounts used by a firm. Shows account and increase/decrease in eachT-accounts- Simplified format for an accountAccount TitleDebit CreditDebit/Credit – Debit = Left; Credit = RightTrial balance – List of all accounts with their balances used to prove that accounts equation is in balanceRules of Debit/CreditType of account Debit CreditAsset Increase DecreaseLiability Decrease IncreaseStock Decrease IncreaseRetained earnings Decrease IncreaseRevenue or gain Decrease IncreaseExpense or loss Increase DecreaseDividends Increase DecreaseEasy way to remember: Debits increaseExpensesAssetsDividendsAll of these increase with debit while everything else increases with creditSteps in the recording process:Analyze transaction record in journal post to ledger trial balanceSince 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