Chapter 1 Review

• What is financial accounting?

• What are accounting equations?

• What are four financial statements?

– Relationship among them
• Equityt+1 = Share Capitalt + Retained
Earningst + Net Incomet – Dividendst

• Net Incomet=Revenuet (Gaint) – Expenset

(Losst)

• Assetst+1 = Liabilitiest+1 + Equity t+1

 Chapter 2

Recording Business
Transactions
 Conceptual Framework
• Assets = Liability + Equity

• Net income= Revenue– Expense

• Revenue= Equity

• Expense = Equity
 Transactions
• ALL events that have a financial impact on the
business and can be reliably measured

– Selling products, paying expenses

– Giving & Receiving

• Accounting records both sides of transactions

– Often called Double-entry Accounting
 Assets, Liabilities and Equity
• Assets= Liabilities + Equity (Jan 1, 2017)

• Assets= Liabilities + Equity (Dec 31, 2017)

• ∆ Assets= ∆ liabilities + ∆ equity (from Jan 1 to

Dec 31, 2016)
 Exercise 1
• Are the followings transactions?

• Tencent Holdings
– borrows a $2 billion loan
– applies for a $2billion loan

• Diamond De Beers
– delivers the diamonds to customers
– retailers place an order with De Beers
 Why transaction?
• Assets = Liabilities + Equity

– Transactions affect this equation!

– But the two slides are always balanced

 The Account
These are all categories of accounts

Shareholders’
Assets Liabilities
Equity

• An Account is a record of all the changes in a

particular asset, liability and shareholders’ equity
element
– Basic summary device of accounting
– We will use examples known as a T-account
These are examples of Asset Accounts (there can be many more
other examples)
Assets
Accounts
Cash Inventory
Receivable

Prepaid
Land Buildings
Expenses

Equipment,
Furniture &
Fixtures
 Assets Accounts
Asset Name Description
Cash Money and any medium of exchange including bank account balances,
paper currency, coins, certificates of deposit, and checks.
Accounts Receivable Companies sell their goods and services and receives a promise for future
collection of cash. The Accounts receivable account holds these amounts.
(from customers)
Notes Receivable A note receivable is similar to an account receivable, but a note receivable is
more binding because the borrower signs a note, often with a specific
interest rate. (from borrowers)
Inventory The products a company sells to customers. Other titles for this account
include Stocks and Merchandise inventory.
Prepaid Expenses A future expense that has already been paid. Examples: Prepaid rent,
Prepaid insurance, and Supplies.
Land The Land account shows the cost of the land a company uses in its
operations.
Buildings The costs of office buildings, manufacturing plants, etc.
Equipment, Furniture, These asset accounts includes items such as computers, office furniture and
and Fixtures store shelving.
(Land, Buildings, Equipment are commonly combined into PPE)
 Exercise 2
• Brain Horton opened a software consulting
firm that immediately paid $8,000 for a
computer. Was Horton’s computer an expense
of the business?
 Liabilities

Accounts Notes Accrued

payable payable liabilities
 Liabilities
Liability Name Description
Accounts Payable The direct opposite of Accounts receivable. A
company’s promise to pay a debt arising from a credit
purchase.
Notes Payable A note payable is the opposite of a note receivable.
The Notes payable account includes the amounts a
company must pay because it signed notes promising
to pay a future amount, typically with interest.
Accrued Liabilities An accrued liability is a liability for an expense you
have not yet paid. Interest payable and Salary payable
are accrued liability accounts for most companies.
Income tax payable is another accrued liability.
 Shareholders’ Equity

Share Capital,
Common Retained
Dividends
Stock, Earnings
Preferred Stock

Revenues Expenses
 Shareholders’ Equity
Equity Name Description

Share Capital The owners’ investment in the corporation. The corporation receives
cash and issues shares to its shareholders. A company’s ordinary share
capital (Common Stock) is its most basic element of equity. All
corporations have ordinary shares.
Retained Earnings this account shows the cumulative net income earned by a corporation
over its lifetime, minus its cumulative net losses and dividends.

Dividends Dividends are optional; they are declared by the board of directors and
represent a payment from retained earnings back to shareholders
Revenues the increase in shareholders’ equity from delivering goods or services
to customers: includes sales revenue, service revenue, interest
revenue, rent revenue, etc.
Expenses the cost of operating a business. Expenses decrease shareholders’
equity, the opposite effect of revenues. Examples include: Cost of
goods sold, Salary expense, Rent expense, Advertising expense,
Insurance expense, Utilities expense, and Income tax expense.
Businesses strive to minimize expenses and thereby maximize net
income
 Exercise 3
• Yong Software began with cash of $13,000.
Young then bought supplies for $1,800 on
account. Separately, young paid $4,000 for a
computer. Answer these questions.

– How much in total assets does Young have?

– How much in liabilities does Young have?

Analyze transactions
LEARNING OBJECTIVE 1

18
 ShineBrite Car Wash, Inc
Trans# Description
1 Gray and a few friends invest $50,000 to open ShineBrite Car Wash, and the business
issues ordinary share capital to the shareholders.
2 ShineBrite purchases land for a new location and pays cash of $40,000.
3 The business buys supplies on account, agreeing to pay $3,700 within 30 days.
4 ShineBrite earns $7,000 (cash) of service revenue by providing services for customers.
5 ShineBrite performs $3,000 of service on account.
6 During the month, ShineBrite Car Wash pays $2,700 for the following expenses:
equipment rent, $1,100; employee salaries, $1,200; and utilities, $400.
7 ShineBrite pays $1,900 on account, which means to pay off an account payable.
8 Van Gray paid $30,000 to remodel his home.
9 In transaction 5, ShineBrite performed services on account. The business now collects
$1,000. (We say that ShineBrite collects the cash on account)
10 ShineBrite sells some half of the land for $22,000.
11 ShineBrite Car Wash declares a dividend and pays the shareholders $2,100 cash.
• Transaction 1. Gray and a few friends invest
$50,000 to open ShineBrite Car Wash, and the
business issues ordinary share capital to the
shareholders.
• Transaction 2. ShineBrite purchases land for a
new location and pays cash of $40,000.
• Transaction 3. The business buys supplies on
account, agreeing to pay $3,700 within 30
days.
• Transaction 4. ShineBrite earns $7,000 (cash)
of service revenue by providing services for
customers.
• Transaction 5. ShineBrite performs $3,000 of
service on account.
• Transaction 6. During the month, ShineBrite
Car Wash pays $2,700 for the following
expenses: equipment rent, $1,100; employee
salaries, $1,200; and utilities, $400.
 ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity
Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction

issued share
1 50,000 50,000 capital
2 -40000 40,000
3 3,700 3,700
4 7,000 7,000 revenue
5 3,000 3,000 revenue
6 -2700 -2700 expense
expense
expense
14,300 3,000 3,700 40,000 3,700 50,000 7,300
• Transaction 7. ShineBrite pays $1,900 on
account, which means to pay off an account
payable.
• Transaction 8. Van Gray, the major
shareholder of ShineBrite Car Wash, paid
$30,000 to remodel his home.
• Transaction 9. In transaction 5, ShineBrite
performed services on account. The business
now collects $1,000.
• Transaction 10. ShineBrite sells some half of
the land for $22,000.
• Transaction 11. ShineBrite Car Wash declares
a dividend and pays the shareholders $2,100
cash.
 ShineBrite Car Wash, Inc
14,300 3,000 3,700 40,000 3,700 50,000 7,300
7 -1900 -1900
8 not a transaction by the company
9 1,000 -1000
10 22,000 -20000 2,000
11 -2100 -2100 Dividends
33,300 2,000 3,700 20,000 1,800 50,000 7,200

$59,000 $59,000

15–31 The business paid cash expenses: employee salaries, $900; office rent, $
31 The business sold supplies to another physician for cost of $200.
• Why we treat gains from disposal of land
differently from sales revenue?
 ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity

Statement of Changes in Equity Data

Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
1 50,000 50,000 issued share capital
Statement of Cash Flows Data

Income Statement Data

2 -40000 40,000
3 3,700 3,700
4 7,000 7,000 revenue
5 3,000 3,000 revenue
6 -1100 -1100 expense
-1200 -1200 expense
-400 -400 expense
7 -1900 -1900
9 1000 -1000
10 22000 -22000 2,000 Gain from sale
11 -2100 (2,100) Dividends
Bal 33,300 2,000 3,700 18,000 1,800 50,000 7,200

$59,000 Balance Sheet Data $59,000

Understand how accounting works
LEARNING OBJECTIVE 2
 Double-Entry Accounting
• Business transactions have two effects on
financial statements
– Giving and receiving

• Assets = Liability + Equity

• Accounting based on a double-entry system

– Each transaction affects at least two accounts
 T-Account
Account Title

Left side Right side

Debit Credit
 Rules of Debit and Credit
Shareholders’
Assets Liabilities Equity

Debit Credit Debit Credit Debit Credit

• Accounting equation after ShineBrite Car Wash’s First
Transaction
Cash

Debit for increase,

5000 (+A)

Share Capital

Credit for increase,

5000 (+E)
• Accounting equation after ShineBrite Car Wash’s
Second Transaction
Cash

Credit for decrease,

40,000 (-A)

Land

Debt for increase,

40,000 ( +A)
Additional Shareholders’ Equity Accounts:
Revenues & Expenses

Liabilities
Share Capital
Assets +
Beginning Retained Earnings
Shareholders’ +
Revenues
Equity
Expenses

Dividends
 Rules of Debit and Credit
Shareholders’ Equity
Assets Liabilities Share Capital Retained earnings

Debit Credit Debit Credit Debit Credit Debit Credit

- - - Dividends
-

Debit Credit
Revenue
- Expenses

Debit Credit Debit Credit

- -
 Contra accounts
• Dividend and Expense

• The bigger they are the smaller equity

will be
 Exercise 4
• A debit entry to an account
a) increases liabilities
b) increases assets
c) increases shareholders’ equity
d) both a) and c)
 Exercise 5
• An attorney performs services of $900 for a
client and receives $100 cash with the
remainder on account. The journal entry for this
transaction would

a) debit Cash, debit Service Revenue, credit Accounts

Receivable
b) debit Cash, debit Accounts Receivable, credit Service
Revenue
c) debit Cash, credit Service Revenue
d) debit Cash, credit Accounts Receivable, credit Service
Revenue
 Exercise 6
• Purchasing a building for $110,000 by paying cash
of $15,000 and signing a note payable for $95,000
will

a) increase both total assets and total liabilities by

$95,000
b) increase both total assets and total liabilities by
$110,000
c) decrease both total assets and total liabilities by
$15,000
d) decrease total assets and increase total liabilities by
$15,000
Record transactions in the journal
LEARNING OBJECTIVE 3
 The Journal
• Chronological record of transactions
• Three steps
– Specify each account affected by the transaction
and classify by type
– Determine if each account is increased or
decreased
• Use debit credit rules
– Record in journal with amount (called an entry or
journal entry)
 Journal Entry
JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares
 The Ledger
• A group of all the T-accounts
• “keeping the books”
– Books refers to the accounts in the ledger
 The Ledger
Cash

Ledger
Individual
asset accounts Share Capital

Individual
equity
accounts
Accounts payable
Individual
liability
accounts

51
 Posting
JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

Transferring an amount Share Capital

from the Journal to a Cash
Ledger is called Posting: $50,000
$50,000
Example: post $50,000 to
the cash ledger
 Flow of Accounting Data

Transaction occurs

Analyze Transaction: why?

Journalized Transaction (Journal Entry)

Amounts posted to the ledger (Post)

Construct a trial balance
LEARNING OBJECTIVE 4
 Trial Balance
• Lists all accounts with their balances
• Assets listed first, then liabilities and
shareholders’ equity
• Shows that debits equal credits
• Usually prepared at the end of the period
 ShineBrite Car Wash, Inc.
Trail Balance
April 30, 2014
Balance
Account Title Debit Credit
Cash
Accounts receivable
Supplies
Land
Accounts payable
Share capital
Dividends
Service revenue
Gain on sale of land
Rent expense
Salary expense
Utilities expense
Total
 Exercise 5
• On September 1, 2016, Michael Moe
incorporated Moe’s Mowing, Inc., a company
that provides mowing and landscaping
services. During the month of September, the
business incurred the following transactions
 Requirement
• 1. Create blank T-accounts for the following
accounts: Cash, Accounts Receivable, Supplies,
Equipment, Accounts Payable, Utilities
Payable, Share Capital, Dividends, Service
Revenue, Salary Expense, Repair Expense
• 2. Journalize the transactions and then post to
the T-accounts. Use the table in Exhibit 2-16 to
help with the journal entries.
• 3. Total each T-account to determine its
balance at the end of the month.
• 4. Prepare the trail balance of Moe’s Mowing,
Inc., at September 30, 2016.