ACCT 201

Accounting
2
Chapter

Information
System
ACCT 201

UAA – ACCT 201

ACCT 201

Principles of Financial Accounting

Dr. Fred Barbee
ACCT 201

Accounting
2
Chapter

Information
System
ACCT 201

First . . . A brief
review of Day #2
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Topics.
ACCT 201 ACCT 201 ACCT 201
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Debits and Credits

The debit/credit convention or

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coding system is very simple.

Do not make it difficult because

you cannot accept its simplicity.
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Debits

Debit comes from Latin and

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merely means “left,” or the “left-

hand” side of an account.
Abbreviated “DR.”
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 Account Title
Left Side
We need to
stop here
and change
our way of
Debit thinking!
Side
 Symbolically, let’s
erase that memory

C:\memory\debit\erase *.*

All files in directory will be

deleted
Are you sure (Y/N)?
ACCT 201
Credits

Credit also comes from the Latin,

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and means “right,” or the “right-

hand” side of an account.
Abbreviated “CR.”
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 Account Title

Right Side
Let’s stop
here and
modify our
thinking – at
least for this
Credit
class!
Side
 Symbolically, let’s
erase that memory

C:\memory\credit\erase *.*

All files in directory will be

deleted
Are you sure (Y/N)?
 The algebraic
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relationship in the
fundamental
Assets accounting model.
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Liabilities
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Owners’
Equity
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Account Title

Debit Credit
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Always
Assets
DR CR
Liabilities
DR CR
Owners’
Equity
DR CR
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The Second Equality . . .

Debits Credits
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The algebraic
relationship between
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account increases
and decreases.
Debit-Credit Rules . . .

Account Inc. Dec.

Assets Debit Credit
Liabilities Credit Debit
Owners’ Equity Credit Debit
Revenue Credit Debit
Expenses Debit Credit
Debit-Credit Rules . . .

Debits Credits
Liabilities
Assets
Increase Equity
Expenses Revenue
Liabilities
Assets
Decrease Equity
Revenue Expenses
ncrease

ebits
xpenses
ssets
evenues
quity
iabilities
ncrease
redits
 Steps in Processing Transactions

Assets = Liabilities + Equity

Equipment
(3) 30,000
Step 1: Examine
source
Step 2: Analyze
documents.
transactions.

ACCOUNT NAME: ACCOUNT No.

GENERAL JOURNAL Page 123
Post.
Date Description PR Debit Credit Balance
Date Description Ref. Debit Credit

Step 5: Prepare Step 4: Record the Step 3: Record

a trial balance. journal information in transactions in
a ledger. a journal.
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General Journal Page 1

Date Description PR Debit Credit
Jan 6 Art Supplies 1,800
Office Supplies 800
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Accounts Payable 2,600

Purchase of art and office supplies on
credit
General Journal for FastForward

Transaction Titles of Affected

Date Accounts

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

Dec. 2 Supplies 2,500

Transaction
Cash Dollar amount of 2,500
Purchased store supplies
explanation
for cash
debits and credits
 Balance Column Ledger
T-accounts are useful illustrations,
but balance column ledger
accounts are used in practice.
CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance

2001
Dec. 1 Issuance of stock G1 30,000 30,000
Dec. 2 Purchased supplies G1 2,500 27,500
Dec. 3 Purchased equipment G1 26,000 1,500
Dec. 10 Collection from customer G1 1,900 3,400
Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

1
Dec. 2 Identify
Supplies the account. 2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001

Dec. 3 Purchased equipment G1 20,000.00 ########

Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

Enter
2 Dec. the date.
2 Supplies 2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001
Dec. 1

Dec. 3 Purchased equipment G1 20,000.00 ########

Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

Dec. 2 Supplies Enter the amount. 3

2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)

Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

4 2,500
Enter the journal
Dec. 2 Supplies reference.
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)

Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 30,000
Common Stock 30,000
Issuance of stock

Dec. 2 SuppliesCompute the balance. 2,500

Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 5 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)

Posting Journal Entries - Example

GENERAL JOURNAL Page 1

Date Description PR Debit Credit
2001
Dec. 1 Cash 101 30,000
Common Stock 30,000
Issuance of stock

6
Dec. 2 Supplies Enter the ledger reference.2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash
Date Description PR Debit Credit Balance
2001
Dec. 1 Issuance of stock G1 30,000 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)

ACCT 201

Accounting
2
Chapter

Information
System
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Text Section:
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Trial Balance (p. 63)

 P2 Learning
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Objective
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Prepare and explain the use

of a trial balance.
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Procedural
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Trial Balance

A Trial Balance is a listing of all

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accounts and their balances at a point

in time.
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 FastForward
Trial Balance
December 31, 2001
Debits Credits
Cash $ 3,950
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 600
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
ACCT 201

Accounting
2
Chapter

Information
System
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Text Section:
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Unadjusted Financial Statements

(p. 68)
 P3 Learning
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Objective
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Prepare unadjusted financial

statements from business
transactions.
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Procedural
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Income Statement

A statement showing revenues and

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expenses for a period of time.

Revenues = Inflows of assets in
exchange for products and services
provided to customers.
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Expenses = Outflows or the using up of

assets that result from providing
products and services to customers.
 FastForward Exh.
2.19

Income Statement
For Month Ended December 31, 2001
Revenues:
Consulting rev. $ 5,800
Rental revenue 300
Total revenues $ 6,100
Expenses:
Rent expense 1,000
Salaries expense 1,400
Utilities expense 230
Total expenses 2,630
Net income $ 3,470
 Statement of Retained
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Earnings
A statement showing additions to (net
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income) and deductions from (net

loss, dividends) the Retained Earnings
account.
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 Exh.
2.19

FastForward
Statement of Retained Earnings
For Month Ended December 31, 2001
Retained Earnings, 12/1/01 $ -
Add: Net Income 3,470
Total $ 3,470
Less: Dividends (600)
Retained Earnings, 12/31/01 $ 2,870
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Balance Sheet

A statement showing the balances in

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asset, liability, and equity accounts at

a point in time.
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 Exh.
2.19

FastForward
Balance Sheet
December 31, 2001
Assets Liabilities
Cash $ 3,950 Accounts payable $ 6,200
Supplies 9,720 Unearned Revenue 3,000
Prepaid Ins. 2,400 Total liabilities $ 9,200
Equipment 26,000 Equity
Common Stock $ 30,000
Retained Earnings 2,870
Total liabilities and
Total assets $ 42,070 owners' equity $ 42,070
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Statement of Cash Flows

A statement showing the sources and

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uses of funds relating to the

Operating
Investing, and
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Financing
Activities of a company.
 FastForward Exh.
2.19
Statement of Cash Flows
For Month Ended December 31, 2001
Cash flows from operating activities:
Cash received from clients $ 9,100
Cash paid for supplies (3,520)
Cash paid for insurance (2,400)
Cash paid for rent & utilities (1,230)
Cash paid to employee (1,400)
Net cash provided by operating acitivities $ 550
Cash flows from investing activities:
Purchase of equipment $ (26,000)
Net cash used by investing activities (26,000)
Cash flows from financing activities:
Investment by owner $ 30,000
Withdrawal by owner (600)
Net cash provided by financing activities 29,400
Net increase in cash $ 3,950
Cash balance, December 1, 2001 -
Cash balance, December 31, 2001 $ 3,950
 Formatting Conventions

GENERAL JOURNAL Page 123

Post.
Date Description Ref. Debit Credit

Generally, dollar signs ($)

ACCOUNT NAME: ACCOUNT No. are not used in the journals
Date Description PR Debit Credit Balance

or ledgers.

Round numbers in
Rounding financial statements to the
nearest dollar.
ACCT 201

Accounting
2
Chapter

Information
System
ACCT 201

Text Section:
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Decision Analysis (p. 70)

 A2 Learning
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Objective
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Analyze the impact of

transactions on accounts and
financial statements.
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Analytical
 A3 Learning
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Objective
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Compute return on equity

and use it to analyze
company performance.
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Analytical
 Using the Information -
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Return on Equity
 Describes the relationship between net
income for the period and average equity.
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Net Income
Return on Equity =
Average Equity

 Helps an owner judge the compnay’s

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profitability compared to other business or

personal opportunities.
 A4 Learning
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Objective
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Compute the debt ratio and

describe its use in analyzing
company performance.
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Analytical
The End