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Chapter Two Textbook Outline

by: Nicholas D'Ambrosio

Chapter Two Textbook Outline ACG2021

Marketplace > University of Florida > Finance > ACG2021 > Chapter Two Textbook Outline
Nicholas D'Ambrosio

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About this Document

Detailed outline of chapter two of our textbook.
Introduction to Financial Accounting
Jill Kristen Goslinga
Class Notes
financial accounting, Accounting, finance, business
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This 6 page Class Notes was uploaded by Nicholas D'Ambrosio on Thursday September 1, 2016. The Class Notes belongs to ACG2021 at University of Florida taught by Jill Kristen Goslinga in Fall 2016. Since its upload, it has received 201 views. For similar materials see Introduction to Financial Accounting in Finance at University of Florida.


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Date Created: 09/01/16
Chapter Two: Transaction Analysis II. Transaction Analysis A. Explain What a Transaction is A transaction is any event that has a financial impact of the business and can be measured reliably. In accounting, we always record both sides of a transaction. We must be able to measure the financial impact of the event on the business before recording it as a transaction. B. Define “Account”, Differentiate Between Different Types of Account An account is the record of all the changes in a particular asset, liability, or stockholder’s equity during a period. 1. Assets To reiterate, an assets are economic resources that provide a future benefit for a business. Most firms use the following asset accounts: Cash, Account Receivable, Inventory, Prepaid Expenses, Investments, and Property. 2. Liabilities Recall that a liability is a debt. A payable is always a liability. The most common types of liability accounts include: Accounts Payable, Notes Payable, and Accrued Liabilities. 3. Stockholders’ (Owners’) Equity The owners’ claims to the assets of a corporation are called stockholders’ equity. Stockholders’ equity accounts include: Common Stock, Retained Earnings, Dividends, Revenues, and Expenses. C. Show the Impact of Business Transactions on the Accounting Equation 1. Example: Alladin Travel Inc. (this section is long, bear with me) Transaction 1: Starr Williams invests $50,000 to open Alladin Travel Inc and the business issues common stock to the stockholders. The effect on the accounting transaction is a receipt of cash and an issuance of common stock. Assets = Liabilities + Stockholder’s Equity Cash = Common Stock ($50,000) = ($50,000) Transaction 2: Alladin purchases land for a new location and pays $40,000 cash. Assets = Liabilities + Stockholder’s Equity Cash + Land = Common Stock ($50,000) ($50,000) (-$40,000) ($40,000) Total Total ($50,000) = ($50,000) Transaction 3: The business buys supplies on account, agreeing to pay $3,700. The transaction increase both the assets and liabilities of the business. Assets = Liabilities + Stockholder’s Equity Cash + Supplies + Land = Accounts Payable + Common Stock ($10,000) ($3,700) ($40,000)= ($3700) ($50,000) Total Total ($53,000) = ($53,000) Transaction 4: Alladin earns $7000 of service revenue by providing services to customers. The effect is an increase in the asset cash and an increase in retained earnings. Assets = Liabilities + Stockholder’s Equity Cash + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($10,000) ($3,700) ($40,000)= ($3,700) ($50,000) ($7,000) ($7,000) Total = Total ($60,700) ($60,700) Transaction 5: Alladin performs services on account, which means they let some customers pay later. Alladin earns revenue but doesn’t receive cash immediately. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivables + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($17,000) ($3,700) ($40,000)($3,700) ($50,000) ($7,000) ($3,000) ($3,000) Total = Total ($63,700) ($63,700) Transaction 6: During the month, Alladin pays $2,700 for the following expenses; rent, $1,100; employee salaries, $1,200; and utilities, $400. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($17,000) ($3,000) ($3,700) ($40,000)($3,700) ($50,000) ($10,000) (-$2,700) (-$1,100) (-$1,200) (-$400) Total = Total ($61,000) ($61,000) Transaction 7: Alladin pays $1,900 on account, which means to make a payment toward an account payable. In this transaction, Alladin pays the store from which it purchased supplies in transaction 3. The transaction decreases cash and also decreases accounts payable. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($14,300) ($3,000) ($3,700) ($40,000) ($3,700) ($50,000) ($7,300) (-$1,900) (-$1,900) Total = Total ($59,100) ($59,100) Transaction 8: A major stockholder of Alladin pays $30,000 out of her personal bank account to remodel her home. This is a personal transaction, and is not recorded by Alladin Inc., for a business is an entity separate from its owners. Transaction 9: In transaction 5, Alladin performed travel services for customers on account. The business now collects $1,000 from a customer. We say that Alladin collects the ash on account, which means that Alladin will record an increase in cash and a decrease in accounts receivable. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($12,400) ($3,000) ($3,700) ($40,000) ($1,800) ($50,000) ($7,300) ($1,000) (-$1,000) Total = Total ($59,100) ($59,100) Transaction 10: Alladin sells some land for $22,000, which is the same amount that Alladin paid for the land. Increase in cash. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($13,400) ($2,000) ($3,700) ($40,000) ($1,800) ($50,000) ($7,300) ($22,000) (-$22,000) Total = Total ($59,100) ($59,100) Transaction 11: Alladin declares a dividend and pays the stockholders $2,100 cash. Assets = Liabilities + Stockholder’s Equity Cash + Accounts Receivable + Supplies + Land = Accounts Payable + Common Stock + Retained Earnings ($35,400) ($2,000) ($3,700) ($18,000) ($1,800) ($50,000) ($7,300) (-$2,100) (-$2,100) Total = Total ($57,000) ($57,000) D. Analyze the Impact of Business Transactions on Accounts 1. The T Account The left side of each account is called the debit side and the right side is called the credit side. Every business transaction involves both a debit and a credit. 2. Increases and Decreases in the Accounts: The Rules of Debit + Credit  Increases in assets are recorded on the left side of the account. Decreases in assets are recorded on the right side. You receive cash and debit the cash account. You pay cash and credit the cash account.  Increases in liabilities and stockholder’s equity are recorded by credits. Decreases in liabilities and stockholder’s equity are recorded by debits. Accounting Equation Rules of Debit and Credit Assets = Liabilities + Stockholder’s Equity Debit Credit Debit Credit Debit Credit + - - + - + 3. Additional Stockholder’s Equity Accounts: Revenues and Expenses As a part of the accounting equation, stockholder’s equity includes the income statement, meaning it therefore includes accounts for revenues and expenses. Knowing this, we can now construct the final form of the rules of debit and credit. Assets = Liabilities + Stockholder’s Equity Assets Liabilities Common Stock Retained Earnings Debit Credit Debit Credit Debit Credit Debit Credit + - - + - + - + Dividends Revenues Debit Credit Debit Credit + - - + Expenses Debit Credit + - E. Record (Journalize and Post) Transactions in the Books Accountants use a chronological record of transactions called a journal also known as the book of original entry. The journalizing process follows three steps: 1. Specify each account affected by the transaction and classify each account by type. 2. Determine whether each account is increased or decreased by the transaction. Use the rules of debit and credit to increase or decrease each account. 3. Record the transaction in the journal, including a brief explanation. The debit side is entered on the left margin, and the credit side is indented to the right. 1. Copying Information (posting) from the Journal to the Ledger The ledger is a grouping of all the T-accounts, with their balances. Posting is the process of copying data into the ledger. F. Construct and Use a Trial Balance A trail balance lists all accounts with their balances- assets first then liabilities and stockholder’s equity. The trial balance summarizes all the account balances for the financial statements and shows whether total debits equals total credits. Most common time to construct a trial balance is at the end of the period. The trial balance facilities the preparation of the financial statements. 1. The Normal Balance of an Account An accounts normal balance falls on the side of the account- debit or credit- where increases are recorded. The normal balance of assets is on the debit side, so assets are debit-balance accounts. Conversely, liabilities and stockholder’s equity usually have a credit balance, so these are credit-balance accounts.


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