ACT 205 Week 3 Notes and Example Problems
ACT 205 Week 3 Notes and Example Problems ACT 205
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This 13 page Class Notes was uploaded by Rachel Rheingold on Monday September 12, 2016. The Class Notes belongs to ACT 205 at Colorado State University taught by Sally Plasterer Whitney in Fall 2016. Since its upload, it has received 17 views.
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Date Created: 09/12/16
Ch. 2: The Accounting Cycle Measuring Business Activities There are 2 main functions of accounting o Measure a business’s activities o Communicate those measurements to outside people The full set of procedures to achieve those functions is the accounting cycle External Transactions The activities that measure and communicate are classified into 2 categories o External o Internal Transactions the firm has with separate economic entities are external transactions o Sell products to customers o Buying supplies from vendors o Paying salaries to employees o Borrowing money from a bank Things that affect the financial position of the company but don’t have an exchange with a separate entity is an internal transaction o Using already bought supplies o Making revenues after cash payments from a customer In this chapter, the main focus will be on external transactions There are 10 basic transactions to understand a company’s financial position Measuring external transactions has 6 steps Use source document to find accounts affected by an external transaction o Analyze the impact of the transaction on the accounting equation o Asses the transaction as a debit or credit to balance the accounting equation o Record the transactions in a journal using debits and credits o Post the transaction to the general ledger o Prepare a trial balance The first thing to do in the measurement process is to get information about the transactions Sales invoices, bills, and signed contracts are source documents o Those all help give information to external transactions o Source documents identify a date and what each transaction was for, people involved, and the money involved Steps 2-6 capture the effects of the transaction in those accounts Summaries of the transactions similar to certain items over a period of time is an account o Asset accounts Cash Supplies Equipment All transactions involving cash are in a cash account When a company gets cash, the balance of the cash account increases When a company pays cash, the balance of the cash account decreases o Liability accounts Account payable Salaries payable Utilities payable Taxes payable o Asset and liability accounts keeps a balance of amounts owed o Stockholders’ equity 2 Common stalk Retained earnings All account names used to record transaction of a company is the chart of accounts Effects of Transactions on the Basic Accounting Equation Walgreens borrows cash from a bank o Assets (cash) increase o Liabilities (loan payable to bank) increase Walgreens record those events in its records Walgreens hires Ryan, that doesn’t change the company’s assets, liabilities, or stockholder’s equity Until Ryan start work, their financial position is not changes Each transaction has a dual effect When one side increases then the other side does as well At times the transactions will not affect the total on either side Carl’s Jr. buys new cash registers for the store with cash o Asset (cash) goes down o Asset (equipment) goes up You can know if a transaction affects the accounting equation by thinking if the impact on the company’s assets You have $60,000 in cash o That’s the cash account balance If you get $2,000 in cash from a customer o The cash account is $62,000 Transaction (1): Issue Common Stalk o The company gets $25,000 cash from investors o Those investors become owners of the company by getting shares of common stalk Transaction (2): Borrow Cash From The Bank 3 o You borrow $10,000 from the bank and sing a note promising to pay them back in 3 years (IOU) Transaction (3): Purchase Equipment o Once a company gets financing by issuing common stalk and borrowing from the bank o The company can invest in long-term assets for the business o Buying equipment from a supplier cause an asset (equipment) to increase and another asset (cash) to decrease Transaction (4): Pay For Rent In Advance o When a company pays rent in advance ($6,000) o Because the rent was paid in advance its recorded as an asset That’s called prepaid rent o Other prepaid assets are Prepaid insurance Prepaid advertising o Paying rent in advance causes 1 asset to increase o Paying rent in advance causes 1 asset to decrease Transaction (5): Purchase Supplies On Account o The term “on account” means that cash was not paid then and there Cash will be paid in the future o Supplies are an asset (resources) of a company o The promises to pay later is an obligation (a liability) o The term “payable: means to be paid in the future o Buying supplies with a promise for future pay causes an asset (supplies) to increase and a liability (accounts payable) to increase Effects of Transactions on the Expanded Accounting Equation Stockholders equity can be broken into 2 components 4 o Common stalk o Retained earnings Common stalk = investments by stockholders Retained earnings = net income over a period of time that has not been distributed (dividends) to stockholders (owners) Retained earnings can be broken into 3 parts o Revenue o Expenses o Dividends Expanded Accounting Equation We add revenues to calculate retained earnings o Revenues increase net income o Net income increases stockholder’s equity o An increase in revenues has the effect of increasing stockholder’s equity In the basic accounting equation o We subtract expenses and dividends to calculate retained earnings Expense reduce net income Dividends represent a distribution of net income to stockholders Expenses and dividends reduce stockholders claims to a company’s resources An increase in expenses and dividends has the effect of decreasing stockholder’s equity in the basic accounting equation Transaction (6): Provide Services For Cash o Companies record revenues at the time they provide goods and services to customers is the revenue recognition principle o Providing services to customer for cash causes and asset (cash) and stockholders’ equity (service revenue) to increase 5 o An increase in service revenue increase stockholder’s equity by increasing the retained earnings account o When a company record revenue, the mount of retained earnings increases Transaction (7): Provide Services On Account o According to the revenue recognition principle providing services customers causes revenue o When services are performed “on Account” and it’s an asset and is called accounts receivable o Providing services to customers causes an asset (accounts receivable) and stockholders equity (service revenue) to increase Transaction (8): Receive Cash In Advance From Customers o When a company gets cash from customers for a future service You can’t get revenue or record that as an asset until you provide those services o Revenue recognition principle This transaction creates an obligation for the company to perform a service in the future This future obligation is a liability (debt) Referred to as a deferred revenue o Receiving cash in advance causes an asset (cash) and a liability (deferred revenue) to increase Deferred revenue is not revenue, it’s a liability until acted upon Transaction (9): Pay Salaries To Employees o Cash paid to employees is a salaries expense o Paying salaries to decrease for the current period causes an asset (cash) to decrease and stockholders’ equity to decrease (salaries expense decrease) o An increase in salaries expense decreases retained earnings 6 o Expense reduce net income and reduce retained earnings o When a company has a cost that benefits future periods Its typically recorded as an asset rather than an expense Transaction (10): Pay Cash Dividends o A dividend is a cash payment to the owners (stockholders) o Paying dividends causes an asset (cash) to decrease and stockholders’ equity to decrease (and dividends to increase) o Like expenses, dividends reduce retained earnings Dividends are not an expense! o An increase in dividends results in a decrease in retained earnings Debits and Credits Debit and credit Increase and decrease o Those terms are synonymous Effects on Account Balances in the Basic Accounting Equation Debit = left Credit = right The balances of amounts in each of those categories an increase or decreases when a transaction happens Increases in assets as debits Decreases in assets as credits Increases in liabilities and stockholders’ equity as credits Decreases in liabilities and stockholder’s equity as debits Effects on the Accounting Equation in the Expanded Accounting Equation In the expanded equation we include the components of stockholders’ equity 7 o Common Stalk o Retained Earnings And the components of retained earnings are o Revenue o Expenses o Dividends Revenues increase retained earnings o Revenues is a credit account o So increase revenue with a credit Expenses decreases retained earnings Increase expenses with a debit A debit to an expense is a debit to retained earnings, decreasing the accounts Dividends decrease retained earnings o Record an increase in dividend with a debit When a company earns revenue o Credit the revenue account because the amount of revenue increases When a company has expenses o Debit the expense account because the amount of expenses increases The retained earnings account is a stockholders’ equity account usually has a credit balance o The retained earnings amount has 3 components Revenues (increased by credits) Expenses (increased by debits) Dividends (increased by debits) D E A D o Debit o Expenses o Assets o Dividends C R L S o Credit o Revenues o Liabilities 8 o Stockholders equity Recording Transactions in a Journal A journal provides a chronological record of all transactions affecting the firm A journal entry is used to describe the transaction o Date Debit Credit o Account name………………………………………..Amount o Account name (description of transaction) …………………Amount Posting to the General Ledger Collecting all transactions affecting an account in one place is called posting Posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger The general ledger provides a single location of all the transaction affecting each account and the account balance Trial Balance After the journal entire to the ledger have been posted o The sum of the accounts with debit balances should equal the sum of the accounts with credit balances A trail balance is a list of all accounts and their balances at a particular date showing the total debits equal total credits 9 Ch. 2 Example Problem 2 3 4
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