Preview of Chapter 2

Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
2-1
 Using the Accounting Equation

Transaction Analysis
Illustration 1-9
Expanded accounting equation

2-2 LO 7 Analyze the effects of business transactions on the accounting equation.

 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300
in cash.

Illustration 1-10

2-3
LO 7
 The Account

 Record of increases and decreases

Account in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”

An account can be Account Name

illustrated in a T- Debit / Dr. Credit / Cr.
account form.

2-4 LO 1 Explain what an account is and how it helps in the recording process.
 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300
in cash.

Illustration 1-10

2-5
LO 7
 The Account

Debits and Credits

Double-entry system
► Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.

► Recording done by debiting at least one account and

crediting another.

► DEBITS must equal CREDITS.

LO 2 Define debits and credits and explain their use

2-6
in recording business transactions.
 Debits and Credits

If Debit amounts are greater than Credit amounts, the

account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 2 Define debits and credits and explain their use

2-7
in recording business transactions.
 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300
in cash.

Illustration 1-10

2-8
LO 7
 Debits and Credits

If Debit amounts are less than Credit amounts, the

account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

LO 2 Define debits and credits and explain their use

2-9
in recording business transactions.
 Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300
in cash.

Illustration 1-10

2-10
LO 7
 Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

 Liabilities – Credits should

Normal Balance
exceed debits.
Chapter

 Normal balance is on the

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

LO 2 Define debits and credits and explain their use

2-11
in recording business transactions.
 Using the Accounting Equation

Transaction Analysis
Illustration 1-9
Expanded accounting equation

2-12 LO 7 Analyze the effects of business transactions on the accounting equation.

 Debits and Credits

Equity  Issuance of share capital and

Debit / Dr. Credit / Cr.
revenues increase equity (credit).

 Dividends and expenses

Normal Balance
decrease equity (debit).
Chapter
3-25

Share Capital Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23

2-13 LO 2
 Debits and Credits

Revenue  The purpose of earning

Debit / Dr. Credit / Cr.
revenues is to benefit the
shareholders.
Normal Balance
 The effect of debits and credits
Chapter
3-26
on revenue accounts is the
same as their effect on equity.
Expense
Debit / Dr. Credit / Cr.
 Expenses have the opposite
effect: expenses decrease
equity.
Normal Balance

Chapter
3-27

LO 2 Define debits and credits and explain their use

2-14
in recording business transactions.
 Debit/Credit Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

2-15
LO 2
 Debit/Credit Rules
Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 2 Define debits and credits and explain their use

2-16
in recording business transactions.
 Debit/Credit Rules

Question
Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

LO 2 Define debits and credits and explain their use

2-17
in recording business transactions.
 Debit/Credit Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

LO 2 Define debits and credits and explain their use

2-18
in recording business transactions.
 Equity Relationships
Illustration 2-11

2-19 LO 2
 Using the Accounting Equation

Transaction Analysis
Illustration 1-9
Expanded accounting equation

2-20 LO 7 Analyze the effects of business transactions on the accounting equation.

 Net income is needed to determine the
Financial Statements ending balance in retained earnings.

Illustration 1-11
Financial statements and
their interrelationships

2-21 LO 8
 The ending balance in retained earnings is
Financial Statements needed in preparing the balance sheet

Illustration 1-11

2-22 LO 8
 The balance sheet and income statement are
Financial Statements needed to prepare statement of cash flows.

Illustration 1-11

2-23 LO 8
 Summary of Debit/Credit Rules

Relationship among the assets, liabilities and equity of a

business:
Illustration 2-12

The equation must be in balance after every transaction.

For every Debit there must be a Credit.

LO 2 Define debits and credits and explain their use

2-24
in recording business transactions.
 Kate Browne, president of Hair It Is, Inc., has just rented space in a
shopping mall in which she will open and operate a beauty salon. A
friend has advised Kate to set up a double-entry set of accounting
records in which to record all of her business transactions. Identify the
balance sheet accounts that Hair It Is, Inc., will likely need to record
the transactions needed to establish and open the business. Also,
indicate whether the normal balance of each account is a debit or a
credit.

Assets Liabilities Equity

Cash (debit) Notes payable (credit) Share capital (credit)

Supplies (debit) Accounts payable (credit)
Equipment (debit)

2-25 LO 2
 Steps in the Recording Process

Illustration 2-13

Transfer journal information to

Analyze each transaction Enter transaction in a journal ledger accounts

Business documents, such as a check or a bill, provide

evidence of the transaction.

2-26 LO 3 Identify the basic steps in the recording process.

 Steps in the Recording Process

The Journal
 Book of original entry.

 Transactions recorded in chronological order.

 Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit and

credit amounts can be easily compared.

2-27 LO 4 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

Journalizing - Entering transaction data in the journal.

Illustration: On September 1, shareholders’ invested €15,000 cash
in the corporation in exchange for share of stock, and Softbyte
purchased computer equipment for €7,000 cash.
Illustration 2-14

General Journal

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Share capital-ordinary 15,000

Equipment 7,000
Cash 7,000
2-28 LO 4 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

Simple and Compound Entries

Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account.
Illustration 2-15

General Journal

Date Account Title Ref. Debit Credit

July 1 Equipment 420,000
Cash 240,000
Accounts payable 180,000

2-29 LO 4 Explain what a journal is and how it helps in the recording process.
 The Account

Debits and Credits

Double-entry system
► Each transaction must affect two or more accounts to
keep the basic accounting equation in balance.

► Recording done by debiting at least one account and

crediting another.

► DEBITS must equal CREDITS.

LO 2 Define debits and credits and explain their use

2-30
in recording business transactions.
 Steps in the Recording Process

Simple and Compound Entries

Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account.
Illustration 2-15

General Journal

Date Account Title Ref. Debit Credit

July 1 Equipment 420,000
Cash 240,000
Accounts payable 180,000

2-31 LO 4 Explain what a journal is and how it helps in the recording process.
 Steps in the Recording Process

The Ledger
 General Ledger contains the entire group of accounts
maintained by a company.
Illustration 2-16

2-32 LO 5 Explain what a ledger is and how it helps in the recording process.
 Steps in the Recording Process

Standard Form of Account

Illustration 2-17

2-33 LO 5 Explain what a ledger is and how it helps in the recording process.
 On September 1, shareholders’ invested €15,000 cash in
the corporation in exchange for share of stock
Steps

Posting –
process of
transferring
amounts from
the journal to
the ledger
accounts.

Illustration 2-18

2-34 LO 6 Explain what posting is and how it helps in the recording process.
 Chart of Accounts
Accounts and account numbers arranged in sequence in which
they are presented in the financial statements.
Illustration 2-19

2-35 LO 6 Explain what posting is and how it helps in the recording process.
 The balance sheet and income statement are
Financial Statements needed to prepare statement of cash flows.

Illustration 1-11

2-36 LO 8
 The Recording Process Illustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.

Illustration 2-20

2-37
LO 6
 The Recording Process Illustrated

Illustration 2-21

2-38
LO 6
 The Recording Process Illustrated

Illustration 2-22

2-39
LO 6
 The Recording Process Illustrated

Illustration 2-23

2-40
LO 6
 The Recording Process Illustrated

Illustration 2-24

2-41
LO 6
 The Recording Process Illustrated

Illustration 2-25

2-42
LO 6
 The Recording Process Illustrated

Illustration 2-26

2-43
LO 6
 The Recording Process Illustrated

Illustration 2-27

2-44
LO 6
 The Recording Process Illustrated

Illustration 2-28

2-45
LO 6
 The Recording Process Illustrated

Illustration 2-29

2-46
LO 6
 Basel Company recorded the following transactions in a general journal
during the month of March. Post these entries to the Cash account.

Mar. 4 Cash 2,280

Service Revenue 2,280
Mar. 15 Salaries and Wages Expense 400
Cash 400
Mar. 19 Utilities Expense 92
Cash 92

2-47
LO 6
 Illustration 2-31
2-48
 Trial Balance

Illustration 2-32

2-49 LO 7 Prepare a trial balance and explain its purposes.

 Trial Balance

Limitations of a Trial Balance

The trial balance may balance even when

1. a transaction is not journalized,

2. a correct journal entry is not posted,

3. a journal entry is posted twice,

4. incorrect accounts are used in journalizing or posting, or

5. offsetting errors are made in recording the amount of a

transaction.

2-50 LO 7 Prepare a trial balance and explain its purposes.

 Another Perspective

Key Points
 Rules for accounting for specific events sometimes differ across
countries. For example, IFRS companies rely less on historical cost and
more on fair value than U.S. companies. Despite the differences, the
double-entry accounting system is the basis of accounting systems
worldwide.
 A trial balance under GAAP follows the same format as shown in the
textbook.

2-51
 Another Perspective

Key Points
 In the United States, equity is often referred to as either shareholders’
equity or stockholders’ equity, and Share Capital—Ordinary is referred
to as Common Stock. The statement of financial position is often called
the balance sheet in the United States.
 As shown in the textbook, currency signs are typically used only in the
trial balance and the financial statements. The same practice is followed
under GAAP, using the U.S. dollar.

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 Lion

2-53
 Sea lion

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