Chapter THE ACCOUNTING

3 CYCLE:
Capturing Economic Events

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 The Role of Accounting
Records
Establishes accountability for
Establishes accountability for
assets
assetsand
andtransactions.
transactions.
Keeps
Keepstrack
trackof
ofroutine
routine
business
businessactivities.
activities.
Obtains
Obtainsdetailed
detailedinformation
information
about
aboutaaparticular
particulartransaction.
transaction.
Evaluates
Evaluatesefficiency
efficiencyand
and
performance
performancewithin
withincompany.
company.

Maintains
Maintainsevidence
evidenceof
of
company’s
company’sbusiness
businessactivities.
activities.
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 The Ledger

Accounts
Accounts are
are
Cash individual
individual records
records
showing
showing increases
increases
Accounts
and
and decreases.
decreases.
Payable
The
The entire
entire group
group of
of
Capital accounts
accounts is is kept
kept
Stock together
together in in an
an
accounting
accounting record
record
called
called aa ledger.
ledger.
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 The Use of Accounts

Increases are recorded on one

side of the T-account, and Title of
decreases are recorded on the
other side. Account
Left Right
or or
Debit Credit
Side Side

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 Let’s
Let’s see
see how
how
debits
debits and
and credits
credits
are
are recorded
recorded inin the
the
Cash
Cash account
account for
for
JJ’s
JJ’s Lawn
Lawn Care
Care
Service.
Service.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Debit and Credit Entries
Cash
Cash
Receipts
5/1
5/1 8,000
8,000 5/2
5/2 2,500
2,500 Payments
are on 5/25
5/25 75
75 5/8
5/8 2,000
2,000 are on the
the debit 5/29 750
side.
5/29 750 5/28
5/28 150
150 credit
side.
5/31
5/31 50
50
5/31
5/31 4,125
4,125 The
Thebalance
balanceis
isthe
the
Bal.
Bal. difference
differencebetween
between
the
thedebit
debitand
andcredit
credit
entries
entriesin
inthe
the
account.
account.
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 Debit and Credit Rules
Debits
Debits and
and credits
credits affect
affect accounts
accounts as
as
follows:
follows:

A = L + OE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

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 Double Entry
AccountingThe Equality of

A = L + OE
Debits and Credits

=
Debit Credit
balances balances

In
In the
the double-entry
double-entry accounting
accounting system,
system,
every
every transaction
transaction is
is recorded
recorded by
by equal
equal
dollar
dollar amounts
amounts of
of debits
debits and
and credits.
credits.
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 Let’s record
selected
transactions for
JJ’s Lawn Care
Service in the
accounts.

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  May
May 1:
1: Jill
Jill Jones
Jones and
and her
her family
family invested
invested $8,000
$8,000
in
in JJ’s
JJ’s Lawn
Lawn CareCare Service
Service and
and received
received 800
800 shares
shares
of
of stock.
stock.

Will Capital Stock

Will Cash increase
increase or
or decrease?
decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

  May
May 1:
1: Jill
Jill Jones
Jones and
and her
her family
family invested
invested $8,000
$8,000
in
in JJ’s
JJ’s Lawn
Lawn CareCare Service
Service and
and received
received 800
800 shares
shares
of
of stock.
stock.

Capital Stock
Cash increases
increases $8,000
$8,000 with a debit.
with a credit.

Cash Capital Stock

5/1 8,000 5/1 8,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

  May
May 2:
2: JJ’s
JJ’s purchased
purchased aa riding
riding lawn
lawn mower
mower
for
for $2,500
$2,500 cash.
cash.

Will Tools &

Will Cash increase
Equipment increase
or decrease?
or decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

  May
May 2:
2: JJ’s
JJ’s purchased
purchased aa riding
riding lawn
lawn mower
mower
for
for $2,500
$2,500 cash.
cash.

Tools & Equipment

Cash decreases
increases $2,500
$2,500 with a credit.
with a debit.

Cash Tools & Equipment

5/1 8,000 5/2 2,500 5/2 2,500

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 8:
8: JJ’s
JJ’s purchased
purchased aa $15,000
$15,000 truck.
truck. JJ’s
JJ’s
paid
paid $2,000
$2,000 down
down inin cash
cash and
and issued
issued aa note
note
payable
payable for
for the
the remaining
remaining $13,000.
$13,000.

Will Cash and

Notes Payable
Will Truck increase
increase or
or decrease?
decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 8:
8: JJ’s
JJ’s purchased
purchased aa $15,000
$15,000 truck.
truck. JJ’s
JJ’s
paid
paid $2,000
$2,000 down
down inin cash
cash and
and issued
issued aa note
note
payable
payable for
for the
the remaining
remaining $13,000.
$13,000.

Cash decreases
$2,000 with a credit.
Truck increases
Notes Payable
$15,000 with a debit.
increases $13,000
with a credit.
Cash
5/1 8,000 5/2 2,500
Truck
5/8 2,000
5/8 15,000
Notes Payable
5/8 13,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
  May
May 11:
11: JJ’s
JJ’s purchased
purchased some
some repair
repair parts
parts
for
for $300
$300 on
on account.
account.

Will Tools & Will Accounts

Equipment increase Payable increase or
or decrease? decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

  May
May 11:
11: JJ’s
JJ’s purchased
purchased some
some repair
repair parts
parts
for
for $300
$300 on
on account.
account.

Tools & Equipment Accounts Payable

increases $300 with increases $300 with
a debit. a credit.

Tools & Equipment Accounts Payable

5/2 2,500 5/11 300
5/11 300

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 
 May
May 18:
18: JJ’s
JJ’s sold
sold half
half of
of the
the repair
repair parts
parts to
to
ABC
ABC Lawns
Lawns for
for $150,
$150, aa price
price equal
equal to
to JJ’s
JJ’s cost.
cost.
ABC
ABC Lawns
Lawns agrees
agrees to
to pay
pay JJ’s
JJ’s within
within 30
30 days.
days.

Will Tools & Will Accounts

Equipment increase Receivable increase
or decrease? or decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 18:
18: JJ’s
JJ’s sold
sold half
half of
of the
the repair
repair parts
parts to
to
ABC
ABC Lawns
Lawns for
for $150,
$150, aa price
price equal
equal to
to JJ’s
JJ’s cost.
cost.
ABC
ABC Lawns
Lawns agrees
agrees to
to pay
pay JJ’s
JJ’s within
within 30
30 days.
days.

Tools & Equipment Accounts Receivable

decreases $150 with increases $150 with
a credit. a debit.

Tools & Equipment Accounts Receivable

5/2 2,500 5/18 150 5/18 150
5/11 300

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 The Journal

In
In an
an actual
actual accounting
accounting system,
system, transactions
transactions
are
are initially
initially recorded
recorded in
in the
the journal.
journal.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
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 Posting Journal Entries to the
Ledger Accounts

Posting
involves
copying
information
from the
journal to the
ledger
accounts.
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 Posting Journal Entries to
the Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
General
Owners invest cash Ledger
in the business.
Cash
Date Debit Credit Balance
2003
May 1 8,000 8,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Posting Journal Entries to
the Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
General
Owners invest cash Ledger
in the business.
Capital Stock
Date Debit Credit Balance
2003
May 1 8,000 8,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Posting Journal Entries to
the Ledger Accounts
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
2003
May 2 Tools & Equipment 2,500
Cash 2,500
Purchased lawn mower.

Let’s
Let’s see
see what
what the
the cash
cash account
account lookslooks like
like after
after
posting
posting the
the cash
cash portion
portion of
of this
this transaction
transaction forfor
JJ’s
JJ’s Lawn
Lawn Care
Care Service.
Service.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
 Ledger Accounts After
Posting
General Ledger
Cash
Date Debit Credit Balance
2003
May 1 8,000 8,000
2 2,500 5,500

This
This ledger
ledger format
format is
is referred
referred to
to as
as aa
running
running balance
balance (as
(as opposed
opposed to to simple
simple
TT accounts).
accounts).
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 What is Net Income?

Net
Net income
income is
is not
not an asset it’s
an asset it’s anan increase
increase in
in
owners’
owners’ equity
equity from
from profits
profits of
of the
the business.
business.

A = L + OE
Increase Decrease Increase

Either (or both) of these . . . but this is

effects occur as net income what “net income”
is earned . . . really means.
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 Retained Earnings

A = L + OE
Capital Retained
Stock Earnings

The balance in the Retained Earnings account represents

the total net income of the corporation over the entire
lifetime of the business, less all amounts which have
been distributed to the stockholders as dividends.
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 Revenue and Expenses
The price for
goods sold
and services Increases
rendered during a owner’s equity.
given accounting
period.

The costs of
goods and Decreases
services used up owner’s equity.
in the process of
earning revenue.
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 The Realization Principle: When
To Record Revenue

Realization Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.

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 The Matching Principle:
When To Record Expenses

Matching Principle
Expenses should be
recorded in the
period in which they
are used up.

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 Debits and Credits for
Revenue and Expense
Expenses EQUITIES Revenues
decrease Debit Credit increase
owner’s for for owner’s
equity. Decrease Increase equity.

EXPENSES REVENUES
Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Investments by and
Payments
Payments to
to Owners Owners’
EQUITIES
owners investments
decrease Debit Credit increase
for for
owners’ Decrease Increase owners’
equity. equity.

DIVIDENDS CAPITAL STOCK

Debit Credit Debit Credit
for for for for
Increase Decrease Decrease Increase

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 Let’s
Let’s analyze
analyze the
the
revenue,
revenue, and
and
expense
expense
transactions
transactions forfor
JJ’s
JJ’s Lawn
Lawn Care
Care
Service
Service for
for the
the
month
month ofof May.
May.
We
We will
will also
also
analyze
analyze aa dividend
dividend
transaction.
transaction.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
  May
May 29:
29: JJ’s
JJ’s provided
provided lawn
lawn care
care services
services for
for
aa client
client and
and received
received $750
$750 in
in cash.
cash.

Will Sales Revenue

Will Cash increase
increase or
or decrease?
decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

  May
May 29:
29: JJ’s
JJ’s provided
provided lawn
lawn care
care services
services for
for
aa client
client and
and received
received $750
$750 in
in cash.
cash.

Sales Revenue
Cash increases
increases $750 with
$750 with a debit.
a credit.

Cash Sales Revenue

5/1 8,000 5/2 2,500 5/29 750
5/29 750 5/8 2,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 31:
31: JJ’s
JJ’s purchased
purchased gasoline
gasoline for
for the
the lawn
lawn
mower
mower and
and the
the truck
truck for
for $50
$50 cash.
cash.

Will Gasoline
Will Cash increase
Expense increase or
or decrease?
decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 31:
31: JJ’s
JJ’s purchased
purchased gasoline
gasoline for
for the
the lawn
lawn
mower
mower and
and the
the truck
truck for
for $50
$50 cash.
cash.

Gasoline Expense
Cash decreases $50
increases $50 with a
with a credit.
debit.

Cash Gasoline Expense

5/1 8,000 5/2 2,500 5/31 50
5/29 750 5/8 2,000
5/31 50

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 
 May
May 31:
31: JJ’s
JJ’s Lawn
Lawn Care
Care paid
paid Jill
Jill Jones
Jones and
and
her
her family
family aa $200
$200 dividend.
dividend.

Will Dividends
Will Cash increase
increase or
or decrease?
decrease?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 
 May
May 31:
31: JJ’s
JJ’s Lawn
Lawn Care
Care paid
paid Jill
Jill Jones
Jones and
and
her
her family
family aa $200
$200 dividend.
dividend.

Cash decreases Dividends increase

$200 with a credit. $200 with a debit.

Cash Dividends
5/1 8,000 5/2 2,500 5/31 200
5/29 750 5/8 2,000
5/31 50
5/31 200

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 Now,
Now, let’s
let’s look
look at
at
the
the Trial
Trial Balance
Balance
for
for JJ’s
JJ’s Lawn
Lawn CareCare
Service
Service for
for the
the
month
month of of May.
May.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 JJ's Lawn Care Service All balances
Unadjusted Trial Balance are taken from
May 31, 2003 the ledger
accounts on
Cash $ 3,925
Accounts receivable 75 May 31 after
Tools & equipment 2,650 considering all
Truck 15,000 of JJ’s
Notes payable $ 13,000 transactions
Accounts payable 150 for the month.
Capital stock 8,000
Dividends 200 Proves equality
Sales revenue 750 of debits and
Gasoline expense 50 credits.
Total $ 21,900 $ 21,900

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20

 The Accounting Cycle

Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.

Prepare after closing Journalize and Prepare Prepare adjusted

trial balance. post closing financial trial balance.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20
entries. statements.
 End of Chapter 3

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