The only way to learn accounting is to practice. Each chapter builds so you must understand Chapter 1, then Chapter 2 before
The only way to learn accounting is to practice. Each chapter builds so you must understand Chapter 1, then Chapter 2 before you proceed to Chapter 3.
For Chapter 3 assignment, please submit the responses in ONE MS Word or MS Excel document/spreadsheet for the following Exercises for Chapter 3. Please understand that the EB stands for Exercise Set B. Do not get confused because there is a Exercise Set A.
Exercise B2
Exercise B8
Exercise B10
Exercise B12
Exercise B21
Exercise B23.
Please label the assignments and place all responses in one MS Word or one MS Excel document/spreadsheet. You do not have to retype the question just the solution/answer.
Please save your file using your last name ACT 231 and Chap 3 (example Jaridau ACT231 Chap 3).
NOTE: THE BLUE HYPERLINKS WILL LEAD YOU TO THE CHAPTER SECTIONS THAT RELATES TO THE QUESTIONS.
TEXTBOOK: https://openstax.org/details/books/principles-financial-accounting?Book%20details
Chapter 3 ANALYZING AND RECORDING TRANSACTIONS
Principles of Accounting, Volume 1: Financial Accounting
PowerPoint Image Slideshow
Chapter Outline
3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
3.3 Define and Describe the Initial Steps in the Accounting Cycle
3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
3.6 Prepare a Trial Balance
Module 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
The Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP), for both public- and private-sector businesses in the United States.
GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements.
US accounting rules are called US GAAP.
International accounting rules are called International Financial Reporting Standards (IFRS).
Some companies that operate on a global scale may be able to report their financial statements using IFRS.
Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC).
Teacher Notes: By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. As a result, financial statement users are more informed when making decisions.
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The conceptual framework is a set of concepts that guide financial reporting. These concepts help ensure information is comparable and reliable to stakeholders.
Revenue recognition principle: directs a company to recognize revenue in the period in which it is earned; is earned when a product or service has been provided
Expense recognition (matching) principle: states that we must match expenses with associated revenues in the period in which the revenues were earned
Cost principle: states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition
Full disclosure principle: states that a business must report any business activities that could affect what is reported on the financial statements
The Conceptual Framework
Teacher Notes: Revenue recognition is not dependent on when cash is received.
Expense recognition is not dependent on when cash is paid.
Matching is important so as not to overstate or understate income.
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Separate entity concept: prescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally
Conservatism: states if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount
Monetary measurement concept: must be a monetary unit by which to value the transaction
Going concern assumption: assumes a business will continue to operate in the foreseeable future
Time period assumption: states a company can present useful information in shorter time periods, such as years, quarters, or months
The Conceptual Framework (continued)
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Figure 3.2
GAAP Accounting Standards Connection Tree. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
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The accounting equation can be thought of from a “sources and claims” perspective. Everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations).
For the rest of the text, we switch the structure of the business to a corporation, and instead of owner’s equity, we begin using stockholder’s equity, which includes account titles such as common stock and retained earnings to represent the owners’ interests.
Accounting Equation
Teacher Notes: Remind students of a home, mortgage, equity example. Common stock and retained earnings will be discussed/explained in more detail later.
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Double-Entry Bookkeeping
The basic components of even the simplest accounting system are accounts and a general ledger.
An account is a record showing increases and decreases to assets, liabilities, and equity; each of these categories includes many individual accounts.
A general ledger is a comprehensive listing of all of a company’s accounts with their individual balances.
Recording transactions in the general ledger utilizes a double-entry accounting system:
Each time we record a transaction, we must record a change in at least two different accounts. Having two or more accounts change will allow us to keep the accounting equation in balance.
Not only will at least two accounts change, but there must also be at least one debit and one credit side impacted.
The sum of the debits must equal the sum of the credits for each transaction.
Teacher Notes: The double-entry accounting system has been around since the 11th or 12th century when it was first formally written about by Luca Pacioli, a Franciscan friar and mathematician who was good friends with Leonardo da Vinci. It had been used in various forms since the 1300s, and likely even way before that, but it had never been formalized until Pacioli. After his 615 page book—a summary of everything we knew about math at that point—was published, the double-entry accounting system was used more, but it really took off during the Industrial Revolution.
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Debits and Credits
In order for companies to record the myriad of transactions they have each year, there is a need for a simple, but detailed, system. Each account can be split into a right side and a left side.
A debit (DR) records financial information on the left side of each account. A credit (CR) records financial information on the right side of an account. One side of each account will increase and the other side will decrease. The ending account balance is found by calculating the difference between debits and credits for each account.
This graphic representation of a general ledger account is known as a T-account:
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Depending on the account type, the sides that increase and decrease will vary.
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The normal balance is the expected balance each account type maintains, which is the side that increases.
Account Normal Balances and Increases
Table 3.1
| Type of Account | Increases with | Normal balance |
| Asset | Debit | Debit |
| Liability | Credit | Credit |
| Common Stock | Credit | Credit |
| Dividends | Debit | Debit |
| Revenue | Credit | Credit |
| Expense | Debit | Debit |
Teacher Notes: It is important to understand normal balances, as these help not only with recording transactions, but also with putting together the financial statements and tracking recording errors.
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Accounting equation with expanded equity side:
Expanded Accounting Equation. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Module 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
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Various Asset Accounts
Cash: includes paper currency as well as coins, checks, bank accounts, and money orders
Accounts receivable: money that is owed to the company, usually from a customer
Inventory: goods available for sale; are an asset until they are sold
Supplies: (office supplies) include pens, paper, and pencils; considered assets until an employee uses them, at which time they have lost their economic value and their cost is now an expense to the business
Prepaid expenses: items paid for in advance of their use, such as rent and insurance; considered assets until used
Notes receivable: similar to accounts receivable, is money owed to the company by a customer or other entity, but includes interest and specific time payment terms
Equipment: includes desks, chairs, and computers; has a long-term value and is considered a long-term asset, meaning it can be used for more than one accounting period; will lose value over time in a process called depreciation
Buildings, machinery, and land: all considered long-term assets; building and machinery depreciate; land is not depreciated
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Figure 3.4
Assets. Cash, buildings, inventory, and equipment are all types of assets. (credit clockwise from top left: modification of “Cash money! 140606-A-CA521-021” by Sgt. Michael Selvage/Wikimedia Commons, Public Domain; modification of “41 Cherry Orchard Road” by “Pafcool2”/Wikimedia Commons, Public Domain; modification of “ASM-e1516805109201” by Jeff Green, Rethink Robotics/ Wikimedia Commons, CC BY 4.0; modification of “Gfp-inventory-space” by Yinan Chen/Wikimedia Commons, CC0)
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Various Liability Accounts
Accounts payable: recognizes that the company owes money and has not paid
Notes payable: similar to accounts payable in that the company owes money and has not yet paid, but the terms are usually longer, are typically more formal (written agreements), and include interest
Unearned revenue: represents a customer’s advanced payment for a product or service that has yet to be provided by the company; the company cannot record revenue yet, and must record a liability, as the company is liable to the customer to either complete the service (or deliver the goods) or return the customer’s money.
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Equity Account Components
Stockholders’ equity is the owner’s (stockholders’) investments in the business and earnings.
Two components of stockholders’ equity:
Contributed capital: amounts paid into the business for an ownership interest (stock); business uses that money to grow and develop the business
Retained earnings: income that has been earned by the business that has been paid out in the form of dividends to the owners (stockholders)
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Assets = Liabilities + Stockholders’ Equity
Assets = Liabilities + [Contributed Capital + Retained Earnings]
Assets = Liabilities + [Contributed Capital + {Beg. Retained Earnings + Net Income – Dividends}]
Assets = Liabilities + [Contributed Capital + {Beg. Retained Earnings + (Revenues – Expenses) – Dividends}]
Income Statement
Statement of Stockholders’ (Owners’) Equity
Balance Sheet
Financial Statement and Accounting Equation Interrelationships Review
Teacher Notes: This helps show why the income statement must be completed first, then the income is moved to the statement of stockholder’s (owner’s) equity, and finally, the final stockholder’s equity balances are part of the balance sheet. In Chapter 4, students will be presented with the statement of retained earnings.
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Sample Exercise
EA11. Identify whether each of the following transactions would be recorded with a debit (Dr) or credit (Cr) entry.
| Debit or credit? | ||
| A. | Cash increase | |
| B. | Supplies decrease | |
| C. | Accounts Payable increase | |
| D, | Common Stock decrease | |
| E. | Interest Payable decrease | |
| F. | Notes Payable decrease |
Module 3.3 Define and Describe the Initial Steps in the Accounting Cycle
The accounting cycle is a step-by-step process to record business activities and events to keep financial records up to date. The process occurs over one accounting period, and the cycle will begin again in the following period. A period is one operating cycle of a business, which could be a month, quarter, or year.
Figure 3.5
The Accounting Cycle. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
The entire cycle is meant to keep financial data organized and easily accessible to both internal and external users of information.
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Figure 3.6
Accounting Cycle. The first four steps in the accounting cycle. Modified for PPT. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
The first four steps of the accounting cycle are
This takes information from original sources or activities and translates that information into usable financial data.
This takes analyzed data from Step 1 and organizes it into a comprehensive record of every company transaction.
Posting takes all transactions from the journal during a period and moves the information to a general ledger.
This takes information from the general ledger and transfers it onto a document showing all account balances, and ensures debits = credits.
Teacher Notes: In this chapter, we focus on the first four steps in the accounting cycle: identify and analyze transactions, record transactions to a journal, post journal information to a ledger, and prepare an unadjusted trial balance.
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Figure 3.7: Sample General Journal (Used in Step 2)
General Journal. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
The general journal will contain a chronological listing of transactions. A transaction is a business activity or event that has an effect on financial information presented on financial statements and comes from an original source. The journal is where a company can find a record of all transactions that occurred during a given time period, such as a day.
Teacher Notes: These next few slides will show in very general form the first four steps of the accounting cycle. Those four steps will be detailed in the remaining sections of the chapter/slides.
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Figure 3.8: Sample General Ledger in T-Account Form (Used in Step 3)
General Ledger in T-Account Form. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
The general ledger provides a record of transactions for each individual account in chronological order within that account. The ledger is where a company will find the balance for a specific account. These account balances will make up the trial balance created in Step 4.
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Figure 3.9: Sample Trial Balance (Created in Step 4)
Unadjusted Trial Balance. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
The trial balance will include all account balances. Those balances will come from the general ledger.
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Module 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
The first step in the accounting cycle is to identify and analyze transactions.
Each original source must be evaluated for financial implications. Meaning, will the information contained on this original source affect the financial statements? If the answer is yes, the company will then analyze the information for how it affects the financial statements.
One task is to determine the value of the transaction; sometimes this is obvious, and others times it is less clear.
Your Turn: Monetary Value of Transactions
You are the accountant for a small computer programming company. You must record the following transactions. What values do you think you will use for each transaction?
The company purchased a secondhand van to be used to travel to customers. The sellers told you they believe it is worth $12,500 but agreed to sell it to your company for $11,000. You believe the company got a really good deal because the van has a $13,000 Blue Book value.
Your company purchased its office building five years ago for $175,000. Values of real estate have been rising quickly over the last five years, and a realtor told you the company could easily sell it for $250,000 today. Since the building is now worth $250,000, you are contemplating whether you should increase its value on the books to reflect this estimated current market value.
Your company has performed a task for a customer. The customer agreed to a minimum price of $2,350 for the work, but if the customer has absolutely no issues with the programming for the first month, the customer will pay you $2,500 (which includes a bonus for work well done). The owner of the company is almost 100% sure she will receive $2,500 for the job done. You have to record the revenue earned and need to decide how much should be recorded.
The owner of the company believes the most valuable asset for his company is the employees. The service the company provides depends on having intelligent, hardworking, dependable employees who believe they need to deliver exactly what the customer wants in a reasonable amount of time. Without the employees, the company would not be so successful. The owner wants to know if she can include the value of her employees on the balance sheet as an asset.
Transaction 1: Issues $20,000 shares of common stock for cash.
Analysis: Cash is an asset and common stock is stockholder’s equity. When a company collects cash, this will increase assets because cash is coming into the business. When a company issues common stock, this will increase a stockholder’s equity because he or she is receiving investments from owners.
Recording Transactions: Understanding Impact on the Accounting Equation
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Transaction 2: Purchases equipment on account for $3,500, payment due within the month.
Analysis: Equipment is an asset. There is an increase to assets because the company has equipment it did not have before. We also know that the company purchased the equipment on account, meaning it did not pay for the equipment immediately and asked for payment to be billed instead and paid later—this is a liability, specifically labeled as accounts payable. There is also an increase to liabilities because the company now owes money.
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Transaction 3: Receives $4,000 cash in advance from a customer for services not yet rendered.
Analysis: We know that the company collected cash, which is an asset. This collection of $4,000 increases assets because money is coming into the business.
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Transaction 4: Provides $5,500 in services to a customer who asks to be billed for the services.
Analysis: The company performed a service and therefore earned revenue. However, the customer asked to be billed for the service, meaning the customer did not pay with cash immediately. The customer owes money and has not yet paid, signaling an accounts receivable. Accounts receivable is an asset that is increasing in this case.
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Transaction 5: Pays a $300 utility bill with cash.
Analysis: The company paid with cash, an asset. Assets are decreasing by $300 since cash was used to pay for this utility bill. The company no longer has that money.
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Transaction 6: Distributed $100 cash in dividends to stockholders.
Analysis: The company paid the distribution with cash, an asset. Assets decrease by $100 as a result. Dividends affect equity and, in this case, decrease equity by $100.
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All six transactions summarized:
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Your Turn: Debbie’s Dairy Farm
Debbie’s Dairy Farm had the following transactions:
Debbie ordered shelving worth $750.
Debbie’s selling price on a gallon of milk is $3.00. She finds out that most local stores are charging $3.50. Based on this information, she decides to increase her price to $3.25. She has an employee put a new price sticker on each gallon.
A customer buys a gallon of milk paying cash.
The shelving is delivered with an invoice for $750.
Which events will be recorded in the accounting system?
Sample Exercise
EA3. Provide the missing amounts of the accounting equation for each of the following companies.
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Module 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
Accountants use special forms called journals to keep track of their business transactions. A journal is the first place information is entered into the accounting system.
Formatting when recording journal entries:
Include a date of when the transaction occurred.
The debit account title(s) always come first and on the left.
The credit account title(s) always come after all debit titles are entered, and on the right.
The titles of the credit accounts will be indented below the debit accounts.
You will have at least one debit (possibly more).
You will always have at least one credit (possibly more).
The dollar value of the debits must equal the dollar value of the credits or else the equation will go out of balance.
You will write a short description after each journal entry.
Skip a space after the description before starting the next journal entry.
Teacher Notes: The process of recording entries using the accounting equation is not how transactions are recorded by businesses. They use a systematic process to follow the steps of the accounting cycle.
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Date
Debit Accounts First
Credit Accounts Indented
Description
Dollar Values of Debits Equal Dollar Values of Credits
Modified for PPT.
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A compound entry is when there is more than one account listed under the debit and/or credit column of a journal entry.
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Putting the First Three Steps of the Accounting Cycle Together
Printing Plus, Inc. had the following transactions for the month of January:
On January 3, 2019, issues $20,000 shares of common stock for cash.
On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.
On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.
On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.
On January 12, 2019, pays a $300 utility bill with cash.
On January 14, 2019, distributed $100 cash in dividends to stockholders.
On January 17, 2019, receives $2,800 cash from a customer for services rendered.
On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.
On January 20, 2019, paid $3,600 cash in salaries expense to employees.
On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.
On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.
On January 30, 2019, purchases supplies on account for $500, payment due within three months.
Teacher Notes: The following series of slides will detail the various steps in the accounting cycle.
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Transaction 1: On January 3, 2019, issues $20,000 shares of common stock for cash.
Analysis: Cash, an asset, increases and Common Stock, an equity, increases.
Financial Statement Impact:
Step 1: Record the Transactions in the General Journal
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Transaction 2: On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.
Analysis: Equipment, an asset, increases and Accounts Payable, a liability, increases.
Financial Statement Impact:
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Transaction 3: On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.
Analysis: Cash, an asset, increases and Unearned Revenue, a liability, increases.
Financial Statement Impact:
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Transaction 4: On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the services.
Analysis: Accounts Receivable, an asset, increases and Service Revenue, which positively impacts equity, increases.
Financial Statement Impact:
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Transaction 5: On January 12, 2019, pays a $300 utility bill with cash.
Analysis: Cash, an asset, decreases and Utility Expense, which negatively impacts equity, increases.
Financial Statement Impact:
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Transaction 6: On January 14, 2019, distributed $100 cash in dividends to stockholders.
Analysis: Cash, an asset, decreases and Dividends, which negatively impacts equity, increases.
Financial Statement Impact:
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Transaction 7: On January 17, 2019, receives $2,800 cash from a customer for services rendered.
Analysis: Cash, an asset, increases and Service Revenue, which positively impacts equity, increases.
Financial Statement Impact:
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Transaction 8: On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.
Analysis: Cash, an asset, decreases and Equipment, an asset, increases.
Financial Statement Impact:
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Transaction 9: On January 20, 2019, paid $3,600 cash in salaries expense to employees.
Analysis: Cash, an asset, decreases and Salaries Expense, which negatively impacts equity, increases.
Financial Statement Impact:
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Transaction 10: On January 23, 2019, received cash payment in full from the customer on the January 10 transaction.
Analysis: Cash, an asset, increases and Accounts Receivable, an asset, decreases.
Financial Statement Impact:
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Transaction 11: On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the services.
Analysis: Accounts Receivable, an asset, increases and Service Revenue, which positively impacts equity, increases.
Financial Statement Impact:
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Transaction 12: On January 30, 2019, purchases supplies on account for $500, payment due within three months.
Analysis: Supplies, an asset, increases and Accounts Payable, a liability, increases.
Financial Statement Impact:
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All the transactions as they would appear, chronologically, in the general journal
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Sample Exercise
EA15. Journalize for Harper and Co. each of the following transactions or state no entry required and explain why. Be sure to follow proper journal writing rules.
A corporation is started with an investment of $50,000 in exchange for stock.
Equipment worth $4,800 is ordered.
Office supplies worth $750 are purchased on account.
A part-time worker is hired. The employee will work 15–20 hours per week starting next Monday at a rate of $18 per hour.
The equipment is received along with the invoice. Payment is due in three equal monthly installments, with the first payment due in sixty days.
Posting example:
The January 3 entry entered in the journal is shown here, posted to the general ledger accounts for Cash and Common Stock.
Each account will show the current balance.
Step 2: Posting Transactions from General Journal to the General Ledger
Modified for PPT.
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These are all the transactions recorded in the journal during the month of January that affected the cash account.
Teacher Notes: Only the cash entries were extracted from the journal in order to show how to post to the general ledger.
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The cash transactions from the journal would be posted to the Cash account in the ledger.
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