Professional Documents
Culture Documents
Decisions
and the Balance Sheet
Chapter 2
McGraw-Hill/Irwin
How do
specific
activities
affect each
balance?
How do
companies
keep track of
balance sheet
amounts?
2-2
2
Elements
Elementsof
ofStatements
Statements
Relevancy
Relevancy
Asset
Asset
Reliability
Reliability
Liability
Liability
Comparability
Comparability
Stockholders
StockholdersEquity
Equity
Consistency
Consistency
Revenue
Revenue
Expense
Expense
Gain
Gain
Loss
Loss
2-3
3
Primary Characteristics
Relevancy: predictive value,
Elements
Elementsof
ofStatements
Statements
feedback value, and
Asset
Asset
timeliness.
Reliability: verifiability,
Liability
Liability
representational
faithfulness,
Stockholders
StockholdersEquity
Equity
and neutrality.
Revenue
Revenue
SecondaryExpense
Characteristics
Expense
Comparability: across
Gain
companies. Gain
Consistency: Loss
over
Loss time.
2-4
4
Separate
Separateentity:
entity:Activities
Activitiesof
ofthe
thebusiness
businessare
are separate
separatefrom
from
activities
activitiesof
ofowners.
owners.
Continuity:
Continuity:The
Theentity
entitywill
willnot
notgo
goout
outof
of business
businessininthe
thenear
near
future.
future.
Unit-of-measure:
Unit-of-measure:Accounting
Accountingmeasurements
measurementswill
willbe
beininthe
thenational
national
monetary
monetaryunit
unit(i.e.,
(i.e.,$$ininthe
theU.S.).
U.S.).
Principle
Principle
Historical
Historicalcost:
cost: Cash
Cashequivalent
equivalentcost
costgiven
givenup
up
isisthe
thebasis
basisfor
forthe
theinitial
initialrecording
recordingof
of elements.
elements.
2-6
6
Borrow cash
2-8
8
Accounts
An
An organized
organized format
format used
used by
by
companies
companies to
to accumulate
accumulate the
the dollar
dollar
effects
effects of
of transactions.
transactions.
Cash
Inventory
Equipment
Notes
Payable
2-9
9
Liabilities
Cash
Short-Term Investment
Accounts Receivable
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term Investments
Equipment
Buildings
Land
Intangibles
Accounts Payable
Accrued Expenses
Notes Payable
Taxes Payable
Unearned Revenue
Bonds Payable
Stockholders
Stockholders Equity
Contributed Capital
Retained Earnings
2-10
10
Expenses
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue
2-11
11
A = L + SE
(Assets)
(Liabilities)
(Stockholders
Equity)
2-12
12
Duality of Effects
Most transactions
with external parties
involve an exchange
where the business
entity gives up
something but
receives something in
return.
2-13
13
them
them by
by type
type of
of account
account (A,
(A, L,
L, SE).
SE).
Determine
Determine the
the direction
direction of
of the
the effect
effect
(increase
(increase or
or decrease)
decrease) on
on each
each account.
account.
Step
Step 2:
2: Balancing
Balancing
Verify
Verify that
that the
the accounting
accounting equation
equation (A
(A =
= LL
+
+ SE)
SE) remains
remains in
in balance.
balance.
2-14
Analyzing Transactions
Papa Johns issues $2,000 of additional common
stock to new investors for cash.
Identify
Identify&&Classify
Classifythe
theAccounts
Accounts
1.
1. Cash
Cash(asset).
(asset).
2.
2. Contributed
ContributedCapital
Capital (equity).
(equity).
Determine
Determine the
the Direction
Direction of
of the
the Effect
Effect
1.
1. Cash
Cashincreases.
increases.
2.
2. Contributed
Contributed Capital
Capitalincreases.
increases.
2-15
15
Analyzing Transactions
Papa Johns issues $2,000 of additional common
stock to new investors for cash.
(a)
Effect
Cash
Investments
2,000
Equip.
2,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
2,000
A = L + SE
2-16
16
Analyzing Transactions
The company borrows $6,000 from the
local bank, signing a three-year note.
Identify
Identify&&Classify
Classifythe
theAccounts
Accounts
1.
1. Cash
Cash (asset).
(asset).
2.
2. Notes
NotesPayable
Payable(liability).
(liability).
Determine
Determinethe
theDirection
Directionof
ofthe
theEffect
Effect
1.
1. Cash
Cashincreases.
increases.
2.
2. Notes
NotesPayable
Payableincreases.
increases.
2-17
17
Analyzing Transactions
The company borrows $6,000 from the
local bank, signing a three-year note.
(a)
(b)
Effect
Cash
Investments
2,000
6,000
Equip.
8,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
6,000
8,000
A = L + SE
2-18
18
Analyzing Transactions
Papa Johns purchases $10,000 of new equipment, paying
$2,000 in cash and signing a two-year note payable for the rest.
Identify
Identify&&Classify
Classifythe
theAccounts
Accounts
1.
1. Equipment
Equipment(asset).
(asset).
2.
2. Cash
Cash(asset).
(asset).
3.
3. Notes
NotesPayable
Payable(liability).
(liability).
Determine
Determine the
the Direction
Direction of
of the
the Effect
Effect
1.
1. Equipment
Equipmentincreases.
increases.
2.
2. Cash
Cashdecreases.
decreases.
3.
3. Notes
NotesPayable
Payableincreases.
increases.
2-19
19
Analyzing Transactions
Papa Johns purchases $10,000 of new equipment, paying
$2,000 in cash and signing a two-year note payable for the rest.
(a)
(b)
(c)
Effect
Cash
Investments
2,000
6,000
(2,000)
Equip.
16,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
6,000
8,000
10,000
16,000
A = L + SE
2-20
20
Determine
Determine the
the Direction
Direction of
of the
the Effect
Effect
1.
1. Cash
Cashdecreases.
decreases.
2.
2. Notes
NotesReceivable
Receivableincreases.
increases.
2-21
21
Effect
Cash
Investments
2,000
6,000
(2,000)
(3,000)
Equip.
16,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
6,000
8,000
10,000
3,000
16,000
A = L + SE
2-22
22
Determine
Determine the
the Direction
Direction of
of the
the Effect
Effect
1.
1. Cash
Cashdecreases.
decreases.
2.
2. Investments
Investmentsincrease.
increase.
2-23
23
(a)
(b)
(c)
(d)
(e)
Effect
Cash
Investments
2,000
6,000
(2,000)
(3,000)
(1,000)
1,000
Equip.
16,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
6,000
8,000
10,000
3,000
16,000
A = L + SE
2-24
24
Analyzing Transactions
Papa Johns board of directors declares and
pays $3,000 in dividends to shareholders.
Identify
Identify&&Classify
Classifythe
theAccounts
Accounts
1.
1. Cash
Cash(asset).
(asset).
2.
2. Retained
RetainedEarnings
Earnings(equity).
(equity).
Determine
Determinethe
theDirection
Direction of
of the
theEffect
Effect
1.
1. Cash
Cashdecreases.
decreases.
2.
2. Retained
RetainedEarnings
Earningsdecreases.
decreases.
2-25
Analyzing Transactions
Papa Johns board of directors declares and
pays $3,000 in dividends to shareholders.
(a)
(b)
(c)
(d)
(e)
(f)
Effect
Cash
Investments
2,000
6,000
(2,000)
(3,000)
(1,000)
1,000
(3,000)
Equip.
13,000
Notes
Receivable
Notes
Payable
Contributed
Capital
2,000
Retained
Earnings
6,000
8,000
10,000
3,000
(3,000)
13,000
A = L + SE
2-26
26
Analyze transactions.
Record journal entries in the general journal.
Post amounts to the general ledger.
Prepare a complete
set of financial statements.
Disseminate statements
to users.
2-27
27
Journal entries
2-28
28
Account Name
Left
Right
Debit
Credit
2-29
29
A = L + SE
ASSETS
LIABILITIES
EQUITIES
Debit
Credit
for
for
Increase Decrease
Debit
Credit
for
for
Decrease Increase
Debit
Credit
for
for
Decrease Increase
2-30
30
A = L + SE
ASSETS
LIABILITIES
EQUITIES
Debit
Credit
for
for
Increase Decrease
Debit
Credit
for
for
Decrease Increase
Debit
Credit
for
for
Decrease Increase
Reference:
Reference:
Letter,
Letter,
number,
number, or
or
date.
date.
Account
Account Titles:
Titles:
Debited
Debited accounts
accounts on
on top.
top.
Credited
Credited accounts
accounts on
on bottom.
bottom.
Amounts:
Amounts:
Debited
Debited amounts
amounts on
on left.
left.
Credited
Credited amounts
amounts on
on right.
right.
2-32
32
The T-Account
After journal entries are prepared,
the accountant posts (transfers)
the dollar amounts to each account
affected by the transaction.
Ledger
Post
2-33
(a)
Beg. Bal.
(a)
Cash
6,000
2,000
8,000
Contributed Capital
1,000 Beg. Bal.
2,000 (a)
3,000
2-34
34
Beg. Bal.
(a)
(b)
Cash
6,000
2,000
6,000
14,000
Notes Payable
146,000 Beg. Bal.
6,000 (b)
152,000
2-35
35
It is possible to
prepare a balance
sheet at any point
in time from the
balances in the
accounts.
Balance
BalanceSheet
Sheet
2-36
36
2-37
37
2-38
38
2.37
2-40
40
2-41
41
End of Chapter 2
McGraw-Hill/Irwin