The
Accounting
Cycle:
During the
Period
Financial Accounting
Chapter 2
Spiceland | Thomas | Herrmann
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2-2
Learning Objectives
• Identify the basic steps in measuring external
transactions
• Analyze the impact of external transactions on the
accounting equation
• Assess whether the impact of external
transactions results in a debit or credit to an
account balance
• Record transactions using debits and credits
• Post transactions to T-accounts in the general
ledger
• Prepare a trial balance
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-3
Functions of Financial Accounting
• Measure business activities of the company
• Communicate measurements to external parties
for decision making
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Part A
Measuring Business Activities
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2-5
Learning Objective 1
Identify the Basic Steps in Measuring External
Transactions.
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External Transactions
• Transactions conducted with a separate economic
entity
• Internal transaction: events that affect the
financial position of the company but do not
include an exchange with a separate economic
entity
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Capturing Transactions in Accounts
• Account: Summary of all transactions related to
a particular item over a period of time.
• Asset accounts: Cash, Supplies, and Equipment
• Liability accounts: Accounts Payable, Salaries
Payable, Utilities Payable, and Taxes Payable
• Stockholders’ equity accounts: Common Stock
and Retained Earnings
• Chart of accounts: A list of all account names
used to record transactions
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2-8
Measuring External Transactions
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2-9
Learning Objective 2
Analyze the impact of external transactions on the
accounting equation.
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2-10
Effects on the Basic Accounting
Equation
• Each transaction will have a dual effect
• An increase on one side will increase the other
side
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Understanding Effects of
Transaction
• Ask these questions:
• What is one account affected by the transaction?
• Does it increase or decrease?
• What is a second account affected by the
transaction?
• Does it increase or decrease?
• Do assets still equal liabilities plus stockholders’
equity?
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2-12
Transactions of Eagle Golf Academy
Date
External Transactions in January
(1) Dec. 1
(2) Dec. 1
(3) Dec. 1
(4)
(5)
(6)
(7)
(8)
Dec. 1
Dec. 6
Dec. 12
Dec. 17
Dec. 23
(9) Dec. 28
(10) Dec. 30
Sell shares of common stock for $25,000 to obtain the
funds necessary to start the business
Borrow $10,000 from the local bank and sign a note
promising to repay the full amount of the debt in three
years
Purchase equipment necessary for giving golf training,
$24,000
Pay one year of rent in advance, $6,000 ($500 per month)
Purchase supplies on account, $2,300
Provide golf training to customers for cash, $4,300
Provide golf training to customers on account, $2,000
Receive cash in advance for 12 golf training sessions to be
given in the future, $600
Pay salaries to employees, $2,800
Pay cash dividends of $200 to shareholders
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2-13
Transaction 1—Issue Common
Stock
Eagle sells shares of common stock for $25,000
• What is one account affected by the transaction?
• Cash
• Does that account increase or decrease?
• Increase by $25,000
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2-14
Transaction 1—Issue Common
Stock
Eagle sells shares of common stock for $25,000
• What is a second account affected by the transaction?
• Common Stock
• Does that account increase or decrease?
• Increase by $25,000
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2-15
Transaction 1—Issue Common
Stock
Eagle sells shares of common stock for $25,000
• Do assets equal liabilities plus stockholders’ equity?
• Yes, assets increase by $25,000 and stockholders’ equity increase
by $25,000
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2-16
Transaction 2—Borrow from the
Bank
Eagle borrows $10,000 from the bank and signs a note for it
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2-17
Transaction 3—Purchase
Equipment
Purchase equipment with cash, $24,000
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2-18
Transaction 4—Incur Costs for Rent
Pay one year of rent in advance, $6,000
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2-19
Transaction 5—Incur Costs for
Supplies
Purchase of supplies on account, $2,300
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2-20
The Expanded Accounting Equation
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2-21
Transaction 6—Provide Services for
Cash
Provide service to customers for cash, $4,300
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2-22
Transaction 7—Provide Services on
Account
Provide service to customers on account, $2,000
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2-23
Transaction 8—Receive Cash in
Advance of Providing Services
Receive cash in advance from customers, $600
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2-24
Transaction 9—Incur Cost for
Salaries
Pay salaries to workers, $2,800
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2-25
Transaction 10—Pay Dividends
Pay dividends to stockholders, $200
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2-26
Part B
Debits and Credits
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2-27
Learning Objective 3
Assess Whether the Impact of External Transactions
Results in a Debit or Credit to an Account Balance.
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2-28
Effects on Account Balances
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2-29
Debit and Credit Effects on Accounts in
the Expanded Accounting Equation
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2-30
Debit and Credit Effects on Each
Account Type
• A simple memory aid
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2-31
Learning Objective 4
Record transactions using debits and credits.
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2-32
Recording Transactions
• Journal: provides a chronological record of all
transactions
• Journal entry: format used for recording
transactions
• Debits in a transaction must equal its credits
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2-33
Recording Transactions—Example
• On December 1, Eagle Golf Academy sells shares
of common stock to investors for cash of $25,000.
• Cash debited for $25,000
• Common Stock credited for $25,000
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2-34
Learning Objective 5
Post transactions to T-accounts in the general
ledger.
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2-35
Posting
• Posting: process of transferring the debit and
credit information from the journal to individual
accounts in the general ledger
• General ledger: includes all accounts used to
record the company’s transactions
• Useful to calculate the account balances
• T-account: a simplified form of a general ledger
account
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2-36
Posting—Example
• On December 1, Eagle Golf Academy sells shares
of common stock to investors for cash of $25,000.
• Debit to Cash is transferred to the Cash account
• Credit to Common Stock is transferred to the
Common Stock account
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2-37
Summary of External Transactions
Recorded for Eagle Golf Academy
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2-38
Summary of External Transactions
Recorded for Eagle Golf Academy
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2-39
Summary of External Transactions
Recorded for Eagle Golf Academy
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2-40
Learning Objective 6
Prepare a Trial Balance.
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2-41
Trial Balance
• A list of all accounts and their balances at a
particular date
• Shows that total debits equal total credits
• Assists in preparing adjusting entries
• Used for internal purposes only
• Not published to external parties
• Not required to follow an order of listing
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2-42
Trial Balance—Example
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2-43
End of Chapter 2
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