Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 2 Lecture Note Part 2

March 26, 2020
Chapter Outline
Notes
I. Analyzing and Recording Processsteps include:
A. Analyzing each transaction and event from source documents. Source
documents are business papers that identify and describe economic
events and transactions. Examples: sales tickets, checks, purchase
orders, bills, and bank statements. Source documents provide
objective and reliable evidence about transactions and events.
B. Record relevant transactions and events in a journal.
C. Post journal information to ledger accounts.
D. Prepare and analyze the trial balance.
II. The Account and its Analysis
A. An account is a record of increases and decreases in a specific asset,
liability, equity, revenue, or expense item.
B. Accounts are arranged into three basic categories based on the
accounting equation. Categories are:
1. Assetsresources owned or controlled by a company that have
future economic benefit. Examples include Cash, Accounts
Receivable, Note Receivable, Prepaid Expenses, Prepaid
Insurance, Supplies, Store Supplies, Equipment, Buildings, Land.
2. Liabilitiesclaims (by creditors) against assets, which means
they are obligations to transfer assets or provide products or
services to others. Examples include Accounts Payable, Note
Payable, Unearned Revenues, and Accrued Liabilities.
a. Accounts Payableverbal or implied promise to pay later
usually arising from purchase of inventory or other assets.
b. Notes Payableformal promise to pay usually denoted by
signing a promissory note, to pay a future amount.
c. Unearned revenuerevenue collected before it is earned;
before services or goods are provided.
d. Accrued liabilitiesamounts owed that are not yet paid.
3. Equity—owner’s claim on company’s assets is called equity or
owner’s equity. Examples include Owner’s Capital, Owner’s
Withdrawals (decreases in equity). Revenues (results from
providing goods or services; i.e. Sales, Fees Earned) increases
equity. Expenses (results from assets or services used in
operation; i.e. Supplies Expense) decreases equity.
III. Analyzing and Processing Transactions
A. The general ledger or ledger (referred to as the books) is a record
containing all the accounts a company uses.
B. The chart of accounts is a list of all accounts in the ledger with their
identification numbers.
C. A T-account represents a ledger account and is a tool used to
understand the effects of one or more transactions. Has shape like the
letter T with account title on top.
Chapter Outline
Notes
IV. Debits and Credits
A. The left side of an account is called the debit side. A debit is an entry
on the left side of an account.
B. The right side of an account is called the credit side. A credit is an
entry on the right side of an account.
C. Accounts are assigned balance sides based on their classification or
type.
D. To increase an account, an amount is placed on the balance side, and
to decrease an account, the amount is placed on the side opposite its
assigned balance side.
E. The account balance is the difference between the total debits and the
total credits recorded in that account. When total debits exceed total
credits the account has a debit balance. When total credits exceed
total debits the account has a credit balance. When two sides are
equal the account has a zero balance.
V. Double-Entry Accountingrequires that each transaction affect, and be
recorded in, at least two accounts. The total debits must equal total credits
for each transaction.
A. The assignment of balance sides (debit or credit) follows the
accounting equation.
1. Assets are on the left side of the equation; therefore, the left, or
debit, side is the normal balance for assets.
2. Liabilities and equities are on the right side; therefore, the right,
or credit, side is the normal balance for liabilities and equity.
3. Withdrawals, revenues, and expenses really are changes in equity,
but it is necessary to set up temporary accounts for each of these
items to accumulate data for statements. Withdrawals and
expense accounts really represent decreases in equity; therefore,
they are assigned debit balances. Revenue accounts really
represent increases in equity; therefore, they are assigned credit
balances.
B. Three important rules for recording transactions in a double-entry
accounting system are:
1. Increases to assets are debits to the asset accounts. Decreases to
assets are credits to the asset accounts.
2. Increases to liabilities are credits to the liability accounts.
Decreases to liabilities are debits to the liability accounts.
3. Increases to equity are credits to the equity accounts. Decreases
to equity are debits to the equity accounts.
Chapter Outline
Notes
VI. Journalizing and Posting Transactions
A. Four steps in processing transactions are as follows:
Journalizing--The process of recording each transaction in a journal.
1. Identify transaction and source documents.
2. Analyze using the accounting equation. Apply double entry
accounting to determine account to be debited and credited.
3. Record journal entryrecorded chronologically (A journal
gives us a complete record of each transaction in one place.)
a. A General Journal is the most flexible type of journal
because it can be used to record any type of transaction.
b. When a transaction is recorded in the General Journal, it is
called a journal entry. A journal entry that affects more
than two accounts is called a compound journal entry.
c. Each journal entry must contain equal debits and credits.
4. Post entry to ledgertransfer (or post) each entry from journal
to ledger.
a. Debits are posted as debit, and credits as credits to the
accounts identified in the journal entry.
b. Actual accounting systems use balance column accounts
rather than T-accounts in the ledger.
c. A balance column account has debit and credit columns
for recording entries and a third column for showing the
balance of the account after each entry is posted.
Note: To see an illustration of analyzing, journalizing and posting of 16
basic transactions refer to pages 64-72 of the textbook.
VII. Trial Balance
A. A trial balance is a list of accounts and their balances at a point in
time. Account balances are reported in their appropriate debit or
credit columns of the trial balance.
B. The trial balance tests for the equality of the debit and credit
account balances as required by double-entry accounting.
C. Three steps to prepare a trial balance are as follows:
1. List each account and its amount (from the ledger).
2. Compute the total debit balances and the total credit balances.
3. Verify (prove) total debit balances equal total credit balances.
D. When a trial balance does not balance (the columns are not equal),
an error has occurred in one of the following steps:
1. Preparing the journal entries.
2. Posting the journal entries to the ledger.
3. Calculating account balances.
Chapter Outline
Notes
4. Copying account balances to the trial balance.
5. Totaling the trial balance columns.
(Note: Any errors must be located and corrected before preparing
the financial statements. Financial Statements prepared from the
trial balance are actually unadjusted statements. The purpose,
content and format for each statement was presented in Chapter 1.
The next chapter will address adjustments)
E. Correcting Errors
1. Approach to correcting errors depends on the kind of error and
when it is discovered.
2. Correcting entries may be necessary.
F. Presentation Issues
1. Dollar signs are not used in journals and ledgers but do appear
in financial statements and other reports such as a trial
balance.
2. Usual practice on statements is to put dollar signs before the
first and last number in each column.
3. Commas are optional except for financial reports were they
are always used.
4. Companies commonly round in reports to the nearest dollar, or
even higher levels.
5. Double rule the final total(s) on the financial statements.
VIII. Global ViewCompares U.S.GAAP to IFRS
A. Analyzing and recording transactionsall transactions in this
chapter are accounted for identically under both systems.
B. Financial Statementsboth systems require the same 4 basic
statement but there are some differences in the presentation
sequence with a given statement.
C. Accounting controls and assuranceSOX strengthened U.S.
control procedures that insure proper principle application,
however global standards for control and enforcement are diverse.
This can yield different outcomes.
IX. Decision AnalysisDebt Ratio:
A. Companies finance their assets with either liabilities or equity.
B. A company that finances a relatively large portion of its assets
with liabilities has a high degree of financial leverage.(greater
risk)
C. The debt ratio describes the relationship between a company's
liabilities and assets. It is calculated as total liabilities divided by
total assets.
D. The debt ratio tells us how much (what percentage) of the assets
are financed by creditors (non-owners), or liability financing. The
higher this ratio, the more risk a company faces, because liabilities
must be repaid and often require regular interest payments.
Alternate Demonstration Problem
Chapter Two
Record the following transactions of Speedy Computer Service, owned by
Bill Smith, for the month of March 2015.
March 1. Bill Smith invested $3,000 cash in his business.
15. Bill provided services and received cash amounting to $5,400
from customers.
16. Purchased supplies on account, $100.
17. Paid for gas and oil, $800.
18. Paid salaries, 5,000.
21. Provided service on credit, $600.
28. Bill provided services and received cash amounting to $6,000.
29. Paid for truck and equipment rental, $2,500.
30. Bill withdrew $2,000 for personal use.
Required:
1. Record the above transactions in general journal form.
2. Prepare a trial balance after posting the entries to t-accounts (you
can make your own t-accounts).
3. prepare an income statement from trial balance
4. Prepare a statement of stockholders’ equity from the trial balance
and income statement
5. Prepare a balance sheet using the trial balance totals and the
statement of owner’s equity
Explain why the company’s cash balance does not agree with net income.
Solution: Alternate Demonstration Problem
Chapter Two
GENERAL JOURNAL
DATE
P.R.
DEBIT
CREDIT
March 1
3
0
0
0
00
3
0 0 0
00
15
5
4
0
0
00
5
4 0 0
00
16
1
0
0
00
1 0 0
00
17
8
0
0
00
8 0 0
00
18
5
0
0
0
00
5
0 0 0
00
21
6
0
0
00
6 0 0
00
28
6
0
0
0
00
6
0 0 0
00
29
2
5
0
0
00
2
5 0 0
00
30
2
0
0
0
00
2
0 0 0
00
Speedy Computer Service
Trial Balance
March 31, 2015
Cash
4
1
0
0
00
Accounts Receivable
6
0
0
00
Supplies
1
0
0
00
Accounts Payable
1
0
0
00
B. Smith, Capital
3
0
0
0
00
B. Smith, Withdrawals
2
0
0
0
00
Service Fees Earned
1
2
0
0
0
00
Gas & Oil Expense
8
0
0
00
Equipment Rental Expense
2
5
0
0
00
Salaries Expense
5
0
0
0
00
Totals
1
5
1
0
0
00
1
5
1
0
0
00
3.
Speedy Computer Service
Income Statement
For the month ended March 31, 2015
Fees Earned ...............................................................
$12,000
Expenses:
Equipment Rental Expense ................................
$2,500
Gas & Oil Expense ..............................................
800
Salary Expense ....................................................
5,000
Total expenses ....................................................
8,300
Net income .................................................................
$ 3,700
4.
Speedy Computer Service
Statement of Owner’s Equity
For the month ended March 31, 2015
Beginning Capital
$0
Add: Investments
$3,000
Net Income
3,700
6,700
Total
6,700
Less: Owner Withdrawal
2,000
Ending Capital balance
$4,700
5.
Speedy Computer Service
Balance Sheet
March 31, 2015
Assets
Liabilities and Owner’s Equity
Cash ..................................
$4,100
Accounts payable ...........
$ 100
Accts Receivable .............
600
B. Smith, Capital ..............
3, 700
Supplies ...........................
100
Total Assets .....................
$4,800
Total liabilities and
owner’s equity .............
$4,800
6. First, note that the cash investment ($2,000) and cash withdrawal
($2,000) affect the cash balance but do not affect the amount of net
income earned during the period. Also, revenues in the amount of
$600 (March 21) are reflected in the net income figure, but have not yet
been collected. As such, these revenues did not impact the cash
balance.

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