Chapter 02 – The Accounting Cycle: During the Period
Chapter 2
The Accounting Cycle: During the Period
INSTRUCTOR’S MANUAL
Authors’ Perspectives
PART A: Measuring Business Activities
LO2-1 Identify the basic steps in measuring external transactions.
Begin with the Basics: A = L + SE – Start slowly with just the basic accounting equation. In
Part A, students are given 10 external transactions for Eagle Soccer Academy. The transactions
are listed in an intentional order. The first five transactions involve accounts affecting only the
Expand the Accounting Equation – The final five transactions are used to help students
understand the effects of revenues, expenses, and dividends on retained earnings in the expanded
accounting equation.
Understanding how and why transactions involving revenues, expenses, and dividends affect
retained earnings is a difficult concept at first for many students. To help make this concept
easier, instructors can begin by explaining the simpler concept that a company’s equity is
Chapter 02 – The Accounting Cycle: During the Period
PART B: Debits and Credits
LO2-3 Assess whether the impact of external transactions results in a debit or credit to an
account balance.
“The very day a debit is born, it has a twin credit” – These words were written by Luca
Pacioli in his original Summa de Arithmetica, Geometria, Proportioni et Proportionalita. We can
present debits and credits as the language of accounting (or the terminology used to indicate an
increase or decrease in accounts). A journal entry is the sentence form of the accounting
language. Just like an English sentence has proper format, so does an accounting sentence.
✓ An English sentence requires at least one noun and one verb, and there is noun-verb
Part B shows students how to record transactions in a journal using debits and credits with
the same 10 transactions that were covered in Part A. This helps students draw the connection
between the effects of transactions on account balances and recording debits and credits.
• Illustration 2-6 is the debit-credit version of Illustration 2-3 and shows students how
debits and credits are used in the expanded accounting equation.
Aggregation of Measurements – To demonstrate the process of aggregation of individual
Chapter 02 – The Accounting Cycle: During the Period
transactions to compute a single ending account balance, the chapter ends with a full summary of
Cash account are posted to the credit side of the general ledger account, reducing the balance.
Self-Study Materials
■ Let’s Review—Effects of transactions on the accounting equation (p. 70).
■ Let’s Review—Effects of debits and credit on account balances (p. 73).
Chapter 02 – The Accounting Cycle: During the Period
Key Points by Learning Objective
Throughout the chapter, Key Points provide quick synopses of the critical pieces of information
LO2-1 Identify the basic steps in measuring external transactions.
External transactions are transactions between the company and separate economic entities.
Internal transactions do not include an exchange with a separate economic entity.
LO2-2 Analyze the impact of external transactions on the accounting equation.
After each transaction, the accounting equation must always remain in balance. In other words,
LO2-3 Assess whether the impact of external transactions results in a debit or credit to an
account balance.
For the basic accounting equation (Assets = Liabilities + Stockholders’ Equity), assets (left side)
increase with debits. Liabilities and stockholders’ equity (right side) increase with credits. The
LO2-4 Record transactions in a journal using debits and credits.
For each transaction, total debits must equal total credits.
LO2-5 Post transactions to the general ledger.
LO2-6 Prepare a trial balance.
Chapter 02 – The Accounting Cycle: During the Period
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Questions
Learning
Objective(s)
Topic
Time
(Min.)
1
LO2-1
Understand the difference between external and
internal transactions
5
2
LO2-1
List steps to measure external transactions
5
3
LO2-2
Explain the dual effect of transactions
5
4
LO2-2
Describe the impact of transactions on the
accounting equation
5
5
LO2-2
Explain the dual effect of transactions
5
6
LO2-3
Identify normal accounting balances
5
7
LO2-3
Understand the effects of debits and credits on
account balances
5
8
LO2-3
Determine whether a debit or credit increases an
account balance
5
9
LO2-3
Determine whether a debit or credit decreases an
account balance
5
LO2-3
Explain the relation between retained earnings and
its revenue and expense components
5
LO2-4
Describe a journal and a journal entry
5
LO2-4
Explain why debits equal credits
5
LO2-4
Record transactions
5
LO2-4
Describe recorded transactions
5
LO2-5
Explain a T-account
5
LO2-5
Post transactions
5
LO2-5
Describe a general ledger
5
LO2-6
Describe a trial balance
5
LO2-6
Understand total debits and total credits in a trial
balance
5
Chapter 02 – The Accounting Cycle: During the Period
Brief
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
BE2-1
LO2-1
List steps in the measurement process
5
BE2-2
LO2-2
Balance the accounting equation
5
BE2-3
LO2-2
Balance the accounting equation
LO2-2
Analyze the impact of transactions on the
accounting equation
10
LO2-3
Understand the effect of debits and credits on
10
LO2-3
Understand the effect of debits and credits on
accounts
10
BE2-7
LO2-4
Record transactions
BE2-8
LO2-4
Record transactions
BE2-9
LO2-5
Analyze T-accounts
Analyze the impact of transactions on the
accounting equation, record transactions, and post
10
LO2-6
Prepare a trial balance
LO2-6
Correct a trial balance
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
E2-1
LO2-1
Identify terms associated with the measurement
process
5
E2-2
LO2-2
Analyze the impact of transactions on the
accounting equation
5
E2-3
LO2-2
Analyze the impact of transactions on the
accounting equation
10
E2-4
LO2-2
Analyze the impact of transactions on the
accounting equation
5
LO2-2
Understand the components of retained earnings
LO2-3
Indicate the debit or credit balance of accounts
E2-7
LO2-3
Associate debits and credits with external
transactions
5
LO2-4
Record transactions
LO2-4
Identify transactions
5
LO2-4
Record transactions
LO2-4
Record transactions
LO2-4
Correct recorded transactions
LO2-4
Correct recorded transactions
LO2-5
Post transactions to Cash T-account
LO2-5
Post transactions to T-accounts
LO2-5
Identify transactions
LO2-6
Prepare a trial balance
LO2-6
Prepare a trial balance
Chapter 02 – The Accounting Cycle: During the Period
a trial balance
LO2-4, 2-5, 2-6
Record transactions, post to T-accounts, and prepare
a trial balance
30
Problems
Learning
Objective(s)
Topic
Time
(Min.)
P2-1A
LO2-2
Analyze the impact of transactions on the
accounting equation
10
P2-2A
LO2-2
Analyze the impact of transactions on the
accounting equation
15
P2-3A
LO2-3
Identify the type of account and its normal debit or
credit balance
15
Record transactions
P2-5A
Analyze the impact of transactions on the
accounting equation and record transactions
30
Prepare a trial balance
P2-7A
LO2-4, 2-5, 2-6
Complete the steps in the measurement of external
transactions
45
P2-8A
LO2-4, 2-5, 2-6
Complete the steps in the measurement of external
transactions
50
transactions
P2-1B
LO2-2
Analyze the impact of transactions on the
accounting equation
10
P2-2B
LO2-2
Analyze the impact of transactions on the
accounting equation
15
P2-3B
LO2-3
Identify the type of account and its normal debit or
credit balance
15
Record transactions
P2-5B
Analyze the impact of transactions on the
accounting equation and record transactions
30
Prepare a trial balance
P2-7B
LO2-4, 2-5, 2-6
Complete the steps in the measurement of external
transactions
45
P2-8B
LO2-4, 2-5, 2-6
Complete the steps in the measurement of external
transactions
50
P2-9B
LO2-4, 2-5, 2-6
Complete the steps in the measurement of external
transactions
60
Chapter 02 – The Accounting Cycle: During the Period
Additional
Perspectives
Time
(Min.)
AP2-1
45
AP2-2
15
Chapter 02 – The Accounting Cycle: During the Period
Alternate Let’s Review
Problem #1
A company has the following transactions during June:
June 2 Provide services to customers for cash, $4,300
Required:
Indicate how each transaction affects the accounting equation.
Solution:
Assets
=
=
Liabilities
+
+
Stockholders’ Equity
June 2
+ $4,300
=
+
+ $4,300
June 8
+ $1,000
=
June 11
=
+
June 15
+ $6,000
=
+ $6,000
June 28
=
+
+ $9,400
=
Problem #2
A company has the following transactions during June:
June 2 Provide services to customers for cash, $4,300
June 8 Purchase office supplies on account, $1,000
Solution:
Date
(1)
Accounts Involved
(2)
Account Type
(3)
Increase or
Decrease
(4)
Debit or Credit
June 2
Cash
Asset
Increase
Debit
Service Revenue
Revenue
Increase
Credit
June 8
Supplies
Asset
Increase
Debit
June 11
Salaries Expense
Expense
Increase
Debit
Cash
Asset
Decrease
Credit
June 15
Cash
Asset
Increase
Debit
June 28
Accounts Payable
Liability
Decrease
Debit
Cash
Asset
Decrease
Credit
Chapter 02 – The Accounting Cycle: During the Period
Problem #3
A company has the following transactions during June:
June 2 Provide services to customers for cash, $4,300
June 8 Purchase office supplies on account, $1,000
June 11 Pay workers’ salaries for the current period, $1,400
June 15 Issue additional shares of common stock, $6,000
June 28 Pay one-half of the amount owed for supplies purchased on June 8, $500
Required:
Record each transaction.
Solution:
Debit
Credit
June 2
Cash
4,300
Service Revenue
(Provide services for cash)
4,300
June 8
Supplies
June 11
Salaries Expense
June 15
Cash
June 28
Accounts Payable
Chapter 02 – The Accounting Cycle: During the Period
Common Mistakes
Common Mistakes made by students are highlighted in each of the chapters. With greater
awareness of the potential pitfalls, students can avoid making the same mistakes and gain a
deeper understanding of the chapter material.
Common Mistake
It’s sometimes tempting to decrease cash as a way of recording an investor’s initial investment.
However, we account for transactions from the company’s perspective, and the
company received cash from the stockholder—an increase in cash.
Common Mistake
Common Mistake
Students often believe a payment of dividends to owners increases stockholders’ equity.
Remember, you are accounting for the resources of the company. While stockholders have more
personal cash after dividends have been paid, the company in which they own stock has
fewer resources (less cash).
Common Mistake
Common Mistake
Common Mistake
Students sometimes hear the phrase “assets are the debit accounts” and believe it indicates that
assets can only be debited. This is incorrect! Assets, or any account, can be either debited or
Chapter 02 – The Accounting Cycle: During the Period
Common Mistake
Just because the debits and credits are equal in a trial balance does not necessarily mean that all
Chapter 02 – The Accounting Cycle: During the Period
Decision Points
Decision Points are provided in each chapter to give insight into how measurement and
communication of financial accounting information help decision makers.
Decision Points
Question
Accounting Information
Analysis
How much profit has
a company earned
business?
Retained earnings
The balance of retained earnings
provides a record of all revenues and
Question
Accounting Information
Analysis
transactions?
them in a trial balance.
How does the
Journal entries
The effects of external transactions
Chapter 02 – The Accounting Cycle: During the Period
Posting Transactions of Eagle Soccer Academy to the Cash General Ledger Account (Learning Objective 2-5)
Illustration 2-11
Cash account from Illustration 2-12
Account: Cash
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Issue common stock for cash
25,000
25,000
Dec. 1
Borrow by signing three-year note
10,000
35,000
Dec. 1
Purchase equipment for cash
11,000
Dec. 1
Prepay rent with cash
Dec. 12
Provide training to customers for cash
Dec. 23
Receive cash in advance from customers
Dec. 28
Pay salaries to employees
Dec. 30
Pay cash dividends
Post