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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
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
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
Chapter 02 - The Accounting Cycle: During the Period
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
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
Chapter 02 - The Accounting Cycle: During the Period
Additional
Perspectives
Topic
Time
(Min.)
AP2-1
Continuing Problem: Great Adventures
45
AP2-2
Financial Analysis: American Eagle Outfitters, Inc.
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
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
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
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
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
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
Post
