TAILIEUCHUNG - Lecture Financial accounting in an economic context (9th edition): Chapter 4 – Jamie Pratt
Chapter 4 - The mechanics of financial accounting. In this chapter students will be able to: List and explain the two criteria necessary for economic events to be directly recorded on the financial statements, describe the accounting equation and how it relates to each of the four financial statements. | 2 Chapter 4: The Mechanics of Financial Accounting 2 The Mechanics of Financial Accounting The first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Equity 3 3 Now look at E4-2 Spreadsheet Using a spreadsheet approach, analyze the transactions. (Spreadsheet on next slide). Note that effects may be on both sides of the equation, in the same direction, or effects may be on one side of the equation with offsetting directions. 4 4 Exercise 4-2 Spreadsheet Cash + A/R + Land = N/P + CC + RE 1. = 2. = 3. = 4. = 5. = 6. __ __ __ = __ __ __ 5 30,000 30,000 (20,000) 20,000 9,000 9,000 8,000 8,000 Rev. (5,500) (5,500) Exp. (500) (500) Div. Tot. 13,000 + 8,000 + 20,000= 9,000 + 30,000 + 2,000 5 Exercise 4-3 Financial Statements Income Statement Revenues $8,000 Expenses 5,500 Net Income $2,500 Statement of Retained Earnings RE (beginning) $ 0 Add: Net Income 2,500 Less: Dividends (500) RE (ending) $2,000 6 6 Exercise 4-3 Financial Statements Balance Sheet Assets Cash $13,000 A/R 8,000 Land 20,000 Total $41,000 Liabilities and . N/P $ 9,000 CS 30,000 RE (ending) 2,000 Total $41,000 7 7 Now look at E4-2 Spreadsheet Note that the transaction analysis was relatively simple with a few transactions and a few accounts. However, with thousands of transactions and hundreds of accounts, the spreadsheet program is inefficient. Therefore accountants use a “double entry” system based on debits and credits. 8 8 Double Entry Accounting The journal entry is an efficient representation of economic events and how they affect the accounting equation. Debit (dr) - means an entry to the left hand side of an account. Credit (cr) - means an entry to the right hand side of an account. Note that a debit or credit, per se, does not indicate increase or decrease. To decide the effect of a debit or credit, the type of account must be
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