Chapter 3

Processing Accounting
Information

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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 Learning Objectives
LO1 Explain the difference between external and internal
events.
LO2 Explain the role of source documents in an
accounting system.
LO3 Analyze the effects of transactions on the accounting
equation and understand how these transactions affect the
balance sheet and the income statement.
LO4 Define the concept of a general ledger and understand the
use of the T account as a method for analyzing transactions.
LO5 Explain the rules of debits and credits.
LO6 Explain the purposes of a journal and the posting process.
LO7 Explain the purpose of a trial balance.

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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 Module 1 Transactions and the
Accounting Equation
Source documents are used as the necessary
evidence to record transactions
Transactions affect the accounting equation and
the financial statements

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 External and Internal Events
External event: interaction between an entity
and its environment
Internal event: occurs entirely within an entity
Transaction: any event that is recognized in a
set of financial statements

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 The Role of Source Documents in
Recording Transactions
Used as evidence to record a transaction
Documents need not be in hard copy form and
can come from parties that are either internal or
external to the company
Different forms:
Purchase invoice
Sales invoice
Cash register tape
Time cards

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 2
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Analyzing the Effects of
Transactions on the Accounting
Equation
The accounting equation illustrates the
relationship between assets, liabilities, and
stockholders equity accounts
Understanding these relationships helps to see
the logic behind the double-entry system in
recording transactions

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Accounting Equation

As transactions are recorded, the accounting

equation must remain in balance:
Assets = Liabilities + Stockholders Equity
The equation can be expanded to show the
linkage between the balance sheet and the
income statement through the Retained
Earnings account:
Assets = Liabilities + Capital Stock + Retained Earnings

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Example 3-1Analyzing the Effects
of Transactions on the Accounting
Equation
Following is a series of transactions for a
hypothetical corporation, Glengarry Health Club
The transactions are for January 2016, the first
month of operations for the new business

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Issuance of Capital Stock
Glengarry Health Club is started when Karen
Bradley and Kathy Drake file articles of
incorporation with the state to obtain a charter
Each invests $50,000 in the business
In return, each receives 5,000 shares of capital
stock

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Acquisition of Property in
Exchange for a Note
Company buys a piece of property for $200,000
The seller agrees to accept a five-year
promissory note
The property consists of land valued at $50,000
and a newly constructed building valued at
$150,000

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Acquisition of Equipment on an
Open Account
Karen and Kathy contact an equipment supplier
and buy $20,000 of exercise equipment:
treadmills, barbells, and stationary bicycles
The supplier agrees to accept payment in full in
30 days

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Sale of Monthly Memberships on
Account
During January, the owners sell 300 monthly
club memberships for $50 each, or a total of
$15,000
The members have until the 10th of the
following month to pay

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Sale of Court Time for Cash
Inaddition to memberships, Glengarry sells
court time
Court fees are paid at the time of use and
amount to $5,000 for the first month

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Payment of Wages and Salaries
Wages and salaries for the first month amount
to $10,000

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Payment of Utilities
Costof utilities for the first month is $3,000
Glengarry pays this amount in cash

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Collection of Accounts Receivable
Amount received from members in payment of
their accounts is $4,000

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Payment of Dividends
Karen and Kathy, acting on behalf of Glengarry
Health Club, decide to pay a dividend of $1,000
on the shares of stock that each of them owns,
or $2,000 in total

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 The Cost Principle
Record an asset at the cost to acquire it and
continue to show this amount on all balance
sheets until the asset is disposed

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Exhibit 3-1Transactions

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Exhibit 3-2Balance Sheet

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Exhibit 3-3Income Statement

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 1: LO 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Module 2 Ledger Accounts and
Debits and Credits
The double-entry system of accounting is used
in the recording process
Debits increase asset accounts and credits
increase liability and equity accounts
The double-entry system requires that total
debits equal total credits for any transaction
recorded in the accounting system

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Account and Chart of Accounts
Account: record used to accumulate amounts
for each individual asset, liability, revenue,
expense, and component of stockholders
equity
Chart of accounts: numerical list of all accounts
used by a company

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 4
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Exhibit 3-4Chart of Accounts

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 4
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Ledger Accounts
General ledger: a book, a file, a hard drive, or
another device containing all of the accounts
Double-entry system: system of accounting
Forevery transaction recorded, total debits must
equal total credits
Accounting equation must always be in balance

T Account: format for showing amounts coming

into and leaving an account

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 4
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Example 3-2Using a T Account

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 4
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits
Tools to record increases and decreases in
accounts
Debits increase asset accounts, and credits
increase liability and stockholders equity
accounts
Additionally, debits increase expense accounts,
and credits increase revenue accounts

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Summary of the Rules for
Increasing and Decreasing Accounts

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 Example 3-3Determining Normal
Account Balances

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
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 Debits and Credits Applied to
Transactions
(1) Issuance of capital stock
Cash Capital Stock
(1)100,000 100,000 (1)

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(2) Acquisition of property in exchange for a note
Building Notes Payable
(2)150,000 200,000 (2)

Land
(2) 50,000

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(3) Acquisition of equipment on an open account
Equipment Accounts Payable
(3) 20,000 20,000 (3)

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(4) Sale of monthly memberships on account
Accounts Receivable Membership Revenue
(4) 15,000 15,000 (4)

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(5) Sale of court time for cash
Cash Court Fee Revenue
(1)100,000 5,000 (5)
(5) 5,000
T Accounts reflect
current and previous
postings to the account
for each period

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(6) Payment of wages and salaries
Cash Wage & Salary Expense
(1)100,000 10,000 (6) (6) 10,000
(5) 5,000

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(7) Payment of utilities
Cash Utilities Expense
(1)100,000 10,000 (6) (7) 3,000
(5) 5,000 3,000 (7)

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(8) Collection of accounts receivable
Cash Accounts Receivable
(1)100,000 10,000 (6) (4) 15,000 4,000 (8)
(5) 5,000 3,000 (7)
(8) 4,000

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Debits and Credits Applied to
Transactions
(9) Payment of dividends
Cash Dividends
(1)100,000 10,000 (6) (9) 2,000
(5) 5,000 3,000 (7)
(8) 4,000 2,000 (9)

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 2: LO 5
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Module 3 Journal Entries and Trial
Balance
Accountants use tools to effectively and
efficiently process the information that appears
on financial statements
A journal documents the details of transactions
by date
A trial balance lists all of the accounts in the
general ledger along with their debit or credit
balances

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as Module 3
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Journal Entries and Trial Balances
Journal: chronological record of a companys
transactions
Book of original entry
Transactions are periodically posted from the
journal to ledger accounts
Journalizing: act of recording journal entries

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 Posting
Process of transferring amounts from a journal
to the ledger accounts

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 Example 3-6Posting from the
Journal to the Ledger

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 Trial Balance
Listof each account and its balance at a specific
point in time
Used to prove the equality of debits and credits
Normally prepared at the end of the accounting
period
Basis for preparation of financial statements

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 Example 3-7Preparing a Trial
Balance

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Review
LO1 Explain the difference between external and internal
events.
Both of these different types of events affect an entity and are usually
recorded in the accounting system as a transaction.
External events are interactions between an entity and its environment.
Internal events are interactions entirely within an entity.
LO2 Explain the role of source documents in an accounting
system.
Source documents provide the evidence needed to begin the
procedures for recording and processing a transaction.
These documents need not be in hard copy form and can come from
parties that are either internal or external to the company.

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Review
LO3 Analyze the effects of transactions on the accounting
equation and understand how these transactions affect the
balance sheet and the income statement.
The accounting equation illustrates the relationship between assets,
liabilities, and stockholders equity accounts. Understanding these
relationships helps to see the logic behind the double-entry system in
recording transactions.
The accounting equation: Assets = Liabilities + Stockholders Equity
This equality must always be maintained. The equation can be expanded to show
the linkage between the balance sheet and the income statement through the
Retained Earnings account:
Assets = Liabilities + Capital Stock + Retained Earnings

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Review
LO4 Define the concept of a general ledger and understand the
use of the T account as a method for analyzing transactions.
The general ledger is a crucial part of the accounting system that lists
all accounts and their balances. Financial statements may be
prepared from current account balances in the general ledger.
T accounts are a convenient way to analyze the activity in any
particular account. One side of the account is used to record
increases; the other side, decreases.

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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 Review
LO5 Explain the rules of debits and credits .
Debits and credits represent the left and right sides of a T account,
respectively. They take on meaning only when associated with the
recording of transactions involving asset, liability, and equity
accounts.
In general, debits increase asset accounts and credits increase liability and equity
accounts.
The double-entry system requires that total debits equal total credits for any
transaction recorded in the accounting system.

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Review
LO6 Explain the purposes of a journal and the posting process.
A journal documents the details of transactions by date. Entries are
made to a journal every time a transaction occurs.
Similar transactions that occur regularly may be recorded in special journals.
Ultimately, information is posted from the journal to the ledger for
each individual account.
LO7 Explain the purpose of a trial balance.
At the end of a period, a trial balance may be prepared that lists all of
the accounts in the general ledger along with their debit or credit
balances.
The purpose of the trial balance is to see whether total debits equal
total credits. This provides some assurance that the accounting
equation was adhered to in the processing of transactions but is no
guarantee that transactions have been recorded properly.

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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 End of Chapter 3

2017 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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