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Accrual Accounting Process:
Part I
15
...

7

Components of stockholders’ equity

Common Stock
Additional
Capital

Retained Earnings
Expenses
Dividends

Revenue

8

Why record expenses and revenues
separately in various T-accounts?
Retained Earnings
Rent exp
...
450
Salaries
1,000
Rent exp
...
350

1,000
1,100
3,000
200
4,500

Sales revenue
Interest Income
Sales Revenue
Interest Income
Sales Revenue

Sales Revenue (1,000 + 3,000 + 4,500)
Interest Income (1,100 + 200)
Rent expense (800 + 400)
Salaries expense (650 + 1,000)
Interest expense (450 + 350)
Net Income

8,500
1,300
(1,200)
(1,650)
(800)
6,150
9

Why record expenses and revenues
separately in various T-accounts?
Retained Earnings
Rent exp
...
450
Salaries
1,000
Rent exp
...
350

1,000
1,100
3,000
200
4,500

Interest Expense
450
350
Dividends
2,000

Sales revenue
Interest Income
Sales Revenue
Interest Income
Sales Revenue

Sales Revenue
1,000
3,000
4,500
Interest Revenue
1,100
200
Rent Expense
800
400
Salaries Expense
650
1,000

10

Why record expenses and revenues
separately in various T-accounts?
Retained Earnings

Sales Revenue
1,000
3,000
4,500

Rent Exp
...
1,650 1,300 Interest Revenue
Interest Exp
...


ƒ

Decreases in retained earnings are recorded
on the left side

ƒ

Expenses are recorded on the left side

13

Recording Revenues: A Summary
ƒ Revenues increase retained earnings
...

ƒ Revenues have credit balance because
ƒ they increase retained earnings

ƒ Expenses and dividends have debit balance because
ƒ they decrease retained earnings

ƒ Can retained earnings have a debit balance?
ƒ Yes, when cumulative earnings are less than cumulative
dividends

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Recap: T-Account
Has two sides

ƒ Debit means Left
ƒ Credit means Right

17

Recap: Summary of
T-account Rules
Assets (cash, receivables, equipment)
Increases

Decreases

Liabilities (loans payable)
Decreases

Increases

Owners’ equity (contributed capital, retained earnings)
Decreases

Increases
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The Ledger

ƒ Accounts are collectively referred to as the ledger
ƒ Types of accounts
ƒ Balance Sheet accounts or real accounts or
permanent accounts
ƒ Income statement accounts or nominal
accounts or temporary accounts,
ƒ

i
...
, revenue, expenses, and dividends - all these
are subdivisions of retained earnings

19

The Recording Process

ƒ Journal entries
ƒ Posting to T-accounts
ƒ Trial Balance
ƒ Adjusting entries (Next class)
ƒ Financial statement preparation

20

The Journal

ƒ Journal contains a chronological record of the
transactions of a business

21

Emily’s Bakery
Emily contributes $10,000 in cash

ƒ

Assets

ƒ

Cash

ƒ

+$10,000

=

Liabilities

+

Owners’ Equity
Contributed Capital
+$10,000

Journal Entry
Dr Cash (+A)
Cr Contributed Capital (+CC)

10,000
10,000

22

The company borrows $3,000 from the
bank

ƒ

Assets

ƒ

Cash

Loans Payable

ƒ

+$3,000

+$3,000

=

Liabilities

Journal Entry
Dr Cash (+A)
Cr Loans Payable (+L)

+

Owners’ Equity

3,000
3,000
23

Company purchases equipment for
$5,000 cash

ƒ

Assets

ƒ

Cash

ƒ

-$5,000

=

L

+ OE

Equipment
+$5,000

Journal Entry
Dr Equipment (+A)
Cr Cash (-A)

5,000
5,000

24

Company performs service for $12,000
...


ƒ

Assets

ƒ

Cash

ƒ

+$8,000

=

L + Owners’ Equity

Receivables

Retained Earnings

+$4,000

+$12,000

Journal Entry
Dr Cash (+A)
Dr Receivables (+A)
Cr Service Revenue (+RE)

8,000
4,000
12,000
25

Company pays $9,000 for expenses (wages,
interest, and maintenance)

ƒ

Assets

ƒ

Cash

ƒ

-$9,000

=

Liabilities

+

Journal Entry
Dr Expenses (-RE)
Cr Cash (-A)

Owners’ Equity
Retained Earnings
-$9,000

9,000
9,000

26

Company pays a dividend of $1,000

ƒ Assets

=

Liabilities

+

ƒ Cash
ƒ -$1,000
Journal Entry
Dr Dividends (-RE)
Cr Cash (-A)

Owners’ Equity
Retained Earnings
-$1,000

1,000
1,000
27

Posting
ƒ

Transactions from the journal are posted to the
ledger (we will ignore this step)

28

Trial Balance

ƒ Trial balance is a listing of all the accounts and their
balances in this order:
ƒ
ƒ
ƒ
ƒ
ƒ

Assets
Liabilities
shareholders’ equity
Revenues
Expenses

ƒ Prepared prior to the preparation of financial statements

ƒ Duality is an important check of arithmetic accuracy
ƒ However, equality of debits and credits in a trial balance does
not mean that accounting is error free
ƒ
ƒ
ƒ

Complete omission of a transaction
Recording an entry in the wrong account
Compensating errors

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Emily’s Bakery
Trial Balance

Cash
Accounts Receivable
Equipment
Loans Payable
Contributed Capital
Retained Earnings
Service Revenue
Expenses
Dividend
Total

Debit
6,000
4,000
5,000

Credit

3,000
10,000
0
12,000
9,000
1,000
25,000

25,000
30

Prepare Income Statement
For the year ended December 31, 1997
Revenues: Fees earned for service

$12,000

Expenses: Wages, interest, maintenance

$ 9,000

Net income

$ 3,000

31

Statement of Retained Earnings
For the year ended December 31, 1997
Beginning retained earnings balance

0

Plus: Net income

3,000

Less: Dividend to stockholder

1,000

Ending retained earnings balance

$ 2,000

32

Summary
ƒ T-accounts
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ

Debit is Left
Credit is Right
Increases in Assets – Debits
Increases in liabilities – Credits
Increases in shareholders’ equity – Credits
Expenses are Debits
Revenues are Credits

ƒ Use balances from T-accounts to prepare
financial statements at the end of a fiscal period
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