2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 4
The Bookkeeping Process and
Transaction Analysis
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

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 23

LO 1
The Balance Sheet EquationA
Mechanical Key

A = L + SE
The basic accounting equation can be
expanded to include revenues and
expenses.

A = L + PIC + RE + R - E BEG

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LO 2 The Balance Sheet Equation

Transactions
a. The stockholders invested $2,000.
b. The company borrowed $6,000 from a bank.
c. Equipment costing $10,000 was purchased for $2,000 cash and
signing a note payable for $8,000.
d. Equipment that cost $3,000 was sold for $3,000. The $3,000 will
be received within 30 days.
e. The company provided services for $8,000 and received cash.
f. Wages of $2,000 were paid in cash.
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LO 3 The Balance Sheet Equation

Statement of Changes in
Income Statement Retained Earnings
Revenues $ 8,000 Beginning Balance $ -
Expenses 2,000 Add: Net Income 6,000
Less: Dividends -
Net Income $ 6,000
Ending Balance $ 6,000

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LO 4 Bookkeeping Jargon

Transactions are initially recorded in

a journal.

Transactions are then recorded

posted toindividual accounts in
Equipment
the ledger.
Cash

Inventory
Notes
Payable Accounts are used to organize or
group transactions to facilitate
financial statement preparation.

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 27

LO 4 T-Account
The left side of the The right side of the
T-account is always T-account is always the
the debit side. credit side.

Account Name
Left Right
Debit Credit

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 28

LO 4 Debits and Credits

Debits
Debits and
and credits
credits affect
affect the
the accounting
accounting
equation
equation as
as follows:
follows:

A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

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LO 5 Debits and Credits

A = L + SE
ASSETS LIABILITIES EQUITIES
Debit Credit Debit Credit Debit Credit
for for for for for for
Increase Decrease Decrease Increase Decrease Increase

Remember that stockholders'

Paid-in Retained
equity includes paid-in capital and
capital earnings
retained earnings.
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 210

LO 5 Revenue and Expenses

Increases in Increase with a

stockholders' credit.
equity.

Decreases in Increase with a

stockholders' debit.
equity.

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LO 5 Debits and Credits

A = L + SE

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LO 5 Journal Entry Format

A typical journal entry might look like this.

Date Description Debit Credit

6/30 Cash 2,000
Paid-in Capital 2,000
To record an investment
by the owners.

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LO 5 Journal Entry Format

Provide a reference
date for each transaction. Debits are recorded first.

Date Description Debit Credit

6/30 Cash 2,000
Paid-in Capital 2,000
To record an investment
by the owners. Total debits must equal
Credits are indented and total credits.
recorded after debits.

A brief description of the transaction to explain the entry.

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LO 5 The Bookkeeping Process

Transactions Recorded in the Journal
Date Description Debit Credit
6/30 Cash 2,000
Paid-in Capital 2,000
To record an investment
by the owners.

Source Documents

Posted to the Ledger

Account Name
Debit Credit

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LO 6 Types of Adjusting Entries

Transactions for which The initial recording of a

cash has NOT yet been transaction does not
received or paid, but the result in assigning
effect of which must be revenues to the period in
recorded in the accounts which they were earned
in order to accomplish a or expenses to the
matching of revenues period in which they
and expenses. were incurred.

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 216

LO 6 Accruing Expenses
Hey, when do
we get paid?

Examples include:
Wages and Salaries
Interest Payable
Property Taxes

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LO 6 Accruing Revenues

Examples Include:
Interest Earned
Work Completed But Not
Yet Billed to Customer

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LO 6
Reclassifying Assets to
Expenses

End of month adjusting entries

Assets Expenses

Adjusting entries:
Prepaid Insurance Insurance Expense
Supplies Supplies Expense
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LO 6
Reclassify Liabilities to
Revenues

End of month adjusting entries

Liabilities Revenues

Unearned Revenue Revenue

Unearned Rental Revenue Rental Revenue
Airline Ticket Advanced Sales Ticket Revenue
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LO 7 Closing the Books

The closing process simply transfers the year-end

balances of all income statement accounts (e.g.,
revenues, expenses, gains, and losses) to the retained
earnings account.
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LO 7 Closing Entries

Expenses, losses, and Revenues and gains

dividends decrease increase retained
retained earnings. earnings.
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End of Chapter 4

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