University of Massachusetts Lowell s2

University of Massachusetts Lowell College of Management Department of Accounting Dr. C. P. (Monty) Carter

60.201 Accounting/Financial Lecture Notes

Chapter 1: Reporting About Resources

Goals and resources

Goal defined:

A goal is something you try to achieve.

"The perfect search engine," says Google co-founder Larry Page, "would understand exactly what you mean and give back exactly what you want." … Google is committed to blazing that trail. …Google's goal is to provide a much higher level of service to all those who seek information, whether they're at a desk in Boston, driving through Bonn, or strolling in Bangkok.

Why are resources important?

Identify the three primary sources of resources for companies.

Modern financial reporting evolved from owners’, lenders’, managers’, and others’ interests in companies. Identify the four major items about which information was needed.

Financial reporting illustrated: Guitar Lessons Corporation August transactions.

Getting resources from the owner: On August 1, the owner establishes a Guitar Lessons Company by investing $7,000 cash. Show how this event affects the company’s resources and sources of resources.

Resources = Sources of Resources

Sources of Sources of Sources of Owner Management Total = Borrowed + Invested + Generated Resources Resources Resources Resources

Use the information in the above accounting system to answer the following two questions about the Guitar Lessons Corporation.

Question 1: What are the company's resources on August 1?

Question 2: Where did the company get its August 1 resources?

**You now have the background to do text exercise 1.2. 3

Using resources to buy other resources: On August 4, the company's manager pays $200 cash for supplies. Show how this event affects the company’s resources and sources of resources.

Resources = Sources of Resources $7,000 = $7,000

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Common Cash = Stock $7,000 $7,000

+ = + +

Use the information in the above accounting system to answer the following two questions about the Guitar Lessons Corporation.

Question 2: Where did the company get its August 4 resources? 4

Generating resources through management operations: The manager coaches one client on August 7 and receives $1,000 cash. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Common Cash + Supplies = Stock $6,800 $200 $7,000

+ = + +

Use the information in the above accounting system to answer the following four questions about the Guitar Lessons Corporation.

Question 3: What did management do with the company's resources in August?

Question 4: What did the company do with the resources generated by management in August? 5

Borrowing resources: The company buys $700 supplies on August 9, agreeing to pay for the supplies later in August or September. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Common Retained Cash + Supplies = Stock + Earnings $7,800 $200 $7,000 $1,000

+ = + +

Paying for borrowed resources: On August 12, the company pays $250 owed on the supplies purchased on August 9. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Accounts Common Retained Cash + Supplies = Payable + Stock + Earnings $7,800 $900 $700 $7,000 $1,000

+ = + +

Generating resources through management operations: On August 20, the manager coaches another client who agrees to pay $1,400 later in August or September. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Accounts Common Retained Cash + + Supplies = Payable + Stock + Earnings $7,550 $900 $450 $7,000 $1,000

+ + = + +

Converting one resource into another: The client coached on August 20 pays $800 to the company on August 25. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Accounts Accounts Common Retained Cash + Receivable + Supplies = Payable + Stock + Earnings $7,550 $1,400 $900 $450 $7,000 $2,400

+ + = + +

Using up resources in management operations: The manager's review of supplies shows that only $400 of supplies are on hand on August 31 ($500 of supplies have been used). Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Accounts Accounts Common Retained Cash + Receivable + Supplies = Payable + Stock + Earnings $8,350 $600 $900 $450 $7,000 $2,400

+ + = + +

Distributing resources to the owner: On August 31, the company pays a $100 dividend to the owner. Show how this event affects the company’s resources and sources of resources.

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources Accounts Accounts Common Retained Cash + Receivable + Supplies = Payable + Stock + Earnings $8,350 $600 $400 $450 $7,000 $1,900

+ + = + +

Question 4: What did the company do with the resources generated by management in August?

** You now have the background to do text exercise 1.3. 11

Financial Statements: Income Statement

Prepare a financial report, called an income statement, designed to provide information to help answer the following question.

What did management do with the company's resources in August?

Guitar Lessons Corporation Income Statement For the Month Ended August 31

Fees Revenue Expenses Supplies Expense Net Income 12

Financial Statements: Statement of Retained Earnings

Prepare a financial report, called a statement of retained earnings, designed to provide information to help answer the following question.

What did the company do with the resources generated by management in August?

Guitar Lessons Corporation Statement of Retained Earnings For the Month Ended August 31

Balance, August 1 $0 Plus: Net Income for August Subtotal Less: Dividends in August Balance, August 31 13

Financial Statements: Balance Sheet

Prepare a financial report, called a balance sheet, designed to provide information to help answer the following questions.

What are the company's resources on August 31?

Where did the company get its August 31 resources?

Guitar Lessons Corporation Balance Sheet August 31

Assets Cash Accounts Receivable Supplies Total Assets

Liabilities Accounts Payable Total Liabilities

Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity 14

Accounting Equation

Resources = Sources of Resources

Sources of Sources of Sources of Owner Management = Borrowed + Invested + Generated Total Resources Resources Resources Resources

Using the terms assets, liabilities, and stockholders’ equity, restate the resources = sources of resources equation. The equation is commonly referred to as the accounting equation.

Define assets.

Identify two examples of assets.

Define liabilities.

Identify one example of a liability.

Define stockholders' equity.

Give two examples of stockholders’ equity.

** You now have the background to do text exercises 1.5, 1.6, and 1.7. 15

Chapter 2: T Accounts, Debits, and Credits

State the accounting equation:

Why is the accounting equation important?

** You now have the background to do text exercise 2.1.

Maintaining the equality of the accounting equation: The double-entry system. Using accounting terms, identify the two sides of the T account.

Account Name

(Left side) (Right side) 16

Using T Accounts: Guitar Lessons Corporation September transactions.

Receiving cash from customers: On September 2 the client serviced in August pays the company the $600 she owes. Show how this event affects the company's resources and sources of resources.

Sources of Sources of Sources of Owner Management Total = Borrowed + Invested + Generated Resources Resources Resources Resources Assets = Liabilities + Stockholders’ Equity $9,250 = $450 + $7,000 + $1,800

Show how the September 2 collection of cash from a customer serviced in August affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 8/31 $600 8/31 $400

Accounts Payable Common Stock Retained Earnings 8/31 $450 8/31 $7,000 8/31 $1,800 $450 $7,000 $1,800

Identify the two debit and credit rules developed in the above analysis. One rule has been identified for you.

Assets increase with debits. 17

Borrowing resources: On September 6 the company buys $550 of supplies, agreeing to pay for the supplies later in September or October. Show how this event affects the company's resources and sources of resources.

Show how the September 6 purchase of supplies affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 8/31 $600 9/2 $600 8/31 $400 9/2 $600 $8,850 $0

Accounts Payable Common Stock Retained Earnings 8/31 $450 8/31 $7,000 8/31 $1,800

$7,000 $1,800

Identify the one new debit and credit rule developed in the above analysis.

Assets increase with debits. Assets decrease with credits. 18

Generating resources through management operations: On September 12 the manager coaches one client and receives $800 cash. Show how this event affects the company's resources and sources of resources.

Sources of Sources of Sources of Owner Management Total = Borrowed + Invested + Generated Resources Resources Resources Resources Assets = Liabilities + Stockholders’ Equity $9,800 = $1,000 + $7,000 + $1,800

Show how the September 12 collection of cash from a customer serviced on September 12 affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 8/31 $600 9/2 $600 8/31 $400 9/2 $600 9/6 $550

$0 $950

Accounts Payable Common Stock Retained Earnings 8/31 $450 8/31 $7,000 8/31 $1,800 9/6 $550 $1,000 $7,000

Assets increase with debits. Assets decrease with credits. Liabilities increase with credits. 19

Paying for borrowed resources: On September 18 the company pays the $450 owed on the supplies purchased in August. Show how this event affects the company's resources and sources of resources.

Show how does the September 18 payment of cash owed for supplies purchased in August affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 8/31 $600 9/2 $600 8/31 $400 9/2 $600 9/6 $550 9/12 $800 $0 $950

Accounts Payable Common Stock Retained Earnings 8/31 $450 8/31 $7,000 8/31 $1,800 9/6 $550 9/12 $800 $7,000 $2,600

Assets increase with debits. Assets decrease with credits. Liabilities increase with credits.

Stockholders' equity increases with credits. Revenues increase with credits. 20

Generating resources through management operations: On September 20 the manager coaches another client who agrees to pay $1,300 later in September or October. Show how this event affects the company's resources and sources of resources.

Show how the September 20 providing of service to a customer in return for a promise of future payment affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 9/18 $450 8/31 $600 9/2 $600 8/31 $400 9/2 $600 9/6 $550 9/12 $800 $9,200 $950

Accounts Payable Common Stock Retained Earnings 9/18 $450 8/31 $450 8/31 $7,000 8/31 $1,800 9/6 $550 9/12 $800

$550 $7,000

New debit and credit rules were not developed in the above analysis.

Assets increase with debits. Assets decrease with credits. Liabilities increase with credits. Liabilities decrease with debits. Stockholders' equity increases with credits. Revenues increase with credits. 21

Distributing resources to the owner: On September 25 the company pays an $80 dividend to the owner. Show how this event affects the company's resources and sources of resources.

Show how the September 25 payment of an $80 cash dividend affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 9/18 $450 8/31 $600 9/2 $600 8/31 $400 9/2 $600 9/20 $1,300 9/6 $550 9/12 $800 $1,300 $950

Accounts Payable Common Stock Retained Earnings 9/18 $450 8/31 $450 8/31 $7,000 8/31 $1,800 9/6 $550 9/12 $800 9/20 $1,300 $550 $7,000

Assets increase with debits. Assets decrease with credits. Liabilities increase with credits. Liabilities decrease with debits. Stockholders' equity increases with credits.

Revenues increase with credits. 22

Using up resources in management operations: On September 30 the manager's review of supplies shows that $575 of supplies are on hand. Show how this event affects the company's resources and sources of resources.

Show how the September use of $375 of supplies affects the company's T accounts.

Accounts Cash Receivable Supplies 8/31 $8,250 9/18 $450 8/31 $600 9/2 $600 8/31 $400 9/2 $600 9/25 $80 9/20 $1,300 9/6 $550 9/12 $800 $9,120 $1,300

Accounts Payable Common Stock Retained Earnings 9/18 $450 8/31 $450 8/31 $7,000 9/25 $80 8/31 $1,800 9/6 $550 9/12 $800 9/20 $1,300 $550 $7,000

Assets increase with debits. Assets decrease with credits. Liabilities increase with credits. Liabilities decrease with debits. Stockholders' equity increases with credits. Stockholders' equity decreases with debits. Revenues increase with credits.

Dividends increase with debits.

Debits and credits summarized:

Account Debits Credits

Assets Increase: (1) Decrease: (1) Liabilities Decrease: (4) Increase: (2) Stockholders' Equity Decrease: (6) Increase: (3) Revenues Decrease Increase: (3) Expenses Increase: (7) Decrease Dividends Increase: (6) Decrease

Instead of memorizing all of the above debit and credit rules, it is possible to account for most business events by remembering two points.

Identify those two important points.

Point 1:

Point 2: 24

Prepare a financial report, called an income statement, designed to provide information about management.

Guitar Lessons Corporation Income Statement For the Month Ended September 30

Fees Revenue Expenses Supplies Expense Net Income

What did management do with the company's resources in September?

Prepare a financial report, called a statement of retained earnings, designed to provide information about what happened to any resources generated by management.

Guitar Lessons Corporation Statement of Retained Earnings For the Month Ended September 30

Balance, September 1 $1,800 Plus: Net Income for September Subtotal Less: Dividends in September Balance, September 30

What did the company do with the resources generated by management in September?

Prepare a financial report, called a balance sheet, designed to provide information about a company’s resources and sources of resources.

Guitar Lessons Corporation Balance Sheet September 30

Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

What are the company's resources on September 30?

Where did the company get its September 30 resources?

Chapter 3: Journal Entries, Posting, General Ledger, and Trial Balance

State the accounting equation:

Why is the accounting equation important?

In order to always keep the accounting equation in balance, accounting systems make use of two important points. Identify the two points. 1. Assets increase with 2. Debits =

Modern accounting systems must be able to process large amounts of data because many of today’s companies engage in thousands of events every day.

Identify the two items that modern accounting systems use to organize the data to be reported.

Identify the item that modern accounting systems use to put accounting data into the organized data system.

Identify the item that modern accounting systems use to verify that the data in the accounting system will result in a balanced accounting equation. 27

Organizing Accounting Data: Chart of Accounts:

What is a chart of accounts?

Guitar Lessons Corporation Chart of Accounts

Account Number Account Name Assets 111 Cash 113 Accounts Receivable 115 Supplies

Liabilities 211 Accounts Payable

Stockholders’ Equity 311 Common Stock 313 Retained Earnings 315 Dividends

Revenues 411 Fees Revenue

Expenses 511 Supplies Expense 517 Wages Expense

Organizing Accounting Data: General Ledger:

What is a general ledger?

Guitar Lessons Corporation General Ledger September 30

Accounts Cash Receivable Supplies 9/30 $9,120 9/30 $1,300 9/30 $575

Accounts Payable Common Stock Retained Earnings 9/30 $550 9/30 $7,000 9/30 $3,445

Dividends Fees Revenue Supplies Expense

Wages Expense

Calculate the total debits in the above general ledger $______.

Calculate total credits $______.

Calculate total assets $______.

Calculate total liabilities $______

Calculate total stockholders’ equity $______29

Entering Data into the Accounting System: Guitar Lessons Corporation October transactions.

Identify the item that modern accounting systems use to put accounting data into the organized data system.

Converting one resource into another resource: On October 3 the client serviced in September pays the company the $1,300 he owes. Show how this event affects the company's resources and sources of resources.

Prepare the journal entry to record the October 3 transaction.

Post Date Description Ref. Debits Credits 30

Borrowing resources: On October 6 the company buys $400 supplies, agreeing to pay for them later in October or November. Show how this event affects the company's resources and sources of resources.

Generating resources through management operations: on October 13 the manager coaches one client and receives $1,100 cash. Show how this event affects the company's resources and sources of resources.

Paying for borrowed resources: On October 19 the company pays the $550 owed on the supplies purchased in September. Show how this event affects the company's resources and sources of resources.

Generating resources through management operations: On October 21 the manager coaches another client who agrees to pay $1,200 later in October or November. Show how this event affects the company's resources and sources of resources.

Distributing resources to the owner: On October 26 the company pays a $90 dividend to the owner. Show how this event affects the company's resources and sources of resources.

Using up resources in management operations: On October 31 the company pays $600 to an employee for work done in October. Show how this event affects the company's resources and sources of resources.

Using up resources in management operations: On October 31 the manager's review of supplies shows that $525 of supplies are on hand. Show how this event affects the company's resources and sources of resources.

Post Date Description Ref. Debits Credits

Entering Accounting Data in the General Ledger:

What is the term used to identify the process through which information recorded in the journal is transferred to the general ledger?

All but the last two October journal entries have been posted to the general ledger. Post to the general ledger the two journal entries recorded on October 31. Calculate the ending balance in each general ledger account.

Guitar Lessons Corporation General Ledger October 31 Accounts Cash Receivable Supplies 9/30 $9,120 9/30 $1,300 9/30 $575 10/3 $1,300 10/19 $550 10/21 $1,200 10/3 $1,300 10/6 $400 10/13 $1,100 10/26 $90

Accounts Payable Common Stock Retained Earnings 9/30 $550 9/30 $7,000 9/30 $3,445 10/19 $550 10/6 $400

Dividends Fees Revenue Supplies Expense

10/26 $90 10/13 $1,100 10/21 $1,200

Wages Expense

Calculate the total debits in the above general ledger $______. Calculate total credits $______.

Calculate total assets $______. Calculate total liabilities $______

Calculate total stockholders’ equity $______

** You now have the background to do text exercises 3.3 and 3.4. 38

Verifying Data in the General Ledger

Identify the item that modern accounting systems use to verify that the data in the accounting system will result in a balanced accounting equation.

Using the data in the company’s general ledger, complete the trial balance below.

Calculate the totals for the debits and credits columns.

Guitar Lessons Corporation Unadjusted Trial Balance October 31

Acct. No. Account Debits Credits 111 Cash $10,280 113 Accounts Receivable 1,200 115 Supplies 525 211 Accounts Payable $400 311 Common Stock 7,000 313 Retained Earnings 3,445 315 Dividends 411 Fees Revenue 511 Supplies Expense 517 Wages Expense Totals

Guitar Lessons Corporation Income Statement For the Month Ended October 31

Fees Revenue Less: Supplies Expense Wages Expense Net Income

What did management do with the company's resources in October? 40

Guitar Lessons Corporation Statement of Retained Earnings For the Month Ended October 31

Balance, October 1 $3,445 Plus: Net Income for October Subtotal Less: Dividends in October Balance, October 31

What did the company do with the resources generated by management in October? 41

Guitar Lessons Corporation Balance Sheet October 31

What are the company's resources on October 31?

Where did the company get its October 31 resources?

Chapter 4: Adjusting Entries

In order to generate information for financial statements, accounting systems progress through a series of logical, detailed steps. Identify the four steps examined in chapter three.

Accounting systems’ four above steps result in information that could be used in the preparation of financial statements. In order to assure that accounting information is reasonable enough to be reported in the financial statements, however, the information generated through the above four steps must be reviewed. If the review reveals that the information is not reasonable, that is, not good enough to be reported in the financial statements, the information must be changed to become reasonable.

Identify the process through which accounting information is reviewed and changed, if necessary, to become reasonable. 43

Unadjusted trial balance: The Guitar Lessons Corporation’s following trial balance contains information generated through the first four steps in the accounting process. The trial balance is called an unadjusted trial balance because the balances have not yet been reviewed for reasonableness. Guitar Lessons Corporation Trial Balance December 31 Acct. No. Account Debits Credits 111 Cash $9,750 112 Notes Receivable 3,000 113 Accounts Receivable 1,200 114 Interest Receivable 0 115 Supplies 600 119 Prepaid Insurance 1,000 211 Accounts Payable $1,350 213 Unearned Fees Revenue 800 214 Wages Payable 0 215 Income Taxes Payable 0 311 Common Stock 7,000 313 Retained Earnings 4,250 315 Dividends 150 411 Fees Revenue 3,200 412 Interest Revenue 0 511 Supplies Expense 0 517 Wages Expense 900 521 Insurance Expense 0 523 Income Taxes Expense 0 Totals $16,600 $16,600

1. Based on the above unadjusted trial balance calculate December’s net income $______. 2. Calculate the December 31 retained earnings balance $______. 3. Calculate the December 31 total assets $______. 4. Calculate the December 31 total liabilities $______. 5. Calculate the December 31 total stockholders’ equity $______. 44

Adjusting process illustrated:

Review of supplies: Based on a physical examination of its supplies, the company determined that it had $200 of supplies on hand on December 31, not $600 as reported on its trial balance. The company determined that $400 of supplies had been used up in December. Show how this information affects the company's resources and sources of resources.

Prepare the journal entry necessary to adjust the appropriate unreasonable account balances on the December 31 trial balance.

Review of insurance: A review of its insurance policies showed that the company used up $250 of insurance protection in December. $750 of insurance protection is still available on December 31. Show how this information affects the company's resources and sources of resources.

Review of employees' wages: The company’s payroll system showed that on December 31, $500 of wages are still owed to employees for work they did in December. A total of $1,400 of employees' services had been used up in December. Show how this information affects the company's resources and sources of resources.

Review of notes receivable: On December 1, the company loaned $3,000 cash to the Manchester Company. The Guitar Lessons Corporation properly reported the $3,000 loan on its December 31 trial balance as the asset notes receivable. Based on the terms of the loan, the Guitar Lessons Corporation determined that it had earned $20 of interest but not yet received it on December 31. In other words, $20 of interest services had been provided to the Manchester Company in December and the Manchester Company is going to pay the $20 sometime in the future. Show how this information affects the Guitar Lessons Corporation’s resources and sources of resources.

Review of unearned fees revenue: Prior to December 1, the company received $800 cash from a customer for guitar lessons to be provided in the future by the company. The Guitar Lessons Corporation properly reported the $800 of services it owes the customer on its December 31 trial balance as the liability unearned fees revenue. An examination of its contract showed that the company provided the customer with $175 of guitar lessons in December. On December 31, $625 of services are still owed to the customer. Show how this information affects the company's resources and sources of resources.

Review of income taxes: For the right to conduct business in the United States, the federal government charges corporations a fee called income taxes. Based on its December revenues and expenses, the company determined that the government’s charge for income taxes in December would be $425. The company expects to pay it income taxes in January. Show how this information affects the company's resources and sources of resources.

Adjusted trial balance: As part of the normal accounting process, the above adjusting entries would be posted to the Guitar Lessons Corporation’s general ledger. To check on the equality of debits and credits in the general ledger, an adjusted trial balance would be prepared, as shown below.

Guitar Lessons Corporation Adjusted Trial Balance December 31 Acct. No. Account Debits Credits 111 Cash $9,750 112 Notes Receivable 3,000 113 Accounts Receivable 1,200 114 Interest Receivable 20 115 Supplies 200 119 Prepaid Insurance 750 211 Accounts Payable $1,350 213 Unearned Fees Revenue 625 214 Wages Payable 500 215 Income Taxes Payable 425 311 Common Stock 7,000 313 Retained Earnings 4,250 315 Dividends 150 411 Fees Revenue 3,375 412 Interest Revenue 20 511 Supplies Expense 400 517 Wages Expense 1,400 521 Insurance Expense 250 523 Income Taxes Expense 425 Totals $17,545 $17,545

1. Based on the above adjusted trial balance calculate December’s net income $______. 2. Calculate the December 31 retained earnings balance $______. 3. Calculate the December 31 total assets $______. 4. Calculate the December 31 total liabilities $______. 5. Calculate the December 31 total stockholders’ equity $______. 51

Guitar Lessons Corporation Income Statement For the Month Ended December 31

Revenues Fees Revenue Interest Revenue Total Revenues Operating Expenses Supplies Expense Wages Expense Insurance Expense Total Operating Expenses Income Before Taxes Income Taxes Expense Net Income

What did management do with the company's resources in December? 52

Guitar Lessons Corporation Statement of Retained Earnings For the Month Ended December 31

Balance, December 1 $4,250 Plus: Net Income for December Subtotal Less: Dividends in December Balance, December 31

What did the company do with the resources generated by management in December? 53

Guitar Lessons Corporation Balance Sheet December 31

Assets Cash Notes Receivable Accounts Receivable Interest Receivable Supplies Prepaid Insurance Total Assets

Liabilities Accounts Payable Unearned Fees Revenue Wages Payable Income Taxes Payable Total Liabilities

What are the company's resources on December 31?

Where did the company get its December 31 resources?

Chapter 5: Closing Process

In order to generate information for financial statements, accounting systems progress through a series of logical, detailed steps, the first four of which are shown below. Identify the three steps examined in chapter four. As a result of the seven steps, the data is reasonable enough to be reported in financial statements.

1. Organize the data to be reported by using a chart of accounts and a general ledger. 2. Analyze business events and convert them into debits and credits through the preparation of journal entries. 3. Post the journal entries to the general ledger. 4 Prepare an unadjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger.

Once the financial statements for a period are prepared, the income statement reports how management affected the company’s resources during the period. For example, December’s income statement reports how management affected the company’s resources in December, while January’s income statement should report how management affected the company’s resources in January.

The following information was obtained from the Guitar Lessons Corporation’s general ledger.

Fees Revenue $700 December 7 1,100 December 12 600 December 21 800 December 27 175 December 31 500 January 6 1,600 January 13 900 January 20 $6,375 January 31

Determine the Guitar Lessons Corporation's January fees revenue $______.

Why doesn’t January’s fees revenue equal the $6,375 balance in the fees revenue account?

To make it easy to determine revenues, expenses, and dividends for a specific period, January for example, once the financial statements for December are prepared, all December’s revenues, expenses, and dividends are removed from these accounts. As a result, at the end of January, the only amounts appearing in revenues, expenses, and dividends accounts will have resulted from events that occurred in January.

Identify the process through which revenues, expenses, and dividends amounts are removed from the accounts once financial statements are prepared.

Closing process illustrated:

The Guitar Lesson Corporation’s December 31 adjusted trial balance is shown below. This is the same trial balance that was prepared at the end of Chapter 4.

Guitar Lessons Corporation Adjusted Trial Balance December 31 Acct. No. Account Debits Credits 111 Cash $9,750 112 Notes Receivable 3,000 113 Accounts Receivable 1,200 114 Interest Receivable 20 115 Supplies 200 119 Prepaid Insurance 750 211 Accounts Payable $1,350 213 Unearned Fees Revenue 625 214 Wages Payable 500 215 Income Taxes Payable 425 311 Common Stock 7,000 313 Retained Earnings 4,250 315 Dividends 150 399 Income Summary 0 411 Fees Revenue 3,375 412 Interest Revenue 20 511 Supplies Expense 400 517 Wages Expense 1,400 521 Insurance Expense 250 523 Income Taxes Expense 425 Totals $17,545 $17,545 57

Closing the December revenue accounts:

Prepare the journal entry necessary to close the company’s two revenue accounts at the end of December.

Post Date Description Ref. Debits Credits Dec. 31

Close revenue accounts

Post the closing entry to the general ledger and calculate the balance in each account.

Fees Revenue Interest Revenue Income Summary $700 $20 1,100 600 800 175

Show how the closing of revenue accounts affects the company's resources and sources of resources.

= + + 58

Closing the December expense accounts:

Prepare the journal entry necessary to close the company’s four expense accounts at the end of December.

Close expense accounts

Supplies Expense Wages Expense Insurance Expense $400 $900 $250 500

Income Taxes Exp. Income Summary $425 $3,395

Show how the closing of expense accounts affects the company's resources and sources of resources.

= + + 59

Closing the December income summary account:

Prepare the journal entry necessary to close the company’s income summary account at the end of December.

Close income summary account

Retained Earnings Income Summary $4,250 $2,475 $3,395

Show how the closing of the income summary account affects the company's resources and sources of resources.

= + + 60

Closing the December dividends account:

Prepare the journal entry necessary to close the company’s dividends account at the end of December.

Close dividends account

Retained Earnings Dividends $4,250 $150 920

Show how the closing of the dividends account affects the company's resources and sources of resources.

Post-closing trial balance: As part of the normal accounting process, the above closing entries would be posted to the Guitar Lessons Corporation’s general ledger. To check on the equality of debits and credits in the general ledger, an adjusted trial balance would be prepared.

Find the retained earnings ending balance in the company’ general ledger on the previous page. Insert the retained earnings balance into the post-closing trial balance. Calculate the total debits and total credits and insert the totals into the post-closing trial balance.

Guitar Lessons Corporation Post-closing Trial Balance December 31 Acct. No. Account Debits Credits 111 Cash $9,750 112 Notes Receivable 3,000 113 Accounts Receivable 1,200 114 Interest Receivable 20 115 Supplies 200 119 Prepaid Insurance 750 211 Accounts Payable $1,350 213 Unearned Fees Revenue 625 214 Wages Payable 500 215 Income Taxes Payable 425 311 Common Stock 7,000 313 Retained Earnings 315 Dividends 0 399 Income Summary 0 411 Fees Revenue 0 412 Interest Revenue 0 511 Supplies Expense 0 517 Wages Expense 0 521 Insurance Expense 0 523 Income Taxes Expense 0 Totals 62

In order to generate information for financial statements, accounting systems progress through a series of logical, detailed steps, the first eight of which are shown below. Identify the three steps examined in chapter five. As a result of the eleven steps, the data is reasonable enough to be reported in financial statements and such statements report the effects of events occurring in a specific time period separately from the effects of events occurring in other time periods.

1. Organize the data to be reported by using a chart of accounts and a general ledger.

2. Analyze business events and convert them into debits and credits through the preparation of journal entries.

3. Post the journal entries to the general ledger.

4. Prepare an unadjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger.

5. Review the data in the unadjusted trial balance for reasonableness and prepare necessary adjusting entries to correct any unreasonable account balances.

6. Post the adjusting journal entries to the general ledger.

7. Prepare an adjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger.

8. Prepare financial statements: income statement, statement of retained earnings, and balance sheet.

11. 63

Chapter 6: Cash and Cash Equivalents

The purpose of this chapter is to examine how cash and cash equivalents affect businesses, how they are controlled and accounted for, and why their proper accounting is important to corporate income and the quality of information reported in financial statements.

What are cash and cash equivalents:

What is cash?

Identify two examples of cash.

What are cash equivalents?

Identify two examples of cash equivalents.

Identify four sources of cash for corporations:

Borrowing cash: On June 16, a company borrows $12,000 cash for 90 days. The company intends to repay the $12,000 on September 13. Show how this information affects the company's resources and sources of resources.

Sources of Sources of Sources of Owner Management Total = Borrowed + Invested + Generated Resources Resources Resources Resources Assets = Liabilities + Stockholders’ Equity

Prepare the journal entry to record the June 16 transaction.

Post Date Description Ref. Debits Credits June 16 65

The cost of borrowing cash: On June 16, the $12,000 was borrowed for 90 days at an annual interest rate of 10%. The company agreed to pay back the $12,000 cash plus interest on September 13.

Calculate the cost of borrowing the $12,000 cash for 90 days $______.

Calculate the cost of borrowing the $12,000 cash and using it for 15 days in June $______.

Show how this information affects the company's resources and sources of resources.

Prepare the journal entry to record the June cost of borrowing.

Post Date Description Ref. Debits Credits June 30

Obtaining cash from owners: Owners invest $50,000 cash in a corporation on June 10. Show how this information affects the company's resources and sources of resources.

Cash generated by management: Managers provide services to customers on June 11 and the company receives $1,500 cash. Show how this information affects the company's resources and sources of resources.

Obtaining cash by converting other resources into cash: The company collects $800 on June 18 from customers for services provided to them in May. Show how this information affects the company's resources and sources of resources.

Post Date Description Ref. Debits Credits June 18

Identify four reasons corporations use cash:

Paying for borrowed cash: The June 16, $12,000 cash loan is repaid with interest on September 13. Show how this information affects the company's resources and sources of resources on September 13.

Prepare the journal entry to record the September 13 transaction.

Post Date Description Ref. Debits Credits Sept. 13 70

Paying cash to owners: The company pays a $2,000 cash dividend on June 22. Show how this information affects the company's resources and sources of resources.

Cash used by management: The company pays $120 cash on June 27 for telephone services used during June. Show how this information affects the company's resources and sources of resources.

Using cash to obtain other resources: The company pays $900 cash on June 7 for supplies it will use in June and July. Show how this information affects the company's resources and sources of resources.

Controlling cash:

What is a bank reconciliation?

To understand the bank reconciliation process, it is necessary to understand (1) the ways companies account for their cash and (2) the ways banks account for companies’ cash being held by banks.

On July 2, the Lowell Corporation was formed when its owner opened a checking account by depositing $6,000 in the Lawrence National Bank at 10:00 AM. Show how this information affects the Lowell Corporation's simplified general ledger shown below.

Since the bank reconciliation process is primarily concerned with the company’s cash account, the general ledger’s “All other accounts” account represents all accounts other than cash. For example, if a company received cash resulting from owners’ investments, it would actually be recorded as a debit to cash and a credit to common stock. In the general ledger below, the credit to common stock would be posted to All other accounts. Note that the All other accounts is being used for illustration purposes only. Companies actually use individual accounts like accounts payable, common stock, etc.

Lowell Corporation's General Ledger

Cash All other accounts 74

Show how the Lowell Corporation’s $6,000 cash deposit affects the Lawrence National Bank's simplified general ledger shown below.

Lawrence National Bank's General Ledger

Cash Customer Deposits (liability) 7/1 $960,000 $825,000 7/1

Show how the Lowell Corporation’s $6,000 cash deposit affects the Lawrence National Bank's simplified subsidiary ledger shown below.

Lawrence National Bank's Customer Deposits Subsidiary Ledger

All companies other than The Lowell Corporation Lowell Corporation $825,000 7/1

Prepare the Lowell Corporation’s July 2 bank reconciliation 75

Outstanding deposit: On July 5, the Lowell Corporation received an $800 check for services provided to K. Berger Engineering on July 5. The Lowell Corporation deposited the check in the Lawrence National Bank at 4:30 on July 5. On July 6, the Lawrence National Bank processed the check. Show how this information affects the Lowell Corporation's simplified general ledger shown below.

Cash All other accounts 7/2 $6,000 $6,000 7/2

Show how the Lowell Corporation’s $800 cash deposit affects the Lawrence National Bank's simplified general ledger shown below.

Cash Customer Deposits 7/1 $960,000 $825,000 7/1 7/2 $6,000 $6,000 7/2

Show how the Lowell Corporation’s $800 cash deposit affects the Lawrence National Bank's simplified subsidiary ledger shown below.

All companies other than the Lowell Corporation Lowell Corporation $825,000 7/1 $6,000 7/2

Prepare the Lowell Corporation’s July 5 bank reconciliation

Balance per Lawrence National Bank, July 5

Balance per Lowell Corporation checkbook, July 5 76

Outstanding check: On July 8, the Lowell Corporation wrote a $500 check to Staples Depot for the purchase of supplies. Staples Depot deposited the check in its bank. On July 10, the Lawrence National Bank received the check and processed it. Show how this information affects the Lowell Corporation's simplified general ledger shown below.

Cash All other accounts 7/2 $6,000 $6,000 7/2 7/5 $800 $800 7/5

Show how the Lowell Corporation’s $500 check to Staples Depot affects the Lawrence National Bank's simplified general ledger shown below.

Cash Customer Deposits 7/1 $960,000 $825,000 7/1 7/2 $6,000 $6,000 7/2 7/6 $800 $800 7/6

Show how the Lowell Corporation’s $500 check to Staples Depot affects the Lawrence National Bank's simplified subsidiary ledger shown below.

Lawrence National Bank's Customer Deposits Subsidiary Ledger All companies other than the Lowell Corporation Lowell Corporation $825,000 7/1 $6,000 7/2 $800 7/6

Balance per Lawrence National Bank, July 8 Add: Outstanding deposit

Balance per Lowell Corporation checkbook, July 8

Interest revenue and bank service charge: On July 15 the Lowell Corporation received its bank statement from the Lawrence National Bank. On July 12, the bank had added $4 to the company's account for interest earned on its cash and subtracted $19 for services provided to the company by the bank. Show how this information affects the Lowell Corporation's simplified general ledger shown below.

Cash All other accounts 7/2 $6,000 $500 7/8 7/8 $500 $6,000 7/2 7/5 $800 $800 7/5

Show how the bank’s $4 of interest and $19 of service charges affect the Lawrence National Bank's simplified general ledger shown below.

Cash Customer Deposits 7/1 $960,000 $500 7/10 7/10 $500 $825,000 7/1 7/2 $6,000 $6,000 7/2 7/6 $800 $800 7/6

Service Revenue Interest Expense

Show how the bank’s $4 of interest and $19 of service charges affect the Lawrence National Bank's simplified subsidiary ledger shown below.

All companies other than the Lowell Corporation Lowell Corporation $825,000 7/1 7/10 $500 $6,000 7/2 $800 7/6 78

Balance per Lawrence National Bank, July 12 Add: Outstanding deposit Subtotal Deduct: Outstanding checks

Balance per Lowell Corporation checkbook, July 12: (before the bank statement was received)

Certificates of Deposit:

What are certificates of deposit and why do companies invest in them?

Treasury Bills:

What are treasury bills and why do companies invest in them? 79

Financial reporting of cash and cash equivalents:

The Christopher Corporation had $20,000 of cash and cash equivalents on December 31. Add the $20,000 of cash and cash equivalents to the company’s balance sheet.

Christopher Corporation Balance Sheet December 31

Assets Current Assets

Accounts Receivable 60,000 Merchandise Inventory 280,000 Total Current Assets $360,000 Property, Plant, and Equipment Land $80,000 Buildings 230,000 Machinery and Equipment 350,000 Total Property, Plant, and Equipment $660,000 Other Assets 10,000 Total Assets $1,030,000

Liabilities and Stockholders' Equity Liabilities Current Liabilities Accounts Payable $155,000 Income Taxes Payable 35,000 Wages Payable 10,000 Total Current Liabilities $200,000 Long-term Liabilities 350,000 Total Liabilities $550,000

Stockholders' Equity Common Stock $360,000 Retained Earnings 120,000 Total Stockholders' Equity $480,000 Total Liabilities and Stockholders' Equity $1,030,000

Christopher Corporation Income Statement For the Year Ended December 31

Revenues $400,000 Operating Expenses Supplies Expense $22,000 Wages Expense 255,000 Insurance Expense 18,000 Rent Expense 30,000 Total Operating Expenses $325,000 Operating Income $75,000 Other Revenues and (Expenses) 1,000 Income Before Taxes $76,000 Income Taxes Expense 27,000 Net Income $49,000