CHAPTER

Settin
g the With the number of transactions that occur on
a daily basis, the accounting for McDonald’s
Stage would be impossible if not for a systematic
method for analyzing these transactions and
collecting and recording transaction related
information.

How are millions of transactions summarized

and eventually reported as useful information
in the primary financial statements?

This transformation process is called the

accounting
CHAPTER
The Accounting Cycle:
3 The Mechanics of Accounting

LO1 LO2 LO3

How Do How Do We
How Can We Transactions
Collect All This Record the
Affect the Effects of
Information? Accounting Transactions?
Equation?

LO4 LO5
Posting Journal Where Do
Entries and Computers
Preparing a Fit in All
Trial Balance This?
 How Can We Collect All This Information?

LO1 The Accounting Cycle

 The procedure for analyzing, recording, summarizing, and
reporting the transactions of a business.

Record the effects of

Analyze transactions.
transactions.
Exchange Transactions
(Business enter into exchange transactions

1 2
signaling the beginning of the accounting cycle)

Step Step

Summarize the effects of Prepare reports.

transactions. 1 Adjusting entries.
1 Posting journal entries. 2 Preparing financial statements.
2 Preparing a trial balance. 3 Closing the books.

Exhibit 3.1 Sequence of the

Accounting Cycle
Step

3 Step

4
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4
 How Do Transactions Affect the Accounting Equation?

LO2 Which Events Are to Be Reflected in The

Accounting Records?

Determining the Amount of a Transaction

► Events that cannot be reliably measured in monetary
terms will not be reflected in the financial statements.
► Information relating to the competitive environment,
product development, and marketing and sales efforts is
included in a company’s annual report to stockholders,
but not as part of the accounting information.

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LO2 Which Events Are to Be Reflected in The
Accounting Records?

Competitive attempts to gain

market share, like developing
a Big Mac clones, could have
a serious impact on a
company’s profitability, but
are not reported in the
financial statements.

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LO2 Which Events Are to Be Reflected in The
Accounting Records?

Determining If an Arm’s-length Transaction Has

Occurred
► Accounting is concerned primarily with reflecting the
effects of transactions between two independent
entities.
► e.g., China Airlines signing a contract with Boeing to
purchase airplanes in the future.
• It would not be reflected in the financial statements until
the airplanes are manufactured and delivers and China
Airline has agreed to pay for them.

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LO2 The Accounting Equation 會計恆等式

 The accounting equation:

Assets 資產 = Liabilities 負債 + Equity 權益

 Resources owned  Creditors’ claim against  Owners’ claim against the
or controlled by the firm’s resources firm’s resources
the firm  Requires repayment  Requires no repayment but
represents ownership interest
in the firm

 The equation must always remain in balance.

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LO2 The Accounting Equation 會計恆等式

Business Activity (Transaction) #1:

Investment of €50,000 by owners.
Assets = Liabilities + Equity

Cash Capital Stock

TRANSACTION # ASSETS = LIABILITIES + EQUITY

Beginning Balance € 0 = € 0 + € 0
1. +50,000 +50,000
Subtotal €50,000 = € 0 + €50,000

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LO2 The Accounting Equation 會計恆等式

Business Activity (Transaction) #2:

Borrowed €25,000 from bank. A note is signed to the bank.
Assets = Liabilities + Equity

Cash Notes Payable

TRANSACTION # ASSETS = LIABILITIES + EQUITY

Beginning Balance € 0 = € 0 + € 0
1. +50,000 +50,000
Subtotal €50,000 = € 0 + €50,000
2. +25,000 +25,000
Subtotal €75,000 = €25,000 + €50,000
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LO2 The Accounting Equation 會計恆等式

Business Activity (Transaction) #3:

Purchased €14,000 worth of supplies on credit (will pay
later).
Assets = Liabilities + Equity

Supplies Accounts Payable

TRANSACTION # ASSETS = LIABILITIES + EQUITY

Subtotal €75,000 = €25,000 + €50,000
3. +14,000 +14,000
Subtotal €89,000 = €39,000 + €50,000

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LO2 The Accounting Equation 會計恆等式

Business Activity (Transaction) #4:

Purchased equipment costing €15,000 for cash.
Assets = Liabilities + Equity

Equipment Cash

TRANSACTION # ASSETS = LIABILITIES + EQUITY

Subtotal €75,000 = €25,000 + €50,000
3. +14,000 +14,000
Subtotal €89,000 = €39,000 + €50,000
4. +15,000
–15,000
Total €89,000 = €39,000 + €50,000
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LO2 Using Accounts to Categorize Transactions

Account
► An accounting record in which the results of transactions
are accumulated.
► Shows increases, decreases, and a balance.
► You can think of an individual account as a summary of
every transaction affecting a certain item.
► Asset account: Cash, Suppliers, Office Equipment
► Liability account: Accounts Payable, Notes Payable
► Equity account: Capital Stock, Retained Earnings
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LO2 Using Accounts to Categorize Transactions

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LO2 Using Accounts to Categorize Transactions

€89,000 €39,000 €50,000

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LO2 Using Accounts to Categorize Transactions

T-Account T 字帳
► An abbreviated representation of an actual account.
► Used as a teaching and learning tool.
► Debit 借方 : the left side of a T-account.
► Credit 貸方 : the right side of a T-account.
► Debit means left, credit means right—nothing more,
nothing less. Cash
Debit (Dr) Credit (Cr)

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LO2 Using Accounts to Categorize Transactions

T-Account T 字帳
► By convention, for asset accounts, debits refer to
increases and credits to decreases. Asset accounts
will usually have debit balances.
► Liability and equity accounts are decreased by debits
and increased by credits. As a result, they will typically
have credit balances.
Assets = Liabilities + Equity

DR CR DR CR DR CR
(+) (–) (–) (+) (–) (+)

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LO2 Using Accounts to Categorize Transactions

Three basic facts regarding double-entry accounting:

► Debits are always entered on the left side of an
account and credits on the right side.
► For every transaction, there must be at least one
debit and one credit.
► Debits must always equal credits for each
transaction.

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LO2 Using Accounts to Categorize Transactions

 To make sure you understand the relationship between

debits and credits, the various accounts, and the
accounting equation, we need to examine further the
transactions.

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LO2 Using Accounts to Categorize Transactions

Self-Checking of Accounting Information

► If debits do not equal credits, an error has been made in
analyzing and recording the entity’s activities.
Business Activity (Transaction) Effect in Terms of the Accounting Equation
Assets = Liabilities + Equity

Capital
Cash Stock
1. Investment by owners DR (+) CR (+)

Notes
2. Borrowed money Cash Payable
from bank DR (+) CR (+)

Accounts
3. Purchased Supplies Payable
supplies on credit DR (+) CR (+)

Office
4. Purchased equipment Cash
Equipment
for cash DR (+) CR (–)
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LO2 Using Accounts to Categorize Transactions

Debit-Credit Rule 借貸法則

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 Expanding Accounting Equation for Revenue,
LO2 Expense, Dividends

Temporary Accounts that Affect Equity

Expenses decrease increase

Equity Revenues
Dividends

Increased by debits Increased by credits

 Temporary accounts.
 They are closed into the Retained Earnings account at the end
of the accounting cycle.
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 Expanding Accounting Equation for Revenue,
LO2 Expense, Dividends

• Revenues provide resource inflows

• They are increases in resources from the sale of
goods or services.
• Expenses represent resource outflows
• They are costs incurred in generating revenues.
• Note that revenues are not synonymous with
cash or other assets
• They are a way of describing where the assets came
from

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 Expanding Accounting Equation for Revenue,
LO2 Expense, Dividends

Exhibit 3.2
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LO2 Quiz Yourself

 For each of the following three transactions,

determine
(a) the specific accounts involved;
(b) whether the accounts increased or decreased;
(c) whether the accounts are assets, liabilities, or
equity accounts; and
(d) whether the accounts are debited or credited.

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LO2 Quiz Yourself

Solution:
1 Borrowed money from a bank
(a) The accounts involved are Cash and Loans Payable.
(b) Both Cash and Loans Payable increased.
(c) Cash is an asset, and Loans Payable is a liability.
(d) Assets increase with a debit. Cash is an asset; therefore,
Cash is debited.
Liabilities increase with a credit. Loans Payable is a
liability; therefore, Loans Payable is credited.
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LO2 Quiz Yourself

2 Purchased a transportation equipment on credit

(a) The accounts involved are Transportation Equipment and
Accounts Payable.
(b) Both Transportation Equipment and Accounts Payable
increased.
(c) Transportation Equipment is an asset, and Accounts Payable is
a liability.
(d) Assets increase with a debit. Transportation Equipment is an
asset; therefore, Transportation Equipment is debited.
Liabilities increase with a credit. Accounts Payable is a liability;
therefore, Accounts Payable is credited.
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LO2 Quiz Yourself

3 Purchased office equipment paying cash

(a) The accounts involved are Office Equipment and Cash.
(b) Office Equipment increased, and Cash decreased.
(c) Both Office Equipment and Cash are assets.
(d) Assets increase with a debit. Office Equipment is an
asset; therefore, Office Equipment is debited.
Assets decrease with a credit. Cash is an asset;
therefore, Cash is credited.

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 How Do We Record the Effects of
Transactions?
LO3 Journals and Journal Entries

Journal 日記簿
► Journal is an accounting record in which transactions are
first entered.
► Provide a chronological record of all transactions of a
business. [Journalizing]
► Journal entry:
• A recording of a transactions where debits equals credits;
usually includes a date and an explanation of the
transaction.
• General journal 普通日記簿
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LO3 Journals and Journal Entries

Journal Entry 分錄

General Journal Entry Format

1 2
Date Debit Entry …………………...………… XX
3
Credit Entry ………………….……….. XX
4
Explanation.

Dollar signs
usually are
omitted

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LO3 Journals and Journal Entries

General Journal

Exhibit 3.3
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LO3 Journal Entry Example

 Suppose you decide to start your own landscaping

business. This business will involve mowing lawns, pulling
weeds, trimming shrubs, and so forth.
 These transactions fit into the following four general
categories:
► Acquiring cash
► Acquiring assets other than cash
► Providing services
► Collecting cash and paying obligations
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LO3 Journal Entry Example
Acquiring Cash
Example 1: Acquiring Cash from Owners
Your parents offer to match any funds that you are going to
put into your business. You have €1,000 in savings, and
coupled with your parents’ matching funds, you decide to
issue 200 shares of stock at €10 per share on July 1, 2022.

Transaction The asset-cash account increases by €2,000 and the

effect equity-capital stock account increases by €2,000.

July 1 Cash 2,000

Journal
Capital Stock 2,000
entry
Issue 200 shares of capital stock at €10 per share.

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LO3 Journal Entry Example

Example 1: Acquiring Cash from Owners

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LO3 Journal Entry Example
Example 2: Acquiring Cash by Borrowings
Suppose that on top of the money from yourself and your
parents, you went to a bank on July 1, 2022 and convinced
the loan officer to lend you some additional money € 2,000 at
12% interest.
Transaction The asset-cash account increases by €2,000 and the
effect liability-notes payable account increases by €2,000.

July 1 Cash 2,000

Journal Notes Payable 2,000
entry
Borrowed € 2,000 from First National Bank, signing
a 12-month note at 12% interest.

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LO3 Journal Entry Example
Example 2: Acquiring Cash by Borrowings
► A “note” is a contract specifying an amount that one
party will repay to another, usually with interest along
the way. This particular account could also be called
“Loan Payable.”

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LO3 Journal Entry Example

Acquiring Assets Other than Cash

► Such assets include supplies (like fertilizer), inventory
(perhaps shrubs that you will plant), and equipment
(like a lawnmower and a truck for hauling).
► These assets may be purchased with cash or on credit.
Credit purchases require payment after a period of
time.

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LO3 Journal Entry Example

Example 3: Acquiring Noncash Assets

The first thing you need is a lawnmower and some form of
transportation. On July 5, 2022. You find an old 2010 pickup
truck for sale for €800, and you buy it paying cash.

Transaction The asset-transportation equipment account increases

effect by €800 and the asset-cash account decreases by €800.

July 5 Transportation Equipment 800

Journal
Cash 800
entry
Purchased a used truck.

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LO3 Journal Entry Example

Example 3: Acquiring Noncash Assets

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LO3 Journal Entry Example

Example 4: Acquiring Noncash Assets

Next, you drive to the local lawn-and-garden store and
purchase a lawnmower and gas can for €250 on July 5,
2022. Instead of paying for the mower with cash, you open a
charge account, which will allow you to pay for the mower in
30 days with no interest charge.
Transaction The asset-machinery equipment account increases by €250
effect and the liability-accounts payable account increases by €250.

July 5 Machinery Equipment 250

Journal
Accounts Payable 250
entry
Purchased a lawnmower and gas can on account.

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LO3 Journal Entry Example

Example 4: Acquiring Noncash Assets

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LO3 Journal Entry Example

Example 5: Acquiring Noncash Assets

Back you go to the lawn-and-garden store on July 5, 2022 to
purchase fertilizer, gloves, a rake, a shovel, and other
assorted supplies. The total cost is €180, which you pay in
cash.
Transaction The asset-supplies account increases by €180 and the
effect asset-cash account decreases by €180.

July 5 Supplies 180

Journal
Cash 180
entry
Purchased supplies for cash.

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LO3 Journal Entry Example
Example 5: Acquiring Noncash Assets
► An increase in one asset (supplies) results in a
decrease in another asset (cash).

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LO3 Journal Entry Example
Example 6: Acquiring Noncash Assets
On your way home from the store, you drive past a
greenhouse and notice a big sign advertising a “50% off”
sale on shrubs. Since you anticipate that planting shrubs will
be part of your business on July 7, 2022, you stop and
purchase for cash €150 worth of shrubs as inventory.

Transaction The asset-inventory account increases by €150 and the

effect asset-cash account decreases by €150 .

July 7 Inventory 150

Journal
Cash 150
entry
Purchased inventory for cash.

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LO3 Journal Entry Example

Example 6: Acquiring Noncash Assets

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LO3 Journal Entry Example

Providing Services
► Sometimes services and merchandise are sold for
cash; at other times they are sold on credit, and a
receivable is established for collection at a later date.
► Revenues indicate the source not only of cash but of
other assets as well, all of which are received in
exchange for the merchandise or services provided.
► Similarly, expenses may be “charged” with a cash
payment to be made at a later date.

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LO3 Journal Entry Example
Example 7: Providing Services
On July 9, 2022, you perform a lawn care service for €350. A
portion of your revenues is received immediately in cash
(€270), while the balance becomes receivables.
The asset-cash account increases by €270, the asset-
Transaction accounts receivable account increases by €80
effect and the revenue account increases by €350; in turn,
equity increases by €350.

July 9 Cash 270

Journal Accounts Receivable 80
entry Lawn Care Revenue 350
To record revenue for lawn care services.

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LO3 Journal Entry Example

Example 7: Providing Services

► Compound journal entry 複合分錄 : The type of entry
which more than two accounts can be involved in
recording a transaction of entry.
► “Revenue” is not an asset.

Revenue
The label given to the source of assets
Capital Stock Assets

Liability

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LO3 Journal Entry Example

Example 7: Providing Services

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LO3 Journal Entry Example

Selling Goods
► Sales, whether made on account or for cash, require
entries that reflect not only the sale, but also the cost of
the inventory sold.
► The “cost of goods sold” is an expense and, as
such, is subtracted from the sales revenue to
determine the profitability of sales transactions.

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LO3 Journal Entry Example

Example 8: Selling Goods

On July 14, 2022, you charged your customer €90 for one-
half of the shrubs you purchased earlier.
The asset-cash account increases by € 90 and revenue
Transaction account increases by €90. At the same time, the cost of good
effect sold account increases by €75; in turn, equity decreases by
€75; and the asset-inventory account decreases by €75.
July 14 Cash 90
Sales Revenue 90
Journal
entry Cost of Goods Sold 75
Inventory 75
To record the cost of inventory sold and to reduce
inventory for its cost.
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LO3 Journal Entry Example

Example 8: Selling Goods

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LO3 Journal Entry Example

Example 9: Providing Services

In addition to making a profit on the sale of shrubs on July
14, 2022, you also generated revenue of planting them. The
journal entry to record this revenue is:

Transaction The asset-cash account increases by €45 and the

effect revenue account increases by €45; in turn, equity
increases by €45.

July 14 Cash 45
Journal
Landscaping Revenue 45
entry
To record revenue for landscaping services.

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LO3 Journal Entry Example

Example 9: Providing Services

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LO3 Journal Entry Example
Example 10: Incurring Expenses Other Than Cost of Goods Sold

Expenses include gas (€50) for the lawnmower and the truck
on July 18, 2022 and the wages (€60) you agreed to pay
your little brother for working for you on July 23, 2022.
The gasoline expenses (wages expenses) account increases
Transaction by €50 (€60); in turn, equity decreases by €50 (€60); and the
effect asset-cash account decreases by €50 (€60).

July 18 Gasoline Expenses 50

Cash 50
Journal Paid cash for gas for the truck and the mower.
entry
July 23 Wages Expenses 60
Cash 60
Paid wages expense.
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LO3 Journal Entry Example
Example 10: Incurring Expenses Other Than Cost of Goods Sold
► The label “expenses” is used to explain how assets have been
used.
► “Expenses” is the label we give to the amount of assets
consumed in doing business.

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LO3 Journal Entry Example

Collecting Cash and Paying Obligations

Example 11: Collecting Accounts Receivable
The receivables €80 are collected on July 30, 2022.
Transaction The asset-cash account increases by €80 and the
effect asset-accounts receivable account decreases by €80.

July 30 Cash 80
Journal
entry Accounts Receivable 80
Collected €80 of receivables.

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LO3 Journal Entry Example
Example 11: Collecting Accounts Receivable
► The collection of receivables merely involves exchanging one asset
for another. No revenue is involved here.

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LO3 Journal Entry Example

Example 12: Paying Obligations

On July 31, 2022, you pay for the obligation with cash of
purchasing lawnmower and gas on account €250.
Transaction The asset-cash account decreases by €250 and the
effect liability-accounts payable account decreases by €250.

July 31 Accounts Payable 250

Journal
entry Cash 250
Paid €250 for the lawnmower and gas can
previously purchased.

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LO3 Journal Entry Example

Example 12: Paying Obligations

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LO3 Journal Entry Example

Example 13: Paying Obligations and Interest

In example 2, you borrowed €2,000 to be paid over 12 months.
Suppose you are required to make monthly loan payments of
€178 with a portion of each payment being attributed to interest
and a portion to reducing the liability on July 31, 2022.
The asset-cash account decreases by €178, the liability-notes
Transaction payable account decreases by €158 and the interest expense
effect account increases by €20 which in turn decreases equity by
€20.

July 31 Notes Payable 158

Journal Interest Expense 20

entry Cash 178
Paid first monthly payment on note with interest
(€2,000 × 0.12 × 1/12).

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LO3 Journal Entry Example
Example 13: Paying Obligations and Interest

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LO3 Journal Entry Example

Example 14: Payment of Dividends

Corporations that are profitable generally pay dividends to
their stockholders. The following entry illustrates the
payment of a cash dividend (€50) on July 31, 2022:
The asset-cash account decreases by €50 and the
Transaction
dividends account increases by €50 which in turn
effect
decreases equity by €50.

July 31 Dividends 50
Journal
Cash 50
entry
Paid a €50 cash dividends.

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LO3 Journal Entry Example
Example 14: Payment of Dividends

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LO3 Summary of Transactions

Exhibit 3.4
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LO3 A Note on Journal Entries

A Journal Entry Involves a Three-step Process:

► Identify which accounts are involved.
► For each account, determine if it is increased or
decreased: are to debited or credited.
► For each account, determine by how much it has
changed.

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LO3 Quiz Yourself

 For each of the following transactions,

(a) identify the accounts involved,
(b) identify whether the accounts increased or
decreased,
(c) state by how much the accounts increased or
decreased, and
(d) provide the required journal entry to record the
effects of the transaction.

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LO3 Quiz Yourself

1. Purchased supplies costing €5,000 on account

(a) Supplies is an asset, Accounts Payable is a liability.
(b) Supplies increased (assets increase with debits), and
Accounts Payable increased (liabilities increase with credits).
(c) Both accounts changed by €5,000.
(d) The required journal entry is

Supplies................................... 5,000
.
Accounts 5,000
Payable .............
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LO3 Quiz Yourself

2. Paid wages of €200

(a) Wages is an expense, Cash is an asset.
(b) Wages Expense increased (expense decrease equity,
and equity decreases with debits), and Cash decreased
(assets decrease with credits).
(c) Both accounts changed by €200.
(d) The required journal entry is

Wages 200
Expense........................
Cash ................................ 200
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LO3 Quiz Yourself

3. Paid €3,600 for supplies purchased previously

(a) Cash is an asset, Accounts Payable is a liability.
(b) Cash decreased (assets decrease with credits), and
Accounts Payable decreased (liabilities decrease with
debits).
(c) Both accounts changed by €3,600.
(d) The required journal entry is
Accounts 3,600
Payable ....................
Cash ................................ 3,600
.
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 Posting Journal Entries and Preparing a Trial Balance

LO4 Posting Journal Entries

Posting 過帳
► The process of transferring amounts from the journal to
the ledger.
► It is no more than sorting all journal entry amounts by
account and copying those amounts to the appropriate
account.

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LO4 Posting Journal Entries

Ledger 分類帳
► All accounts are maintained in an accounting record
called a “ledger.”
► A ledger (the main ledger is called a general ledger 總
分類帳 ) is a “book of accounts.”

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LO4 Posting to the General Ledger
JOURNAL Page 1
Date Description Post. Ref. Debits Credits
2022 July 1 Cash 101 2,000
Capital Stock 2,000
Issued 200 shares of capital stock at € 10 per share.
1 Cash 101 2,000
Notes Payable 2,000
Borrowed €2,000 from First National Bank, signing a
12-month note at 12% interest.
5 Transportation Truck 800
Cash 101 800
Purchased a used truck.
5 Machinery Equipment 250
Accounts Payable 250
Purchased a lawnmower on account.
5 Supplies 180
ACCOUNT: Cash ACCOUNT NO. 101
Cash 101 180
Date Description Post. Ref. Debits Credits Balance
Purchased supplies for cash.
2022 July 1 Balance 0
1 Issued 200 shares of capital stock at € 10 per share. GJ1 2,000 2,000
1 Borrowed €2,000 from First National Bank, signing a GJ1 2,000 4,000
12-month note at 12% interest.
5 Purchased a used truck. GJ1 800 3,200
5 Purchased supplies. GJ1 180 3,020
Exhibit 3.5
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LO4 Posting to the General Ledger
Chart of Accounts

Exhibit 3.6 Chart

of Accounts for
a
Hypothetical
Company
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO4 Determining Account Balances

 At the end of an accounting period, the accounts in the

general ledger are reviewed to determine each account’s
balance.
 The balance is normally on the side that increases the
account.

€4,485 €1,718

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LO4 Determining Account Balances
► Assets/expenses/
dividends: normally
have a debt
balances
► Liability/equity/
revenue: normally
have credit
balances.
► The balance is
normally on the side
that increases the
account.

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LO4 Determining Account Balances

Exhibit 3.8
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LO4 Determining Account Balances

Exhibit 3.9
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LO4 Determining Account Balances

Exhibit 3.9

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LO4 Determining Account Balances

Exhibit 3.10
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Three Steps
► Step 1: Analyze these transactions and supporting
documents.
► Step 2: The pertinent facts are obtained and the
transactions are recorded in a journal.
► Step 3 (part 1): The transactions are posted to the
ledger accounts. T-accounts are used to illustrate this
process.
► Step 3 (part 2): After the account balances have been
determined, a trial balance is usually prepared.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Suppose that Ashin and his friends established the Mayday

Corporation in 2022. The following transactions occurred.
A Initial capital contribution of €20,000, for which Ashin and friends received
1,000 shares of capital stock.
b Mayday Corporation paid €10,000 cash for inventory.

c Borrowed €20,000 from a bank to buy some land, signing a long-term note
with the bank.
d Land was purchased for €25,000 cash.
e During the year 2022, Mayday Corporation sold 20%, or €2,000, of the
inventory purchased. The company sold that inventory for €3,200, and the
sale was originally made on credit.
f The company paid €200 in selling expenses and €100 in miscellaneous
expenses.
g The company collected the full amount of the accounts receivable in cash.
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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 1: Analyze These Transactions and Supporting

Documents.
► e.g., the purchases of land are verified by invoices
showing the actual items purchased, dates, amounts,
and so forth. There is a €20,000 note payable to the
bank. Other business documents indicate the sale of
inventory and the expenses incurred.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 2: Recording the Transactions in a Journal.

a. Initial capital contribution of €20,000, for which Ashin and
friends received 1,000 shares of capital stock.
Business
Transaction Journal Entries Debits Credits

Issued stock Cash 20,000

Capital Stock 20,000
Issued 1,000 shares of capital stock for
€20,000.
b. Mayday Corporation paid €10,000 cash for inventory.
Business
Transaction Journal Entries Debits Credits

Purchases inventory Inventory 10,000

Cash 10,000
Purchased € 10,000 of inventory in cash

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 2: Recording the Transactions in a Journal.

c. Borrowed €20,000 from a bank to buy some land, signing a
long-term note with the bank.
Business
Transaction Journal Entries Debits Credits

Borrowed money Cash 20,000

Notes Payable 20,000
Borrowed €20,000 from a bank.

d. Land was purchased for €25,000 cash.

Business
Transaction Journal Entries Debits Credits

Purchased land Land 25,000

Cash 25,000
Purchased land for cash.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle
Step 2: Recording the Transactions in a Journal.
e. During the year of 2022, Mayday Corporation sold 20% or
€2,000 of the inventory purchased. The company sold the
inventory for €3,200 and the sale was originally made on credit.
Business
Transaction Journal Entries Debits Credits

Sold inventory Accounts Receivable 3,200

Services Revenue 3,200
Provided services for €3,200 on account.

Business
Transaction Journal Entries Debits Credits
Cost of Goods Sold 2,000
Inventory 2,000
To record the cost of goods or inventory sold

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 2: Recording the Transactions in a Journal.

f. The company paid €200 in selling expenses and €100 in
miscellaneous expenses.

Business
Transaction Journal Entries Debits Credits
Paid expenses Selling Expenses 200
Miscellaneous Expenses 100
Cash 300
Paid advertising and miscellaneous expenses.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 2: Recording the Transactions in a Journal.

g. The company collected the full amount of the accounts
receivable in cash.
Business
Transaction Journal Entries Debits Credits

Collected cash Cash 3,200

Accounts Receivable 3,200
Collected accounts receivable.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 3-1: Posting the Journal Entries to the Ledger.

► Using T-accounts.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 3-1: Posting the Journal Entries to the Ledger.

Exhibit 3.11

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LO4 Determining Account Balances

Trial Balance 試算表

► Lists each account with its debit or credit balance.
► Even if the trial balance does show total debits
equal to total credits, there may be errors.

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Step 3-2: Preparing a Trial Balance.

Exhibit 3.12
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Preparing Financial Statements

Exhibit 3.13

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 Illustration of the First Three Steps in the
LO4 Accounting Cycle
Preparing Financial Statements
► Notice that there is no retained earnings account in the
trial balance but there is one on the balance sheet.
► Because all the accounts such as Revenue, Cost of
Goods Sold, and Expenses are eventually accumulated
into Retained Earnings.

Exhibit 3.13
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Illustration of the First Three Steps in the
LO4 Accounting Cycle
Preparing Financial Statements

Exhibit 3.14
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distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Illustration of the First Three Steps in the
LO4 Accounting Cycle

Two Final Notes

► First, the preparation of financial statements also
involves the adjustment of some ledger accounts.
(Chapter 4)
► Second, net income does not usually equal the ending
retained earnings balance. Only in the first year of a
company’s operations would this be the case.

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LO4 Quiz Yourself

 From the following four journal entries, prepare a trial

balance. Assume that the beginning balance for all
accounts is zero.
1 Inventory 2,400
Accounts Payable 2,400
2 Cash 4,500
Sales 4,500
3 Cost of Goods Sold 1,800
Inventory 1,800
4 Accounts Payable 1,700
Cash 1,700

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LO4 Quiz Yourself
Solution:

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 Where Do Computers Fit in All This?

LO5 How Have Computers Changed the

Accounting Cycle?
 The time spent posting journal entries and summarizing
accounts into a trial balance has been greatly reduced as
a result of computers.
 Computers can’t think—that is your job!
► What accounts are involved?
► Did those accounts increase or decrease?
► By how much did each account change?

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