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Financial Management Certificate Program Curriculum

Basic Accounting for the UC Berkeley Financial Environment


Making Cents of Economic Events Part Two: The Accounting Equation

UC Berkeley Controllers Office

November 2009

UC Berkeley Controllers Office Basic Accounting: Part Two

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UC Berkeley Controllers Office Basic Accounting: Part Two

Further Tips We recommend that you leave the sound audio ON during this presentation, in order to hear the explanations and examples of the slides If you would like to print the slides of this course, Making Cents of Economic Events, go to: controller.berkeley.edu/financialManagementTraining/FM CP/online1.htm

UC Berkeley Controllers Office Basic Accounting: Part Two

Financial Management Certificate Program This four part course, Basic Accounting for the UC Berkeley Financial Environment, is part of the Financial Management Certificate Program (FMCP) If you want course credit in the Financial Management Certificate Program, you must complete this online course and pass the online quiz, Basic Accounting for the UC Berkeley Financial Environment, Part 2: The Accounting Equation You can access the quiz through the UC Learning Center For information about FMCP click on the following link:
Financial Management Certificate Program (controller.berkeley.edu/financialManagementTraining/FMC P/index.htm)

UC Berkeley Controllers Office Basic Accounting: Part Two

How This Course Works This course, Making Cents of Economic Events, is designed to introduce accounting concepts. Due to the complexity of the material, the course is presented in four sections:
Part One: Introduction to Accounting discusses the characteristics of accounting information and their importance in enabling decision-makers to make better decisions Part Two: The Accounting Equation introduces the accounting equation and the rules for debits and credits Part Three: Fund Accounting Basics discusses how fund accounting works at UC Berkeley and introduces basic accounting principles Part Four: Reporting moves from unit reports to campus reports, and ends with the consolidated statements of the University of California (systemwide)

UC Berkeley Controllers Office Basic Accounting: Part Two

Six Course Objectives At the end of the four parts of this course you should:
1. Understand the role of accounting in decision-making and in the stewardship of resources, and what characteristics of accounting information are required for the information to be useful for decision-making 2. Be familiar with the accounting equation, its elements, such as assets, liabilities, revenues and expenses, and how these elements change in relation to one another 3. Have a general understanding of debits and credits and why they are used 4. Know the definitions to common accounting terms; 5. Know the basics of fund accounting, the different types of funds used by the University, and some basic accounting principles 6. Be familiar with unit and campus financial statements and how they impact the financial statements of the University of California as a whole

UC Berkeley Controllers Office Basic Accounting: Part Two

Summary Part One: Introduction to Accounting Part 1 introduced Accounting as: Providing quantitative information that is intended to be useful in making financial decisions about economic entities (in making reasoned choices among alternative courses of actions) The process of identifying, measuring, recording, classifying and summarizing economic events, and then communicating information based on these economic events to interested users

UC Berkeley Controllers Office Basic Accounting: Part Two

Outline Part Two: The Accounting Equation Part Two covers the following topics: 1. The Accounting Equation, its elements and their definitions 2. Rules for debits and credits 3. Simple financial reports

UC Berkeley Controllers Office Basic Accounting: Part Two

The Accounting Equation

UC Berkeley Controllers Office Basic Accounting: Part Two

An Accounting Entity An accounting entity is any organization (unit) that 1. Uses economic resources to achieve a purpose 2. Has an identity of its own 3. Is of interest to one or more individuals for decisionmaking purposes Examples of accounting entities at UC Berkeley are the campus as a whole, a control unit, a department, an organized research unit (ORU), a recharge unit, a restricted gift, and a research grant

UC Berkeley Controllers Office Basic Accounting: Part Two

What Does Accounting Involve? Accounting involves six actions:


1. Selecting relevant events (such as the purchase of office supplies, time worked by an employee, or the receipt of student fees) that are evidence of economic activity 2. Measuring the economic events (transactions) in financial terms, i.e., quantifying in dollars and cents 3. Keeping a chronological diary of measured events 4. Classifying and summarizing the measured events 5. Preparing and distributing accounting reports 6. Analyzing and explaining the uses, meaning, and limitations of the reported information

UC Berkeley Controllers Office Basic Accounting: Part Two

Accounting History One of the earliest books printed (1494) was an accounting textbook. It memorialized a systematic approach for keeping track of an entitys resources (assets) and claims against those resources (obligations to creditors and rights of owners). The simple accounting equation discussed in that first textbook is still the foundation for accounting today, whether for the complex accounting information systems developed for multinational businesses, governments and the University of California, or the simple Quick Books approach for small business

UC Berkeley Controllers Office Basic Accounting: Part Two

Fund Accounting Part 1 of this course discussed how accounting information needs to be useful. For a university, because of compliance and stewardship issues (discussed in Part 3), that means the use of funds. Each fund is a separate accounting entity. The Berkeley Financial System (BFS) contains the records for all our funds Each fund must be treated as the separate accounting entity that it is -- each fund has its own accounting elements and each accounting equation must always balance Businesses use only one fund

Universities can easily use thousands of funds

UC Berkeley Controllers Office Basic Accounting: Part Two

The Accounting Equation The Accounting Equation Assets - Liabilities = Net Assets
Reflects the impact transactions have had on the entity over time Forms a snapshot of the organization a picture at one particular point in time Changes with economic events (transactions)

UC Berkeley Controllers Office Basic Accounting: Part Two

Assets: An Element of The Accounting Equation Assets are resources that the entity can use in the future Examples of assets are:
Cash Equipment Inventory of office supplies

UC Berkeley Controllers Office Basic Accounting: Part Two

Liabilities: an Element of The Accounting Equation Liabilities are obligations that will require future action, usually the payment of cash Examples of liabilities are:
Accounts payable (vendors) Vacation accrual (employees)

UC Berkeley Controllers Office Basic Accounting: Part Two

Net Assets: an Element of The Accounting Equation Net Assets is the residual interest in the assets of an entity that remains after deducting liabilities
(In for-profit organizations it is known as Owners Equity.)

Since the University of California is a non-profit organization without owners, the residual interest in the assets is known as net assets or as the fund balance The relationship can be represented mathematically as: Assets - Liabilities = Net Assets (Fund Balance)

UC Berkeley Controllers Office Basic Accounting: Part Two

The Algebra of the Accounting Equation The Accounting Equation (Assets - Liabilities = Net Assets) is an algebraic equation and as such can be manipulated like all algebraic expressions. By adding Liabilities to both sides of the equation, we get
Assets = Liabilities + Net Assets

Traditionally, accounting textbooks use this view of the Accounting Equation when introducing debits and credits. Also, it is the format of one of the standard financial reports known as the balance sheet.

UC Berkeley Controllers Office Basic Accounting: Part Two

Changes to Net Assets As economic events occur, assets and liabilities increase and decrease. In order to understand why the assets and liabilities change and to enable decision makers to make better decisions, we classify the economic events and analyze their impact on net assets over a period of time. Two general classifications are used:
Revenues Expenses

UC Berkeley Controllers Office Basic Accounting: Part Two

Revenues Revenues are inflows of assets, often representing the value of services rendered or goods delivered Examples of revenues are: Student Tuition and Fees Private Gifts Contracts and Grants Facilities rental to outside parties Ticket sales for athletic events Revenues increase net assets

UC Berkeley Controllers Office Basic Accounting: Part Two

Expenses Expenses are the outflows of assets usually resulting from an entitys ongoing operations Examples of expenses are: Salaries Office supplies used Telephone costs Expenses reduce net assets

UC Berkeley Controllers Office Basic Accounting: Part Two

How the Elements are Related The elements (assets, liabilities, net assets, revenues, expenses) are all related via the Accounting Equation. It is a mathematical equation and the equals sign (=) requires that both sides of the equation stay in balance at all times. Assets = Liabilities + Net Assets

A simple example will illustrate this. Lets assume that we only have one fund. Part 3 will discuss what happens when we have multiple funds.

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 1
Assets # 1 Cash 6,000 = = Liabilities + Net Assets Net Assets 6,000 Explanation of Transaction
Gift from donor

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 2
Assets # 1 2 Cash + Copier 6,000 5,000 6,000 + 5,000 = 5,000 5,000 + = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total

= Accounts Payable + Net Assets 6,000 6,000

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 3
Assets # 1 2 3 Cash + Copier 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 = 5,000 5,000 5,000 + + = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total

= Accounts Payable + Net Assets 6,000 6,000 <50> 5,950

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 4
Assets # 1 2 3 4 Cash + Copier 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 = 5,000 5,000 5,000 5,000 + + + = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total

= Accounts Payable + Net Assets 6,000 6,000 <50> 5,950 <200> 5,750

= =

UC Berkeley Controllers Office Basic Accounting: Part Two

Transactions # 5 & 6
Assets # 1 2 3 4 5 6 = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total Copy revenue, week #1 Copy revenue, week #2 Total

Accounts Cash + Copier + Receivable = Accounts Payable + Net Assets 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 100 5,850 + 5,000 + 450 450 = 5,000 5,000 5,000 5,000 + + + 6,000 6,000 <50> 5,950 <200> 5,750 100 450 6,300

= =

5,000

11,300

11,300

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 7
Assets # 1 2 3 4 5 6 7 5,850 + 5,000 + 450 = = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total Copy revenue, week #1 Copy revenue, week #2 Total Receive 1st months phone bill Total

Accounts Cash + Copier + Receivable = Accounts Payable + Net Assets 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 100 5,850 + 5,000 + 450 450 = 5,000 5,000 5,000 5,000 + + + 6,000 6,000 <50> 5,950 <200> 5,750 100 450 6,300 <50> 6,250

= =

5,000 50 5,050

+ +

11,300

11,300

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 8
Assets # 1 2 3 4 5 6 7 8 5,850 + 5,000 <200> 5,650 + 5,000 + + 450 450 = = = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total Copy revenue, week #1 Copy revenue, week #2 Total Receive 1st months phone bill Total Purchase of paper Total

Accounts Cash + Copier + Receivable = Accounts Payable + Net Assets 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 100 5,850 + 5,000 + 450 450 = 5,000 5,000 5,000 5,000 + + + 6,000 6,000 <50> 5,950 <200> 5,750 100 450 6,300 <50> 6,250 <200> 6,050

= =

5,000 50 5,050 5,050

+ + +

11,100

11,100

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 9
Assets # 1 2 3 4 5 6 7 8 9 5,850 + 5,000 <200> 5,650 + 5,000 50 5,700 + 5,000 + + + 450 450 <50> 400 = = = = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total Copy revenue, week #1 Copy revenue, week #2 Total Receive 1st months phone bill Total Purchase of paper Total Deposit check from customer Total

Accounts Cash + Copier + Receivable = Accounts Payable + Net Assets 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 100 5,850 + 5,000 + 450 450 = 5,000 5,000 5,000 5,000 + + + 6,000 6,000 <50> 5,950 <200> 5,750 100 450 6,300 <50> 6,250 <200> 6,050 6,050

= =

5,000 50 5,050 5,050 5,050

+ + + +

11,100

11,100

UC Berkeley Controllers Office Basic Accounting: Part Two

Transaction # 10
Assets # 1 2 3 4 5 6 7 8 9 5,850 + 5,000 <200> 5,650 + 5,000 50 + + + + 450 450 <50> 400 400 = = = = = Liabilities + Net Assets Explanation of Transaction
Gift from donor Purchase of copier on credit Total Flyers advertising copy service Total Cell phone service Total Copy revenue, week #1 Copy revenue, week #2 Total Receive 1st months phone bill Total Purchase of paper Total Deposit check from customer Total Payment to copier vendor Total

Accounts Cash + Copier + Receivable = Accounts Payable + Net Assets 6,000 5,000 6,000 + 5,000 <50> 5,950 + 5,000 <200> 5,750 + 5,000 100 5,850 + 5,000 + 450 450 = 5,000 5,000 5,000 5,000 + + + 6,000 6,000 <50> 5,950 <200> 5,750 100 450 6,300 <50> 6,250 <200> 6,050 6,050 6,050

= =

5,000 50 5,050 5,050 5,050 <3,000> 2,050

+ + + + +

5,700 + 5,000 10 <3,000> 2,700 + 5,000

UC Berkeley Controllers Office Basic Accounting: Part Two

Link to Print Version of Spreadsheet Here is a link to a printable version (pdf) of the Accounting Equation Illustrated spreadsheet
controller.berkeley.edu/financialManagementTraining/Cour seMaterials/AccountingEquationPartTwo.pdf

Please print a copy of this spreadsheet before proceeding to the next section, Debits and Credits
You will use the spreadsheet as a tool while reviewing debits and credits

UC Berkeley Controllers Office Basic Accounting: Part Two

Debits and Credits

UC Berkeley Controllers Office Basic Accounting: Part Two

Debits and Credits Debits and credits have been linked to the accounting elements for 500 years and have been the source of confusion to many over the centuries. They are, however, just a means to an end a convenient way to manipulate large amounts of accounting data so that it can be classified and summarized and ultimately communicated.
Economic events are measured in dollars and then translated into debits or credits depending on the events impact on the accounting equation Once the economic events are represented by debits and credits, the process of classification and summarization is mechanical, and today can be effectively and efficiently done by a computer

UC Berkeley Controllers Office Basic Accounting: Part Two

Debits On the Left; Credits on the Right Credits are just the opposite of debits. Often debits are thought of as positive numbers and credits as negative numbers. But really debits are positive numbers that are represented on the left side of the accounting equation, and credits are positive numbers represented on the right side of the accounting equation. Assets = Liabilities + Equity (Net Assets)

Debits

Credits

UC Berkeley Controllers Office Basic Accounting: Part Two

Accounts An account is an individual record of increases and decreases in specific asset, liability and net asset items In its simplest form, an account consists of three parts:
The title of the account (its name) A left or debit side A right or credit side

Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account Name Debit Side Credit Side

UC Berkeley Controllers Office Basic Accounting: Part Two

General Ledger Even small organizations have numerous accounts. They are grouped together in what is known as the General Ledger.
At one time the General Ledger was an actual book, each page representing an account Now the General Ledger exists in a computer. A listing of all the accounts in the General Ledger is known as the Chart of Accounts.

UC Berkeley Controllers Office Basic Accounting: Part Two

The Starting Point: Assets Long ago it was decided that assets will have debit balances. From that decision, the rules for debits and credits follow. Liabilities and Net Assets, being on the opposite side of the equation (equals sign), work opposite that of assets. A generic asset account looks like this: Asset Debit Increases Balance Credit Decreases

UC Berkeley Controllers Office Basic Accounting: Part Two

Rule 1 - Debits and Credits The rules for debits and credits are:
1. Assets have debit balances. To represent an increase in an asset, add more debits to the account. To represent a decrease in an asset, add credits to the account.
Cash

Example:

Debit (1) 6000 (5) 100 (9) 50

Credit 50 (3) 200 (4) 200 (8) 3000 (10)

6150 Balance 2700

3450

UC Berkeley Controllers Office Basic Accounting: Part Two

Rule 2 - Debits and Credits


2. Liabilities have the opposite balance from assets, i.e., a credit balance. To increase a liability account, credits are added. To decrease a liability, debits are added.

Accounts Payable

Example:

Debit (10) 3000

Credit 5000 (2) 50 (7)

3000

5050 2050 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Rule 3 - Debits and Credits


3. Net Assets also has a credit balance because it is on the same side of the equation as liabilities. To increase Net Assets, credits are added. To decrease Net Assets, debits are added.
Net Assets

Example:

Debit 50 (3) 200 (4) 50 (7) 200 (8) 500

Credit (1) 6000 (5) 100 (6) 450

6550 6050 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Recapping - Debit and Credit Rules Assets = Liability + Net Assets

Debit Credit

Debit Credit

Debit Credit

Debits are on the left and credits are on the right when T accounts are used All asset accounts are increased with debits and decreased with credits Liabilities and Net Assets work opposite that of assets

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entries For over 500 years, transactions have been recorded in a diary called the General Journal The General Journal is the log of events impacting the entity, translated into debits and credits There is a standard format for manual journal entries (entries into a computerized journal look very different) Because every journal entry has a debit and a credit, we call this process double-entry bookkeeping
Journal # Account to be debited Account to be credited

Amount Amount

Explanation of transaction

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry #1
Transaction # 1: gift received by donor
Cash
Debit (1) 6000 Balance 6000 Credit Debit Debit Cash Net Assets 6,000 6,000 Credit

Net Assets
Credit 6000 (1) 6000 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 2
Transaction # 2: purchase of copy machine
Copier
Debit (2) 5000 Balance 5000 Credit Debit Copier Accounts Payable 5000 5000 Credit

Accounts Payable
Debit Credit 5000 (2) 5000 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 3
Transaction # 3: flyers advertising copy service
Cash
Debit (1) 6000 Balance 6000 Balance 5950 50 (3) (3) 50 Credit Debit Debit Net Assets Cash 50 50 Credit

Net Assets
Credit 6000 (1) 6000 Balance 5950 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 4
Transaction # 4: cell phone service
Debit Net Assets Cash 200 200 Credit

Cash
Debit (1) 6000 Balance 6000 Balance 5950 Balance 5750 50 (3) 200 (4) Credit Debit

Net Assets
Credit 6000 (1) (3) 50 (4) 200 6000 Balance 5950 Balance 5750 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 5
Transaction # 5: Copy Revenue Week #1
Cash
Debit (1) 6000 Balance 6000 Balance 5950 Balance 5750 (5) 100 Balance 5850 50 (3) 200 (4) (3) 50 (4) 200 Credit Debit Debit Cash Net Assets 100 100 Credit

Net Assets
Credit 6000 (1) 6000 Balance 5950 Balance 5750 Balance 100 (5) 5850 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 6
Transaction # 6: Copy Revenue Week #2
Accounts Receivable
Debit (6) 450 Balance 450 (3) 50 (4) 200 Credit Debit Debit Accounts Receivable Net Assets 450 450 Credit

Net Assets
Credit 6000 (1) 6000 Balance 5950 Balance 5750 Balance 100 (5) 5850 Balance 450 (6) 6300 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 7
Transaction # 7: first months phone bill
Accounts Payable
Debit Credit 5000 (2) 5000 Balance 50 (7) 5050 Balance (3) 50 (4) 200 Debit Debit Net Assets Accounts Payable 50 50 Credit

Net Assets
Credit 6000 (1) 6000 Balance 5950 Balance 5750 Balance 100 (5) 5850 Balance 450 (6) (7) 50 6300 Balance 6250 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 8
Transaction # 8: Purchase of paper
Cash
Debit (1) 6000 Balance 6000 Balance 5950 Balance 5750 (5) 100 Balance 5850 Balance 5650 (8) 200 6250 Balance 6050 Balance 200 (8) (7) 50 50 (3) 200 (4) (3) 50 (4) 200 Credit Debit Debit Net Assets Cash 200 200 Credit

Net Assets
Credit 6000 (1) 6000 Balance 5950 Balance 5750 Balance 100 (5) 5850 Balance 450 (6) 6300 Balance

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 9
Transaction # 9: Check received from customer
Cash
Debit (1) 6000 Balance 6000 Balance 5950 Balance 5750 (5) 100 Balance 5850 Balance 5650 (9) 50 Balance 5700 200 (8) 50 (3) 200 (4) Credit Debit Cash Accounts Receivable 50 50 Credit

Accounts Receivable
Debit (6) 450 Balance 450 Balance 400 50 (9) Credit

UC Berkeley Controllers Office Basic Accounting: Part Two

Journal Entry # 10
Transaction #10: Payment made to copier vendor
Cash
Debit (1) 6000 Balance 6000 Balance 5950 Balance 5750 (5) 100 Balance 5850 Balance 5650 (9) 50 Balance 5700 3000 (10) Balance 2700 200 (8) 2050 Balance 50 (3) 200 (4) Credit Debit Accounts Payable Cash 3000 3000 Credit

Accounts Payable
Debit Credit 5000 (2) 5000 Balance 50 (7) 5050 Balance 3000 (10)

UC Berkeley Controllers Office Basic Accounting: Part Two

General Ledger (end of period 1)


Assets
Cash Debit (1) 6,000 (5) 100 (9) 50 Credit 50 (3) 200 (4) 200 (8) 3,000 (10) 3,450 2,050 Balance 6,050 Balance Copier Debit (2) 5,000 Balance 5,000 Credit

Liabilities
Accounts Payable Debit (10) 3,000 Credit 5,000 (2) 50 (7) 3,000 5,050

Net Assets
Net Assets Debit (3) (4) (7) (8) 50 200 50 200 500 Credit 6,000 (2) 100 (5) 450 (6)

6,150 Balance 2,700

6,050

Accounts Receivable Debit (6) 450 Balance 400 Credit 50 (9)

UC Berkeley Controllers Office Basic Accounting: Part Two

The Trial Balance After the ten transactions, a listing of the accounts in the General Ledger looks like this:
Account Cash Copier Accounts Receivable Accounts Payable Net Assets Totals 8100 Debits Credits 2700 5000 400 2050 6050 8100

The accounting equation is in balance because total debits equals total credits.

UC Berkeley Controllers Office Basic Accounting: Part Two

Revenue and Expense Accounts If we use Revenue and Expense accounts, we get more information on the changes in Net Assets.
Net Assets
Expenses Debit (3) 50 (4) 200 (7) 50 (8) 200 Balance 500 6550 Balance Credit Revenues Debit Credit 6000 (1) 100 (5) 450 (6)

UC Berkeley Controllers Office Basic Accounting: Part Two

Revenues Further Classification


Gifts Debit Credit
6,000 (1) 6,000 Balance 550 Balance

Copy Revenue Debit Credit


100 (5) 450 (6)

Revenues:
Gifts 6,000 Copy Revenue 550

Total

6,550

UC Berkeley Controllers Office Basic Accounting: Part Two

Expenses Further Classification


Advertising Expense Debit (3) 50 Balance 50 Balance 200 Telephone Expense Debit (4) 200 (7) 50 Balance 250 Credit Expenses: Advertising 50 Telephone 250 Paper 200 500 Credit Paper Expense Debit (8) 200 Credit

UC Berkeley Controllers Office Basic Accounting: Part Two

The Trial Balance Expanded Using the revenue and expense accounts, the General Ledger listing of accounts looks like this:
Account Cash Copier Accounts Receivable Accounts Payable Net Assets Gifts Copy Revenue Advertising Telephone Paper Totals 50 250 200 8600 8600 Debits Credits 2700 5000 400 2050 0 6000 550

UC Berkeley Controllers Office Basic Accounting: Part Two

In Conclusion: Debits and Credits Debits and credits make it possible to handle large amounts of transactional data in a timely manner The computer enhances the process by moving the debits and credits faster, and by its ability to keep the accounting equation in balance at all times

UC Berkeley Controllers Office Basic Accounting: Part Two

Basic Reports

UC Berkeley Controllers Office Basic Accounting: Part Two

Simple Reports Information in a general ledger is useless unless it is communicated to decision makers in a fashion that is understandable. Three simple reports have stood the test of time.
Balance Sheet Income Statement Statement of Changes in Net Assets

These reports are usually not prepared for campus units, but rather are of the type that would be given to stakeholders outside the organization. As we will see in Part 4 of this course, financial statements for the University of California as a whole would be similar to these, just much more complex.

UC Berkeley Controllers Office Basic Accounting: Part Two

Balance Sheet
Balance Sheet At the End of Period 1 Assets Cash Copier Accounts Receivable $2,700 5,000 400 Liabilities Accounts Payable Total Liabilities Net Assets $2,050 $2,050 6,050

Total

$8,100

Total

$8,100

The balance sheet documents the accounting equation for a particular point in time.

UC Berkeley Controllers Office Basic Accounting: Part Two

Income Statement
Income Statement For Period 1 Revenues: Gifts $6,000 Copy Revenue 550 Total Revenues Expenses: Advertising Telephone Paper Total expenses Net Income 50 250 200 500 $6,050

$6,550

The income statement lists the revenues and the expenses that the entity has experienced during a particular period in time.

UC Berkeley Controllers Office Basic Accounting: Part Two

Statement of Changes in Net Assets


Statement of Changes in Net Assets For Period 1

Beginning Balance Plus: Revenues Less: Expenses

6,550 500

Ending Balance

$ 6,050

The statement of changes in net assets ties two balance sheets together with the income statement, documenting the period between the two balance sheet dates.

UC Berkeley Controllers Office Basic Accounting: Part Two

The Accounting Cycle Accounting involves six actions:


1. Selecting relevant events (such as the purchase of office supplies, time worked by an employee, or the receipt of student fees) that are evidence of economic activity 2. Measuring the economic events (transactions) in financial terms, i.e., quantifying in dollars and cents 3. Keeping a chronological diary of measured events (the general journal) 4. Classifying and summarizing the measured events (posting to the general ledger) 5. Preparing and distributing accounting reports 6. Analyzing and explaining the uses, meaning, and limitations of the reported information

UC Berkeley Controllers Office Basic Accounting: Part Two

Summary Part 2 The Accounting Equation (Assets = Liabilities + Net Assets) must be in balance at all times The traditional accounting books are the General Journal and the General Ledger In order to work with the elements of the Accounting Equation (assets, liabilities, net assets, revenues, expenses), you must know how they are defined Debits and credits make it possible to handle large amounts of transactional data in a timely manner Data in a General Ledger is not useful. Reports are necessary to transform the data into accounting information that can be communicated to decision makers

UC Berkeley Controllers Office Basic Accounting: Part Two

Looking Ahead Parts 3 and 4

There are still two more on-line sections to go in this course: Part 3 will discuss the different types of funds used by the University, the reasons behind fund accounting, and what happens when two funds interact Part 4 will discuss UC Berkeleys financial statements, how they are developed, and how they impact those of the University of California as a whole

UC Berkeley Controllers Office Basic Accounting: Part Two

Questions? For questions about the Basic Accounting for the UC Berkeley Financial Environment course content, please contact:
Barbara VanCleave Smith, Director of Controls, Accountability and Risk Management Controllers Office Email: bvsmith@berkeley.edu Phone: (510) 643-4171

UC Berkeley Controllers Office Basic Accounting: Part Two

FMCP Program Credit The Financial Management Certificate Program (FMCP) curriculum includes this online course REMEMBER: In order to get full FMCP credit for this course you must take and pass the online quiz, Basic Accounting for the UC Berkeley Financial Environment, Part 2: The Accounting Equation You can access this quiz through the UC Learning Center

UC Berkeley Controllers Office Basic Accounting: Part Two

Course History

Course History
Course created: Aug 2007 Course published to UC Learning Center: Spring 2009 Web links updated: Nov 2009

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