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Basics of Accounting

(The Language of Finance)
Introduction Video
Discussion of Fundamentals
Basic Accounting Problem
Grade on Neatness – Bring Back Problem on
Note: Use a Pencil & Take Good Notes

Business & Accounting
Accounting is the universal language of Business and
More CEO’s from fortune 500 companies have come up
through the ranks of accounting than from any other area
in business. Currently: 54%
Small businesses and usually fail because of poor
accounting understanding.
Marriages usually fail because of poor financial
management (80% of divorces are $$$$ related.)
If you want to get ahead in business & marriage
determine that you are going to understand accounting

What do Accountants Account For?
Everything of value!

Supplies  Fixed Assets (Depreciated over several yrs. but never depreciated) Intangible Assets: Patents. Copyrights . Trademarks. Natural Resources   Land (Fixed.Terms Assets: Tangible and Non-tangible resources of a business that have future value. Equipment.Securities  Current Assets (Turn into cash/use annually) All the above + Inventories.) Buildings. Usually sub-classified as follows:  Quick Assets (Liquid Assets) Cash – Petty Cash – Receivables .

Knowledge???? Abilities???? .What are your Assets? Bank Account & Money in your pocket Car Clothes Books Stocks/Bonds/CD’s Prepaid rent Computers & Electronic Equip.

Accounting Term: Liabilities Other people’s claims against your assets!   What you owe!! Debts! Classified as: Current Liabilities (one year debt)  Credit Card Debt. Note Payable Unearned revenues Bonds (usually super long term) . Accounts Payable Long Term Liabilities  Car. Mortgage.

What are your liabilities? School Loan Car Loan Credit Card Balance J. Penny Account BYU-Idaho Amount Due .C.

000 Equals: Your equity in the building (Capital) or your net worth in the building. (Net Assets) What you really own legally.000)    Cost of a building (sales price = Asset amount) $500. Assets – (minus) Liabilities = Owners Equity (or Capital) Example (purchased a building for $500.000 with a 10% down payment ($50.) .000 Less: What you still owe on the building (Liability) $450.Capital or Owners Equity The portion of your assets that you can legally claim.000 Formula universally used in all financial and personal financial institutions:   Assets = Liability + Owners Equity (Balance Sheet Equation) (Resources you have) =(What you owe on them) + (the principle you have paid on them. $50.

Owners Equity Account Titles Single Proprietorship:  Capital Corporation:    Common Stock (what owners paid in) Preferred Stock (what owners paid in) Retained Earnings (profits that the business keeps in the business) .

What format do we use in business and in personal finance to show our net worth?  A Balance Sheet Financial Statement List of Assets (classified by type in accounts) Compared or balanced with:  List of Liabilities and Owners Equity (classified by type and in accounts) Text Book Example Page 660 .What is your net worth??? What you have minus what you owe.

100 $8. John Doe: Total Liabilities & Owners Equity: $8. 2003 Assets:  Current: Cash at Home Cash Deposits in Bank  Fixed: Wardrobe Equipment Car  $100 500 2000 1000 5000 Total Assets: Liabilities:  Current: Credit Card Payable  Long Term: Note Payable (on Car)  Total Liabilities Capital.500 6.600 $500 $2000 $2.600 .Example (Simplified) John Doe’s Business or Personal Records Balance Sheet September 10.

Other Terms Temporary Accounts are used in addition to balance sheet accounts to record changes in owners equity each reporting period. Drawing or Dividends – Decrease in owners equity due to personal withdrawals by the owner(s). (or creating additional liabilities) Revenue – Increase in owners equity during the period by performing a service or selling an asset. .    Expenses – Decrease in owners equity during the period by using up an asset or a portion of an asset.

Used by the IRS for determining taxes .    Used for marking progress by comparing months and years Used by financial institutions for determining the progress and status of a company or individuals financial health.Income Statement Report Used to determine the net income or net loss of an individual or business for a defined period of time.

) No Assets/Liabilities Income Statement accounts are closed out at the end of the reporting period and started over again the next period….so comparisons can be made. Personal Income Statement sometimes called a Cash Flow Statement example on page 661 . (Only the temporary type of accounts are on the income statement.Income Statement – What does it contain? Matches Expenses with Revenues for a specific period of time.

Income Statement – Example Name of Individual or business Income Statement For period of time (Month of Sept. 2003) Revenue: Income from Job $500 Income from Pell Grant 2000 Total Revenue: Expenses: Clothes Expense $300 Rent Expense 200 Food Expense 50 Tuition Expense 1200 Misc. Expense 250 Total Expenses: Net Income for September: $2500 $2000 $ 500 .

If the bank wanted to know your “Net Worth” what report would they ask for? 8. (name them in the order they are given on the report) 7.Pop Quiz – Use a Pencil Today 1. What are the two kinds of accounts found on an Income Statement? 5. What are the three subtitles of a income statement. Which financial report is a “moving picture” of the business/enterprise for a period of time? 3. On what financial report(s) is the “cash” account found? 6. What does a balance sheet balance? 4. Two ways to increase the capital account are? 10. Two ways to decrease the capital account are? .and is given a specific date? 2. Capital in a corporation is entitled ? 9. Which financial report is a “snapshot” of the of the financial status of a business or a family…..

Based on universally accepted accounting principles. revenues.How do individuals or businesses keep track for all their assets. Cash Accounting Bookkeeping part of accounting. expenses. liabilities. (also called the “Audit Trail” of business. . (Generally accepted accounting principles) Double Entry Bookkeeping Accrual Accounting vs. Etc. capital.? The “Accounting Process” or otherwise known as the Accounting Cycle.

   Chronological record of transactions Book of original entry – checks and balances Two or more accounts entered at cost Make a Journal – Required . receipts. etc.Accounting Cycle – Start with financial transactions (you will need to know these steps!) Verbs & Nouns for each step #1 Analyze Source Documents   Check. deposit slips. invoices. Decide what accounts they represent #2 Enter (journalize) data in the journal.

required . (to keep a running balance of each account)  Ledger divided up into these different accounts: Assets (100 accounts) Liabilities (200 accounts) Capital/Owners Equity (300 accounts) Revenues (400 accounts) Cost of Goods Sold (Expense) – (500 accounts) General Expenses (600 accounts) Make some ledger accounts .Accounting Cycle #3 Post from the journal to the individual ledger accounts.

Accounting Cycle #4 Adjust the necessary accounts to bring them up to date.     Requires internal transactions Requires journal entries & posting as well Example: Maybe some of your Supplies valued at $500 when you bought them have been used…you need to bring their value up to date and expense what has been used. Example: Depreciation of Equipment .

The total of the debit balances must equal the total of the credit balances.Accounting Cycle #5 #5 At the end of the period or at any time (with computers) balance all of the accounts in a trial balance.Required . (Checks and balance step to see if all of your journal entries and posting was correct.)   The trail balance is a list of all of your accounts with balances. Make a Trial Balance .

Accounting Cycle #6 & 7 & 8 #6 Prepare the Financial Statements    Income Statement Statement of Changes in Owners Equity Balance Sheet Make Financial Statements .  Requires journal entries and postin gs #8. Analyze your financial findings. . so that you can start a new period/cycle.Required #7 Close out all the temporary accounts to zero.

The Balance Sheet and Debits and Credits
Balance Sheet Equation

A = L + OE

Use of another checks & balance method

Debits and Credits are terms used to increase or
decrease various accounts and show balances.
All Accounts have either a debit or credit balance.
Assets/Expenses/Withdrawals have debit balances
Increased by debiting and decreased by crediting

Liabilities, Capital, and Revenues have credit
Increased by crediting, and decreased by debiting


50 100







-Drawing -Expense +Revenue







Each Transaction in finance has a debit and a credit. The debit amount must
always equal the credit amount. (Checks & Balances)
Example: Invested 100 Cash in my business.
Example: Paid $50 for Advertising Expense.
Example: Earned $75 for performing services
At the end of the day: (Assets = 125) = (Liabilities = 0) + (OE = 125) and
debits = 225 and credits = 225 (Double balance, double witness)

Quiz Preview – Review with Partner
1-2. Give the accounting equation and define each element in the equation.
_____________________________ = _________________________ + ______________________



3. Accounting is called the _____________________________________ of business.
4-7. Name these two statements (The Trial Balance is not a Statement) used in accounting which are used
by managers to make financial decisions (the ones completed in your accounting project) What type of
accounts are on each statement?
First Statement Prepared_____________________________________________________________
Types of accounts found on this
Last Statement Prepared___________________________________________________________
Two accounts found on this statement?
8-12. Give the verbs and nouns of the Six first steps in the accounting cycle: (fill in the blanks)
____Adjust _______________________
____Internal Accounts_______________

_______Revenue accounts carry what kind of balance: A. Can be either Dr or Cr.Continued 13.Accounting Quiz ._______Increase to Liabilities when recorded in the journal are: 18._______Asset accounts carry what kind of balances: 20. Credit(s) C. The report that determines the net profit or loss of a business for a specific period of time is called the: ______________________________________________________ Credit Debit Matching 16. _______Increase to Expenses when recorded in the journal are: 19. Debit(s) B. Always both Dr & Cr . If the accountant wanted to know what type of transaction happened on a specific day he would go to the: ______________________________________________________ 15. D. ______Increase to Assets when recorded in the journal are: 17. If the accountant wanted to know the balance of cash currently owned by the business he would go to the: ______________________________________________________ 14.

Received $5000 into the business from a personal investment from the owner of the business. Advertising Expense: $100. Sales Revenue: $1000. . Wages Expense $200. In what two ways can you decrease the Capital Account? _________________ _____________________ On the Back 25-26. (You do not need to make any journal entries. Format the April Income Statement for “Ace” company that has these accounts: (You may not need to use all of the accounts): Cash: $100. Expense: $300. A/R: $300.Quiz – Last Page 21. 27-30. Paid out $1000 to employees in wages. What is the “Separate Entity Principle”_______________________________________________________ 23. Cost of Goods Sold Expense: $400. Service Revenue: $500.) A. A/P $50. Net Income is added to what account in the “Statement of Owners Equity”__________________________ 24. Draw/format the ledger account for cash (only) with a beginning balance of $2000 and post the following two transactions in the account that occurred today. What does ROI stand for in finance/accounting? _____________ __________ ______________________ 22. Misc. B.

Work in partnership with another student and the teacher. Use a pencil! Final product: Do your own set of personalized financial statements. . Quiz over the accounting language and Accounting Cycle on Friday. Problem due on Friday 1/16/04.The best way to learn: Complete a simplified practice set that covers the entire accounting cycle.

Separate Entity Principle (Keep your business records separate from you personal records) Lets start a home cleaning business.  Assets = Liabilities + Owners Equity Cash = 0 Capital 1.000 1.000 savings out of your personal account and put it into your business account. First Transaction on 1/1 Pull $1.000  .

CR Pg1 1/1 $1000 .Record in Daily Journal Date    Entries PR DR Cash 101 $1000 Capital 301 Started business with personal investment.

Posting to the Ledger Accounts: Post $1000 as a debit to the cash account Post $1000 as a credit to the capital account Cash 101 Date Explanation 1/1 Capital 301 1/1 PR DR J1 $1000 J1 CR BAL $1000 $1000 $1000 .

2 Transaction nd Acquire a Loan of $5.000 to buy equipment and materials to start a cleaning business.000) $6000 = $6000 .000 ($1. Assets = Liabilities + OE Cash Loan Payable Capital $6.000 + $5.000 $5.000 $1.

Journal Entry Date Explanation    1/2 PR Cash 101 Loan Payable 201 Received cash on credit. DR CR $5000 $5000 .

Posting Cash (101)    Date Explanation 1/1 1/2 PR J1 J1 DR CR BAL 1000 1000 5000 6000 Loan Payable (201)   Date Explanation 1/2 PR J1 DR CR BAL 5000 5000 .

Floor Polisher etc.3 Transaction – Jan 3rd rd Purchased Equipment (Vacuum.) Cost: $3.000 Assets = Liabilities + OE Cash Loan Payable + Capital Equipment Accounting Equation Stays in Balance: Cash = $3000 = $5000 + $1000 Equipment = $3000 . Carpet Cleaner.

Journal Entry Date   1/3 PR Dr Equipment Cash 120 Cr___ $3000 101 Used cash to purchase equipment $3000 .

Posting to the Ledger Accounts Cash     Date 1/1 1/2 1/3 101 PR J1 J1 J1 Dr 1000 5000 Cr 3000 Equipment   Date 1/3 Bal___ Bal 1000 6000 3000 120 PR J1 Dr 3000 Cr Bal__ 3000 .

6. What kind of a balance do the following accounts carry:?  Assets Expenses Revenues Liabilities Capital Drawing 9.Pop Quiz – Are you ready? 1. When a family or a business does something to change their financial picture or position it is called what? 5. Goodwill . Liquidity. 4. When we increase an asset what do we say in terms of debits and credits? How about a liability? 7. Give the first three steps in the accounting cycle using verbs and nouns. 10. Profit. Give the accounting equation and define each element. What are the temporary accounts used in financial management? 8. What is the separate-entity principle? 3. 2. What are the two financial statements discussed in class and what type of accounts are on each. Format a balance sheet and income statement. What do the following terms mean? ROI.

.4 Transaction – 1/4 th Paid $200 for full page ad in the Newspaper.

Journal Entry Date PR  1/3 Advertising Expense 601  Cash 101  Purchased ad for business Dr 200 Cr 200 .

Postings Advertising Expense  Date 1/4 601 PR J2 Dr 200 Cr Cash      Date 1/1 1/2 1/3 1/4 Bal______ Bal 200 101 PR J1 J1 J1 J2 Dr Cr 1000 5000 3000 200 Bal___ Bal 1000 6000 3000 2800 .

. Was paid $100 down with the rest due at the end of the month.5 Transaction 1/5 th Had my first cleaning job for $400.

Journal Entry Date PR Dr 1/5 Cash 101 100 A/R 110 300 Revenue 401 Performed services and received down payment. Bal due: 1/31 Cr 400 .

Postings Cash  Date  1/1  1/2  1/3  1/4  1/5 101 PR J1 Dr 1000 Cr Bal___ Bal 1000 J1 5000 J1 3000 J2 200 100 2900 J2 Accounts Receivable   Date 1/5 PR J2 Dr 300 Service Revenue   Date 1/5 PR J2 Dr 6000 3000 2800 110 Cr Bal___ Bal 300 401 Cr 400 Bal___ Bal 400 .

Book price of truck = $6000 . Took $200 out of my business to take my wife on a mini moon.Transaction #6 #7#8#9&10 Hired my little brother to help me and paid him $100 in wages Worked all day on second cleaning job and was paid $500 Had to spend $300 on cleaning supplies to be used during the next two months. Allocated 50% use of my truck to my business.

Journal Entries Date 1/6 Wages Expense Cash 1/7 Cash Service Revenue 1/8 Cleaning Supplies Cash 1/9 Drawing Cash 1/10 Truck Capital PR 620 Debit 100 100 101 101 500 500 401 130 300 300 101 320 200 200 101 150 301 Credit 3000 3000 .

Postings Wages Expense Date 1/6 Cash  Date  1/1  1/2  1/3  1/4  1/5  1/6  1/7  1/8  1/9 PR J2 PR J1 J1 J1 J2 J2 J2 J2 J2 J2 Dr 1000 5000 Dr 100 Cr 3000 200 100 100 500 300 200 Cr 101 Bal___ Bal 1000 6000 3000 2800 2900 2800 3300 3000 2800 620 Bal 100 .

Posting Cont. Drawing  Bal___ Bal 400 900 Bal_____ 300 320 Date PR Dr 1/9 J2 200 Cr Bal______ 200 . Service Revenue    Date 1/5 1/7 401 PR J2 J2 Dr Cr 400 500 Cleaning Supplies   Date 1/8 130 PR J2 Dr 300 Cr Anderson.

Posting Cont. Truck   Date 1/10 Capital 1/1 1/10 150 PR J2 J1 J2 Dr 3000 Cr $1000 $3000 Bal_____ 3000 301 $1000 $4000 .

Adjustments at the end of the month – Internal Transactions – Step #4 in the Accounting Cycle Adjusted the cleaning supplies to show that 33% had been used up.   Truck was expected to last for two more years $3000/24months = $125 use per month . Adjusted the truck account to show that one month had been used up.

Journal Entries – Adjustments Date 1/31   Adjustments Cleaning Supplies Expense Cleaning Supplies PR Dr 621 100 Cr__ 100 130 Inventory showed that only $200 in supplies remained at the end of the month. 1/31 Adjustment Depreciation Expense/Trk Truck (Accum Dpr.) 650 151 125 125 .

Postings of Adjustment Entries Cleaning Supplies Expense Date  1/31 Adjustment PR Dr J2 100 Cleaning Supplies    Date 1/8 1/31 1/31 Adjustment Truck Date   1/10 1/31 100 Dr 300 J2 Cr 100 Depreciation Expense – Truck Date PR  Bal 130 PR J2 Adjustment 621 Cr J2 Dr 650 Cr 125 Bal_____ 300 200 Bal 125 150 Adjustment PR Dr J2 3000 Cr 125 Bal_____ 3000 2875 .

Drawing Service Revenue Advertising Expense Wages Expense Cleaning Supplies Expense Depreciation Expense/Truck $2800 300 200 3000 2875 Total Balance $9.900 Credit 5000 4000 200 900 200 100 100 125 $9.Step # 5 – Trial Balance Account               Debit Cash Accounts Receivable Cleaning Supplies Equipment Truck Loan Payable Anderson. Capital Anderson.900 .

Step #6 – Prepare Financial Statements Anderson Cleaning Services Income Statement Month of January 2004 Revenue: Service Revenue: $900 Expenses: Advertising Expense: $200 Wages Expense: 100 Cleaning Supplies Expense: Depreciation Expense: Total Expenses: 525 Net Income (Loss) 100 125 $375 Return on Cash Investment $375/1000 = 37.5% Return on Total Investment $375/4000 = 9.4% What is our Income Statement Missing??????? .

Statement of Owners Equity Anderson’s Cleaning Business Statement of Owners Equity For May 2005 Beginning Capital 5/1/05: Add: New Investments (truck) Net Income (from Income Statement) Less: Drawing (mini-moon) Net Loss Ending Capital 5/31/05: $1000 3000 375 (200) na $4175 .

175 ______ . Depr.Balance Sheet Anderson Cleaning Balance Sheet January 31. Capital Total Liabilities & O.175 ________ Liabilities  Loan Payable $5.175 $9. Total Assets: $2. 2204 Assets:        Cash Accounts Receivable Cleaning Supplies Equipment Truck Less Accum.000 Owner’s Equity  Anderson.800 300 200 3000 3000 125 2875 $9.E: 4.

Sample Quiz Questions Terms: Assets. Debits. Liabilities. Ledger. Owners Equity. Accounting Equation. Financial Statements. Capital. Credits. Accounting Cycle. ROI Seven Steps in the Accounting Cycle? Verbs & Nouns??? Format an Income Statement/Balance Sheet? (Given the accounts) Record and post and business transaction . Posting.

Verb Analyze Enter (Journalize) Post Adjust Balance Prepare 7. 4. 8. Close Analyze Noun Source Documents Journal Ledger Internal Entries Trial Balance Financial Statements Temporary Accounts Data . 2. 3. 6.8 Steps Reviewed 1. 5.

Debits & Credits Used for checks and balances in Acct. Must always be equal Every Transaction has equal debits/credits Debits increase Assets/Expenses/Drawing Credit increase Liabilities/Capital/Revenue Debits decrease Liabilities/Cap/Rev Credits decrease Assets/Exp/Drawing .

.Owners Equity Two ways to increase this account:  1) New investments in the business Cash Investments Equipment Investments  2) Revenues earned in the business Two ways to decrease this account:   1) Expenses (Using assets up to generate a profit or incurring new liabilities) 2) Taking money out of the business for personal use.

Increases Increases Increases (Debits) (Credits) (Credits) Decreases Decreases Decreases (Credits) (Debits) (Debits) . Assets = Liabilities + O.E.Debits and Credits Terms used to increase or decrease an account and keep everything in balance.

Invoices. packing slips. electronic memos. Analyze the transaction source documents and decide what accounts are involved.what account(s) needs to be debited and what account(s) need to be credited. Contracts. . memos. What account needs to be increased and what account needs to be decreased…. Sales Slips. etc. Source documents are usually kept on file (three years) as backup for tax and company audits.Steps in the Accounting Cycle 1. Examples of Source Documents:  Deposit Slips..

   It gives the date of the transaction.Enter source document data in a chronological journal. (Data Entry on the Computer) The Journal is called the book of original entry.Step #2 . (the accounts increased or decreased) It gives the post reference number of the ledger accounts involved. (after the transaction has been posted to the ledger accounts) . and is on the computer in most companies. It gives a record of the accounts debited and credited in the transaction.

Each Ledger Account is updated daily and keeps a ongoing record of activity in the account and balance of the account. The “Ledger Accounts” are individual records of all the assets. and owners equity accounts. . All data that goes into the ledger accounts must first be put into the journal and then posted from the journal to the ledger account on the day the information is journalized. liabilities.Step #3 – Post (transfer) transaction data from the journal to the individual ledger accounts.

Adjustments are usually made at the end of an accounting period.Step #4 – Adjustments Adjustments are the internal transactions of a company that a good accountant will make to set in order each account. They must be journalized first and then posted to the ledger. interest earned or expensed. . use of supplies and materials. unearned revenues earned during the period. Use of pre-paid rent or insurance. Examples: Depreciation.

If not in balance you must go back in your audit trail and find your errors. List of all accounts with debit and credit balances……DEBITS MUST EQUAL CREDITS. make sure that all of your accounts have the correct balance. .Step #5 – Trial Balance Before preparing your statements.

Statement of OE. This knowledge is essential. These statements and how to read them and create profitability ratios from their numbers should become second nature to a business owner. .#6 Prepare your Financial Statement – Income Statement. & Balance Sheet This is the main product of the accounting system that outsiders/investors/creditors etc. or anyone interested in finance. will look at to see the financial health of your business.

.#7 – Close all the temporary accounts and start over. Transfer the net increases or decreases of these temporary accounts into the permanent owners equity account of capital or retained earnings. This makes it possible for the company to start a new set of reports to compare with the old etc. Close the temporary accounts:    All Expense Accounts All Revenue Accounts All Drawing or Dividend accounts.

#8 Analyze Data A list of the accounts you start the new accounting period with. . A check to see if Debits = Credits with these continuing accounts. If total DEBITS DO NOT EQUAL total CREDITS a mistake has been made and needs correction.

Final Quiz 1. Define:      Asset: Liability: Capital: Expense: Revenue: 2. Write out the proper accounting equation: (formula) .

For any and all transactions Debits must always equal _______________? 5. If I wanted to know what balance I had in cash what record/book would I turn to? 6. What is the first accounting book called that is used to record transactions chronologically? 4. Cash carries what kind of a balance? .Final Quiz: 3.

What is ROI and what two figures in accounting do you use to determine it? 9.Quiz: 7. The accounting cycle is also known as the _______________ _____________? . The use of a fixed asset over a period of time is called what? 8.

Capital . Accounts Payable. Advertising Expense. Service Revenue.Quiz – Last Question 10.)         Cash. Using the following accounts. Accounts Receivable. Equipment. format in titles only the Income Statement and the Balance Sheet. (List titles and total lines were appropriate. Depreciation Expense.

and the expenses (money) you spent. Using the “income statement format. Examples of expenses: (money paid for tuition) (money paid for books) (food) (entertainment) (utilities) (phone) etc. Both Need to be typed. Using the “Balance Sheet Format. The bottom line would be your net profit or net loss for January. .” prepare your own personalized or family Balance Sheet Report listing at least seven accounts. Examples of Revenue: (money from parents) (money from pell grant) (money from savings) (money earned from work) (money borrowed from roommates) (money received from loans) etc. Both Reports need to have headings and both need to be in the format for balance sheet and income statement that we have learned in class.Monday’s Assignment 1. (Make it neat (with heading) and type it up) 2.” complete a cash flow personalized income statement showing all the revenue (money) you received in January. Show at least seven items in this report.

Turn in your personal balance sheets and income statements for January.   Know the 8 steps of the accounting cycle.Monday Turn in your neat & complete accounting problem with three statements. Know the financial report formats for the income statement and balance sheet…. Be prepared for a quiz on the basics of accounting.and the format of a ledger account. Also debits & credits. .