342 - wk02 - Basic Accounting - AccountAdj - Student

IES 342 Industrial Cost Analysis & Control | Dr.
Karndee Prichanont, SIIT
Basic Accounting
Chapter 1 – 3 (Warren et al.)
Learning Objectives:
 Review financial statement
analysis
Read & interpret basic financial
statements
 Analyze typical business
transactions using balance sheet
equation
1
IES 342 Industrial Cost Analysis & Control 2/2005 | Dr. Karndee Prichanont, SIIT
Accounting:
Information Process
Identification
of Users
User
Information
Needs
Economic Data
and Activities  Accounting
System
User
 Reports
Decisions
2
The Need for Accounting
Managers, investors,
Managers, investors, and
and other
other internal
internal groups
groups
want the
want the answers
answers to
to two
two important
important questions:
questions:
Major Financial Statements

How well did the
organization perform?
_______________
_______________
Where does the
organization stand?
3
Financial Statements
Balance Sheet Income Statement

• Also called statement • ___________________
of financial position ___________________
or statement of
financial condition • Match its
• _________________ accomplishments and
_________________ its efforts
_________________ • ___________________
• Month / quarter
4
Balance Sheet
Accounting Equation
Resources = Sources
Cost of Resources
resources used supplied by
in the business creditors and
owners
5
Assets
• Physical items (tangible) or rights (intangible)
that have value and that are owned by the
business entity
• Can be converted into cash or used in
operations
________________ _____________
• • Tangible asset
Cash
• Depreciation
• Account receivable
• Inventory
• Prepaid expense _____________
• Goodwill
• Prepaid insurance
• Supplies
6
Liabilities
• Debts owed to outsiders (creditors)

• Item with the word “___________”
__________________ ________________________
• Account payable • Secured debt
• Accrued liabilities / • Unsecured debt
accrued expenses
• Income taxes payable
• Current portion of long-
term debt
• Unearned revenue /
Deferred revenue
7
Owner’s Equity
(shareholder’s equity, capital, net worth)
• The owners’ equity in a corporation

• The owner’s ____________________________
______________ _________________
• Stockholder (owner) _________________
investments +
– Reinvested earnings
– Generated from operations
8
Effects of Transactions on
Owner’s Equity
OWNER’S EQUITY
decreased by increased by
Owner’s withdrawals Owner’s investments
Profits
(earnings or income)
9
Revenues vs Expense
Revenues Expense
• Decreases in ownership
• Increases in owner’s
claims arising from
equity as a result of delivering goods or
business and services or using up
professional activities assets
that earn income • Assets used up or
• Revenues must be services consumed in
earned and realized the process of
generating revenues
Profits (or earnings or income)

excess of revenues over expenses 10
Balance Sheet
Accounting Equation
ASSET = LIABILITIES + PAID-IN RETAINED

+
CAPITAL EARNING
ASSET = LIABILITIES + PAID-IN -

+
CAPITAL
11
Accrual Basis /
Cash Basis
__________________
• Exact timing of cash receipts and disbursements
__________________
• Recognizes impact of transactions
• Cash not necessarily changes hands
• Match revenues and expenses
• Record revenues when earned
• Record expenses when incurred
12
Income Statement
• Show a company’s Key Items

ability to produce long-
run earnings and
dividends
• Summarizes revenue
and expense
• Matching the company’s
“accomplishments” and
“efforts”
• Revenue – Expenses
13
Ex 1: King’s Hardware’s Transaction in March 2004

(Adapted from Horngren et al. 2002)
1. Initial investment by owners, $100,000 in cash

2. Acquisition of inventory for $75,000 in cash
3. Acquisition of inventory on open account $35,000
4. Merchandise carried in inventory at a cost of $100,000 was sold on open account for
$120,000
5. Cash collection of account receivable, $30,000
6. Cash payment of account payable, $10,000
7. On March 1, King Hardware paid $3,000 cash for rent for March, April, and May.
Required:
a) Prepare an analysis of King’s Hardware’s transaction in March
b) Prepare a balance sheet as of March 31, 2004 and an income statement for the month of
March 2004 (ignore income tax)
14
Ex 2: Analysis of
Transaction
(Adapted from Warren et al., 2002)
Jameson, Attorney-at-Law, is a proprietorship owned and

operated by Cecil Jameson. On July 1 on the current
year, C. J. has the following assets and liabilities: cash,
$1000; account receivable, $3200; supplies, $850; land,
$10,000; accounts payable, $1530. Office space and
equipment are currently being rented, pending the
construction of an office complex on land purchased last
year.
15
Business Transaction of
Jameson (Ex 2, continue)
1. Received cash from clients for services, $3928
2. Paid creditors on account, $1055
3. Additional investment from C.J. $3700 in cash
4. Paid office rent for the month, $1200
5. Charged clients on account, $2025
6. Purchase office supplies on account, $245
7. Received cash from clients on account, $3000
8. Received invoice for paralegal service (to be paid on August 10), $1635
9. Paid the following expenses: wages, $850; service, $250; Utilities,
$325; Miscellaneous, $75
10. Determined that the cost of office supplies on hand was $980
11. C.J. withdrew $1000 in cash from the business for personal use
•• Determinethe
Determine theamount
amountofofowner’s
owner’sequity
equity(C.J.’s
(C.J.’scapital)
capital)as
asofofJuly
July1.1.
•• Analyzeeach
Analyze eachtransaction
transactionusing
usingthe
thebalance
balancesheet
sheetequation
equation
•• Preparean
anincome
incomestatement
statementofofJuly
July 16
Prepare
IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
T-Account
Account Adjustment
Chapter 2 -3 (Warren et al.)
Learning Objectives:
 Relate the measurement
of expenses to the expiration
of assets
17
Double Entry Accounting

T Account
Scale or Balance
• Double-entry accounting is based on
a simple concept: each party in a business
transaction will receive something and give Receive
something in return. In bookkeeping terms, DEBIT
what is received is a debit and what is given
is a credit. Give
CREDIT
• The T account is a representation of a

T account
scale or balance
Left Side Right Side
Receive Give
• General journal DEBIT CREDIT
Date Description Debit
Credit
18
Account Adjustment
• Under the accrual basis of accounting,

adjustments are used to record implicit
transactions, in contrast to the explicit transactions
that trigger nearly all day-to-day routine entries.
• Adjustments are generally prepared by the

accountant at month or year end.
19
Adjustments:
Deferrals and Accruals
Revenues
Current Period Future Period
Deferrals Cash Received Revenue Recorded Unearned
revenues
Accruals Revenue Recorded Cash Received Accrued
revenues
Expenses
Current Period Future Period
Prepaid
Deferrals Cash Paid Expense Recorded expenses
Accruals Expense Recorded Cash Paid Accrued

liability
20
Type 1: Deferred Expenses

(Prepaid expenses)
• Asset that becomes an expense in future periods

– Inventory
– Prepaid rent and other prepaid expense
– Equipment
• Some services are acquired and used up instantaneously, e.g.,
advertisement service
– Theoretically, it is an unexpired cost
• 2 steps of analysis
(1) Acquire advertising service
(2) Use advertising service
• When assets expire  become expense  asset & owner’s equity are
decreased
• Example: Newspaper advertising was acquired for $1000 cash. To
follow the acquisition-expiration sequence, there are 2 steps of analysis:
21
Type 2: Deferred Revenues

(unearned revenues)
• Liability created by receiving cash in advance

of providing goods or services.
• Advanced collection
– magazine subscription,
– rent (landlord’s view)
• How do “Prepaid Expense (type I)” and

“Unearned Revenue (type II)” relate?
22
Type 3: Accrued Expenses

(Accrued Liabilities)
• Services are paid for after the service has

been performed
– Wages of employees
– Interest (in borrower’s view)
• Another type of liability
• Ex: Wage payment of King’s Hardware
23
Type 4: Accrued Revenues

(Accrued Assets)
• Mirror image of Type 3

– Interest in lender’s view
24
Ex 3: Transaction Analysis of King Hardware during

April, 2003
(adapted from Horngren, 2002)
Balances of March 31  Beginning balance for April

1. Cash collection of accounts receivable, $88,000
2. Cash payments of account payable, $24,000
3. Acquisition of inventory on open account, $80,000
4. Merchandise carried in inventory at a cost of $70,000 was sold on open
account for $85,000
5. Adjustment for recognition of rent expense for April
6. Some customers paid $3,000 in advance for merchandise that they ordered
but KH did not expect to deliver until May
7. Total wages of $6000 were paid on 4 Fridays in April.
8. KH incurred wages of $600 near the end of April, but it did not pay the
employees till after April 30.
9. Cash dividends of $18,000 disbursed to stockholders on April 29
25

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IES 342 Industrial Cost Analysis & Control | Dr.

Karndee Prichanont, SIIT

The Need for Accounting

Major Financial Statements

Balance Sheet Income Statement

• Debts owed to outsiders (creditors)

• The owners’ equity in a corporation

Owner’s withdrawals Owner’s investments

Profits (or earnings or income)

ASSET = LIABILITIES + PAID-IN RETAINED

ASSET = LIABILITIES + PAID-IN -

• Show a company’s Key Items

Ex 1: King’s Hardware’s Transaction in March 2004

1. Initial investment by owners, $100,000 in cash

Jameson, Attorney-at-Law, is a proprietorship owned and

Chapter 2 -3 (Warren et al.)

Double Entry Accounting

• The T account is a representation of a

• Under the accrual basis of accounting,

• Adjustments are generally prepared by the

Accruals Expense Recorded Cash Paid Accrued

Type 1: Deferred Expenses

• Asset that becomes an expense in future periods

Type 2: Deferred Revenues

• Liability created by receiving cash in advance

• How do “Prepaid Expense (type I)” and

Type 3: Accrued Expenses

• Services are paid for after the service has

• Ex: Wage payment of King’s Hardware

Type 4: Accrued Revenues

• Mirror image of Type 3

Ex 3: Transaction Analysis of King Hardware during

Balances of March 31  Beginning balance for April

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