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Accounting Chapters 1, 2, 19 Finance Ch 1
• Why does someone go into business?
The Income Statement
Revenue Cost of Good Sold Gross Profit Selling and admin EBIT Tax Net Income 10,000 6,000 4,000 2,500 1,500 750 750
The Balance Sheet
Balance Sheet Assets Cash 23000 Supplies 2500 Equipment 105500 Tl Assets 131,000
Liabilities and Equity Acc pay 11000 note pay 60000 Equity 60000 131,000
Notice that Assets = Liabilities and Owner Equity
What is Accounting?
The purpose of accounting is to:
(1) (2) (3) •
identify, record, and communicate the economic events of an organization to interested users. Identify – events relative to the business. Record -systematic, chronological diary of events (bookkeeping) – needs to be complete, accurate and timely. Complete – missing info, don’t get the whole picture. Dan’s accting – no receipts when cash is close.
• • •
Timely – 6 mo later, - can’t make decisions timely.Dq – cash flow
Or not balancing give way to doubt Valuation methods – always challenging Timing, inventory, interest calc methods, depreciation
Communicate – via reports called financial statements.
SO 1 Explain what accounting is.
COMMUNICATION • The reports that the accountant prepares are used to make critical decisions – Investing in a company – Expanding operations – How to finance the company – Stock prices – Loan agreements • They must be prepared timely and accurately. .
Do we need to borrow in the near future? 4. Will the company be able to pay its short-term debts? User Human Resources Investors Management Finance Marketing Creditors SO 2 Identify the users and uses of accounting. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Can we afford to give our employees a pay raise? 2.Who Uses Accounting Data? Common Questions Asked 1. Did the company earn a satisfactory income? 3. .
are Ethics. . Effective financial reporting depends on sound ethical behavior. honest or dishonest. and others. Ethics start with you - SO 3 Understand why ethics is a fundamental business concept. fair or not fair. AIG. to reduce unethical behavior. HealthSouth. WorldCom. Recent financial scandals include: Enron. Congress passed Sarbanes-Oxley Act of 2002.The Building Blocks of Accounting Ethics In Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong.
Generally Accepted Accounting Principles (GAAP) SO 4 Explain generally accepted accounting principles and the cost principle. .The Building Blocks of Accounting Various users need financial information Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
The Building Blocks of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.org/ SO 4 Explain generally accepted accounting principles and the cost principle.sec.iasb.org/ International Accounting Standards Board (IASB) http://www. .gov/ Financial Accounting Standards Board (FASB) http://www.fasb.
.Opinions SO 4 Explain generally accepted accounting principles and the cost principle.What does a CPA do? Audit Taxes Attest .
Fair value information may be more useful. . Issues: Reported at cost when purchased and also over the time the asset is held. SO 4 Explain generally accepted accounting principles and the cost principle. whereas market value is often subjective.The Building Blocks of Accounting Cost Principle (Historical) – dictates that companies record assets at their cost. Cost easily verified.
.Assumptions Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Corporation. Partnership. Proprietorship. Forms of Business Ownership SO 5 Explain the monetary unit assumption and the economic entity assumption.
Assets are claimed by either creditors or owners. .The Basic Accounting Equation Assets Liabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. and define its components. Claims of creditors must be paid before ownership claims. SO 6 State the accounting equation.
Accounting’s Building Blocks Communicating Recording Balance Sheet Journal Owner Equity Income Statement Post Cash Flow Trial Balance Double Entry accounting: Debit and Credits Identifying Is it a transaction? Is it ours? Assets = Liabilities + Owner Equity Cost Prinicpal Economic Entity Monetary unit GAAP .
5 Account Classes Assets Liabilities Equity = Capital Income Expenses Normal Bal DR CR CR CR DR Fin Stmt BS BS BS IS IS .
accounts payable _A_ .Salaries Payable _OE.Cleaning Supplies _A_ .Accounts Receivable _L_ .KM Capital .Notes Payable _L_ .• • • • • • • • • • Homework answers E1-5 Classify each account _L_ .Cleaning Equipment _A_ .Cash _A_ .
Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. . SO 7 Analyze the effects of business transactions on the accounting equation.Using The Basic Accounting Equation Transactions are a business’s economic events recorded by accountants. May be external or internal.
Criterion Is the financial position (assets. or owner’s equity) of the company changed? Record/ Don’t Record SO 7 Analyze the effects of business transactions on the accounting equation. Owner withdraws cash for personal use. .Transactions (Question?) Q1-15: Are the following events recorded in the accounting records? Event Supplies are purchased on account. An employee is hired. liabilities.
Debits are not always good and credits are not always bad. I purchased $100 in supplies and baked 3 cakes today! And sold one cake to my favorite accounting student for $25 Cash Equipment Sales $100 $25 $100 $25 There is ALWAYS a debit and a credit. Practice Flexible thinking! .The T Account Marsha’s Famous Apple Cakes! I woke up this morning and decided to start a business baking my world famous apple cakes.
The Building Blocks of Accounting – the process Identifying Recording Determine the accounts to use Close out temporary accounts Analyze the transactions Journal the transaction Post to the ledger accounts Create a trial balance Create income statement using _______& _____ accounts Create Owner Equity Statement Create Balance sheet using ___________& ____________ accounts Create a post closing trial balance Communicating .
ASSETS = LIABILITIES + OWNERS EQUITY ASSETS DR = CR LIABILITIES + OWNERS EQUITY DR CR + NORMAL BALANCE EXPENSES DRAW - REVENUE + NORMAL BALANCE .
DEBIT ASSET • Cash is an _______ for you. • A loan is a LIABILITY __________ to you. • Assets for the bank:___________ LOAN • Liabilities for the bank:___________ DEPOSITS • You add money to your bank account with a _________. . • When the bank debits your account they take ______ money.The Bank makes accounting confusing.
DOUBLE ACCOUNTING SYSTEM There are always two entries A debit (left) And A credit (right) .
they either increase or decrease an account! • DEBITS – On the left – Increase • assets.Debits and credits = flexible thinking! Debits are not good or bad. • Draw • CREDITS • Comes from the Italian “debito” which comes from the Latin “debita” and “debeo” which means: OWED TO the proprietor or an asset of the proprietor – On the right – Increase – Liabilities – Owner equity – Revenue •Comes from the Italian “credito” which comes from the Latin “credo” which means: Trust or belief (in the proprietor) or OWED BY the proprietor • . • expenses.
3. debits or credits? 2. – What accounts.Steps in the recording process 1. . Transfer the journal information to the appropriate accounts in the ledger. Enter the transaction information in a journal. Analyze each transaction for its effects on the accounts.
Bakers and Dad (1) • COMPOUND – CASH (15) $4000 – ACC RECEIVABLE (15) $3000 – Sale.Journal entries • Simple debit credit 5000 – Cash (1) 5000 – Sales. Bakers and Dad (15) 7000 EACH JOURNAL ENTRY SHOULD HAVE A UNIQUE NUMBER .
• It’s a record of transactions • Recording the transaction. but not a running balance. • Chronological order • Audit trail • Always list the debit item first .The Journal • Is like a checkbook register.
Helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. A simple journal entry involves only two accounts (one debit and one credit) whereas a compound journal entry involves three or more accounts. . 2.The General Journal 1. Discloses in one place the complete effects of a transaction. 3. Provides a chronological record of transactions. 4.
Journal Practice • You took me to a business lunch and spent $30 • You bought some supplies for $50 with your visa. • You paid your employee $100 • You Paid the rent $500 .
THE “T” ACCOUNT ACCOUNT NAME Left Right DEBITS CREDITS .
Receipts Pasta House McAllisters 1st step is to journal Employee lunch exp $25 Cash 25 $25.00 Taco Bell $100.00 Employee lunch ex Cash Board Dinner Cash $5 $5 $100 100 $5.00 .
00 125.00 McAllisters $25.00 Cash $5.00 Taco Bell $100.00 100.Receipts Pasta House Dining Out 25.00 .00 125.00 25.00 100.00 5.00 5.
Illustration 2-15 SO 5 Explain what a ledger is and how it helps in the recording process. revenue and expense accounts. liability. The General Ledger includes all the asset. owner’s equity. .The Ledger A General Ledger contains the entire group of accounts maintained by a company.
In practice. Illustration 2-16 SO 5 Explain what a ledger is and how it helps in the recording process. . the account forms used in ledgers are much more structured.Standard Form of Account T-account form used in accounting textbooks.
Trial Balance List accts with dr And cr balances Dr should = CR Cash Trial Balance DR CR 11000 Acc Rec2000 Acc pay Sales Capital Exp 5000 10000 2000 5000 _____ 17000 17000 .
3. a journal entry is posted twice. offsetting errors are made in recording the amount of a transaction. 4. a transaction is not journalized. LO 7 Prepare a trial balance and explain its purposes. a correct journal entry is not posted. incorrect accounts are used in journalizing or posting. or 5. 2.The Trial Balance Limitations of a Trial Balance The trial balance may balance even when 1. .
Withdrew $350 for draw T account practice cash Visa (a/p) supplies Equipment sales advertising Rent capital Adv Accounting Inclass Activites and Notes 38 . including the two already posted 2. Do an income stmt and bal sheet. Do a trial balance 5.1. Post the following transactions to T Accounts. Paid $250 on visa card 5. Transactions 1. Bought ad in newspaper $60 on visa 8. Sold 100 cakes for $40 each 6. and OE stmt. Determine the ending balance for each account. Journal the entries. Started business with $2000 2. Bought $50 flour at Costco 7. 4. Paid rent $1000 4. 3. Purchased equipment on visa $500 3.
Cash Sales 4000 1000 500 1000 250 250 4000 Accounting Inclass Activites and Notes 39 . EQUIPMENT 500 ACC PAY (VISA) PURCHASED PANS FOR CAKE BUSINESS 3. Rent Cash 4.Journal entries 1. A/P Visa CASH 5. CASH 2000 CAPITAL 2000 STARTED MARSHA’S FAMOUS APPLE CAKES 2.
Draw Cash 350 Accounting Inclass Activites and Notes 40 . Supply cash 50 50 7. Ad ACC PAY (VISA) 350 60 60 8.Journal entries 6.
Paid $250 on visa card 5.T account practice answer Transactions 1. Paid rent $1000 4. Bought $50 flour at Costco 7. Purchased pans for my Started business with $2000 2. Sold 100 cakes for $40 each 6. Bought ad in newspaper $60 on visa 8. Withdrew $250 for draw cash 2000 250 50 4000 350 1000 4350 supplies 50 50 sales 4000 draw 350 350 rent 1000 1000 Accounting Inclass Activites and Notes Visa (a/p) 500 250 60 310 Equipment 500 500 advertising 60 4000 capital 2000 60 2000 41 . Purchased equipment on visa $500 3.
TRIAL BALANCE CASH SUPPLIES EQUIPMENT VISA Rent Draw SALES ADVERTISEMENT CAPITAL BALANCE DEBIT 4350 50 500 1000 350 4000 60 6310 2000 6310 CREDIT 310 Accounting Inclass Activites and Notes 42 .
INCOME STMT & BAL SHEET MARSHA’S FAMOUS APPLE CAKES Income statement SALES 4000 ADVERTISMENT 60 Rent 1000 NET INCOME 2940 MARSHA’S FAMOUS APPLE CAKES BALANCE SHEET CASH SUPPLIES EQUIPMENT TOTAL ASSETS VISA CAPITAL TOTAL LIAB + OE 4350 50 500 4900 310 4590 4900 OWNER EQUITY STATEMENT BEG BAL $2000 REVENUE 2940 DRAW -350 ENDING BAL 4590 Accounting Inclass Activites and Notes 43 .
Owner's equity statement. Income statement. b.REVIEW QUESTIONS Which of the following financial statements contains expenses? a. SO 8 Understand the four financial statements and how they are prepared. Statement of cash flows. d. c. Balance sheet. .
. SO 8 Understand the four financial statements and how they are prepared.REVIEW QUESTIONS Signing a 3 year maintenance contract is an economic event recorded by the financial information system.
S. .REVIEW QUESTIONS The Securities and Exchange Commission oversees U. financial markets and accounting standardsetting bodies SO 8 Understand the four financial statements and how they are prepared.
d. communicating financial information to users by preparing financial reports. recording nonquantifiable economic events.REVIEW QUESTIONS The accounting process involves all of the following except a. . c. analyzing and interpreting financial reports. b. SO 8 Understand the four financial statements and how they are prepared. identifying economic transactions that are relevant to the business.
REVIEW QUESTIONS The Duce Company has five plants nationwide that cost $100 million. $500 million. d. $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at a. c. $600 million. $400 million. b. SO 8 Understand the four financial statements and how they are prepared. .
c. Assets = Liabilities + Owner's Equity. . d.REVIEW QUESTIONS The basic accounting equation may be expressed as a. SO 8 Understand the four financial statements and how they are prepared. all of these. b. Assets = Equities. Assets – Liabilities = Owner's Equity.
d. SO 8 Understand the four financial statements and how they are prepared. these withdrawals are termed a. drawings. c. b. depletions. consumptions.REVIEW QUESTIONS When an owner withdraws cash or other assets from a business for personal use. a credit line. .
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