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ACCT 201 ACCT 201 ACCT 201

Learning Accounting
If you want to learn accounting, you learn it one concept at a time, one principle at a time.

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Accounting Information System

Chapter

Text Section: Generally Accepted Accounting Principles (p. 38)

C1

Learning Objective

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Explain the financial reporting environment

Conceptual

The Accounting System: A Conceptual Overview

Operating Environment
Entity B
Business Entity A
System Inputs: Measurable Transactions and Events
Process and Summarize

Entity C

System Outputs: Financial Statements and Reports

Entity D

Entity E

Financial Reporting Environment

FASB GAAP
Financial Statements

Preparers
Audit Report

Decision makers

Auditors

ASB

GAAS

Independent Auditor

Management

Management Prepares 1

3 Auditors

A
G G

Income Statement Balance Sheet

S A
A

Statement of Cash Flows

Lends Credibility

Basic Mistrust

Users

International Accounting Principles

Despite our growing global economy, countries continue to maintain their unique set of acceptable accounting practices.

C2

Learning Objective

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Identify, explain, and apply accounting principles.

Conceptual

A business continues operation instead of being closed or sold.

A business is accounted for separately from its owner(s).

Financial Statement information is supported by independent, unbiased evidence.

Express transactions and events in monetary units.

Financial statements are based on actual costs incurred in business transactions.

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Accounting Information System

Chapter

Text Section: Transactions, Documents, and Accounts (p. 41)

C3

Learning Objective

ACCT 201 ACCT 201 ACCT 201

Identify, explain, and apply accounting principles.

Conceptual

The Accounting Process

Exh. 2.2

Transaction or event

Source documents

Analysis

Reporting Trial balance Recording & posting

Transactions and Events

Exchanges of economic consideration between two parties.
External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization.

Accounting Information System

Boundary

Ongoing events in world

Recording

Data Bank

Information

Classifying

C4

Learning Objective

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Describe source documents and their purpose.

Conceptual

Source Documents
Other
Invoices Bank Statement

Check Stubs

Journal

C5

Learning Objective

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Describe an account and its uses in recording transactions.

Conceptual

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Account
A storage unit used to classify and summarize money measurements of business activity of a similar nature.

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The Account
Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. =======================
Separate accounts are maintained for each item of importance.

The General Ledger

Accts Rec. Inventory Cash

General Ledger

Notes Pay. Mortgage Accts Pay.

Revenue Expenses Retained Earnings

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Account Title
Left Side Right Side

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The Formal Account

The Balance Column Ledger

Account Title
Date Item Post Ref Debit

Account No. ### Balance Credit Debit Credit

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Accounting Information System

Chapter

Text Section: Transactional Analysis and the Accounting Equation (p. 46)

A1

Learning Objective

ACCT 201 ACCT 201 ACCT 201

Analyze business transactions using the accounting equation.

Analytical

Assets

Liabilities

Owners Equity

Capital Stock

Retained Earnings

The Accounting Equation A = L + OE

Revenue

-Expenses

Net Income

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Analyzing Transactions
1. Analyze the transaction and its source.
2. Identify the impact of the transaction on account balances. 3. Identify the financial statements that are impacted by the transaction.

Transaction Analysis Part 1 (Text p. 47)

On December 1, Chuck Taylor forms an athletic shoe consulting business. He sets it up as a corporation. Taylor owns and manages the business. The marketing plan for the business is to focus primarily on consulting with sports clubs, amateur athletes and others who place orders for athletic shoes with manufacturers.

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Transaction Analysis Part 1 (Text p. 47)

Taylor personally invests $30,000 cash in the new company in exchange for common stock, and deposits the cash in a bank account opened under the name of FastForward, Inc.

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Transaction Analysis Part II (Text p. 50)

To illustrate how revenue recognition works, lets return to FastForwards transactions.

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Chuck Taylor invests $30,000 in the company in exchange for common stock.
Assets = Liabilities Accounts Notes Payable Payable + Equity Equity $ 30,000

Cash Supplies Equipment (1) $ 30,000

$ 30,000 $

$ 30,000

$ 30,000

$ 30,000

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FastForward purchases $2,500 of supplies for cash.

Assets Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500

Liabilities Accounts Notes Payable Payable

Equity Equity $ 30,000

$ 27,500 $

2,500 $

$ 30,000

$ 30,000

$ 30,000

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FastForward spends $26,000 to acquire equipment for testing athletic shoes.

Assets = Liabilities Accounts Notes Payable Payable + Equity Equity $ 30,000

Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500 (3) (26,000) 26,000 $ 1,500 $ 2,500 $ 26,000 =

$ 30,000

$ 30,000

$ 30,000

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FastForward purchased $7,100 of supplies on credit.

Assets Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500 (3) (26,000) 26,000 (4) 7,100 $ 1,500 $ 9,600 $ 26,000 $ 37,100

Liabilities Accounts Notes Payable Payable

Equity Equity $ 30,000

7,100 $ 7,100 $ =

$ 30,000

$ 37,100

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FastForward provides consulting services to an athletic club and collects $4,200 in cash.
Assets = Liabilities + Accounts Notes Payable Payable Equity Equity $ 30,000

Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500 (3) (26,000) 26,000 (4) 7,100 (5) 4,200 $ 5,700 $ 9,600 $ 26,000 $ 41,300 =

7,100 $ 7,100 $ 4,200 $ 34,200

$ 41,300

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FastForward pays $1,000 rent to the landlord of the building where its store is located.
Assets = Liabilities + Accounts Notes Payable Payable Equity Equity $ 30,000

Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500 (3) (26,000) 26,000 (4) 7,100 (5) 4,200 (6) (1,000) $ 4,700 $ 9,600 $ 26,000 $ 40,300 =

7,100 4,200 (1,000) $ 33,200

$ 7,100 $

$ 40,300

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FastForward pays the biweekly $700 salary of the companys only employee.
Assets = Liabilities + Accounts Notes Payable Payable Equity Equity $ 30,000

Cash Supplies Equipment (1) $ 30,000 (2) (2,500) 2,500 (3) (26,000) 26,000 (4) 7,100 (5) 4,200 (6) (1,000) (7) (700) $ 4,000 $ 9,600 $ 26,000 $ 39,600 =

7,100 4,200 (1,000) (700) $ 32,500

$ 7,100 $

$ 39,600

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Revenue Recognition Principle

1. Revenue is recognized when earned.
2. Assets received from selling products and services need not be in cash. 3. Revenue recognized is measured by the cash received plus the cash equivalent (market) value of any other assets received.

FastForward provides consulting services of $1,600 and rents its test facilities for $300.
Assets = Liabilities Accounts Accounts Notes Rec Supplies Equipment Payable Payable 2,500 26,000 7,100 7,100 4,200 (1,000) (700) 1,600 300 $ 34,400 + Equity Equity $ 30,000

Cash (1) $ 30,000 (2) (2,500) (3) (26,000) (4) (5) 4,200 (6) (1,000) (7) (700) (8) $

1,900 1,900 $ 9,600 $ 26,000 = $ 7,100 $ -

4,000 $

$ 41,500

$ 41,500

The client in transaction 8 pays $1,900 to FastForward 10 days after it is billed for consulting services.
Assets = Liabilities Accounts Accounts Notes Rec Supplies Equipment Payable Payable 2,500 26,000 7,100 7,100 4,200 (1,000) (700) 1,900 9,600 $ 26,000 = $ 7,100 $ $ 34,400 + Equity Equity $ 30,000

Cash (1) $ 30,000 (2) (2,500) (3) (26,000) (4) (5) 4,200 (6) (1,000) (7) (700) (8) (9) 1,900 $ 5,900

1,900 (1,900) $0 $

$ 41,500

$ 41,500

10
Cash (1) $ 30,000 (2) (2,500) (3) (26,000) (4) (5) 4,200 (6) (1,000) (7) (700) (8) (9) 1,900 (10) (900) $ 5,000

FastForward pays $900 to CalTech Supply as partial payment for its earlier $7,100 purchase of supplies.
Assets = Liabilities Accounts Accounts Notes Rec Supplies Equipment Payable Payable 2,500 26,000 7,100 7,100 4,200 (1,000) (700) 1,900 (900) $ 6,200 $ = + Equity Equity $ 30,000

1,900 (1,900) $0 $ 9,600 $ 26,000 -

$ 34,400

$ 40,600

$ 40,600

11
Cash (1) $ 30,000 (2) (2,500) (3) (26,000) (4) (5) 4,200 (6) (1,000) (7) (700) (8) (9) 1,900 (10) (900) (11) (600) $ 4,400

FastForward declares and pays a $600 cash dividend to its owner.

Assets = Liabilities Accounts Accounts Notes Rec Supplies Equipment Payable Payable 2,500 26,000 7,100 7,100 4,200 (1,000) (700) 1,900 (900) $0 $ 9,600 $ 26,000 = $ 6,200 $ (600) $ 33,800 + Equity Equity $ 30,000

1,900 (1,900)

$ 40,000

$ 40,000

Cash
(1) (5) (9)
Increases

30,000 4,200 1,900

36,100 Decreases -31,700 Balance 4,400

(2) (3) (6) (7) (10) (11)

Decreases

2,500 26,000 1,000 700 900 600 31,700

Cash
Date (1) (2) (3) (5) (6) (7) (9) 1,900 4,200 Item PR Debit 30,000 Credit

Account No. 101

Balance Debit 30,000 2,500 27,500 26,000 1,000 700 1,500 5,700 4,700 4,000 5,900 Credit

(10)
(11)

900
600

5,000
4,400

One must learn by doing the thing; though you think you know it, you have no certainty until you try it.
Publilius Syrus, Moral Sayings