Accounting Class 1

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, dont get the whole picture. Dans accting no receipts when cash is close.

Timely 6 mo later, - cant make decisions timely.Dq cash flow

Or not balancing give way to doubt Valuation methods always challenging Timing, inventory, interest calc methods, depreciation

(4)

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.

Who Uses Accounting Data?

Common Questions Asked
1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. 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.

The Building Blocks of Accounting Ethics In Financial Reporting

Standards of conduct by which ones actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passed Sarbanes-Oxley Act of 2002. to reduce unethical behavior. Effective financial reporting depends on sound ethical behavior.

Ethics start with you -

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Various users need financial information Financial Statements
Balance Sheet Income Statement Statement of Owners 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.

Generally Accepted Accounting Principles (GAAP)

SO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of Accounting Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)
http://www.sec.gov/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/

International Accounting Standards Board (IASB) http://www.iasb.org/

SO 4 Explain generally accepted accounting principles and the cost principle.

What does a CPA do?

Audit

Taxes
Attest - Opinions

SO 4 Explain generally accepted accounting principles and the cost principle.

The Building Blocks of Accounting

Cost Principle (Historical) dictates that companies record
assets at their cost. Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. Fair value information may be more useful.

SO 4 Explain generally accepted accounting principles and the cost principle.

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. Proprietorship. Partnership. Corporation.

Forms of Business Ownership

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Basic Accounting Equation

Assets Liabilities Owners Equity

Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims.

SO 6 State the accounting equation, and define its components.

Accountings 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

Homework answers
E1-5 Classify each account _L_ - accounts payable _A_ - Cash _A_ - Cleaning Supplies _A_ - Cleaning Equipment _A_ - Accounts Receivable _L_ - Notes Payable _L_ - Salaries Payable _OE- KM Capital

Using The Basic Accounting Equation

Transactions are a businesss economic events recorded by

accountants. May be external or internal. 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.

Transactions (Question?)
Q1-15: Are the following events recorded in the accounting records?

Event

Supplies are purchased on account.

An employee is hired.

Owner withdraws cash for personal use.

Criterion

Is the financial position (assets, liabilities, or owners equity) of the company changed?

Record/ Dont Record

SO 7 Analyze the effects of business transactions on the accounting equation.

The T Account
Marshas Famous Apple Cakes!

I woke up this morning and decided to start a business baking my world famous apple cakes. 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. Debits are not always good and credits are not always bad. Practice Flexible thinking!

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

The Bank makes accounting confusing.

When the bank debits your account they take ______ money. Assets for the bank:___________ LOAN Liabilities for the bank:___________ DEPOSITS You add money to your bank account with a _________. DEBIT ASSET Cash is an _______ for you. A loan is a LIABILITY __________ to you.

DOUBLE ACCOUNTING SYSTEM

There are always two entries

A debit (left) And

A credit (right)

Debits and credits = flexible thinking!

Debits are not good or bad, they either increase or decrease an account! DEBITS
On the left Increase
assets, expenses, 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

Steps in the recording process

1. Analyze each transaction for its effects on the accounts.
What accounts, debits or credits?

2. Enter the transaction information in a journal. 3. Transfer the journal information to the appropriate accounts in the ledger.

Journal entries
Simple debit credit
5000

Cash (1) 5000 Sales, Bakers and Dad (1)

COMPOUND
CASH (15) $4000 ACC RECEIVABLE (15) $3000 Sale, Bakers and Dad (15) 7000 EACH JOURNAL ENTRY SHOULD HAVE A UNIQUE NUMBER

The Journal
Is like a checkbook register. Its a record of transactions Recording the transaction, but not a running balance. Chronological order Audit trail Always list the debit item first

The General Journal

1. Discloses in one place the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. 4. A simple journal entry involves only two accounts (one debit and one credit) whereas a compound journal entry involves three or more accounts.

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

Receipts
Pasta House

Dining Out 25.00 5.00 100.00

McAllisters

$25.00 Taco Bell

$100.00

125.00
Cash

$5.00

25.00 5.00 100.00 125.00

The Ledger
A General Ledger contains the entire group of accounts maintained by a company. The General Ledger includes all the asset, liability, owners equity, revenue and expense accounts.
Illustration 2-15

SO 5 Explain what a ledger is and how it helps in the recording process.

Standard Form of Account

T-account form used in accounting textbooks. In practice, the account forms used in ledgers are much more structured.
Illustration 2-16

SO 5 Explain what a ledger is and how it helps in the recording process.

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

The Trial Balance

Limitations of a Trial Balance

The trial balance may balance even when
1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect accounts are used in journalizing or posting, or 5. offsetting errors are made in recording the amount of a

transaction.

LO 7 Prepare a trial balance and explain its purposes.

1. Journal the entries, including the two already posted 2. Post the following transactions to T Accounts. 3. Determine the ending balance for each account. 4. Do a trial balance 5. Do an income stmt and bal sheet, and OE stmt. Transactions 1. Started business with $2000 2. Purchased equipment on visa $500 3. Paid rent $1000 4. Paid $250 on visa card 5. Sold 100 cakes for $40 each 6. Bought $50 flour at Costco 7. Bought ad in newspaper $60 on visa 8. Withdrew $350 for draw

T account practice
cash Visa (a/p)

supplies

Equipment

sales

advertising

Rent

capital

Adv

Accounting Inclass Activites and Notes

38

Journal entries
1. CASH 2000 CAPITAL 2000 STARTED MARSHAS FAMOUS APPLE CAKES

2. EQUIPMENT 500 ACC PAY (VISA) PURCHASED PANS FOR CAKE BUSINESS
3. Rent Cash 4. A/P Visa CASH 5. Cash Sales 4000 1000

500

1000 250 250

4000

Accounting Inclass Activites and Notes

39

Journal entries
6. Supply cash 50 50

7.

Ad ACC PAY (VISA) 350

60 60

8. Draw Cash

350

Accounting Inclass Activites and Notes

40

T account practice answer

Transactions 1. Purchased pans for my Started business with $2000 2. Purchased equipment on visa $500 3. Paid rent $1000 4. Paid $250 on visa card 5. Sold 100 cakes for $40 each 6. Bought $50 flour at Costco 7. 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

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

MARSHAS FAMOUS APPLE CAKES Income statement SALES 4000 ADVERTISMENT 60 Rent 1000 NET INCOME 2940 MARSHAS 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

REVIEW QUESTIONS

Which of the following financial statements contains expenses?

a. Balance sheet. b. Income statement. c. Owner's equity statement.

d. Statement of cash flows.

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.

SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONS

The Securities and Exchange Commission oversees U.S. financial markets and accounting standardsetting bodies

SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONS

The accounting process involves all of the following except a. identifying economic transactions that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording nonquantifiable economic events. d. analyzing and interpreting financial reports.
SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONS

The Duce Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at a. $100 million. b. $600 million. c. $400 million. d. $500 million.
SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONS

The basic accounting equation may be expressed as a. Assets = Equities. b. Assets Liabilities = Owner's Equity. c. Assets = Liabilities + Owner's Equity. d. all of these.

SO 8 Understand the four financial statements and how they are prepared.

REVIEW QUESTIONS

When an owner withdraws cash or other assets from a business for personal use, these withdrawals are termed a. depletions. b. consumptions. c. drawings. d. a credit line.
SO 8 Understand the four financial statements and how they are prepared.