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Accounting Principles (1)

Chapter (1)

Dr.Mohamed Hanafy

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1) What is Accounting?Accounting:- Is the information system of Identifying, recording and communicating financial information about economic events (transactions) of an organization (business) to interested users using financial statements .

So, there are 3 activities of Accounting:

1-Identifying:- Select the economic activities that can be expressed in Term of money.2-Recording: - Entering the business transactions into a set of accounting Records.3-Communicating:- Communicate the financial information to interested Users using financial statements (reports).

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2) Accounting concepts:

Assets (A):- Are economic resources owned by the business and are expected to provide future benefits. Assets could be classified into two categories as follows:

1- Fixed (long term) assets:Assets that acquired for using in a business's operations (Not for resale to customers) and provide services for a long period of time. Such as:

- Land. - Cars. - Building. - Machines. - Office Equipment. - Trucks. - Furniture.

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Imp. Note: These financial statements (F.S.) should be prepared according to Generally Accepted Accounting Principles (GAAP.)* GAAP: Are the common standards that indicate how to report the economic events.

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2) Accounting concepts (Continued):* Revenues:Generally, revenues result from selling merchandise, performing services, renting property, and lending money. Common sources of revenue are sales, fees, services, commissions, interest, and rent. Revenue is defined as: -The price of goods sold or service rendered during an accounting period. -The gross increase in O.E resulted from business activities which aim to gain profit.

Such As: Sales revenue Merchandising business. Service revenue (Fees) Service business. Rent revenue. Interest revenue. Commission revenue.

Effects of Revenue on the Accounting Equation:* Increase at Owner's Equity.* Increase at Assets, Or Decrease at Liabilities.

Q: When revenue is recorded (recognized) in the accounting records?Answer:Revenue is recorded when it is earned (When goods are sold or services are rendered) Regardless the timing of cash collection. This is called Revenue recognition principle.

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* Expenses:-Expenses are the cost of assets consumed or services used in the process of earning revenue during an accounting period.Common expenses are: salaries expense, rent expense, utilities expense, tax expense, Depreciation expense, Interest expense etc.

Effects of Expense on the Accounting Equation:* Decrease at Owner's Equity.* Decrease at Assets, Or Increase at Liabilities.

Imp. Note:* The difference between total revenues and total expenses of an accounting period is called Net income (Profit) or Loss.

* Drawings:-are the withdrawals of cash or other assets for the owner's personal use.

Effects of Drawings on the Accounting Equation:* Decrease at Owner's Equity.* Decrease at Assets.

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Some important equations: OE End = OE Beg. + Additional investment + Revenues – Expenses – Drawing OE End = OE Beg. + Additional investment + Net income – Drawings - Net loss OE = Additional investment + Net income – Drawings - Net loss Net income (Loss) = Revenues - expensesEx. 1:Owner's equity at the beginning of the year $130,000Owner's drawing during the year $32,000Owner's Equity at the year-end $145,000What is the net income (loss) for the year?SolutionOE End = OE Beg. + Additional investment + Net income – Drawings - Net loss

$145,000 = $130,000 + 0 + X– $32,000 X=$145,000 – $130,000 + $32,000 = + 47,000 (Net Income)

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Exercise 2:Liabilities at 1/1/99 $100,000 Assets at 12/31/99 $500,000Revenues of 1999 $200,000 drawings during 1999 $20,000During 1999 assets increased by $50,000 & liabilities decreased by $30,000

Required:a. Find owner’s equity at 1/1/99?b. Find expenses of 1999?

SolutionA end = a beg. ± A$500,000 = A beg. + $50,000A beg. = $500,000 – $50,000 = $450,000 (a) OE beg. = A beg. – L beg. = $450,000 - $100,000 = $350,000 A = L + OE$50,000 = - $30,000 + OE OE = $50,000 + $30,000 = $80,000(b) OE = additional investment + revenue – expense – drawings $80,000 = 0 + $200,000 – expense – $20,000Expenses (1999) = $200,000 – $20,000 – $80,000 = $100,000

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For example:

4. Increase in a liability and decrease in OE by the same amount.

For example:

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First: Transaction analysis:-

Exercise (1): Indicate the effect of the following transactions on assets, liabilities and OE using the code letters (I) for increase , (D) for decrease and (NE) for no effect.

1. purchased a computer from ABC Company on account.2. Purchased a car in cash.3. Rendered service in cash.4. Paid utilities expense in cash.5. Withdrew cash for the owner personal use.6. The owner invests cash in the business.7. Borrowed a loan from Alex bank.8. Paid ABC Company for the computer purchased in (1) above.9. purchased a land a part of its price cash and the remainder on account.10. Collected accounts receivables.11. Incurred advertising expense on account.

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Exercise (2):

Selected transactions for a company are listed below. List the number of the transaction and then show the effect of each transaction on assets, liabilities & OE.

Use (I) for increase, (D) for decrease and (NE) for no effect.

1- Purchased new equipment for cash.2- Paid monthly utility bill.3- Billed customers for service provided.4- Received cash from customers billed in (3)5- Withdrew cash for owner’s personal use.6- Received cash when service rendered to customers.7- Incurred rent expense on account.

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Exercise 1:

On Jan. 1, 2009 ABC Company was started to work, the following transactions were completed during the month.

1. Invested $20,000 cash in the business.

2. Paid $400 cash for Jan. office rent.

3. Purchased office equipment for $2,500 cash.

4. Incurred $300 advertising costs on account.

5. Paid $600 cash for office supplies.

6. Earned $9,000 for service rendered. Cash of $1,000 is received & the balance of $8,000 on account.

7. Withdrew $200 cash for personal use.

8. Paid amount due in transaction (4).

9. Paid employee salaries of $1,200

10. Account of supplies indicates that $450 of supplies had been used.

11. Cash of $8,000 is received from customers who have previously received services in transaction (6).

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Required: Prepare a table to present the effects of these transactions on the basic accounting equation.

Note:

If there is some beginning balances of A, L & OE in the exercise, we should put these balances at first line of the accounting equation table.

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Exercise 2 (Assignment): Maria Gonzalez opened a veterinary business in Nashville, Tennessee, on August 1. On August 31, the balance sheet showed Cash $9,000, Accounts Receivable $1,700, Supplies $600, Office Equipment $6,000, Accounts Payable $3,600, and M. Gonzalez, Capital $13,700. During September the following transactions occurred.

1. Paid $2,900 cash on accounts payable.2. Collected $1,300 of accounts receivable.3. Purchased additional office equipment for $2,100, paying $800 in cash and the balance on account.4. Earned revenue of $8,000, of which $2,500 is paid in cash and the balance is due in October.5. Withdrew $1,000 cash for personal use.6. Paid salaries $1,700, rent for September $900, and advertising expense $300.7. Incurred utilities expense for month on account $170.8. Received $10,000 from Capital Bank–money borrowed on a note payable.

Instructions

Prepare a tabular analysis of the September transactions beginning with August 31 balances.The column headings should be as follows: Cash _Accounts Receivable _Supplies _Office Equipment _ Notes Payable _ Accounts Payable _ M. Gonzalez, Capital _ M. Gonzalez, Drawings _ Revenues _ Expenses.

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4) Financial Statements:

1. Income statement:

A financial statement that presents revenues & expenses and resulting in Net income or loss of a company for a specific period of time.

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P1-3B On June 1, Michelle Sasse started Divine Creations Co., a company that provides craft opportunities, by investing $15,200 cash in the business. Following are the assets and liabilities of the company at June 30 and the revenues and expenses for the month of June.Cash $13,750 Notes Payable $9,000 Accounts Receivable 3,000 Accounts Payable 1,200 Service Revenue 7,000 Supplies Expense 1,600 Craft Supplies 2,000 Gas and Oil Expense 200 Advertising Expense 400 Utilities Expense 150 Equipment 10,000Michelle made no additional investment in June, but withdrew $1,300 in cash for personal use during the month.

InstructionsPrepare an income statement and owner’s equity statement for the month of June and a balance sheet at June 30, 2010.

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