1 basic accounting richard mross (208) 939-4717 revised 02/19/2008
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Basic Accounting
Richard Mross(208) 939-4717
revised 02/19/2008
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Traditional Accounting System
Business Transactions
Accounting System Documents
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Accounting System
Business Transactions
SalesPurchase/ExpenseChange in ValueGuessesOther Events
Accounting System
ListsTransactionsActions
Documents
Income StatementBalance SheetList ReportsTransaction ReportsBudgetsProjectionsInvoicesChecks
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Primary Accounting ReportsThe information results of an accounting system
Balance Sheet – What you have and owe
Assets – Liabilities = Equity and
Liabilities + Equity = Assets
Income Statement – How much you make
Sales - Expenses = Income
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Reports
Income Statement
Balance Sheet
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Balance Sheet
Asset
Equity
Liability
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Income Statement
Profit
Expense
Revenue
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Account
The basic unit of accounting an Account or General Ledger Account.
It is a unit of information that represents business records.
There are five types of accounts:
Asset
Liability
Equity
Revenue
Expense
A business can have anywhere from a dozen to several thousand accounts, with each one being one of the five types.
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AccountingAccounting is the process of recording business activities
that make changes to accounts. These include:• Sales of products• Revenue from services earned• Buying products and/or services• Incurring other expenses• Depreciation of fixed assets• Closing books for the year
When any of these and other business activities are recorded, accounts change in value.
The unit of measure is currency, in most cases, the dollar.
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Double Entry AccountingFor any business transaction that happens, two or more accounts are
affected. There is a give and take of equal dollar amounts.
This is called Double Entry Accounting.
There are two types of actions done to accounts to bring the values up or down.
The actions are called Debit and Credit. Whether an account grows or shrinks when it is debited or credited depends on the account.
A debit to an asset account makes it bigger but a debit to a liability account makes it smaller. The opposite applies when crediting. Crediting an asset makes it smaller and crediting a liability makes it bigger.
A debit to a revenue account makes it smaller and debit to an expense makes it bigger. A credit to a revenue account makes it bigger and credit to expense makes it smaller.
For equity, it gets bigger when it is credited and smaller when it is debited.
A record entry that has debits and credits is called a Journal Entry.
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Debits and Credits
Balance Sheet
Asset
Profit
Expense
Revenue
Equity
Liability
Income StatementTo make an account go up (get bigger)
Debit Credit
Debit
Credit
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Debits and Credits
To make an account go down (get smaller)Balance Sheet
Asset
Profit
Expense
Revenue
Equity
Liability
Income StatementCredit Debit
Credit
Debit
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Bob’s Hotdog Stand
To explain accounting and how business transactions impact financial statements, we will trace through the business transactions of a simple hot dog stand. For simplicity, we will not include all the different taxes and interest associated with business for the first sets of transactions.
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Bobs Hotdog Stand (B.H.S.)Asset
Cash on handCash in bankAccounts ReceivableInventoryHot Dog StandAccumulated Depreciation*
Profit/LossNo account here
ExpenseCost of Good SoldElectricityDepreciation Expense
RevenueSales
EquityBobs Equity
LiabilityAccounts PayableNotes Payable
*Contra-Asset
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Chart of Accounts (General Ledger)
1000 Cash on hand1020 Cash in bank1100 Accounts Receivable1200 Inventory1400 Hot Dog Stand1410 Accumulated Depreciation*
2000 Accounts Payable2400 Notes Payable
3000 Bobs Equity
4000 Sales
5000 Cost of Good Sold6200 Electricity6500 Depreciation Expense
Asset
Liability
Equity
Revenue
Expense
*Contra-Asset
Balance Sheet Accounts
Income Statement Accounts
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Trial Balance1000 Cash on hand 0.001020 Cash in bank 0.001100 Accounts Receivable 0.001200 Inventory 0.001400 Hot Dog Stand 0.001410 Accumulated Depreciation* 0.002000 Accounts Payable 0.002400 Notes Payable 0.003000 Bobs Equity 0.004000 Sales 0.005000 Cost of Good Sold 0.006200 Electricity 0.006500 Depreciation Expense 0.00
Total 0.00
*Contra-Asset
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On December 1, Bob takes $10,000 out of his personal checking account and puts it into a newly created a business checking account, B.H.S. Company.
What General Ledger accounts are affected and how?
DebitAccountDate CreditEvent
General Journal
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DebitAccountDate
10,000
Credit
12/01 Cash in bank
10,00012/01 Bobs Equity
Event
1000 Cash on hand 01020 Cash in bank 10,0001100 Accounts Receivable 0 1200 Inventory 01400 Hot Dog Stand 01410 Accumulated Depreciation* 02000 Accounts Payable 02400 Notes Payable 03000 Bobs Equity 10,0004000 Sales 05000 Cost of Good Sold 06200 Electricity 06500 Depreciation Expense 0
BHS Company Trial Balance
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Bobs Hotdog Stand (B.H.S.)December 1
Asset10,000
Profit/Loss0
Expense0
Revenue0
Equity10,000
Liability0
*Contra-Asset
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On December 2, Bob is busy. He wrote a check for a hotdog stand for $6,000.He buys 100 hot dogs for $1 each on credit. He also withdrew $200 cash from bank.
DebitAccountDate CreditEvent
General Journal
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DebitAccountDate
60001400
Credit
12/02 Wrote check for hot dog stand
1020 600012/02
Event
General Journal
100120012/02 Bought 100 hot dogs on credit
2000 10012/02
200100012/02 Withdrew $200 cash from bank
1020 20012/02
1000 - Cash On Hand
2000 – Accounts Payable
1400 – Hot Dog Stand
1200 - Inventory
1020 - Cash In Bank
3000 – BHS Equity
10,000
10,000
T Account
Debit Credit
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1000 - Cash On Hand
2000 – Accounts Payable
1400 – Hot Dog Stand
1200 - Inventory
1020 - Cash In Bank
3000 – BHS Equity
10,000
10,000
200
3,800
200
6000
100
1006000
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1000 Cash on hand 2001020 Cash in bank 3,8001100 Accounts Receivable 01200 Inventory 1001400 Hot Dog Stand 6,0001410 Accumulated Depreciation 02000 Accounts Payable (100)2400 Notes Payable 03000 Bobs Equity (10,000)4000 Sales 05000 Cost of Good Sold 06200 Electricity 06500Depreciation Expense 0
Total 0
BHS Trial Balance, December 2
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Bobs Hotdog Stand (B.H.S.)December 2
AssetCash on Hand 200Cash in Bank 3,800Inventory 100Hot Dog Stand 6,000
Profit/Loss0
Expense0
Revenue0
Equity10,000
LiabilityAcct Payable 100
*Contra-Asset
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On December 3, Bob gets busy. He sells 50 of them for $2 each. Bob pays the hot dog vendor for the inventory with a check.
DebitAccountDate CreditEvent
General Journal
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DebitAccountDate
1001000
Credit
12/03 Sold 50 hotdogs for cash
Event
General Journal
500012/03 Cost of hot dog inventory in the sales 50
100200012/03 He pays vendor for hot dogs with check
1020 10012/03
1000 - Cash On Hand 2000 – Accounts Payable
1200 – Inventory
4000 – Sales
4000 10012/03
1200 5012/03
5000 – Cost of Goods sold
100
100
200
1020 - Cash In Bank
10,000
3,800
200
6000
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1000 - Cash On Hand 2000 – Accounts Payable
1200 – Inventory
4000 – Sales
5000 – Cost of Goods sold
100
100
200
1020 - Cash In Bank
10,000
3,700
100
6000
100
100
100
50
50
50
200
300 0
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1000 Cash on hand 3001020 Cash in bank 3,7001100 Accounts Receivable 01200 Inventory 501400 Hot Dog Stand 6,0001410 Accumulated Depreciation 02000 Accounts Payable 02400 Notes Payable 03000 Bobs Equity (10,000)4000 Sales (100)5000 Cost of Good Sold 506100 Office Supplies Expense 06200 Electricity 06300 Insurance Expense 06500 Depreciation Expense 0
Total 0
BHS Trial Balance - December 3
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Bobs Hotdog Stand (B.H.S.)December 3
AssetCash on Hand 300Cash in Bank 3,700Inventory 50Hot Dog Stand 6,000
Profit/Loss50
Expense50
Revenue100
Equity10,000
LiabilityAcct Payable 0
*Contra-Asset
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On Dec. 4, Bob was scheduled to work at a wedding. The wedding host told Bob not to charge customers but to bill him. That day, Bob sold 40 hot dogs and sent the bill to the host.
DebitAccountDate CreditEvent
General Journal
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DebitAccountDate
801000
Credit
12/04 Sold 40 hotdogs on account
Event
General Journal
500012/04 Cost of hot dog inventory in the sales 40
4000 8012/04
1200 4012/04
1200 – Inventory
4000 – Sales
5000 – Cost of Goods sold100
100
50
50
50
1100 – Accounts Receivable
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1200 – Inventory
4000 – Sales
5000 – Cost of Goods sold
100
100
50
10
50
1100 – Accounts Receivable
8080
4040
90
180
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Bob did not work any more for the whole month of December.
He recognizes depreciation for the stand. The stand has a book life of 5 years and Bob uses straight line depreciation.
DebitAccountDate Credit
12/31
Event
General Journal
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DebitAccountDate CreditEvent
General Journal
1410 – Accumulated Depreciation 6500 – Depreciation Expense
650012/31 Bob recognized depreciation on stand 100
1410 10012/31
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1000 Cash on hand 3001100 Accounts Receivable 801200 Inventory 101400 Hot Dog Stand 6,0001410 Accumulated Depreciation (100)2000 Accounts Payable 02400 Notes Payable 03000 Bobs Equity (10,000)4000 Sales (180)5000 Cost of Good Sold 906200 Electricity 06500Depreciation Expense 100
Total 0
BHS Trial Balance December 31
1410 – Accumulated Depreciation 6500 – Depreciation Expense
100100
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On January 2 of the next year, Bob gets his electric bill for December for $20. What accounts are affected?
DebitAccountDate Credit
01/02
Event
General Journal
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DebitAccountDate CreditEvent
620001/02 Bob gets $20 electric bill for December 20
6200 – Electricity
2000 2001/02
2000 – Accounts Payable
100100
0
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1000 Cash on hand 3001020 Cash in bank 3,7001100 Accounts Receivable 801200 Inventory 101400 Hot Dog Stand 6,0001410 Accumulated Depreciation (100)2000 Accounts Payable (20)2400 Notes Payable 03000 Bobs Equity (10,000)4000 Sales (180)5000 Cost of Good Sold 906200 Electricity 206500 Depreciation Expense 100
BHS Trial Balance January 2 before year end close
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B.H.S. 12/31/2007
AssetCash on hand 300Accounts Receivable 80Cash in bank 3700Inventory 10Hot Dog Stand 6000Accumulated Depreciation* (100)
Total 9,990
Profit/LossProfit/Loss (30)
ExpenseCost of Good Sold 90Electricity 20Depreciation Expense 100
RevenueSales 180
EquityBobs Equity 10,000
Total 10,020
LiabilityAccounts Payable 20Notes Payable 0
Total 20
*Contra-Asset
Balance Sheet Income Statement
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On January 3 , Bob closes his books for the previous year. Enter the journal entries to close all of the revenue and expense accounts into equity for the year of 2008.
DebitAccountDate Credit
01/03
Event
General Journal
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DebitAccountDate CreditEvent
400012/31 Closes books for the year 180
6500 10012/02
5000 – Cost of Goods Sold 3000 – BHS Equity
6500 – Depreciation Expense
5000 9012/02
4000 – Sales
90
180
300012/02 30
100
10000
6200 2012/02
6200 – Electricity Expense
20
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5000 – Cost of Goods Sold 3000 – BHS Equity
6500 – Depreciation Expense
4000 – Sales
90
180
100
10000
6200 – Electricity Expense
20
100
20180
9030
Sales Revenue 180
Total Revenue 180
Cost of Goods Sold 90
Depreciation Expense 100
Electricity Expense 20
Total Expense 210
Total to go to equity (30)
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1000 Start Cash on hand 3001020 Cash in bank 3,7001100 Accounts Receivable 801200 Inventory 101400 Hot Dog Stand 6,0001410 Accumulated Depreciation 1002000 Accounts Payable 202400 Notes Payable 03000 Bobs Equity 9,9704000 Sales 005000 Cost of Good Sold 006200 Electricity 006500 Depreciation Expense 00
Total 0
BHS Trial Balance 01/03/2008 (after year end close)
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B.H.S. 1/3/2008
AssetCash on hand 300Cash in bank 3700Inventory 10Hot Dog Stand 6000Accumulated Depreciation* (100)
Total 9,990
Profit/LossProfit/Loss 00
ExpenseCost of Good Sold 00Electricity 0Depreciation Expense 000
RevenueSales 0
EquityBobs Equity 9,970
LiabilityAccounts Payable 20Notes Payable 0
Total 20
*Contra-Asset
BHS Balance Sheet for year end 2007 Income Statement for 2007
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On January 5, Bob gets his bank statement for December 2007.
He needs to do a bank rec.
National Bank of America - Bank StatementBHS Company
Starting Balance: 12/01/2006 0.00
Deposits: deposit 12/01/2007 $10,000
Withdraws and Checks: Withdraw 12/01/2007 $200Check #1 12/03/2007 $6,000
Bank charges:Bank Fee 12/31/2007 $10
New Balance: 12/31/2007 $3,790
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Here is the reconciliation
BHS Bank Reconciliation for 12/07
Book Balance (from account 1020 in general ledger)
12/31/2007 $3,700
Bank fee adjustment $10
Balance $3,690
Bank Statement Balance
12/31/2007 $3,790
Outstanding check (Check 2 to Hotdog world ) adjustment $100
Balance $3,690
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Based on the reconciliation, Bob needs to add another expense, bank fee, item to his chart of accounts and enter the bank fee expense into his books. Since the bank expense happened in December, Bob has to do a prior period adjustment. This means that after making bank expense journal entry, he needs to make a closing journal entry for last years books which will change his pre-closing reports
DebitAccountDate
106100
Credit
01/07 Bank Charge Expense
1020 10Cash
Event
General Journal
1020Close Books Bank Expense 10
3000 10Close Books Equity
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B.H.S. 12/31/2007Restated 01/08/2008
AssetCash on hand 300Accounts Receivable 80Cash in bank 3690Inventory 10Hot Dog Stand 6000Accumulated Depreciation* (100)
Total 9,980
Profit/LossProfit/Loss (40)
ExpenseCost of Good Sold 90Electricity 20Bank Charge 10Depreciation Expense 100
RevenueSales 180
EquityBobs Equity 10,000
Total 10,020
LiabilityAccounts Payable 20Notes Payable 0
Total 20
*Contra-Asset
Balance Sheet Income Statement
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Restated 2008 Balance Sheet
AssetCash on hand 300Cash in bank 3690Inventory 10Hot Dog Stand 6000Accumulated Depreciation* (100)
Total 9,980
EquityBobs Equity 9,960
LiabilityAccounts Payable 20Notes Payable 0
Total 20
BHS Balance Sheet for year end 2007