accounting is the art of recording, classifying and summarizing in a significant manner and in terms...
TRANSCRIPT
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof
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Who are the users of Accounting information?
1. Management.
2. Users with direct financial interest (investors and creditors).
3. Users with an indirect financial interests (tax
authorities, Regulatory Agencies and others)
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• Matching Principal.• Continuity.• Historical Cost.• Revenue recognition.• Full Disclosures.
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• Going Concern.• Periodicity.• Accrual
Accounting• Economic Entity.• Monetary Unit.
Is to provide (report) the required financial information timely to the users (Internal users/ external users).
The financial information1. Assets. All asset accounts have a debit nature2. Liabilities. All liability accounts have a credit nature3. Owners Equity. All equity accounts have a credit nature4. Revenue. All revenue accounts have a credit nature 5. Expenses. All expense accounts have a debit nature
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• An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise
• Items of value owned and controlled by the Business– Buildings
– Cash
– Vehicles – equipment
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1. Assets are resources owned by a business.
2. They are used in carrying out such activities as production, consumption and exchange.
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Amounts owed by the Business to people or
Organizations : Loans- Creditors/Accounts Payable
Liabilities are claims against assets. They are existing
debts and obligations.
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Creditors (Accounts Payable) •people or organizations other than the owner to whom the Business owes money.•Usually because of goods or services received which remain unpaid
Creditors are a liability to the business
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Capital or Investments by Owners - Amounts owed
by the Business to the owner (money and other
items contributed to the business by the owner from
his or her resources ie. CAPITAL)
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• Investments (assets) increase owner’s equity• Drawings decrease the owner’s equity• Revenues increase the owner’s equity• Expenses decrease owner’s equity
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• Owner’s Equity is equal to total assets minus total liabilities.
• Owner’s Equity represents the ownership claim on total assets.
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Assets: Liabilities & Equity:
Current Assets Current Liabilities
Cash & M.S. Accounts payable
Accounts receivable Notes Payable
Inventory Total Current Liabilities
Total Current Assets Long-Term Liabilities
Fixed Assets: Total Liabilities
Gross f ixed assets Equity:
Less: Accumulated dep. Common Stock
Goodw ill Paid-in-capital
Other long-term assets Retained Earnings
Total Fixed Assets Total Equity
Total Assets Total Liabilities & Equity
ABC CompanyBalance Sheet
As of December 31, 19xx
WorkingCapital
WorkingCapital
InvestmentDecisions
FinancingDecisions
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Revenue: Gross inflow of economic benefits resulting from an
enterprise's ordinary activities is considered "revenue" provided
those inflows result in increases in equity.
Revenue. The IASC's framework defines "Income" to include both
revenue and gains.
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Revenues
• Revenue for a given period equals:
Cash + Receivables from goods and services provided.
• Liabilities are generally not affected by revenues.
• A bank loan increases liabilities but is not revenue.
• A collection of accounts receivable increases cash but is not revenue.
• Owner investments increase Owner’s Equity but are not revenues.
If revenues are increases in owner’s equity resulting from selling goods, or rendering services.
Expenses:are decreases in owner’s equity resulting from the costs of selling goods, rendering services or performing other business activities.
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Expenses
• Expenses are the costs of doing business.
• Not all cash payments are expenses.
• Prepaid expenses are recorded as assets. As they expire, they become expenses.
• Purchase of plant assets (e.g. equipment) is not an expense.
• Owner withdrawals are not expenses.
• Payment on a liability is not an expense.
Net income:
Is the net increase in the owner’s equity that results from
the operations of a company and is accumulated in the
owner’s equity capital account.
Net income = revenues - expenses
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Merchandising Income Statement as an example
• Income statement consists of three major parts.
1. Net sales.
2. Cost of goods sold.
3. Operating expenses.
• Gross margin represents net sales minus cost of goods sold.
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Net Sales
• Net Sales consists of gross sales less sales returns and allowances.
• Gross sales is the total cash and credit sales occurring during the period.
• Sales Returns and Allowances is a contra-revenue account used to accumulate cash refunds, credits on account, and allowances to customers for defective merchandise.
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Cost of Goods Sold
• Cost of goods sold (COGS) is the amount a merchant paid for the merchandise sold during the period.
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Gross Margin
• Gross margin, or gross profit, is the difference between net sales and cost of goods sold.
• To be successful a firm must have gross margin sufficient enough to pay operating expenses and provide an adequate income.
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Operating Expenses
• Operating expenses represent the expenses other than cost of goods sold that are incurred in running a business.
• Operating expenses are classified as either:
1. Selling expenses.
2. General and administrative expenses.
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Operating Expenses
• Selling expenses include the costs of storing goods
and preparing them for sale, displaying,
advertising, and otherwise promoting sales and
delivering goods to the buyer (freight out expense).
• General and Administrative expenses include
expenses for accounting, personnel, credit and
collections, and any other expenses that apply to
overall operation.
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Net Income
• Net income is the final figure or “bottom line” of the income statement.
• Net income is what remains after operating expenses are deducted from gross margin.
• Net income represents the amount of business earnings that accrue to the owners during a period of time.
The equation must be in balance after every The equation must be in balance after every transaction. For every transaction. For every DebitDebit there must be a there must be a CreditCredit..
Assets Liabilities= Owner’s EquityBasic Equation
Expanded Basic Equation
+
Basic Accounting EquationBasic Accounting Equation
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
AssetAssetssAssetAssetss
Basic Accounting EquationBasic Accounting Equation
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LiabilitiLiabilitiesesLiabilitiLiabilitieses
Basic Accounting EquationBasic Accounting Equation
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity
Owner’s Owner’s EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
Owner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity
Basic Accounting EquationBasic Accounting Equation
Revenues result from business activities entered into for the purpose of earning income.
Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.
Owner’s EquityOwner’s Equity
Expenses are the cost of assets consumed or services used in the process of earning revenue.
Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
Owner’s EquityOwner’s Equity
Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May.
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital+ + = +
1. Invested $10,000 cash to start the repair shop.
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
2. Purchased equipment for $5,000 cash.
-5,0002. +5,000
+ + = +
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
3. Paid $400 cash for May office rent.
-5,0002. +5,000
+ + = +
-4003. -400 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
4. Received $5,100 from customers for repair service.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
5. Withdrew $1,000 cash for personal use.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
6. Paid part-time employee salaries of $2,000.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
7. Incurred $250 of advertising costs, on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
8. Provided $750 of repair services on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Transaction ProblemTransaction Problem
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
9. Collected $120 cash for services previously billed.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e+1209. -120
Barone, Capital
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200
Transaction ProblemTransaction Problem
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Owner’s Equity
Statement
Financial StatementsFinancial Statements
Income Statement
Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Revenues:
S ervice revenue 5,850$
Expenses:
S alary expense 2,000
Rent expense 400
Adver tising expense 250
T otal expenses 2,650
Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2008
Financial StatementsFinancial Statements
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Review QuestionReview QuestionFinancial StatementsFinancial Statements
Revenues:
S ervice revenue 5,850$
Expenses:
S alary expense 2,000
Rent expense 400
Adver tising expense 250
T otal expenses 2,650
Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2008
Income Statement
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owner’s Equity Statement
Net income is needed to determine the ending balance in owner’s
equity.
Financial StatementsFinancial Statements
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owner’s Equity Statement
Statement indicates the reasons why owner’s equity has increased or decreased during the period.
Financial StatementsFinancial Statements
Barone' s, Capital May 1 -$
Add: I nvestment 10,000
N et income 3,200
13,200
Less: Drawings 1,000
Barone' s, Capital May 31 12,200$
Barone’s Repair Shop
Owner' s Equity Statement
For the Month Ended May 31, 2008
Owners’ Equity Statement
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008
The ending balance in owner’s equity is needed in preparing the
balance sheet
Balance Sheet
Financial StatementsFinancial Statements
Balance SheetReports the assets, liabilities, and owner’s equity at a specific date.
Assets listed at the top, followed by liabilities and owner’s equity.
Total assets must equal total liabilities and owner’s equity.
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008
Financial StatementsFinancial Statements
Balance Sheet
Assets
Cash 6,820$
Accounts receivable 630
Equipment 5,000
T otal assets 12,450$
Liabilities
Accounts payable 250$
Owner' s Equity
Barone' s, capital 12,200
T otal liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2008Cash fl ow f rom operating activities
Cash receipts f rom revenues 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activitites
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash Flows
Financial StatementsFinancial Statements
Cash fl ow f rom operating activities
Cash receipts f rom customers 5,220$
Cash paid f or expenses (2,400)
Cash provided by operations 2,820
Cash fl ow f rom investing activities
Purchase of equipment (5,000)
Cash fl ow f rom fi nancing activities
I nvestment by owners 10,000
Drawings by owners (1,000)
Cash provided by fi nancing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2008
Statement of Cash FlowsInformation for a
specific period of time.
Answers the following:1. Where did cash
come from?
2. What was cash used for?
3. What was the change in the cash balance?
Financial StatementsFinancial Statements