basics of accounting. accounting has 3 main activities 1. identifying select events that are...
TRANSCRIPT
Basics of Accounting
Accounting has 3 main activities 1. Identifying
select events that are evidence of economic activity
2. Recording provide a chronological diary of measured
events in an orderly & systematic manner
3. Communicating preparation & distribution of accounting
reports and financial statements; as well as analyzing and interpreting data
Who uses Accounting info? Internal
managers, production supervisors, financial directors, & company officers; usually referred to as Managerial Accounting
External investors, creditors, government, regulatory
agencies, customers, etc.; usually referred to as Financial Accounting
What’s the difference between Bookkeeping and Accounting? Bookkeeping is a part of the Recording
activity of Accounting, but Accounting involves much more
GAAP (Generally Accepted Accounting Principles) Cost Principle
cost is the value exchanged at the time of acquisition; this is used for all accounting purposes until object is sold
Monetary Unit Assumption only transactions that can be expressed in
terms of money are included in accounting records
Economic Entity Assumption economic events can be identified with a
particular unit of accountability; and the business entity is separate from the owners and other entities
Basic Accounting Equation
Assets = Liabilities + Owner’s Equity
Assets Resources that are owned by the business Includes:
Cash Equipment Supplies buildings, etc
Liabilities Existing debts and obligations (Amounts
you owe to others) Includes
accounts payable notes payable, etc
Equity Owner’s claim to assets Called retained earnings and paid in
capital Retained Earnings is determined by 3
items:1. Revenue-gross increase in Equity from
activities entered into for the purpose of earning income
2. Expenses-Decreases in Equity from operating the business
3. Dividends-distribution of cash or other assets to owners (only in corporations)
Financial Statements Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows
Income Statement Presents revenue and expenses
contributing to Net Income (Loss) for a period of time
Statement dated For the Month (Year) Ended ….
Sales (Revenue) $7 500 00
Operating expenses:
Rent expense
$2 125 00Wages expense
800 00
Supplies expense
450 00Utilities expense
275 00Miscellaneous expense
Total operating expenses 4 450 00
NetSolutionsIncome Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00To the statement To the statement of owner’s equityof owner’s equityTo the statement To the statement of owner’s equityof owner’s equity
Statement of Retained Earnings Summarizes changes in Retained Earnings
through Income, Loss, & Dividends Also stated for a period of time
Chris Clark, capital, November 1, 2005 $ 0
NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00Net income for November 3 050 00
$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Chris Clark, capital, November 30, 2005 $26 050 00
From the income From the income statementstatement
From the income From the income statementstatement
To the To the balance sheetbalance sheet
To the To the balance sheetbalance sheet
Balance Sheet Reports Assets, Liabilities, & Stockholder’s
Equity on a Specific Date
Assets Liabilities
NetSolutionsBalance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
From the From the statement of statement of
owner’s equityowner’s equity
From the From the statement of statement of
owner’s equityowner’s equity
Statement of Cash Flows Summarizes information concerning cash
inflows and outflows for a period of time Reports the following:
1. Cash effects of company operations2. Cash effects of investing transactions3. Cash effects of financing transactions4. Net increase or decrease in cash5. Cash on hand at the end of the period
Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 00
Cash flows from investing activities:Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2005
Should match Should match CashCash on the balance sheet on the balance sheetShould match Should match CashCash on the balance sheet on the balance sheet
)
The Recording Process
Basic Recording____________________
Debits | Credits|
Always this way for all accounts Debits always equal credits
if you debit something, you have to credit something else
called the double entry system
Assets Debits increase Assets Credits Decrease Assets The normal balance is on the debit side Anything on the wrong side is a negative
amount
Liabilities Credits increase liabilities Debits decrease liabilities Normal balance is on the credit side Debit balance means a negative amount
Owners Equity Owner’s Equity has a normal credit
balance Owner’s Drawing has a DEBIT balance
(reduces Owner’s Equity) Revenues have a CREDIT balance Expenses have a DEBIT balance
Recording terms General journal
standard journal for recording entries Has a space for date, acct. title & explanation,
ref #, debit, & credit Journalizing
entering data into the journal about a transaction
Ledger contains all the accounts for a company has 3 (or 4) columns for each account: Debit,
Credit, and Bal.
Recording terms Posting
process of transferring journal entries to ledger accounts
Reference # in journal is the account # it was posted to in ledger is the page of the journal it came
from Chart of Accounts
Listing of Accounts and Account #’s to identify location (like a table of contents or index)
Trial Balance List of accounts and balances at a given
time Proves mathematical equality of debits &
credits Also used to uncover errors in journalizing
and posting Useful in preparing financial statements