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Chapter 1-1
Chapter 1-2 CHAPTER CHAPTER 1 1 ACCOUNTING IN ACCOUNTING IN ACTION ACTION Accounting Principles, Eighth Edition
Chapter 1-3 What is Accounting? What is Accounting? LO 1 Explain what accounting is. LO 1 Explain what accounting is. The purpose of accounting is to: (1) (1) identify identify, record record, and communicate communicate the economic events of an (2) organization to (3) interested users.
Chapter 1-4 Three Activities What is Accounting? What is Accounting? LO 1 Explain what accounting is. LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function.
Chapter 1-5 Management Common Questions Human Resources IRS Labor Unions SEC Marketing Finance Investors Creditors Who Uses Accounting Data? Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. LO 2 Identify the users and uses of accounting. Customers Internal Users External Users
Chapter 1-6 Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 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? Who Uses Accounting Data? Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. LO 2 Identify the users and uses of accounting. 6. Will the company be able to pay its short-term debts? Investors Management Finance Marketing Creditors
Chapter 1-7 The Building Blocks of Accounting The Building Blocks of Accounting Ethics In Financial Reporting LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept. Standards of conduct by which one’s 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. Effective financial reporting depends on sound ethical behavior.
Chapter 1-8 Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Review Question Review Question Ethics Ethics LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept.
Chapter 1-9 Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owners’ Equity Statement of Cash Flows Note Disclosure Generally Accepted Generally Accepted Accounting Accounting Principles (GAAP) Principles (GAAP) The Building Blocks of Accounting The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. LO 4 Explain generally accepted accounting principles and the cost principle.
Chapter 1-10 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. The Building Blocks of Accounting The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. LO 4 Explain generally accepted accounting principles and the cost principle.
Chapter 1-11 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. Assumptions Assumptions LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Forms of Business Ownership
Chapter 1-12 Proprietorship Partnership Corporation Owned by two or Owned by two or more persons. more persons. Often retail and Often retail and service-type service-type businesses businesses Generally Generally unlimited unlimited personal liability personal liability Partnership Partnership agreement agreement Ownership Ownership divided into divided into shares of stock shares of stock Separate legal Separate legal entity organized entity organized under state under state corporation law corporation law Limited liability Limited liability Forms of Business Ownership Forms of Business Ownership Generally owned Generally owned by one person. by one person. Often small Often small service-type service-type businesses businesses Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally liable personally liable for all debts. for all debts. LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption.
Chapter 1-13 Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Assumptions Assumptions LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Review Question Review Question
Chapter 1-14 A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Forms of Business Ownership Forms of Business Ownership Review Question Review Question
Chapter 1-15 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity 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. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
Chapter 1-16 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Assets Assets
Chapter 1-17 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Liabilities Liabilities
Chapter 1-18 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Owners’ Equity Owners’ Equity
Chapter 1-19 Owners’ Equity Owners’ Equity 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. Illustration 1-6 LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
Chapter 1-20 Owners’ Equity Owners’ 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. Illustration 1-6 LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
Chapter 1-21 Using The Basic Accounting Equation Using The Basic Accounting Equation Transactions are a business’s 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. LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation.
Chapter 1-22 Q1-15: Q1-15: Are the following events recorded in the accounting records? Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. An employee is hired. Owner withdraws cash for personal use. Record/ Don’t Record Transactions (Question?) Transactions (Question?)
Chapter 1-23 P1-1A: P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. + + = + 1. Invested $10,000 cash to start the repair shop. Investment Assets Liabilities Equity
Chapter 1-24 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 2. Purchased equipment for $5,000 cash. -5,000 2. +5,000 + + = + Investment Assets Liabilities Equity
Chapter 1-25 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 3. Paid $400 cash for May office rent. -5,000 2. +5,000 + + = + -400 3. -400 Expense Barone, Capital Investment Assets Liabilities Equity
Chapter 1-26 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 4. Received $5,100 from customers for repair service. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue Barone, Capital Investment Assets Liabilities Equity
Chapter 1-27 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 5. Withdrew $1,000 cash for personal use. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings Barone, Capital Investment Assets Liabilities Equity
Chapter 1-28 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 6. Paid part-time employee salaries of $2,000. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense Barone, Capital Investment Assets Liabilities Equity
Chapter 1-29 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 7. Incurred $250 of advertising costs, on account. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense Barone, Capital Investment Assets Liabilities Equity
Chapter 1-30 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 8. Provided $750 of repair services on account. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense +750 8. +750 Revenue Barone, Capital Investment Assets Liabilities Equity
Chapter 1-31 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 9. Collected $120 cash for services previously billed. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense +750 8. +750 Revenue +120 9. -120 Barone, Capital Investment Assets Liabilities Equity 6,820 + 630 + 5,000 = 250 + 12,200
Chapter 1-32 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owners’ Equity Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared.
Chapter 1-33 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. Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Review Question Review Question
Chapter 1-34 Income Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Revenues: Service revenue 5,850 $ Expenses: Salary expense 2,000 Rent expense 400 Advertising expense 250 Total expenses 2,650 Net income 3,200 $ Barone’s Repair Shop Income Statement For the Month Ended May 31, 2007
Chapter 1-35 Revenues: Service revenue 5,850 $ Expenses: Salary expense 2,000 Rent expense 400 Advertising expense 250 Total expenses 2,650 Net income 3,200 $ Barone’s Repair Shop Income Statement For the Month Ended May 31, 2007 Income Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Net income is needed to determine the ending balance in owner’s equity.
Chapter 1-36 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period.
Chapter 1-37 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Assets Cash 6,820 $ Accounts receivable 630 Equipment 5,000 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007 The ending balance in owner’s equity is needed in preparing the balance sheet Balance Sheet
Chapter 1-38 Balance Sheet Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Reports 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 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007
Chapter 1-39 Balance Sheet Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Assets Cash 6,820 $ Accounts receivable 630 Equipment 5,000 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007 Cash flow from Operations Cash receipts from customers 5,220 $ Cash paid for expenses (2,400) Cash provided by operations 2,820 Cash flow from Investing Purchase of equipment (5,000) Cash flow from Financing Investment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 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, 2007 Statement of Cash Flows
Chapter 1-40 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Cash flow from Operations Cash receipts from customers 5,220 $ Cash paid for expenses (2,400) Cash provided by operations 2,820 Cash flow from Investing Purchase of equipment (5,000) Cash flow from Financing Investment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 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, 2007 Statement of Cash Flows Information 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?
Chapter 1-41 Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Review Question Review Question

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ACT 201 ch0accounting 201 intro to 1[1].ppt

  • 2. Chapter 1-2 CHAPTER CHAPTER 1 1 ACCOUNTING IN ACCOUNTING IN ACTION ACTION Accounting Principles, Eighth Edition
  • 3. Chapter 1-3 What is Accounting? What is Accounting? LO 1 Explain what accounting is. LO 1 Explain what accounting is. The purpose of accounting is to: (1) (1) identify identify, record record, and communicate communicate the economic events of an (2) organization to (3) interested users.
  • 4. Chapter 1-4 Three Activities What is Accounting? What is Accounting? LO 1 Explain what accounting is. LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function.
  • 5. Chapter 1-5 Management Common Questions Human Resources IRS Labor Unions SEC Marketing Finance Investors Creditors Who Uses Accounting Data? Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. LO 2 Identify the users and uses of accounting. Customers Internal Users External Users
  • 6. Chapter 1-6 Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 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? Who Uses Accounting Data? Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. LO 2 Identify the users and uses of accounting. 6. Will the company be able to pay its short-term debts? Investors Management Finance Marketing Creditors
  • 7. Chapter 1-7 The Building Blocks of Accounting The Building Blocks of Accounting Ethics In Financial Reporting LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept. Standards of conduct by which one’s 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. Effective financial reporting depends on sound ethical behavior.
  • 8. Chapter 1-8 Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Review Question Review Question Ethics Ethics LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept.
  • 9. Chapter 1-9 Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owners’ Equity Statement of Cash Flows Note Disclosure Generally Accepted Generally Accepted Accounting Accounting Principles (GAAP) Principles (GAAP) The Building Blocks of Accounting The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. LO 4 Explain generally accepted accounting principles and the cost principle.
  • 10. Chapter 1-10 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. The Building Blocks of Accounting The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. LO 4 Explain generally accepted accounting principles and the cost principle.
  • 11. Chapter 1-11 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. Assumptions Assumptions LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Forms of Business Ownership
  • 12. Chapter 1-12 Proprietorship Partnership Corporation Owned by two or Owned by two or more persons. more persons. Often retail and Often retail and service-type service-type businesses businesses Generally Generally unlimited unlimited personal liability personal liability Partnership Partnership agreement agreement Ownership Ownership divided into divided into shares of stock shares of stock Separate legal Separate legal entity organized entity organized under state under state corporation law corporation law Limited liability Limited liability Forms of Business Ownership Forms of Business Ownership Generally owned Generally owned by one person. by one person. Often small Often small service-type service-type businesses businesses Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally liable personally liable for all debts. for all debts. LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption.
  • 13. Chapter 1-13 Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Assumptions Assumptions LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Review Question Review Question
  • 14. Chapter 1-14 A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. LO 5 Explain the monetary unit assumption LO 5 Explain the monetary unit assumption and the economic entity assumption. and the economic entity assumption. Forms of Business Ownership Forms of Business Ownership Review Question Review Question
  • 15. Chapter 1-15 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity 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. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
  • 16. Chapter 1-16 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Assets Assets
  • 17. Chapter 1-17 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Liabilities Liabilities
  • 18. Chapter 1-18 Assets Assets Liabilities Liabilities Owners’ Owners’ Equity Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation The Basic Accounting Equation LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity. Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Owners’ Equity Owners’ Equity
  • 19. Chapter 1-19 Owners’ Equity Owners’ Equity 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. Illustration 1-6 LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
  • 20. Chapter 1-20 Owners’ Equity Owners’ 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. Illustration 1-6 LO 6 LO 6 State the accounting equation, and define State the accounting equation, and define assets, liabilities, and owner’s equity. assets, liabilities, and owner’s equity.
  • 21. Chapter 1-21 Using The Basic Accounting Equation Using The Basic Accounting Equation Transactions are a business’s 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. LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation.
  • 22. Chapter 1-22 Q1-15: Q1-15: Are the following events recorded in the accounting records? Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. An employee is hired. Owner withdraws cash for personal use. Record/ Don’t Record Transactions (Question?) Transactions (Question?)
  • 23. Chapter 1-23 P1-1A: P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. + + = + 1. Invested $10,000 cash to start the repair shop. Investment Assets Liabilities Equity
  • 24. Chapter 1-24 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 2. Purchased equipment for $5,000 cash. -5,000 2. +5,000 + + = + Investment Assets Liabilities Equity
  • 25. Chapter 1-25 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 3. Paid $400 cash for May office rent. -5,000 2. +5,000 + + = + -400 3. -400 Expense Barone, Capital Investment Assets Liabilities Equity
  • 26. Chapter 1-26 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 4. Received $5,100 from customers for repair service. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue Barone, Capital Investment Assets Liabilities Equity
  • 27. Chapter 1-27 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 5. Withdrew $1,000 cash for personal use. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings Barone, Capital Investment Assets Liabilities Equity
  • 28. Chapter 1-28 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 6. Paid part-time employee salaries of $2,000. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense Barone, Capital Investment Assets Liabilities Equity
  • 29. Chapter 1-29 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 7. Incurred $250 of advertising costs, on account. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense Barone, Capital Investment Assets Liabilities Equity
  • 30. Chapter 1-30 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 8. Provided $750 of repair services on account. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense +750 8. +750 Revenue Barone, Capital Investment Assets Liabilities Equity
  • 31. Chapter 1-31 Transactions (Problem) Transactions (Problem) +10,000 1. +10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 LO 7 Analyze the effects of business transactions Analyze the effects of business transactions on the accounting equation. on the accounting equation. 9. Collected $120 cash for services previously billed. -5,000 2. +5,000 + + = + -400 3. -400 Expense +5,100 4. +5,100 Revenue -1,000 5. -1,000 Drawings -2,000 6. -2,000 Expense +250 7. -250 Expense +750 8. +750 Revenue +120 9. -120 Barone, Capital Investment Assets Liabilities Equity 6,820 + 630 + 5,000 = 250 + 12,200
  • 32. Chapter 1-32 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owners’ Equity Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared.
  • 33. Chapter 1-33 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. Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Review Question Review Question
  • 34. Chapter 1-34 Income Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Revenues: Service revenue 5,850 $ Expenses: Salary expense 2,000 Rent expense 400 Advertising expense 250 Total expenses 2,650 Net income 3,200 $ Barone’s Repair Shop Income Statement For the Month Ended May 31, 2007
  • 35. Chapter 1-35 Revenues: Service revenue 5,850 $ Expenses: Salary expense 2,000 Rent expense 400 Advertising expense 250 Total expenses 2,650 Net income 3,200 $ Barone’s Repair Shop Income Statement For the Month Ended May 31, 2007 Income Statement Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Net income is needed to determine the ending balance in owner’s equity.
  • 36. Chapter 1-36 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period.
  • 37. Chapter 1-37 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Barone's, Capital May 1 - $ Add: Investment 10,000 Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200 $ Barone’s Repair Shop Owners' Equity Statement For the Month Ended May 31, 2007 Owners’ Equity Statement Assets Cash 6,820 $ Accounts receivable 630 Equipment 5,000 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007 The ending balance in owner’s equity is needed in preparing the balance sheet Balance Sheet
  • 38. Chapter 1-38 Balance Sheet Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Reports 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 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007
  • 39. Chapter 1-39 Balance Sheet Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Assets Cash 6,820 $ Accounts receivable 630 Equipment 5,000 Total assets 12,450 $ Liabilities Accounts payable 250 $ Owners' Equity Barone's, capital 12,200 Total liab. & equity 12,450 $ Balance Sheet Barone’s Repair Shop May 31, 2007 Cash flow from Operations Cash receipts from customers 5,220 $ Cash paid for expenses (2,400) Cash provided by operations 2,820 Cash flow from Investing Purchase of equipment (5,000) Cash flow from Financing Investment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 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, 2007 Statement of Cash Flows
  • 40. Chapter 1-40 Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Cash flow from Operations Cash receipts from customers 5,220 $ Cash paid for expenses (2,400) Cash provided by operations 2,820 Cash flow from Investing Purchase of equipment (5,000) Cash flow from Financing Investment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 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, 2007 Statement of Cash Flows Information 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?
  • 41. Chapter 1-41 Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Financial Statements Financial Statements LO 8 Understand the four financial statements and how they are prepared. LO 8 Understand the four financial statements and how they are prepared. Review Question Review Question

Editor's Notes

  • #12: Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods