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Chapter 1 from accounting course - accounting principles

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Waleed Elsafoury

Chapter 1 from accounting course - accounting principles

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Accounting Principles
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1-2 Learning Objectives Identify the activities and users associated with accounting. Explain the building blocks of accounting: ethics, principles, and assumptions. State the accounting equation and define its components. 3 Analyze the effects of business transactions on the accounting equation. 2 1 4 Describe the four financial statements and how they are prepared. 5 Accounting in Action 1
1-3 LO 1 Accounting in Action What is Accounting Building Box of Accounting •Activities •Users •Ethics •GAAP •Assumptions Basic Accounting Equation • Assets • Liabilities • Equity Using Basic Accounting Equation Transaction Analysis (Dr. & Cr.) Financial Statements •Income statement •Owners’ Equity Statement •Balance Sheet •Cash Flow Statement
1-4 LEARNING OBJECTIVE Identify the activities and users associated with accounting. 1 LO 1 Accounting is “an information system that identifies, records, and communicates the economic events of an organization to the interested users (decision-makers) The purpose of accounting is to show you how the business is doing
1-5 Three Activities LO 1 Relevant to the Organization Will affect the financials of the company involved Measuring events in monetary units. Keeping a systematic chronological diary of events. Classifying economic events Summarizing economic events Preparing accounting reports in a standard format. Analyzing and interpreting information. Explaining uses, meaning, and limitations of data.
1-6 E1-1B Sophie Company performs the following accounting tasks during the year. 1. ______Summarizing economic events. 2. ______Selecting economic activities relevant to the company. 3. ______Reporting information in a standard format. 4. ______Preparing accounting reports. 5. ______Measuring events in dollars and cents. 6. ______Keeping a systematic chronological diary of events. 7. ______Explaining uses, meaning, and limitations of data. 8. ______Classifying economic events. 9. ______Analyzing and interpreting information. Instructions Categorize the accounting tasks performed by Sophie as relating to either the identification (I), recording (R), or R I C C R R C R C DO IT! 1
1-7 LEARNING OBJECTIVE Identify the activities and users associated with accounting. 1 LO 1 LEARNING OBJECTIVE Detailed Steps of the Accounting Cycle 1 Analyze Post Trial Balance Adjusting Entries Adjusted Trial Balance Financial Statements Closing Entries Post Closing Trial Balance Journalize Identifying Recording and Summarizing Communicating
1-8 INTERNAL USERS Who Uses Accounting Data LO 1 Stakeholders Internal users are people inside the business entity (organization) who use accounting information
1-9 LO 1 Who Uses Accounting Data EXTERNAL USERS Stakeholders A creditor is an entity (can either be a person, organisation or a government body) that is owed money, as they have provided goods or services to another entity An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Also: Banks, Customers, Tax authorities, External users are people outside the business entity (organization) who use accounting information
1-10 LO 1 Major Purposes of Accounting Systems Reporting Internal Routine Non-routin e External Provide information for decision-making purposes
1-11 LO 1 Internal Routine Reporting ● This purpose covers information provided for decisions that occur with some regularity: ● Daily reports ● Weekly reports ● Monthly reports
1-12 LO 1 Internal Non-routine Reporting ● This purpose covers information for decisions that occur irregularly or even without precedent: ● Outsourcing ● Design of a special cost control tracking system
1-13 LO 1 External Reporting ● This purpose covers information provided to investors, government authorities, and other outside parties on the organization’s financial position, operations, and related activities.
1-14 LO 1 Financial Accounting... …. focuses on reporting to external parties. ● It measures and records business transactions. ● It provides financial statements based on generally accepted accounting principles. External Accounting
1-15 LO 1 Management Accounting... …… measures and reports financial and non-financial information that helps managers make decisions to fulfill the goals of an organization. Internal Accounting
1-16 LO 1 Cost Accounting... …. provides information for both management accounting and financial accounting. ● It measures and reports financial and non-financial data that relates to the cost of acquiring or consuming resources by an organization.
1-17 LO 1 Cost Accounting... Cost Accounting System I n t e r n a l ( M a n a g e m e n t ) A c c o u n t i n g E x t e r n a l ( F i n a n c i a l ) A c c o u n t i n g
1-18 E1-2B (b) The following questions could be asked by an internal user or an external user. 1. ______What price should we set for our product? 2. ______Did the company earn a satisfactory income? 3. ______Should we hire more employees? 4. ______How does the company’s profitability compare to other companies? 5. ______What does it cost us to manufacture each unit produced? 6. ______Which product should we emphasize? 7. ______Will the company be able to provide a return to its stockholders? Instructions Identify each of the questions as being more likely asked by an internal user (I) or an external user (E). E I E E I I I DO IT! 2
1-19 1 DO IT! 3 Solution: 1. 2. 3. 4. 5. Indicate whether the following statements are true or false. 1. The three steps in the accounting process are identification, recording, and communication. 2. Bookkeeping encompasses all steps in the accounting process. 3. Accountants prepare, but do not interpret, financial reports. 4. The two most common types of external users are investors and company officers. 5. Managerial accounting activities focus on reports for internal users. LO 1 True False False False True Basic Concepts
1-20 ● Ethics are the standards of conduct by which actions are judged as RIGHT or WRONG. ● If you cannot depend on the HONESTY of the individuals you deal with, effective communication and economic activity would be impossible, and information would have no credibility Ethics LO 2
1-21 Various users need financial information The accounting profession has developed standards that are ……. Financial Statements ◆ Balance Sheet ◆ Income Statement ◆ Statement of Owner's Equity ◆ Statement of Cash Flows ◆ Note Disclosure Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles LO 2
1-22 Measurement Principles Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. LO 2 Historical Cost Principle Fair Value Principle (or cost principle) dictates that companies record assets at their cost states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) ?
1-23 Measurement Principles Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. LO 2 Historical Cost Principle Fair Value Principle (or cost principle) dictates that companies record assets at their cost states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) ? Accounting information is relevant when it is provided in time, but at early stages information is uncertain and hence less reliable. But if we wait to gain while the information gains reliability, its relevance is lost
1-24 Assumptions ◆ Proprietorship (sole) ◆ Partnership ◆ Corporation LO 2 Monetary Unit Assumption Economic Entity Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities What are the forms of ownership? An assumption is a thing that is accepted as true or as certain to happen, without proof
1-25 Proprietorship (sole) Partnership Corporation ◆ Owned by two or more persons ◆ Often retail and service-type businesses ◆ Generally unlimited personal liability ◆ Partnership agreement ◆ Ownership divided into shares of stock ◆ Separate legal entity organized under state corporation law ◆ Limited liability ◆ Owned by one person ◆ Owner is often manager/operator ◆ Owner receives any profits, suffers any losses, and is personally liable for all debts Forms of Business Ownership LO 2
1-26 Question 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. LO 2 Assumptions
1-27 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. Question LO 2 Assumptions
1-28 Assets Liabilities Owner's Equity = + LO 3 LEARNING OBJECTIVE State the accounting equation and define its components. 3 Basic Accounting Equation ◆ Provides the underlying framework for recording and summarizing economic events. ◆ Assets are claimed by either creditors or owners. ◆ If a business is liquidated, claims of creditors must be paid before ownership claims.
1-29 Assets Liabilities Owner's Equity = + ◆ Resources a business owns. ◆ Provide future services or benefits. ◆ Cash, Supplies, Equipment, etc. Assets LO 3 Basic Accounting Equation
1-30 Assets Liabilities Owner's Equity = + Basic Accounting Equation ◆ Claims against assets (debts and obligations). ◆ Creditors (party to whom money is owed). ◆ Accounts Payable, Notes Payable, Salaries and Wages Payable, etc. Liabilities LO 3
1-31 Owner's Equity Assets Liabilities Owner's Equity = + Basic Accounting Equation LO 3 ◆ Ownership claim on total assets. ◆ Referred to as residual equity. ◆ Investment by owners and revenues (+) ◆ Drawings and expenses (-).
1-32 ◆ Investments by owner are the assets the owner puts into the business. ◆ 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 Equity Increases in Owner’s Equity LO 3
1-33 ◆ Drawings An owner may withdraw cash or other assets for personal use. ◆ 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 Equity Decreases in Owner’s Equity LO 3
1-34 Expense Decrease Expense Decrease Revenue Increase Drawings Decrease Classification Classify the following items as investment by owner, owner’s drawings, revenue, or expenses. Then indicate whether each item increases or decreases owner’s equity. 1. Rent Expense 2. Service Revenue 3. Drawings 4. Salaries and Wages Expense Effect on Equity LO 3 DO IT! 4 Owner's Equity Effects
1-35 E1-5B Luther Cleaners has the following balance sheet items. 1. -------- Accounts payable 2. -------- Accounts receivable 3. -------- Cash 4. -------- Notes payable 5. -------- Equipment 6. -------- Rent payable 7. -------- Supplies 8. -------- Owner’s capital Instructions Classify each item as an asset (A), liability (L), or owner’s equity (OE). DO IT! 5 L A A L A L A OE
1-36 Transactions are a business’s economic events recorded by accountants. Note that: ◆ May be external or internal. ◆ Not all activities represent transactions. ◆ Each transaction has a dual effect on the accounting equation. LO 4 LEARNING OBJECTIVE Analyze the effects of business transactions on the accounting equation. 4
1-37 Illustration: Are the following events recorded in the accounting records? Event Purchase computer Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Discuss product design with potential customer Pay rent Record/ Don’t Record Transaction Analysis LO 4
1-38 DO IT! 4 1. ---------- Made cash investment to start business. 2. ---------- Purchased equipment on account. 3. -------- Paid salaries. 4. --------- Billed customers for services performed. 5. --------- Received cash from customers billed in (4). 6. Withdrew cash for owner’s personal use. 7. -------- Incurred advertising expense on account. 8. -------- Purchased additional equipment for cash. 9. ------- Received cash from customers when service was performed. Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets and increase in owner’s equity. I cash, I capital I equipment, D A/P D cash, I Exp I revenue, I A/R I cash D A/R I Expense, I A/P I equipment, D cash I cash, I revenue
1-39 Transaction Analysis Each transaction has a dual effect on the accounting equation Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + -
1-40 Transaction Analysis TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital 1. +15,000 +15,000 Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + - Trans- action
1-41 Transaction Analysis TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital 1. +15,000 +15,000 Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + - Trans- action
1-42 8. -250 -250 9. +600 -600 10. -1,300 -1,300 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash. Illustration 1-8 LO 4 Owner's Capital Owner's Drawings Rev. Exp. + -
1-43 8. -250 -250 9. +600 -600 10. -1,300 -1,300 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash. Illustration 1-8 LO 4 Owner's Capital Owner's Drawings Rev. Exp. + -
1-44 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October. LO 4 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-45 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October. LO 4 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-46 + + + + + = - - TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc. receives $1,200 cash from customers for app development services it has performed. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-47 + + + + + = - - TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc. receives $1,200 cash from customers for app development services it has performed. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-48 + + + + + = - - TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-49 + + + + + = - - TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-50 + + + + + = - - TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT. Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-51 + + + + + = - - TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT. Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-52 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. LO 4 + + + + + = - - LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-53 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. LO 4 + + + + + = - - LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-54 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable. LO 4 + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-55 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable. LO 4 + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
1-56 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6). $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
1-57 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6). $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
1-58 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
1-59 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
1-60 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 -$1,300 + $4,700 $1,950 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300
1-61 1. Each transaction is analyzed in terms of its effect on: a. The three components of the basic accounting equation. b. Specific of items within each component. 2. The two sides of the equation must always be equal. Summary of Transactions LO 4
1-62 Companies prepare four financial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement LEARNING OBJECTIVE Describe the four financial statements and how they are prepared. 5 LO 5
1-63 Net income is needed to determine the ending balance in owner’s equity. Income Statement LO 5 SOFTBYTE Income Statement For the Month Ended September 30, 2017 Revenues $4,700 To Owner’s Equity Statement Expenses: Salaries and Wages Ex. $900 Rent Ex. 600 Advertising Ex. 250 Utilities Ex. 200 Total Expenses $1,950 Net Income $2,750 Reports the revenues and expenses for a specific period of time.
1-64 ◆ Lists revenues first, followed by expenses. ◆ Shows net income (or net loss). ◆ Does not include investment and withdrawal transactions between the owner and the business in measuring net income. Income Statement …. LO 5
1-65 Income Statement 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. Question LO 5
1-66 ◆ Reports the changes in owner’s equity for a specific period of time. ◆ The time period is the same as that covered by the income statement. Owner’s Equity Statement LO 5
1-67 Net income is needed to determine the ending balance in owner’s equity. Financial Statements LO 5 SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017 Owner's Capital, Sept. 1 $0 From Income Statement To Balance Sheet Investment $15,000 Net Income $2,750 $17,750 $17,750 Less: Drawings 1,300 Owner's Capital Sept.30 $16,450 Add:
1-68 The ending balance in owner’s equity is needed in preparing the balance sheet. SOFTBYTE Balance Sheet September 30, 2017 Assets ? From OE Statement Reports the assets, liabilities, and owner's equity at a specific date. Cash $8,050 Accounts Receivables 1,400 Supplies 1,600 Equipment 7,000 Total Assets $18,050 Liabilities and Owner's Equity Liabilities Accounts Payable $1,600 Owner's Equity Owner's Capital $16,450 Total Liabilities and Owner's Equity $18,050
1-69 ◆ Lists assets at the top, followed by liabilities and owner’s equity. ◆ Total assets must equal total liabilities and owner's equity. ◆ Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end). Balance Sheet …. LO 5
1-70 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 Question LO 5
1-71 ◆ Information on the cash receipts and payments for a specific period of time. ◆ Answers the following: ► Where did cash come from? ► What was cash used for? ► What was the change in the cash balance? Statement of Cash Flows LO 5
1-72 Balance sheet and income statement are needed to prepare statement of cash flows. SOFTBYTE Statement of Cash Flows For the Month Ended September 30, 2017 Financial Statements Cash flows from operating activities Cash receipts from revenues $3,300 Cash payments for expenses -1,950 Net cash provided by operating activities $1,350 Cash flows from Investing activities Purchase of Equipment -7,000 Cash flows from financing activities Investment by Owners 15,000 Drawings by Owner -1,300 Net cash provided by financing activities 13,700 Net Increase in Cash $8,050 Cash at the beginning of the period 0 Cash at the end of the period $8,050
1-73 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 a) Determine the total assets of on December 31, 2017. b) Determine the net income reported for December 2017. c) Determine the owner’s equity on December 31, 2017.
1-74 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (a) Determine the total assets of on December 31, 2017. Cash 8,000 Accounts Receivables 9,000 Equipment 10,000 Total Assets 27,000
1-75 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (b) Determine the net income reported for December 2017. Revenues Service Revenues 36,000 Less: Expenses Rent Ex. 11,000 Salaries and Wages Ex. 7,000 Utilities Ex. 4,000 Total Expenses 22,000 Net Income 14,000
1-76 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (c) Determine the owner’s equity on December 31, 2017. Total Assets [as computed in (a)] 27,000 Less: Liabilities Notes Payable 16,500 Accounts Payable 2,000 Total Liabilities 18,500 Owner’s Equity 8,500

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Chapter 1 from accounting course - accounting principles

  • 1. 1-1
  • 2. 1-2 Learning Objectives Identify the activities and users associated with accounting. Explain the building blocks of accounting: ethics, principles, and assumptions. State the accounting equation and define its components. 3 Analyze the effects of business transactions on the accounting equation. 2 1 4 Describe the four financial statements and how they are prepared. 5 Accounting in Action 1
  • 3. 1-3 LO 1 Accounting in Action What is Accounting Building Box of Accounting •Activities •Users •Ethics •GAAP •Assumptions Basic Accounting Equation • Assets • Liabilities • Equity Using Basic Accounting Equation Transaction Analysis (Dr. & Cr.) Financial Statements •Income statement •Owners’ Equity Statement •Balance Sheet •Cash Flow Statement
  • 4. 1-4 LEARNING OBJECTIVE Identify the activities and users associated with accounting. 1 LO 1 Accounting is “an information system that identifies, records, and communicates the economic events of an organization to the interested users (decision-makers) The purpose of accounting is to show you how the business is doing
  • 5. 1-5 Three Activities LO 1 Relevant to the Organization Will affect the financials of the company involved Measuring events in monetary units. Keeping a systematic chronological diary of events. Classifying economic events Summarizing economic events Preparing accounting reports in a standard format. Analyzing and interpreting information. Explaining uses, meaning, and limitations of data.
  • 6. 1-6 E1-1B Sophie Company performs the following accounting tasks during the year. 1. ______Summarizing economic events. 2. ______Selecting economic activities relevant to the company. 3. ______Reporting information in a standard format. 4. ______Preparing accounting reports. 5. ______Measuring events in dollars and cents. 6. ______Keeping a systematic chronological diary of events. 7. ______Explaining uses, meaning, and limitations of data. 8. ______Classifying economic events. 9. ______Analyzing and interpreting information. Instructions Categorize the accounting tasks performed by Sophie as relating to either the identification (I), recording (R), or R I C C R R C R C DO IT! 1
  • 7. 1-7 LEARNING OBJECTIVE Identify the activities and users associated with accounting. 1 LO 1 LEARNING OBJECTIVE Detailed Steps of the Accounting Cycle 1 Analyze Post Trial Balance Adjusting Entries Adjusted Trial Balance Financial Statements Closing Entries Post Closing Trial Balance Journalize Identifying Recording and Summarizing Communicating
  • 8. 1-8 INTERNAL USERS Who Uses Accounting Data LO 1 Stakeholders Internal users are people inside the business entity (organization) who use accounting information
  • 9. 1-9 LO 1 Who Uses Accounting Data EXTERNAL USERS Stakeholders A creditor is an entity (can either be a person, organisation or a government body) that is owed money, as they have provided goods or services to another entity An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Also: Banks, Customers, Tax authorities, External users are people outside the business entity (organization) who use accounting information
  • 10. 1-10 LO 1 Major Purposes of Accounting Systems Reporting Internal Routine Non-routin e External Provide information for decision-making purposes
  • 11. 1-11 LO 1 Internal Routine Reporting ● This purpose covers information provided for decisions that occur with some regularity: ● Daily reports ● Weekly reports ● Monthly reports
  • 12. 1-12 LO 1 Internal Non-routine Reporting ● This purpose covers information for decisions that occur irregularly or even without precedent: ● Outsourcing ● Design of a special cost control tracking system
  • 13. 1-13 LO 1 External Reporting ● This purpose covers information provided to investors, government authorities, and other outside parties on the organization’s financial position, operations, and related activities.
  • 14. 1-14 LO 1 Financial Accounting... …. focuses on reporting to external parties. ● It measures and records business transactions. ● It provides financial statements based on generally accepted accounting principles. External Accounting
  • 15. 1-15 LO 1 Management Accounting... …… measures and reports financial and non-financial information that helps managers make decisions to fulfill the goals of an organization. Internal Accounting
  • 16. 1-16 LO 1 Cost Accounting... …. provides information for both management accounting and financial accounting. ● It measures and reports financial and non-financial data that relates to the cost of acquiring or consuming resources by an organization.
  • 17. 1-17 LO 1 Cost Accounting... Cost Accounting System I n t e r n a l ( M a n a g e m e n t ) A c c o u n t i n g E x t e r n a l ( F i n a n c i a l ) A c c o u n t i n g
  • 18. 1-18 E1-2B (b) The following questions could be asked by an internal user or an external user. 1. ______What price should we set for our product? 2. ______Did the company earn a satisfactory income? 3. ______Should we hire more employees? 4. ______How does the company’s profitability compare to other companies? 5. ______What does it cost us to manufacture each unit produced? 6. ______Which product should we emphasize? 7. ______Will the company be able to provide a return to its stockholders? Instructions Identify each of the questions as being more likely asked by an internal user (I) or an external user (E). E I E E I I I DO IT! 2
  • 19. 1-19 1 DO IT! 3 Solution: 1. 2. 3. 4. 5. Indicate whether the following statements are true or false. 1. The three steps in the accounting process are identification, recording, and communication. 2. Bookkeeping encompasses all steps in the accounting process. 3. Accountants prepare, but do not interpret, financial reports. 4. The two most common types of external users are investors and company officers. 5. Managerial accounting activities focus on reports for internal users. LO 1 True False False False True Basic Concepts
  • 20. 1-20 ● Ethics are the standards of conduct by which actions are judged as RIGHT or WRONG. ● If you cannot depend on the HONESTY of the individuals you deal with, effective communication and economic activity would be impossible, and information would have no credibility Ethics LO 2
  • 21. 1-21 Various users need financial information The accounting profession has developed standards that are ……. Financial Statements ◆ Balance Sheet ◆ Income Statement ◆ Statement of Owner's Equity ◆ Statement of Cash Flows ◆ Note Disclosure Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles LO 2
  • 22. 1-22 Measurement Principles Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. LO 2 Historical Cost Principle Fair Value Principle (or cost principle) dictates that companies record assets at their cost states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) ?
  • 23. 1-23 Measurement Principles Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. LO 2 Historical Cost Principle Fair Value Principle (or cost principle) dictates that companies record assets at their cost states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) ? Accounting information is relevant when it is provided in time, but at early stages information is uncertain and hence less reliable. But if we wait to gain while the information gains reliability, its relevance is lost
  • 24. 1-24 Assumptions ◆ Proprietorship (sole) ◆ Partnership ◆ Corporation LO 2 Monetary Unit Assumption Economic Entity Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities What are the forms of ownership? An assumption is a thing that is accepted as true or as certain to happen, without proof
  • 25. 1-25 Proprietorship (sole) Partnership Corporation ◆ Owned by two or more persons ◆ Often retail and service-type businesses ◆ Generally unlimited personal liability ◆ Partnership agreement ◆ Ownership divided into shares of stock ◆ Separate legal entity organized under state corporation law ◆ Limited liability ◆ Owned by one person ◆ Owner is often manager/operator ◆ Owner receives any profits, suffers any losses, and is personally liable for all debts Forms of Business Ownership LO 2
  • 26. 1-26 Question 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. LO 2 Assumptions
  • 27. 1-27 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. Question LO 2 Assumptions
  • 28. 1-28 Assets Liabilities Owner's Equity = + LO 3 LEARNING OBJECTIVE State the accounting equation and define its components. 3 Basic Accounting Equation ◆ Provides the underlying framework for recording and summarizing economic events. ◆ Assets are claimed by either creditors or owners. ◆ If a business is liquidated, claims of creditors must be paid before ownership claims.
  • 29. 1-29 Assets Liabilities Owner's Equity = + ◆ Resources a business owns. ◆ Provide future services or benefits. ◆ Cash, Supplies, Equipment, etc. Assets LO 3 Basic Accounting Equation
  • 30. 1-30 Assets Liabilities Owner's Equity = + Basic Accounting Equation ◆ Claims against assets (debts and obligations). ◆ Creditors (party to whom money is owed). ◆ Accounts Payable, Notes Payable, Salaries and Wages Payable, etc. Liabilities LO 3
  • 31. 1-31 Owner's Equity Assets Liabilities Owner's Equity = + Basic Accounting Equation LO 3 ◆ Ownership claim on total assets. ◆ Referred to as residual equity. ◆ Investment by owners and revenues (+) ◆ Drawings and expenses (-).
  • 32. 1-32 ◆ Investments by owner are the assets the owner puts into the business. ◆ 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 Equity Increases in Owner’s Equity LO 3
  • 33. 1-33 ◆ Drawings An owner may withdraw cash or other assets for personal use. ◆ 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 Equity Decreases in Owner’s Equity LO 3
  • 34. 1-34 Expense Decrease Expense Decrease Revenue Increase Drawings Decrease Classification Classify the following items as investment by owner, owner’s drawings, revenue, or expenses. Then indicate whether each item increases or decreases owner’s equity. 1. Rent Expense 2. Service Revenue 3. Drawings 4. Salaries and Wages Expense Effect on Equity LO 3 DO IT! 4 Owner's Equity Effects
  • 35. 1-35 E1-5B Luther Cleaners has the following balance sheet items. 1. -------- Accounts payable 2. -------- Accounts receivable 3. -------- Cash 4. -------- Notes payable 5. -------- Equipment 6. -------- Rent payable 7. -------- Supplies 8. -------- Owner’s capital Instructions Classify each item as an asset (A), liability (L), or owner’s equity (OE). DO IT! 5 L A A L A L A OE
  • 36. 1-36 Transactions are a business’s economic events recorded by accountants. Note that: ◆ May be external or internal. ◆ Not all activities represent transactions. ◆ Each transaction has a dual effect on the accounting equation. LO 4 LEARNING OBJECTIVE Analyze the effects of business transactions on the accounting equation. 4
  • 37. 1-37 Illustration: Are the following events recorded in the accounting records? Event Purchase computer Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Discuss product design with potential customer Pay rent Record/ Don’t Record Transaction Analysis LO 4
  • 38. 1-38 DO IT! 4 1. ---------- Made cash investment to start business. 2. ---------- Purchased equipment on account. 3. -------- Paid salaries. 4. --------- Billed customers for services performed. 5. --------- Received cash from customers billed in (4). 6. Withdrew cash for owner’s personal use. 7. -------- Incurred advertising expense on account. 8. -------- Purchased additional equipment for cash. 9. ------- Received cash from customers when service was performed. Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and owner’s equity. For example, the first answer is: (1) Increase in assets and increase in owner’s equity. I cash, I capital I equipment, D A/P D cash, I Exp I revenue, I A/R I cash D A/R I Expense, I A/P I equipment, D cash I cash, I revenue
  • 39. 1-39 Transaction Analysis Each transaction has a dual effect on the accounting equation Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + -
  • 40. 1-40 Transaction Analysis TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital 1. +15,000 +15,000 Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + - Trans- action
  • 41. 1-41 Transaction Analysis TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Cash Accounts Receivable Supplies Equipment Accounts Payable Owner's Capital 1. +15,000 +15,000 Assets = Liabilities + Owner's Equity + - + + + = LO 4 Owner's Drawings Rev. Exp. + - Trans- action
  • 42. 1-42 8. -250 -250 9. +600 -600 10. -1,300 -1,300 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash. Illustration 1-8 LO 4 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 43. 1-43 8. -250 -250 9. +600 -600 10. -1,300 -1,300 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash. Illustration 1-8 LO 4 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 44. 1-44 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October. LO 4 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 45. 1-45 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October. LO 4 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 46. 1-46 + + + + + = - - TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc. receives $1,200 cash from customers for app development services it has performed. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 47. 1-47 + + + + + = - - TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc. receives $1,200 cash from customers for app development services it has performed. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 48. 1-48 + + + + + = - - TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 49. 1-49 + + + + + = - - TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 50. 1-50 + + + + + = - - TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT. Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 51. 1-51 + + + + + = - - TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT. Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 52. 1-52 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. LO 4 + + + + + = - - LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 53. 1-53 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. LO 4 + + + + + = - - LO 4 + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 54. 1-54 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable. LO 4 + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 55. 1-55 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable. LO 4 + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + -
  • 56. 1-56 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6). $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
  • 57. 1-57 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6). $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
  • 58. 1-58 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
  • 59. 1-59 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300 LO 4
  • 60. 1-60 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. $18,050 $18,050 LO 4 $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300 + + + + + = - - + + + + + = - - + + + + + = - - $8,050 $1,400 $1,600 $7,000 $1,600 $15,000 -$1,300 + $4,700 $1,950 8. -250 -250 5. +250 -250 4. +1,200 +1,200 7. -1,700 -600 -900 -200 Trans- action Cash Accounts Receivable Supplies Equipment Accounts Payable Assets = Liabilities + Owner's Equity + - + + + = 1. +15,000 +15,000 2. -7,000 +7,000 3. +1,600 +1,600 6. +1,500 +2,000 +3,500 Owner's Capital Owner's Drawings Rev. Exp. + - 9. +600 -600 10. -1,300 -1,300
  • 61. 1-61 1. Each transaction is analyzed in terms of its effect on: a. The three components of the basic accounting equation. b. Specific of items within each component. 2. The two sides of the equation must always be equal. Summary of Transactions LO 4
  • 62. 1-62 Companies prepare four financial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement LEARNING OBJECTIVE Describe the four financial statements and how they are prepared. 5 LO 5
  • 63. 1-63 Net income is needed to determine the ending balance in owner’s equity. Income Statement LO 5 SOFTBYTE Income Statement For the Month Ended September 30, 2017 Revenues $4,700 To Owner’s Equity Statement Expenses: Salaries and Wages Ex. $900 Rent Ex. 600 Advertising Ex. 250 Utilities Ex. 200 Total Expenses $1,950 Net Income $2,750 Reports the revenues and expenses for a specific period of time.
  • 64. 1-64 ◆ Lists revenues first, followed by expenses. ◆ Shows net income (or net loss). ◆ Does not include investment and withdrawal transactions between the owner and the business in measuring net income. Income Statement …. LO 5
  • 65. 1-65 Income Statement 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. Question LO 5
  • 66. 1-66 ◆ Reports the changes in owner’s equity for a specific period of time. ◆ The time period is the same as that covered by the income statement. Owner’s Equity Statement LO 5
  • 67. 1-67 Net income is needed to determine the ending balance in owner’s equity. Financial Statements LO 5 SOFTBYTE Owner’s Equity Statement For the Month Ended September 30, 2017 Owner's Capital, Sept. 1 $0 From Income Statement To Balance Sheet Investment $15,000 Net Income $2,750 $17,750 $17,750 Less: Drawings 1,300 Owner's Capital Sept.30 $16,450 Add:
  • 68. 1-68 The ending balance in owner’s equity is needed in preparing the balance sheet. SOFTBYTE Balance Sheet September 30, 2017 Assets ? From OE Statement Reports the assets, liabilities, and owner's equity at a specific date. Cash $8,050 Accounts Receivables 1,400 Supplies 1,600 Equipment 7,000 Total Assets $18,050 Liabilities and Owner's Equity Liabilities Accounts Payable $1,600 Owner's Equity Owner's Capital $16,450 Total Liabilities and Owner's Equity $18,050
  • 69. 1-69 ◆ Lists assets at the top, followed by liabilities and owner’s equity. ◆ Total assets must equal total liabilities and owner's equity. ◆ Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end). Balance Sheet …. LO 5
  • 70. 1-70 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 Question LO 5
  • 71. 1-71 ◆ Information on the cash receipts and payments for a specific period of time. ◆ Answers the following: ► Where did cash come from? ► What was cash used for? ► What was the change in the cash balance? Statement of Cash Flows LO 5
  • 72. 1-72 Balance sheet and income statement are needed to prepare statement of cash flows. SOFTBYTE Statement of Cash Flows For the Month Ended September 30, 2017 Financial Statements Cash flows from operating activities Cash receipts from revenues $3,300 Cash payments for expenses -1,950 Net cash provided by operating activities $1,350 Cash flows from Investing activities Purchase of Equipment -7,000 Cash flows from financing activities Investment by Owners 15,000 Drawings by Owner -1,300 Net cash provided by financing activities 13,700 Net Increase in Cash $8,050 Cash at the beginning of the period 0 Cash at the end of the period $8,050
  • 73. 1-73 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 a) Determine the total assets of on December 31, 2017. b) Determine the net income reported for December 2017. c) Determine the owner’s equity on December 31, 2017.
  • 74. 1-74 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (a) Determine the total assets of on December 31, 2017. Cash 8,000 Accounts Receivables 9,000 Equipment 10,000 Total Assets 27,000
  • 75. 1-75 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (b) Determine the net income reported for December 2017. Revenues Service Revenues 36,000 Less: Expenses Rent Ex. 11,000 Salaries and Wages Ex. 7,000 Utilities Ex. 4,000 Total Expenses 22,000 Net Income 14,000
  • 76. 1-76 LO 5 DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 (c) Determine the owner’s equity on December 31, 2017. Total Assets [as computed in (a)] 27,000 Less: Liabilities Notes Payable 16,500 Accounts Payable 2,000 Total Liabilities 18,500 Owner’s Equity 8,500