Financial Accounting Chapter-1 ACCOUNTING: Accounting is an information system which provides information to its interested users making useful economic decision. Accounting= Asset + liability + owner equity +income +expense This five things is all about accounting FINANCIAL STATEMENT: In accounting there are five financial statements. These are:- 1. Statement of financial position/Balance sheet 2. Statement of comprehensive income/Income Statement 3. Statement of cash flow/Cash flow 4. Statement of change in owners’ equity/Change in equity 5. Note to the financial statement Statement of financial position /Balance Sheet (Within Point of time) = Asset + liability + owner equity Statement of comprehensive income/Income Statement (Within Period of time) =Loss + Profit +Investment Statement of cash flow/Cash flow= Operating + Investment +Financing Statement of change in owners’ equity/Change in equity = Earning Share BASIC ACCOUNTING EQUATION: The Accounting Equation Measures the resources of the business, and the various claims against those resources o Assets of the business - claims against the assets ASSETS= LIABILITIES(External claim) + OWER'S EQUITY(Internal / Insider claim) The basis for preparing the statement of financial position (Balance Sheet) ELEMENTS OF THE ACCOUNTING EQUATION: Assets Liabilities Owner’s Equity Income Expenses All are parts of OE but shown separately Drawings The business activities (Transactions) one or more of these element, therefore also affect the financial statement. THE ACCOUNTING EQUATION ASSETS= LIABILITIES + OWER'S EQUITY Page 1 of 31
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Financial Accounting
Chapter-1
ACCOUNTING:Accounting is an information system which provides information to its interested users making useful economic decision.Accounting= Asset + liability + owner equity +income +expenseThis five things is all about accounting
FINANCIAL STATEMENT:In accounting there are five financial statements. These are:-
1. Statement of financial position/Balance sheet2. Statement of comprehensive income/Income Statement3. Statement of cash flow/Cash flow4. Statement of change in owners’ equity/Change in equity 5. Note to the financial statement
Statement of financial position /Balance Sheet (Within Point of time) = Asset + liability + owner equity Statement of comprehensive income/Income Statement (Within Period of time) =Loss + Profit +Investment Statement of cash flow/Cash flow= Operating + Investment +Financing Statement of change in owners’ equity/Change in equity = Earning Share BASIC ACCOUNTING EQUATION:The Accounting Equation
Measures the resources of the business, and the various claims against those resourceso Assets of the business - claims against the assets
ASSETS= LIABILITIES(External claim) + OWER'S EQUITY(Internal / Insider claim) The basis for preparing the statement of financial position (Balance Sheet)
ELEMENTS OF THE ACCOUNTING EQUATION: Assets Liabilities Owner’s Equity Income Expenses All are parts of OE but shown separately Drawings
The business activities (Transactions) one or more of these element, therefore also affect the financial statement.THE ACCOUNTING EQUATION
The Equity section of the accounting equation can be expanded to analyze the effects of income (revenue) and expenses -determines net profit/loss for the period.
Reported on the Income Statement Net profit/loss is than added to the entity’s equity on the Balance Sheet.
DEFINATIONS:
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1. ASSETS :- Resources having the following characteristics Expected future economic benefit Business has exclusive right of control of the benefit Arises from a past transaction or event Reliable monetary measurement
You must be able to apply these characteristics to given items to determine whether they arc 'assets' of a business.Some assets are physical/tangible in nature (Inventory, Land, Vehicle) others are Intangible (legal rights. goodwill)2. LIABILITIES: -They are a current/ present obligation of the business, settlement of which normally results in an outflow of economic benefits from the business to
An external Party The result from a past event
The Basic concept of liabilities is a debt payable lo a party outside of the business - an external claim - usually for goods/service supplied, or loans made to the business. Include accounts payable, loans, accrued expenses or expenses payable, unearned revenue, mortgages, etc
3. OWNWR’S EQUITY:- It is known as equity or capital The owners net claim against the business assets.
ASSET-LIABILITIES= OWNER’S EQUITYThe Components of Owners Equity:
1. The owners investment & withdrawals2. The profit earned/Net income.(Revenue-Expense)
Statement of Changes in OE for a sole trader: Balance of capital at start of period plus additional capital injections made by owner plus net profit for the Period (or minus net loss for the Period) minus drawings made by owner equals balance of capital at end of period.
4. REVENUE/INCOME: The purpose of business is to increase OE (to increase the owner's wealth). This is achieved through profitable trading and earning income that
Increases economic benefits of the business Takes the form of asset inflows or enhancements; or decreases in liabilities. Result in an Increase in OE.
5. EXPENSE
Decrease economic benefits of business. Take the form of outflows/depletion of assets (such as cash), or incurrence of liabilities.
o They usually represent assets that have been used up during the period They cause the owner's equity to decrease Excludes distributions to the owners
The types of expenses incurred will also depend on the nature of the business.
Examples includes: cost of goods, salaries and wages, insurance, electricity, postage, telephone, rent, advertising etc.6. DRAWINGS
Amounts taken from the business by the owner Usually for personal use Could be cash or other assets withdrawn The opposite of owner investments, so they reduce OE.
EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION Every transaction will lead to a dual or twofold effect Leads to Double Entry Accounting
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Rules for Entry into Accounts - Debits and Credits End Result - Accounting Equation must balance after each transaction
TRANSACTION SCALESThe scales balance because the assets ($ 100,000) equal the liabilities ($25,000) Plus owner's equity ($75,000)
EXAMPLE:
Flonas FlowersBalance Sheet as at 1st January
Assts LiabilitiesCash 27,000 Bank Loan 20,000Delivery Van 58,000 Accounts Payable 5,000Inventory 15,000 Owners equity(Flonas capital) 75,000
100000 100000
EFFECT OF TRANSACTIONS ON ACCOUNTING EQUATION EXAMPLE:1. Owners invest Cash Tk -15,000/-
EFFECT OF TRANSACTIONS ON EXPNADED ACCOUNTING EQUATION EXAMPLE:1. Selling goods which cost Tk-135 for cash Tk-300
Assts Liabilities Owners equity+Cash Tk 300 – Inventory Tk 135 +Sales Revenue Tk 300 – Cost of goods sold expenseTk-135
2. Purchasing goods on credit for TK-4,320/-Assts Liabilities Owners equity
+Inventory Tk 4,320 +Accounts Payable Tk4,320
3. Owners withdraw Tk-50 cash for personal issue.Assts Liabilities Owners equity
-Cash Tk50 -Drawings Tk50
SUMMARY OF STUDY OBJECTIVES
1. Explain what accounting is. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.
2. Identify the users and uses of accounting. The major users and uses of accounting are as follows: a. Management uses accounting information in planning, controlling, and evaluating business
operations.b. Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of
accounting data. c. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the
basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, labor unions, and economic planners.
3. State the accounting equation, and define its components. The basic accounting equation is:
Assets = Liabilities + Owner’s Equity Assets are resources owned by a business. Liabilities are creditor ship claims on total assets. Owner’s equity is the ownership claim on total assets. The expanded accounting equation is:
Assets =Liabilities + Owner’s Capital -Owner’s Drawings + Revenues - Expenses Owner’s capital is assets the owner puts into the business. Owner’s drawings are the assets the owner withdraws for personal use. Revenues are increases in assets resulting from income - earning activities. Expenses are the costs of assets consumed in the process of earning revenue.
EXAMPLES
Page- 20 Type Example No:- 1
1. The owner invested $25,000 cash in the business.2. The company purchased $7,000 of office equipment on credit.
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3. The company received $8,000 cash in exchange for services performed.4. The company paid $850 for this month’s rent.5. The owner withdrew $1,000 cash for personal use.
Page- 20 Type Example No:- 1 Presented below is selected information related to Flanagan Company at
December 31, 2010. Flanagan reports financial information monthly.
(a) Determine the total assets of Flanagan Company at December 31, 2010.
(b) Determine the net income that Flanagan Company reported for December 2010.
(c) Determine the owner’s equity of Flanagan Company at December 31, 2010.
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Page- 26-27 Type Example No:- 1 Joan Robinson opens her own law office on July 1, 2010. During the first month of operations, the following transactions occurred.1. Joan invested $11,000 in cash in the law practice.2. Paid $800 for July rent on office space.3. Purchased office equipment on account $3,000.4. Provided legal services to clients for cash $1,500.5. Borrowed $700 cash from a bank on a note payable.6. Performed legal services for client on account $2,000.7. Paid monthly expenses: salaries $500, utilities $300, and telephone $100.8. Joan withdraws $1,000 cash for personal use.Instructions(a) Prepare a tabular summary of the transactions.(b) Prepare the income statement, owner’s equity statement, and balance sheet at July 31for Joan Robinson, Attorney.
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PROBLEMS: SET - A P1-1A
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Barone’s Repair Shop was started on May 1 by Nancy Barone. A summary of May transactions is presented below.1. Invested $10,000 cash to start the repair shop.2. Purchased equipment for $5,000 cash.3. Paid $400 cash for May office rent.4. Paid $500 cash for supplies.5. Incurred $250 of advertising costs in the Beacon News on account.6. Received $5,100 in cash from customers for repair service.7. Withdrew $1,000 cash for personal use.8. Paid part-time employee salaries $2,000.9. Paid utility bills $140.10. Provided repair service on account to customers $750.11. Collected cash of $120 for services billed in transaction (10).Instructions(a) Prepare a tabular analysis of the transactions, using the following column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, N. Barone Capital; N. Barone, Drawings; Revenues, and Expenses.(b) From an analysis of the owner’s equity columns, compute the net income or net loss for May.Solution:-
Mark Miller started his own delivery service, Miller Deliveries, on June 1, 2010.The following transactions occurred during the month of June.
June 1 Mark invested $10,000 cash in the business.2 Purchased a used van for deliveries for $12,000. Mark paid $2,000 cash and signed a note payable for
the remaining balance.3 Paid $500 for office rent for the month.5 Performed $4,400 of services on account.9 Withdrew $200 cash for personal use.12 Purchased supplies for $150 on account.15 Received a cash payment of $1,250 for services provided on June 5.17 Purchased gasoline for $100 on account.20 Received a cash payment of $1,500 for services provided.23 Made a cash payment of $500 on the note payable26 Paid $250 for utilities29 Paid for the gasoline purchased on account on June 17.30 Paid $1,000 for employee salaries.
Instructions(a) Show the effects of the previous transactions on the accounting equation using the following format.
Date
Assets Liabilities Owner's Equity
Cash + Account
Receivable+
Supplies +
DeliveryVan
Note Payable +
Accounts Payable +
M.Miller,capital -
M. Miller,Drawing + Revenue -
Expenses
(b) Prepare an income statement for the month of June.(c) Prepare a balance sheet at June 30, 2010.
M. Rodriguez, capital 10,000M. Rodriguez Drawings -200
Net Income 4,050Total Owners equity= 13,850
Total Liabilities & Owners Equity 23,500
P1-4B
Michelle Rodriguez started her own consulting firm, Rodriguez Consulting, on May 1, 2010.The following transactions occurred during the month of May.
May 1 Michelle invested $7,000 cash in the business.2 Paid $900 for office rent for the month.3 Purchased $600 of supplies on account.5 Paid $125 to advertise in the County News.9 Received $4,000 cash for services provided.12 Withdrew $1,000 cash for personal use.15 Performed $6,400 of services on account.17 Paid $2,500 for employee salaries.20 Paid for the supplies purchased on account on May 3.23 Received a cash payment of $4,000 for services provided on account on May 15.26 Borrowed $5,000 from the bank on a note payable.29 Purchased office equipment for $3,100 on account.30 Paid $175 for utilities.
Instructions(a) Show the effects of the previous transactions on the accounting equation using the following format.
Date
Assets Liabilities Owner's Equity
Cash + Account
Receivable+
Supplies +
Office Equipme
nt
Note Payable +
Accounts Payable +
M.Rodriguez,,capital -
M. Rodriguez,,Drawing +
Revenue -Expen
ses
(b) Prepare an income statement for the month of May.(c) Prepare a balance sheet at May 31, 2010.
M. Rodriguez, capital 7,000M. Rodriguez Drawings (1,000)
Net Income 6,700Total Owners equity= 12,700
Total Liabilities & Owners Equity 20,800
Chapter-2
Identify the basic steps in the recording process. The basic steps in the recording process are:(a) Analyze each transaction for its effects on the accounts, (b) Enter the transaction information in a journal, (c) Transfer the journal information to the appropriate accounts in the ledger.
Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) Provides a chronological record of transactions, and (c) Prevents or locates errors because the debit and credit amounts for each entry can be easily compared.
Debits and Credits
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-:Tabular summary compared to account form:-
JOURNALIZING
Illustration 2-13 shows the technique of journalizing, using the first two transactions of Softbyte. On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. The number J1 indicates that these two entries are recorded on the first page of the journal. Illustration 2-13 shows the standard form of journal entries for these two transactions. (The boxed numbers correspond to explanations in the list below the illustration.)
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The LedgerThe entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances.
Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner’s equity accounts, as shown in Illustration
EXAMPLES:
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Summary Illustration of Journalizing and Posting
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Exercise:
General Journal J1Date
2010 OctAccount title & Explanation Ref. Debit Credit
20 Cash( Bobs Withdraw for personal use) J1 700 7,100
30 Cash received laundry service provided J1 6,200 13,300
Equipments No : 104
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
3Purchased Washers & Dryers on cash & note payable)
J1 25,000 25,000
Prepaid Insurance No : 105
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
4 Paid 1 Year accidental insurance policy J1 1,200 1,200
Note Payable No : 201
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
3Purchased Washers & Dryers on cash & note payable
J1 15,000 15,000
Account Payable No : 202
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
10 Advertising Bill J1 200 200
Advertising Expense No : 203
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
10 Advertising Expense J1 200 200
Owners Withdrawal No : 204
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
20 Bobs Withdraw for personal use J1 700 700
Service Revenue No : 205
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
30 Service Revenue J1 6,200 -6,200
Owners Capital No : 301
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
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1 Bob invest in business J1 20,000 -20,000
Rent Expense No : 401
Date 2010 Oct Account title & Explanation Ref. Debit Credit Balance
2 Paid store rent sep-10 J1 1,000 1,000
Trail Balance30-Sep-12
Account title Debit CreditCash 13,300
Equipments 25,000 Prepaid Insurance 1,200
Note Payable 15,000Account Payable 200
Advertising Expense 200 Owners Withdrawal 700
Service Revenue 6,200Owners Capital 20,000Rent Expense 1,000
41,400 41,400
Chapter-3Explain the accrual basis of accounting. Accrual-basis accounting means that companies record events that change a company’s financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash.
Explain the reasons for adjusting entries. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred.
Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.
Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.Adjusting Entries
Deferrals1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed.2. Unearned Revenues. Cash received and recorded as liabilities before revenue is earned.Accruals1. Accrued Revenues. Revenues earned but not yet received in cash or recorded.2. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.