Finl Acctg Info Process

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Chapter 2

The Financial Accounting Information Process

27 June 2013

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1. Explain the use of the accounting equation and its components

2. Analyze the effect of business transaction to the accounting equation

3. Know the nature of accounts

4. Describe the most commonly encountered account names, both standard and hospitality account titles

5. Explain the nature and purpose of a chart of accounts

Learning ObjectivesLearning Objectives

After studying this chapter, you should

be able to:

After studying this chapter, you should

be able to:

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Learning ObjectivesLearning Objectives

6. Identify the basic steps in the accounting process.

7. Apply double-entry accounting system8. Demonstrate journalization and posting

processes9. Balance off the accounts and prepare a trial

balance

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Definition of TermsDefinition of Terms

Business Transactions are events which involve the exchange of values between two or more parties Economic events that occur in the business,

causing at least two changes in accounts Always expressed in terms of money Analyzed from the various business documents or

business papers External transactions – economic events entered into

between the business and outside enterprise or party Internal transactions – economic events that occur

entirely within the enterprise

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Definition of TermsDefinition of Terms

Assets - A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

Liabilities - A company's legal debts or obligations that arise during the course of business operations.

Owner’s equities - The capital employed in a company, computed by deducting the book value of the liabilities from the book value of the assets.

Assets = Liabilities + Owner’s Equity

The resources owned by a

business

The resources owned by a

business

Accounting EquationAccounting Equation


The rights of the creditors, which

represent debts of the business

The rights of the creditors, which

represent debts of the business



The rights of the owners

The rights of the owners


What is a business transaction?

A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2012, Chris

Clark begins a business that will

be known as NetSolutions.

a. Chris Clark deposits P25,000 in a bank account in the name of NetSolutions.

a. Chris Clark deposits P25,000 in a bank account in the name of NetSolutions.

Chris Clark, Capital25,000 Investment

by Chris Clark

Cash25,000 a.

Assets Owner’s Equity=

=

b. NetSolutions exchanged P20,000 for land.b. NetSolutions exchanged P20,000 for land.

Chris Clark, Capital25,000

Cash + Land 25,000 Bal.

Assets Owner’s Equity=

=b. –20,000 +20,000Bal. 5,000 20,000 25,000

Accounts Chris Clark,Cash + Supplies + Land Payable Capital

Assets

c. During the month, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future (on account).

c. During the month, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future (on account).

Owner’s Liabilities + Equity=

Bal. 5,000 20,000 25,000c. + 1,350 + 1,350

Bal. 5,000 1,350 20,000 1,350 25,000

=

d. NetSolutions provided services to customers, earning fees of P7,500 and received the amount in cash.

d. NetSolutions provided services to customers, earning fees of P7,500 and received the amount in cash.

Bal. 12,500 1,350 20,000 1,350 32,500d. + 7,500 + 7,500


Assets Owner’s Liabilities + Equity

Bal. 5,000 1,350 20,000 1,350 25,000Fees earned

=

=

e. – 3,650 –2,125– 800– 450

– 275

Wages

Rent

Util.

Misc.


Assets

e. NetSolutions paid the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275.

e. NetSolutions paid the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275.


Bal. 12,500 1,350 20,000 1,350 32,500

=

Bal. 8,850 1,350 20,000 1,35028,850


Assets

f. NetSolutions paid P950 to creditors during the month.

f. NetSolutions paid P950 to creditors during the month.


Bal. 8,850 1,350 20,000 1,350 28,850f. – 950 – 950

=

Bal. 7,900 1,350 20,000 400 28,850


Assets

g. At the end of the month, the cost of supplies on hand is P550, so P800 of supplies were used.

g. At the end of the month, the cost of supplies on hand is P550, so P800 of supplies were used.


Bal. 7,900 1,350 20,000 400 28,850g. – 800 – 800

=

Bal. 7,900 550 20,000 400 28,050

Supplies expense


Assets

h. At the end of the month, Chris withdrew P2,000 in cash from the business for personal use.

h. At the end of the month, Chris withdrew P2,000 in cash from the business for personal use.

Owner’s Liabilities + Equity

Bal. 7,900 550 20,000 400 28,050h. –2,000 –2,000Bal. 5,900 550 20,000 400 26,050

With-drawal

=

=

Owner’s withdrawals

Expenses

Decreased by

Owner’s Equity

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Increased by

Owner’s investments

Revenues

Net income

Standard Account TitlesStandard Account Titles

Cash: Coins, bills, and near cash items either in the possession of the business or entrusted to the banks for safekeeping and are available for use. Cash account increases with receipts of cash and decreases with payments. Be warned that while cash is an asset, it becomes a liability when over issued with checks, in the case of cash in bank account. Petty cash, demand deposits, time deposits, personal checks, traveller’s check are likewise included in the Cash account. Debit or ATM card transactions are also part of Cash transactions since this results in instant reduction of the cardholder’s cash balance in favour of the business.


Marketable Securities: Otherwise known as Money Market Placements, these are short-term investments for temporary idle cash. They can be easily converted back to cash when the need for it arises. Notes Receivable: Collectible from customers/ clients/ guests due to merchandise and/or services sold/rendered but not yet paid in cash. This collectible is supported by a written promise or note to pay a definite sum of money at a later date. The written promise or promissory note is issued by the customers/ clients/guests (maker) in favour of the seller (payee).


Accounts Receivable: Collectible from customers/ clients/ guests due to merchandise and/or services sold/rendered but not yet paid for in cash. Office Supplies on Hand (Office Supplies Unused): Coupon Bond, carbon paper, ledgers, worksheets, ballpens, erasers, envelopes, journals, fasteners, stationeries, and many others used in the office.

Store Supplies on Hand (Store Supplies Unused): Plastic bags, tapes, stapler, fillers, adding machine tapes, string, and many others used in the store


Prepaid Expenses:Prepaid Rent: Rent payment for the use of office, store and/or factory space made in advance covering a specified period of time Prepaid Insurance: Insurance premiums paid in advance covering a specified period of time. Prepaid Advertising: Payments made in advance in the promotion of the business merchandise/goods and/or services such as publication in the newspapers, announcements, etc.


Investments: Bonds or stocks issued by other businesses where the intention of the management is regular income therefrom or to hold a controlling interest. However, while land is classified under Property and Equipment account, when it is held for future expansion, then it is classified as Investment account. Land: The very land or ground where the building is situated.

Standard Account TitlesStandard Account TitlesBuilding: The cost of building for use by the business., Physically, the land and the building constructed thereon are inseparable. Furniture and Fixture: Cost of office/store chairs, tables, shelves, cabinets, lighting, air-conditions, etc. Office Equipment: Cost of computers, calculators, typewriters, fax machines, etc for use in the office. Store Equipment: Cost of weighing scale, calculators, adding machine, etc, used in the store. Delivery Truck: Cost of truck used in delivery of goods/services from one place to another.


Accounts Payable: Obligations or debts owed by the business to other parties for services or merchandise acquired on account and are not supported by promissory notes. On account means “on credit.” Notes Payable: Obligations or debts owed to other parties for services received or merchandise acquired on account and are supported by promissory notes issued in favour of the creditor/seller.

Standard Account TitlesStandard Account TitlesBank Payable/Loan Payable: Obligations or debts owed to bank (s) for money borrowed and for use by the business. Utilities Payable: Obligations or debts owed to utility companies for the use of electricity, water, and telephone facilities. Interest Payable: Amount due to banks or financing institutions for the use of money. Taxes and Licenses Payable: Estimated taxes, licenses and other fees due to the government.

Standard Account TitlesStandard Account TitlesSSS and Medicare Payable: Amount withheld from the salaries and wages of employees and workers and the employer’s contribution due and payable to the Social Security System. Salaries and Wages Payable: Amounts due as compensation for the services rendered by employees and workers.

Accrued Expenses Payable: Expenses incurred but not payable until after the balance sheet date like salaries and wages, interest, rent, taxes, utilities, vacation pay and many others.

Standard Account TitlesStandard Account TitlesMortgage Payable: Obligations and debts owed to financial institutions and are collateraled by some permanent assets of the business, like land. Bonds Payable: Obligations and debts owed to third parties for the funds used to finance long-term projects of the business. They are also amounts due to bond holders. Unearned Subscription Income: Subscription income already received but not yet earned because the corresponding services are not yet rendered.

Standard Account TitlesStandard Account TitlesProfessional Fees: Income derived in the practice of profession for the professional services rendered, whether received in cash or not. Fare Income: Income derived from transportation services provided to others, whether received in cash or not. Rent Income: Income derived by lessors engaged in business of renting apartment, building, condominium, market stalls, automobile, machines, etc., whether received in cash or not.

Standard Account TitlesStandard Account TitlesLegal Fees: Income derived in the exercise of a law profession. Interest Income: Income derived from lending money to others, whether received in cash or not. Commission Income: Income derived by insurance businesses, real estate brokers, etc. whether received in cash or not.

Standard Account TitlesStandard Account TitlesSalaries and Wages Expense: Amount incurred/paid for the services rendered by employees and workers in the business. Advertising Expense: Payments made in the promotion of the business merchandise/goods and/or services such as publications in the newspaper, announcements through radios and televisions, billboards, etc. Office Supplies Expense (Office Supplies Used): Office-related materials used by the business such as coupon bonds, carbon paper, worksheets, ledgers, ballpens, erasers, envelopes, stationeries, etc.

Standard Account TitlesStandard Account TitlesStore Supplies Expense (Store Supplies Used): Store-related materials used by the business such as plastic bags, tapes, stapler fillers, etc. Rent Expense: Amount incurred/paid for the use of space for the office, store and/or factory area. Transportation Expense: Amount incurred/paid as transportation allowance of executives or staff entitled to it.

Standard Account TitlesStandard Account TitlesDepreciation Expense: Cost allocation of certain permanent assets owned by the business such as building, furniture and fixture, equipment, machineries, etc. over the life of the business or the asset, whichever is shorter. It is noteworthy that of the permanent assets, land is not subject to depreciation. Insurance Expense: Expired insurance or insurance, the period covered of which has already lapsed. Utilities Expense: Amount of incurred/paid for the use of the light, water and telephone for the business.

Standard Account TitlesStandard Account TitlesTaxes and Licenses Expense: Taxes, licenses, and other government fees paid or incurred.

Interest Expense: The cost of money borrowed by the business.

SSS and Medicare Contribution Expense: The employer’s share in the payment of SSS and medicare for the welfare of its employees and workers. Incidentally, this counterpart share of the employer as payment to the SSS is mandated by law.

Miscellaneous Expense: Expenses incurred/paid by the business for which separate account is not advisable as they are immaterial, uncommon and infrequent. Examples may include cost of cleaning materials

Finl Acctg Info Process

Documents

accounts chris clark

cash land

chris clarkcash25

effect of business transaction

chris clark deposits

course of business operations

various business documents

owners equities