Introduction to Accounting

Fundamentals of Fundamentals of Financial Accounting Financial Accounting

BA-603BA-603

Nature and Functions of Nature and Functions of AccountingAccounting

Describe the nature and types Describe the nature and types of business organizationsof business organizations

Types of Business OrganizationsTypes of Business Organizations

Service companies - provide services Service companies - provide services to customersto customers

Merchandise or retail companies - Merchandise or retail companies - sell products sell products

Manufacturing companies - make Manufacturing companies - make their own productstheir own products

Types of Business OwnershipTypes of Business Ownership

ProprietorshipsProprietorships PartnershipsPartnerships CorporationsCorporations

Role of accounting in Role of accounting in business organizationsbusiness organizations

Organization AccountabilityOrganization Accountability

Legal obligation to manage the Legal obligation to manage the resources of an organization resources of an organization responsiblyresponsibly

Stakeholders – investors, creditors, Stakeholders – investors, creditors, suppliers, employees, customers suppliers, employees, customers and government agencies.and government agencies.

Business ActivitiesBusiness Activities

OperatingOperating InvestingInvesting FinancingFinancing

AccountingAccounting

Financial vs. Managerial Financial vs. Managerial AccountingAccounting

Financial Accounting - for those Financial Accounting - for those outside of the companyoutside of the company• Reports are called Financial StatementsReports are called Financial Statements• Prepared according to GAAPPrepared according to GAAP

Managerial AccountingManagerial Accounting• Helps managers plan, control, and make Helps managers plan, control, and make

decisions decisions

GAAP GAAP

Generally Accepted Accounting Generally Accepted Accounting Principles - established rules, Principles - established rules, principles, and conceptsprinciples, and concepts

Formulated by Financial Accounting Formulated by Financial Accounting Standards Board (FASB)Standards Board (FASB)

GAAPGAAP

Primary objective of financial Primary objective of financial accounting – provide information that accounting – provide information that is useful for making investment and is useful for making investment and taking decisionstaking decisions

Entity ConceptEntity Concept

Accounting Entity – organization that Accounting Entity – organization that stands apart as a separate economic stands apart as a separate economic unit.unit.

Accounting information is based on Accounting information is based on the most reliable data availablethe most reliable data available• VerifiableVerifiable• Free from biasFree from bias• Individuals would arrive at similar Individuals would arrive at similar

conclusions using same dataconclusions using same data

Reliability (Objectivity) Reliability (Objectivity) PrinciplePrinciple

Cost PrincipleCost Principle

Acquired assets and services should Acquired assets and services should be recorded at their actual cost be recorded at their actual cost (historical cost)(historical cost)

Going Concern ConceptGoing Concern Concept

Assumes that the entity will remain Assumes that the entity will remain in operation for the foreseeable in operation for the foreseeable futurefuture

S1-1S1-1

a.a. An organization that stands as a An organization that stands as a separate economic unit must not separate economic unit must not have its financial affairs confused have its financial affairs confused with that of other entities.with that of other entities.

____ 1. Cost principle____ 1. Cost principle

____ 2. Entity concept____ 2. Entity concept

____ 3. Going-concern concept____ 3. Going-concern concept

____ 4. Reliability principle____ 4. Reliability principle

a.

S1-1S1-1

b.b. Data must be verifiable.Data must be verifiable.

c.c. The entity will remain in operation The entity will remain in operation for the foreseeable future.for the foreseeable future.





a.

b.c.

S1-1S1-1

d.d. Acquired assets and services Acquired assets and services should be recorded at their actual should be recorded at their actual cost. cost.





a.

b.

c.

d.

Use the accounting equation Use the accounting equation to analyze business to analyze business

transactionstransactions

AssetsAssets

Economic resources, expected to Economic resources, expected to benefit the business in the futurebenefit the business in the future• CashCash• Accounts receivableAccounts receivable• Merchandise inventoryMerchandise inventory• FurnitureFurniture• LandLand

Liabilities Liabilities

Liabilities – economic obligations Liabilities – economic obligations payable to an individual or payable to an individual or organization outside the organization outside the businessbusiness• Accounts payableAccounts payable• Notes payableNotes payable• Salary payableSalary payable

Owner’s EquityOwner’s Equity

Owner’s Equity (capital) – claim of Owner’s Equity (capital) – claim of business owner to the assets of the business owner to the assets of the business business

EconomicResources

Claims toEconomicResources

The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

RevenuesRevenues

Amounts earned by delivering goods Amounts earned by delivering goods or services to customersor services to customers• Sales revenueSales revenue• Service revenueService revenue• Interest revenueInterest revenue• Dividend revenueDividend revenue

ExpensesExpenses

Decrease in owner’s equity - occurs Decrease in owner’s equity - occurs from using resources in the course of from using resources in the course of delivering goods or services to delivering goods or services to customerscustomers• Salary expenseSalary expense• Rent expenseRent expense• Utilities expenseUtilities expense• Interest expenseInterest expense

Net Income (Loss)Net Income (Loss)

Revenues – ExpensesRevenues – Expenses

Components ofComponents ofOwner’s EquityOwner’s Equity

Beginning Balance of

Owner’s Equity

Owner Investments

+

Revenues

Expenses

-

=

Net Income(Net Loss)

+ Owner Withdrawals

-Ending

Balance of Owner’s Equity

=

TransactionTransaction

An event that affects the financial An event that affects the financial position of a particular entity and can position of a particular entity and can be recorded reliablybe recorded reliably

S1-4S1-4

a. Debts that are owed to creditorsa. Debts that are owed to creditorsb. Economic resources that are b. Economic resources that are

expected to be of benefit in the expected to be of benefit in the futurefuture

c.c. Claims of the owner of the businessClaims of the owner of the business

_____ 1. Assets_____ 1. Assets_____ 2. Liabilities_____ 2. Liabilities_____ 3. Owner’s equity_____ 3. Owner’s equity

a.b.

c.

S1-9S1-9

____ 1. Utilities Expense____ 1. Utilities Expense

____ 2. Accounts Receivable____ 2. Accounts Receivable

____ 3. Gay Gillen, Capital____ 3. Gay Gillen, Capital

____ 4. Office Supplies____ 4. Office Supplies

____ 5. Lease Expense, Computer____ 5. Lease Expense, Computer

____ 6. Salary Expense ____ 6. Salary Expense

a.Assets b. Liabilities c. Owner’s Equity d. Revenues e. Expenses

a

a

e

e

e

c

S1-9S1-9

____ 7. Cash____ 7. Cash

____ 8. Rent Expense, Office____ 8. Rent Expense, Office

____ 9. Service Revenue ____ 9. Service Revenue

____ 10. Accounts Payable ____ 10. Accounts Payable

____ 11. Land____ 11. Land

a.Assets b. Liabilities c. Owner’s Equity d. Revenues e. Expenses

a

ed

a

b

Exercise 1-14Exercise 1-14

Assets Liabilities Owner’s Equity

Gemstone $ ? $61,800 $21,000

Sampson Hardware 72,000 ? 34,000

Lundy Plumbing 102,700 79,800 ?

$82,800

38,000

22,900

(1) Cash ((1) Cash (assetasset))

(2) Owner’s Equity ((2) Owner’s Equity (equityequity))

Does the account increase or decrease?

July 6: Hobt invested $60,000 in the business by opening a bank account in the name of K. Hobt, D.D.S.

Analyze this:Analyze this:

What accounts are involved?

Date Assets Liabilities Owner’s Equity

July Cash DentalSupplies

Land Accounts Payable

K. Hobt, Capital

Type of Transaction


60,000 Investment

Assets = $60,000 Liabilities & Owner’s Equity = $60,000

60,0006


(2) Land ((2) Land (assetasset))


July 9: The business paid $55,000 cash for land. Ken plans to build an office building on the land.

Does the account increase or decrease?What accounts are involved?




K. Hobt, Capital

Type of Transaction


60,000 Investment

55,000


60,0006

-55,0009

60,00055,0005,000Bal

(1) Dental Supplies ((1) Dental Supplies (assetasset))

(2) Accounts Payable ((2) Accounts Payable (liabilityliability))


July 12: The business purchased dental supplies for $2,000 on account.

Does the account increase or decrease?What accounts are involved?




K. Hobt, Capital

Type of Transaction


2,000


2,00012

60,00055,000 5,000Bal 2,0002,000

60,00055,0005,000Bal


(1) Cash ((1) Cash (assetasset) )

(2) Revenues ((2) Revenues (equityequity) )

Analyze This:Analyze This:

July 15: The business treated patients and earned service revenue of $7,000, receiving cash.


When the owner completes work,

his interest in the assets increases




K. Hobt, Capital

Type of Transaction



7,000 15 7,000 Revenue

67,00055,00012,000Bal 2,0002,000

60,00055,000 5,000Bal 2,0002,000



(2) Expense ((2) Expense (equityequity))


July 17: The business paid office rent, $1,000.


When an expense is incurred, owner’s equity decreases




K. Hobt, Capital

Type of Transaction



-1,000 17 -1,000 Rent Exp

66,00055,00011,000Bal 2,0002,000

67,00055,00012,000Bal 2,0002,000



(2) Medical Supplies ((2) Medical Supplies (assetasset))


July 28: The business sold supplies to another dentist for the cost of those supplies, $500.





K. Hobt, Capital

Type of Transaction



500 28 -500

66,00055,00011,500Bal 2,0001,500

66,00055,00011,000Bal 2,0002,000



(2) Accounts Payable ((2) Accounts Payable (liabilityliability))


July 31: The business paid $1,500 on account related to the July 12 purchase.





K. Hobt, Capital

Type of Transaction



-1,500 31 -1,500

66,00055,00010,000Bal 5001,500

66,00055,00011,500Bal 2,0001,500

Accounting for Business Accounting for Business TransactionsTransactions

The equation always stays in balanceThe equation always stays in balance Each transaction affects at least two Each transaction affects at least two

accounts, sometimes moreaccounts, sometimes more Some transactions affect only one Some transactions affect only one

side of the equation; some affect side of the equation; some affect both sidesboth sides

Financial StatementsFinancial Statements

Income statementIncome statement Statement of owner’s equityStatement of owner’s equity Balance sheetBalance sheet Statement of cash flowsStatement of cash flows

Income StatementIncome Statement

Summary of an entity’s revenues, Summary of an entity’s revenues, expenses, and net income or net loss expenses, and net income or net loss for a specific periodfor a specific period

Revenues - ExpensesRevenues - Expenses• Net Income: Revenues > ExpensesNet Income: Revenues > Expenses• Net Loss: Expenses > RevenuesNet Loss: Expenses > Revenues

Statement of Owner’s EquityStatement of Owner’s Equity

Summary of changes in an entity’s Summary of changes in an entity’s owner’s equity during a specific owner’s equity during a specific periodperiod

Beginning owner’s equityBeginning owner’s equity+ Owner’s investments+ Owner’s investments+ Net income+ Net income- Net loss- Net loss- Owner’s withdrawals- Owner’s withdrawalsEnding owner’s equityEnding owner’s equity

Balance SheetBalance Sheet

Reports the entity’s assets, liabilities, Reports the entity’s assets, liabilities, and owner’s equity as of a specific and owner’s equity as of a specific datedate

Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity

Statement of Cash FlowsStatement of Cash Flows

Reports cash receipts and cash Reports cash receipts and cash payments during a periodpayments during a period• OperatingOperating• InvestingInvesting• FinancingFinancing

S1-10S1-10

Income Statement (IS) Income Statement (IS) Balance Sheet (BS)Balance Sheet (BS)Statement of Owner’s Equity (OE)Statement of Owner’s Equity (OE)

_____1. Accounts Receivable_____1. Accounts Receivable_____2. Notes Payable_____2. Notes Payable_____3. Advertising Expense_____3. Advertising Expense_____4. Service Revenue_____4. Service Revenue_____5. J. P., Capital, June 1_____5. J. P., Capital, June 1_____6. Office Supplies_____6. Office Supplies

IS

BS

OE

BS

IS

BS

GUJJAR CorporationsGUJJAR CorporationsIncome StatementIncome Statement

For the Month Ended July 31, 2007For the Month Ended July 31, 2007

Revenue:Revenue:

Fees earnedFees earned$7,000$7,000

Expenses:Expenses:

Rent expenseRent expense1,0001,000

Net incomeNet income$6,000$6,000

Notice the proper

heading

Double underline for your

final answer

K. Hobt, capital, July 1, 2007 $ 0Add: Investment by owner 60,000Net income for the month 6,000

Subtotal $66,000 Less: Withdrawals by owner 0K. Hobt, capital, July 31, 2007 $66,000

GUJJAR CORPORATIONSGUJJAR CORPORATIONSStatement of Owner’s EquityStatement of Owner’s Equity

For the Month Ended July 31, 2007For the Month Ended July 31, 2007Dates are important to the reader of the financial

reports

From incomestatement

Details, DetailsDetails, Details

Note the headings for both of these Note the headings for both of these statementsstatements

Name of companyName of company

Name of financial statementName of financial statement

For the period ended …….For the period ended ……. Both statements report activity over Both statements report activity over

a period of timea period of time Final sums are double-underlinedFinal sums are double-underlined


Negative amounts are presented in Negative amounts are presented in parenthesesparentheses

Net income is computed first Net income is computed first because you need that number to because you need that number to complete the ending balance in complete the ending balance in owner’s equityowner’s equity

When preparing a financial When preparing a financial statement, clearly label each line in statement, clearly label each line in the statementthe statement

Details, detailsDetails, details

If you are using columnar paper, If you are using columnar paper, always start your number columns in always start your number columns in the far right-hand columnthe far right-hand column

Numbers that are added or Numbers that are added or subtracted from each other should subtracted from each other should be in the same column be in the same column

GUJJAR CORPORATIONS GUJJAR CORPORATIONS Balance SheetBalance SheetJuly 31, 2007July 31, 2007

AssetsAssetsCashCash

$10,000$10,000Medical suppliesMedical supplies

1,5001,500LandLand

55,000 55,000

Total assetsTotal assets

$ 66,500$ 66,500

LiabilitiesLiabilitiesAccounts payableAccounts payable

$500$500Owner’s equity,Owner’s equity,M. Lange, capitalM. Lange, capital

66,00066,000Total liabilities and Total liabilities and

owner’s equityowner’s equity

$ 66,500$ 66,500

From statement ofowner’s equity

Notice the proper

heading


Note - heading for the balance sheet Note - heading for the balance sheet is different from other statementsis different from other statements

Name of companyName of company

Name of financial statementName of financial statement

DateDate This statement reports what the This statement reports what the

company owns and who has claims to company owns and who has claims to the assets at a specific point in timethe assets at a specific point in time

Cash $2,000

Accounts receivable 6,900

Supplies 600

Equipment 15,500

Total Assets $25,000

Hawkins Graphic DesignBalance Sheet

November 30, 2009

Liabilities

Accounts payable $2,500

Note payable 8,000

Total liabilities $10,500

Owner’s Equity

A. Samuel, capital 14,500

Total liabilities and owner’s equity $25,000

Assets



1.1. What type of business organization What type of business organization is Hawkins’ Graphic Design? is Hawkins’ Graphic Design? You can tell what type of You can tell what type of organization a company is by organization a company is by examining the owner’s equity examining the owner’s equity section of the balance sheet. Since section of the balance sheet. Since there is one owner capital account, there is one owner capital account, it is a sole proprietorshipit is a sole proprietorship

3.3. What does the balance sheet What does the balance sheet report? report? Financial positionFinancial position


Office FurnitureOffice Furniture

Utilities ExpenseUtilities Expense

Accounts PayableAccounts Payable

T. Sullivan, CapitalT. Sullivan, Capital

Service RevenueService Revenue

Accounts ReceivableAccounts Receivable

Supplies ExpenseSupplies Expense

Asset

Asset

Expense

Expense

Liability

Owner’s Equity

Revenue


Note PayableNote Payable

Rent ExpenseRent Expense

CashCash

Office SuppliesOffice Supplies

Salary ExpenseSalary Expense

Salaries PayableSalaries Payable

Property Tax ExpenseProperty Tax Expense

Asset

Asset

Expense

Expense

Expense

Liability

Liability

Exercise 1-21Exercise 1-21SYED, Architect

Income StatementYear Ended December 31, 2009

Service revenue $161,200Expenses:

Salary expense $60,000

Rent expense 24,000

Utilities expense 6,800

Supplies expense 4,000

Property tax expense 1,200

Total expenses 96,000

Net income $65,200

Exercise 1-21Exercise 1-21SYED, Architect

Statement of Owner’s EquityYear Ended December 31, 2009

Sullivan, capital, January 1, 2009Sullivan, capital, January 1, 2009 $ 0 $ 0

Add: Net incomeAdd: Net income 65,20065,200

Investment by ownerInvestment by owner 15,00015,000

SubtotalSubtotal $80,200$80,200

Less: Owner withdrawalLess: Owner withdrawal ??

Sullivan, capital, December 31, 2009Sullivan, capital, December 31, 2009 $27,100$27,100 53,100

Explain the role of ethics in Explain the role of ethics in accounting and businessaccounting and business

EthicsEthics

The principles of right behavior that The principles of right behavior that guide decision-makingguide decision-making• ResponsibilityResponsibility• FairnessFairness• TrustworthinessTrustworthiness• RespectRespect• CaringCaring• CitizenshipCitizenship

EthicsEthics

AuditAudit• Examination of company’s financial Examination of company’s financial

situationsituation• Performed by independent accountants Performed by independent accountants

(CPAs)(CPAs)

Standards of Professional ConductStandards of Professional Conduct

AICPA – Code of Professional Conduct AICPA – Code of Professional Conduct for Accountantsfor Accountants

IMA – Standards of Ethical ConductIMA – Standards of Ethical Conduct

THANK YOUTHANK YOUfor bearing me so longfor bearing me so long

Introduction to Accounting

Documents

separate economic

net income

net loss

balance sheet

owners equity

financial

account increase

professional