Transcript Slide 1

(1) Introduction to Accounting
WHAT IS ACCOUNTING?
Accounting is an information system that
provides reports to stakeholders about the
economic activities and condition of a
business
Users of Accounting Information
External Users
Internal Users
Financial accounting provides
external users with financial
statements.
Managerial accounting provides
information needs for internal
decision makers.
QUESTIONS ASKED BY INTERNAL
USERS
QUESTIONS ASKED BY EXTERNAL
USERS
Accounting Equation
Assets
=
Liabilities
+
Equity
The accounting equation
must remain in balance
after each transaction.
Assets
Liabilities
& Equity
Accounting Equation – Cont’d
Asset= Liabilities + Equity
Resources
Managed
by Managers
Sources of Financing
Creditors
Shareholders
Separation between
ownership and control
Information
Definitions
Assets :
Are resources owned by a business and are
excepted to generate future benefits
Liabilities :
Are creditor claims against asset They are
existing debts and obligations
Capital [Equity]
Resources invested by the owner
Equity = Assets – Liabilities = Net Assets
Assets
Cash
Accounts
Receivable
Vehicles
Store
Supplies
Resources
owned or
controlled
by a
company
Notes
Receivable
Land
Buildings
Equipment
A receivable is something you are going to
“Receive” in the future
[Collect cash in the future]; it is an
ASSET
Liabilities
Accounts
Payable
Bank
Loans
Notes
Payable
Liability
Accounts
Accrued
Liabilities
Unearned
Revenue
A payable is something you are going to
“Pay” in the future
[Pay cash in the future];
it is a LIABILITY
Prepaid
Accounts
Prepaid Expenses
Prepaid Expenses are items that we
pay for today to
be used in the future
(Provide Future Benefits).
Assets
Example: Prepaid Rent,
Prepaid Insurance
Unearned
Revenue
Unearned Revenues
Unearned Revenues are amounts
that we collect toady (Advance
payments), but would be earned in
the future after we sell the product or
provide the service.
Liabilities
Example: Unearned Fees
If the transaction involves “Signing” a document then
use Notes receivable or Notes payable.
Ex: “The company sells a product for 100 and the buyer
signs a note Agreeing to pay the amount at a future date”
• The company will receive the cash in the future
Receivable
• A note is signed : Note Receivable
Ex: “The company buys a product for 200 and signs a
note Agreeing to pay the amount at a future date”
• The company will pay the cash in the future : payable
• A note is signed : Note Payable
If the transaction mentions “On credit” or “On
account” use accounts receivable or
accounts payable.
Ex: “The company sells a product for 100 on credit (on
account) and sends the bill to the buyer who will pay the cash
at a future date ”
• The company will receive the cash in the future: Receivable
• The sale is on account : Accounts Receivable
Ex: “The company buys a product for 200 on credit (on account)
and gets the bill now, but will pay the cash at a future date
• The company will pay the cash in the future: Payable
The purchase is on account : Accounts Payable
Borrow
Buy
PayLand
Cash
Cash
and
for
from
pay
loanBank
cash
Cash
Bank Loan
Building
Cash
Land
Equipment
Cash
Land
Bank Loan
Bank Loan
Balance Sheet
Assets= Liabilities + Owners’ Equity
Equity
Equity
Contributed
Capital
“Common
Stock”/Capital
Stock
Retained
Earnings
Owners’
claims to
Assets
“Net Assets”
Equity = Assets - Liabilities
Definitions
Common Stock / Capital Stock : The Corporation’s basic ownership share
Revenues: Increases in equity resulting from a company’s business
activities (e.g. Sales of a product, fees for rendering a service)
Expenses: Decreases in equity resulting from a company’s business
activities that are incurred to generate revenues. (e.g. Salaries Expense)
Net Income = Revenues – Expenses
Dividends: Distributions of assets generated by past earnings to stockholders
Retained Earnings: Net income not distributed to stockholders
Invest
Receive
forCash
revenues Earned
Pay
Paycash
cashcash
for
forexpenses
dividends
Revenues
Dividends
Expenses
Cash
Cash
Cash
Land
Cash
Equipment
Cash
Building
Common Stock
Liabilities
Common Stock
Balance Sheet
Assets= Liabilities + Owners’ Equity
Retained
Earnings
Undistributed
Net Income
“Retained Earnings”
Equity
Dividends
Contributed
Capital
Common
Stock
Net Income = Revenues - Expenses
1.
2.
Distribute to Stockholders (Dividends)
Retain in company (Retained Earnings)
Three Types of Transactions
That Affect Retained Earnings
Owners’ Investments
1. Invested $50,000 in Shannon Realty, Inc., in exchange for
5,000 shares of $10 par value common stock
Assets
1.
=
Liab.
Stockholders’
Equity
+
Common
Stock
$50,000
Cash
$50,000
A = $50,000
L + SE = $50,000
Notice that the accounting equation
Assets = Liabilities + Stockholders’ Equity
or
A = L + SE
is always in balance
Purchase of Assets with Cash
2. Purchased a land for $10,000 and a small building on the
land for $25,000
Assets
=
Cash
1. $50,000
2. −35,000
Land
Building
$10,000
$25,000
$15,000
$10,000
$25,000
A = $50,000
Liab.
Stockholders’
Equity
+
Common
Stock
$50,000
$50,000
L + SE = $50,000
This transaction only affects one side of the
accounting equation – Assets
Whenever a transaction affects only one side
of the accounting equation, the total on each
side of the equal sign remains unchanged
Purchase of Assets by
Incurring a Liability
3. Purchased office supplies for $500 on credit
Assets
Cash
1. $50,000
2. −35,000
3.
$15,000
=
Supplies
Land
Building
$10,000
$25,000
$500
$500
Liab.
A/P
+
Stockholders’
Equity
Common
Stock
$50,000
$500
$10,000
A = $50,500
$25,000
$500
$50,000
L + SE = $50,500
Payment of a Liability
4.. Paid $200 of the $500 owed for supplies
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
$14,800
=
Supplies
Land
Building
$10,000
$25,000
$500
$500
$10,000
A = $50,300
$25,000
Liab.
A/P
$500
−200
$300
+
Stockholders’
Equity
Common
Stock
$50,000
$50,000
L + SE = $50,300
Revenues
5. Earned and received a commission of $1,500 in cash
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
$16,300
=
Supplies
Land
Building
$10,000
$25,000
$500
$500
Liab.
A/P
+
Stockholders’
Equity
Common Retained
Stock
Earnings
$50,000
$500
−200
$10,000
A = $51,800
$25,000
$300
$50,000
$1,500
$1,500
L + SE = $51,800
Revenues
6. Earned a commission of $2,000 to be received at a later
date
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
$2,000
$16,300
$2,000
= Liab. +
Supplies
A/R
Land
Building
$10,000
$25,000
$500
A/P
Stockholders’
Equity
Common Retained
Stock
Earnings
$50,000
$500
−200
$1,500
2,000
$500
$10,000
A = $53,800
$25,000
$300
$50,000
$3,500
L + SE = $53,800
Accrued Revenue
Revenue not collected in cash
Collection of Accounts Receivable
7. Received $1,000 from client for commission earned earlier
in the month
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
7.
1,000
$17,300
= Liab. +
Supplies
A/R
Land
Building
$10,000
$25,000
$500
$2,000
−1,000
$1,000
A/P
Stockholders’
Equity
Common Retained
Stock
Earnings
$50,000
$500
−200
$1,500
2,000
$500
$10,000
A = $53,800
$25,000
$300
$50,000
$3,500
L + SE = $53,800
Expenses
8. Paid $1,000 to rent equipment for office
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
7.
1,000
8. −1,000
$16,300
Assets
Supplies
A/R
Land
Building
$10,000
$25,000
$500
= Liab. +
A/P
Stockholders’
Common Retained
StockEquity
Earnings
$50,000
$500
−200
$1,500
2,000
$2,000
−1,000
$1,000
$500
$10,000
A = $52,800
$25,000
$300
$50,000
−1,000
$2,500
L + SE = $52,800
Expenses
9. Paid $400 in wages to part-time helper
Stockholders’
= Liab. +
CommonEquity
Retained
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
7.
1,000
8. −1,000
9.
−400
$15,900
Supplies
A/R
Land
Building
$10,000
$25,000
$500
A/P
Stock
$50,000
$500
−200
$1,500
2,000
$2,000
−1,000
$1,000
Earnings
$500
$10,000
A = $52,400
$25,000
$300
$50,000
−1,000
−400
$2,100
L + SE = $52,400
Expenses
10. Recorded utilities expense of $300 incurred in December
but not yet paid
Stockholders’
= Liab. +
Equity
Common Retained
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
7.
1,000
8. −1,000
9.
−400
10.
$15,900
Supplies
A/R
Land
Building
$10,000
$25,000
$500
A/P
Stock
$50,000
$500
−200
$1,500
2,000
$2,000
−1,000
$1,000
Earnings
$500
$10,000
A = $52,400
$25,000
300
$600
$50,000
−1,000
−400
−300
$1,800
L + SE = $52,400
Accrued Expense
Expense not paid immediately
Dividends
11. Declared and paid a $600 dividend
Stockholders’
= Liab. +
Equity
Common Retained
Assets
Cash
1. $50,000
2. −35,000
3.
4.
−200
5.
1,500
6.
7.
1,000
8. −1,000
9.
−400
10.
11.
−600
$15,300
Supplies
A/R
Land
Building
$10,000
$25,000
$500
A/P
Stock
$50,000
$500
−200
$1,500
2,000
$2,000
−1,000
300
$1,000
Earnings
$500
$10,000
A = $51,800
$25,000
$600
$50,000
−1,000
−400
−300
−600
$1,200
L + SE = $51,800
Financial Statements
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
Income Statement
Net Income=Revenues-Expenses
Date reflects
revenues and
expenses incurred
over a period of time
Shannon Realty, Inc.
Income Statement
For the Month Ended December 31, 20xx
Revenues
Commissions earned
Expenses
Equipment rental expense
Wages expense
Utilities expense
Total expenses
Net income
$3,500
$1,000
400
300
1,700
$1,800
Net income figure used to prepare
statement of retained earnings
Non-Cash Expenses
Depreciation
•
Using a fixed asset (e.g. machine) results in an expense
called depreciation expense
EX: A company buys a machine for $100,000 and
estimates that it has a useful life of 10 years . Each
year the company would transfer $10,000
(100,000÷10) from the balance sheet to the income
statement. The value of the machine after the first
year is $90,000.
•
Note: Although the depreciation expense reduces
Net Income it has no effect of cash
Non-Cash Expenses
Bad Debt Expense
• Realistically not all of Accounts Receivable will be
collected.
• The company must estimate the amount of A/R that is
expected to be uncollectible.
This amount is called Bad Debt Expense
EX: Assume the ABC has $10,000 of A/R and it estimates
that 2% will not be collected. Thus the $200
(0.02x10,000) will be reduced from the A/R on the
balance sheet and $200 expense will appear on the
Income Statement.
Note: Although the bad debt expense reduces Net
Income it has no effect of cash
Statement of Retained
Earnings
End RE=Beg RE+NI-DIV
Date reflects changes in retained
earnings over a period of time
Shannon Realty, Inc.
Statement of Retained Earnings
For the Month Ended December 31, 20xx
Retained earnings, December 1, 20xx
Net income for the month
Subtotal
Less dividends
Retained earnings, December 31, 20xx
Ending retained earnings
figure used to prepare the
balance sheet
$
0
1,800
1,800
600
$1,200
Net income figure from
income statement
Balance Sheet
Assets=Liabilities + Equity
Date reflects account
balances as of a
certain date
Shannon Realty, Inc.
Balance Sheet
December 31, 20xx
Assets
Cash
Accounts receivable
Supplies
Land
Building
Total assets
Balance in Cash
account used in
statement of cash
flows
Liabilities
$15,300
1,000
500
10,000
25,000
$51,800
Accounts payable
$
600
Stockholders’ Equity
Common Stock
$50,000
Retained earnings
1,200
Total stockholders’
equity
Total liabilities and
stockholders’ equity
51,200
$51,800
Retained earnings figure from the
statement of retained earnings
Components of the Balance Sheet Assets
Current assets
Cash and other assets reasonably expected to be
converted to cash, consumed, or sold within one
year or its normal operating cycle, whichever is
longer
•Cash & Cash Equivalents : (T-Bills, highly liquid) maturing within 90-days
•Marketable Securities : Stocks and Bonds traded within current year
•Receivables: Accounts (trade receivables) [NRV]
•Inventories : Finished Goods, Raw Materials. Work in progress [LCM]
•Prepayments: Prepaid Expenses
Components of the Balance Sheet Assets
Property, plant, &
equipment/
Noncurrent assets
Long-term
investments
Long-term tangible assets like land and buildings
used in continuing operations.
Resources which can be realized in cash
Their conversion into cash is not expected
within one year or the operating cycle,
whichever is longer. Ex: Long-term loans
to other companies, LT holdings of stock
and bonds of other companies.
•Building, Equipment : Depreciated [Net Book Value , Net Carrying amount]
•Land : Not Depreciated [No Useful life].
Intangible Assets
Assets do not have physical substance
Ex: patents copyrights, trademarks, Goodwill
Components of the Balance Sheet Liabilities
Current liabilities
Obligations due to be paid or performed within one year or
within the normal operating cycle, whichever is longer
Examples: Notes payable, accounts payable, Accrued Expenses
(salaries and wages payable) , customer advances (Deferred Income),
current portion of long-term debt
Long-term liabilities
Debts of a business that fall due more than one year
in the future or beyond the normal operating cycle,
which will be paid out of noncurrent assets
Examples: Mortgages payable, long-term notes, bonds payable,
employee pension obligations, long-term lease liabilities
Relationship Between Income Statement and Balance Sheet
Income Statement
Balance Sheet
Revenues
-Expenses=
Net Income
Assets=
Liabilities+
Equity
Net Income = Revenues - Expenses
Retained Earnings