Financial accounting basics ppt @ bec-doms

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Financial accounting basics ppt @ bec-doms

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Financial accounting basics ppt @ bec-doms

  1. 1. FINANCIAL ACCOUNTING BASICS
  2. 2. P. ACCOUNTING CYCLE <ul><li>The entire process of accounting for transactions and preparing financial statements is known as the accounting cycle . </li></ul><ul><ul><ul><li>This process is repeated each accounting period . </li></ul></ul></ul><ul><li>Some companies prepare monthly financial statements and complete this cycle each month ; other companies prepare quarterly financial statements; and some companies prepare only annual financial statements. </li></ul>
  3. 3. P. ACCOUNTING CYCLE (cont) <ul><li>Preparation of Monthly Financial Statements </li></ul><ul><li>During the month: </li></ul><ul><ul><li>Analyze transactions and prepare journal entries </li></ul></ul><ul><ul><li>Post journal entries to the ledger ( we have done this using T-accounts ) </li></ul></ul><ul><li>End of month: </li></ul><ul><ul><li>Prepare adjusting entries to accrue non-cash expenses and revenues ( accruals and prepayments ) </li></ul></ul><ul><ul><li>Prepare a trial balance to verify that: Total debits = Total credits </li></ul></ul><ul><ul><ul><li>if not, then the balance sheet will not balance; we need to go back and find the journal entry in which debits did not equal credits and correct that error </li></ul></ul></ul><ul><ul><li>Prepare financial statements </li></ul></ul><ul><ul><li>Close revenue and expense accounts to retained earnings </li></ul></ul>
  4. 4. P. ACCOUNTING CYCLE (cont) Example – ABC Company <ul><li>We have already completed steps 1 and 2 during the month for ABC Company for the month of January, Year 1. </li></ul><ul><li>No adjusting entries are needed at January 31, Year 1. ABC Company does not have any accruals or prepayments that need to be recorded in January, Year 1. </li></ul><ul><li>The next step is to prepare a Trial Balance. </li></ul>
  5. 5. ABC Company – Ledger Balances + Cash - + Inventory - - Note Payable + - Paid-in Capital + - Retained Earnings + + Accts Rec - - Accts Payable + 10,000 10,000 5,000 5,000 8,000 8,000 5,000 2,000 4,000 - Sales Revenue + + COGS Expense - 2,000 2,500 2,500 8,000 8,000 4,000 5,000 5,000 5,000 2,000 0 14,500 10,000 5,000 7,500 6,000 0
  6. 6. Trial Balance <ul><li>ABC Company’s trial balance (pre-closing) at the end of January, Year 1: </li></ul>ABC Company January 31, Year 1 Trial Balance Account Debit Credit Cash 14,500 Inventory 2,000 Note payable 5,000 Paid-in capital 10,000 Retained earnings 0 Sales revenue 7,500 Cost-of-goods-sold expense 6,000 0 Total 22,500 22,500 Note that total debits ($22,500) = total credits ($22,500). Note also that Retained earnings has a balance of zero because the revenue and expense accounts have not yet been closed to retained earnings.
  7. 7. Prepare Income Statement and Retained Earnings Statement <ul><li>ABC Company’s financial statements for the month of January, Year 1 are shown below. </li></ul><ul><li>Income Statement </li></ul><ul><li>Retained Earnings Statement </li></ul>ABC Company Income Statement For the period January 1–31, Year 1 Sales revenue $7,500 Cost of goods sold expense 6,000 Income $1,500 ABC Company Retained Earnings Statement For the period January 1–31, Year 1 Retained earnings, January 1 $ 0 Income, January 1,500 Dividends, January 0 Retained earnings, January 31 $1,500
  8. 8. ABC Company – Ledger Balances (Post-closing) + Cash - + Inventory - - Note Payable + - Paid-in Capital + - Retained Earnings + + Accts Rec - - Accts Payable + 10,000 10,000 5,000 5,000 8,000 8,000 5,000 2,000 4,000 - Sales Revenue + + COGS Expense - 2,000 2,500 2,500 8,000 8,000 4,000 5,000 5,000 5,000 2,000 0 14,500 10,000 5,000 7,500 6,000 0 7,500 6,000 6,000 7,500 0 0 1,500
  9. 9. Post-Closing Trial Balance <ul><li>This is what the trial balance will look like after the Sales revenue and Cost-of-goods-sold expense accounts have been closed to Retained earnings : </li></ul>ABC Company January 31, Year 1 Post-Closing Trial Balance Account Debit Credit Cash 14,500 Inventory 2,000 Note payable 5,000 Paid-in capital 10,000 Retained earnings 1,500 Sales revenue 0 Cost-of-goods-sold expense 0 0 Total 16,500 16,500
  10. 10. Prepare Balance Sheet <ul><li>Balance Sheet </li></ul>ABC Company Balance Sheet January 31, Year 1 Assets Liabilities and Equity Cash $14,500 Note payable $ 5,000 Inventory 2,000 Total liabilities 5,000 Total assets $16,500 Paid-in capital 10,000 Retained earnings 1,500 Total liab & equity $16,500
  11. 11. Prepare Statement of Cash Flows <ul><li>The Statement of Cash Flows is prepared last. </li></ul><ul><li>This statement summarizes the inflows and outflows of cash that occurred during the period, classifying cash flow activities as: </li></ul><ul><li>(1) operating , </li></ul><ul><li>(2) investing , and </li></ul><ul><li>(3) financing . </li></ul><ul><li>ABC Company had no investing activities in January, Year 1. </li></ul>
  12. 12. Prepare Statement of Cash Flows <ul><li>Statement of Cash Flows </li></ul>ABC Company Statement of Cash Flows For the period January 1-31, Year 1 Operating Activities Cash collected from customers $ 7,500 Cash paid to suppliers (8,000 ) Net cash flow from operating activities (500 ) Investing Activities Purchases of long-term assets 0 Net cash flow from operating activities 0 Financing Activities Increase in paid-in capital 10,000 Increase in long-term debt (note payable) 5,000 Net cash flow from financing activities 15,000 Net change in cash during the period 14,500 Cash balance, January 1 0 Cash balance, January 31 $14,500
  13. 13. COMPREHENSIVE EXERCISE <ul><li>The following transactions occurred during the first month of operations (January, Year 1) for XYZ Company: </li></ul><ul><ul><li>1. Company was formed on January 1 by owners contributing $50,000 in exchange for common stock. </li></ul></ul><ul><ul><li>2. On January 1, company borrowed $20,000 from bank for 5 years at 12% annual interest rate. Interest payments are made every six months. $20,000 principal will be repaid in 5 years. </li></ul></ul><ul><ul><li>3. On January 1, paid $1,000 in rent for 1 month for retail space in a local shopping mall. </li></ul></ul><ul><ul><li>4. On January 1, purchased $40,000 of inventory on account. </li></ul></ul><ul><ul><li>5. On January 1, paid $1,800 for a one-year insurance policy on inventory. </li></ul></ul><ul><ul><li>6. Sold inventory costing $25,000 for $36,000; one-third for cash, two-thirds on account. </li></ul></ul><ul><ul><li>7. Paid supplier for one-half of the inventory purchased in transaction 4. </li></ul></ul><ul><ul><li>8. Paid salesperson $500 in wages. </li></ul></ul><ul><ul><li>9. Received a bill from the utility company in the amount of $350; bill had not yet been paid as of January 31, Year 1. </li></ul></ul>
  14. 14. COMPREHENSIVE EXERCISE (cont) <ul><li>Required: </li></ul><ul><ul><ul><li>Use T accounts to: </li></ul></ul></ul><ul><ul><ul><ul><li>Account for transactions 1–9, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>record any adjusting entries necessary at the end of the month, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>determine the balance in each account at the end of the month. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Create different T accounts for each of the different types of expense, e.g., rent expense, wage expense, utilities expense, insurance expense, interest expense, and cost of goods sold. </li></ul></ul></ul></ul><ul><ul><ul><li>Prepare a pre-closing trial balance. </li></ul></ul></ul><ul><ul><ul><li>Prepare the Income Statement and Statement of Retained Earnings from the balances in the pre-closing trial balance. </li></ul></ul></ul><ul><ul><ul><li>Close the revenue and expense accounts and prepare a post-closing trial balance. </li></ul></ul></ul><ul><ul><ul><li>Prepare the Balance Sheet from the post-closing trial balance. </li></ul></ul></ul>

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