Accounting for Lawyers -- Spring 2010
          Chapter 2 - The Balance Sheet and Income Statement
                       ...
Let's start a new company
                                 Premier Furniture




          Premier Furniture              ...
The Fundamental Equations

                       Total Assets = Total Liabilities + Equity

                             ...
Double Entry Bookkeeping
        Debits and Credits




                 What Happens
Account Type     Debit   Credit

   ...
Commonly-Used Accounts

       Asset Accounts                Equity Accounts             Expense Accounts
Current assets  ...
Journal Entry 1
                         Owners invest $50,000

                       Debit      Credit
Cash in bank     ...
Journal Entry 2
                  Shareholder lends $25,000 to the company

                           Debit    Credit
Cas...
Journal Entry 3
            Company pays cash to buy saws, lathes and hammers

                           Debit    Credit
...
Journal Entry 4
                  Company uses line of credit to purchase lumber
                                 Debit   ...
Journal Entry 5
                           Company pays first month's rent
                                 Debit      Cre...
Journal Entry 6
                       Company buys office supplies on credit
                                 Debit      ...
Journal Entry 7
                           Company sells furniture for cash
                                 Debit     Cre...
Journal Entry 8
                             Company records cost of sales
                                  Debit      Cr...
Journal Entry 9
                       Company sells more furniture for cash
                                 Debit     Cr...
Premier Furniture
                                           Trial Balance / General Ledger
                              ...
Company Spends $3 Billion Cash on Supplies
                   Capitalize or Expense
     Impact on the Balance Sheet and I...
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1 Table of Contents 2 Let's Start a New Company 3 The ...

  1. 1. Accounting for Lawyers -- Spring 2010 Chapter 2 - The Balance Sheet and Income Statement Double-Entry Bookkeeping 1 Table of Contents 2 Let's Start a New Company 3 The Fundamental Equations 4 Debits and Credits 5 Commonly-Used Accounts 6 Journal Entries 15 Trial Balance 16 Capitalize or Expense -1-
  2. 2. Let's start a new company Premier Furniture Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 1, 2008 January 1, 2008 - January 1, 2008 Assets $0 Revenue $0 Liabilities $0 Expense 0 Equity 0 Income $0 Liabilities + Equity $0 -2-
  3. 3. The Fundamental Equations Total Assets = Total Liabilities + Equity Also called: or Owners' Equity Net Worth Book Value Total Assets - Total Liabilities = Equity What What What You You You're Own Owe Worth Also called: Sales Income[1] [1] Which can be really confusing. Income = Revenue - Expense Also called: Also called: Profit Costs Begin Period Equity + Changes in Equity Accounts + Income = End Period Equity -3-
  4. 4. Double Entry Bookkeeping Debits and Credits What Happens Account Type Debit Credit Asset Bigger Smaller Liability Smaller Bigger Equity Smaller Bigger Income Smaller Bigger Expense Bigger Smaller -4-
  5. 5. Commonly-Used Accounts Asset Accounts Equity Accounts Expense Accounts Current assets Common stock Cost of goods sold Cash Additional paid-in capital Labor Marketable securities Retained earnings Materials Accounts receivable Treasury stock Overhead Inventory Operating expenses Prepaid expenses Advertising Long-term assets Amortization expense Balance Sheet Property Depreciation expense Plant Dues and subscriptions Equipment Entertainment Leasehold improvements Freight Furniture and fixtures Insurance Computer software Interest Accumulated depreciation Income Accounts Leases Accumulated amoritzation Gross sales Marketing Loans to shareholders Discounts Payroll taxes Returns Postage Liability Accounts Allowances Professional fees Current liabilities Net sales Rent Accounts payable Other income Repairs and maintenance Loans payable (current) Salaries Accrued expenses Supplies Payroll taxes Taxes and licenses Income Statement Benefits Telephone Compensation Training and education Deferred income Travel Income taxes payable Utilities Long-term liabilities Other expenses Loans payable (long-term) Income tax Deferred income taxes -5-
  6. 6. Journal Entry 1 Owners invest $50,000 Debit Credit Cash in bank 50,000 Capital stock 50,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 1, 2008 January 1, 2008 - January 1, 2008 Assets Revenue $0 Cash in bank $50,000 Expense 0 Liabilities $0 Income $0 Equity Capital stock 50,000 Liabilities + Equity $50,000 -6-
  7. 7. Journal Entry 2 Shareholder lends $25,000 to the company Debit Credit Cash in bank 25,000 Loan from shareholder 25,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 2, 2008 January 1, 2007 - January 2, 2008 Assets Revenue $0 Cash in bank $75,000 Expense 0 Liabilities Loan from shareholder 25,000 Income $0 Equity Capital stock 50,000 Liabilities + Equity $75,000 -7-
  8. 8. Journal Entry 3 Company pays cash to buy saws, lathes and hammers Debit Credit Equipment 20,000 Cash in bank 20,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 3, 2008 January 1, 2008 - January 3, 2008 Assets Revenue $0 Cash in bank $55,000 Equipment 20,000 Expense 0 Total assets $75,000 Income $0 Liabilities Loan from shareholder $25,000 Equity Capital stock 50,000 Liabilities + Equity $75,000 -8-
  9. 9. Journal Entry 4 Company uses line of credit to purchase lumber Debit Credit Inventory 15,000 Line of credit 15,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 4, 2008 January 1, 2008 - January 4, 2008 Assets Revenue $0 Cash in bank $55,000 Inventory 15,000 Expense 0 Equipment 20,000 Total assets $90,000 Income $0 Liabilities Line of credit 15,000 Loan from shareholder 25,000 Total liabilities 40,000 Equity Capital stock 50,000 Liabilities + Equity $90,000 -9-
  10. 10. Journal Entry 5 Company pays first month's rent Debit Credit Rent 1,000 Cash in bank 1,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 5, 2008 January 1, 2007 - January 5, 2008 Assets Revenue $0 Cash in bank $54,000 Inventory 15,000 Expense Equipment 20,000 Rent 1,000 Total assets $89,000 Income ($1,000) Liabilities Line of credit $15,000 Loan from shareholder 25,000 Total liabilities 40,000 Equity For simplicity's sake, we will ignore the Capital stock 50,000 journal entries to Retained earnings (1,000) "close the books." Total equity 49,000 Liabilities + Equity $89,000 - 10 -
  11. 11. Journal Entry 6 Company buys office supplies on credit Debit Credit Office supplies 1,500 Line of credit 1,500 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 6, 2008 January 1, 2008 - January 6, 2008 Assets Revenue $0 Cash in bank $54,000 Inventory 15,000 Expense Equipment 20,000 Rent 1,000 Total assets $89,000 Supplies 1,500 Total expense 2,500 Liabilities Line of credit $16,500 Income ($2,500) Loan from shareholder 25,000 Total liabilities 41,500 Equity Capital stock 50,000 Retained earnings (2,500) Total equity 47,500 Liabilities + Equity $89,000 - 11 -
  12. 12. Journal Entry 7 Company sells furniture for cash Debit Credit Sales 4,000 Cash in bank 4,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 7, 2008 January 1, 2008 - January 7, 2008 Assets Revenue Cash in bank $58,000 Sales 4,000 Inventory 15,000 Equipment 20,000 Expense Total assets $93,000 Rent 1,000 Supplies 1,500 Liabilities Total expense 2,500 Line of credit $16,500 Loan from shareholder 25,000 Income $1,500 Total liabilities 41,500 Equity Capital stock 50,000 Retained earnings 1,500 Total equity 51,500 Liabilities + Equity $93,000 - 12 -
  13. 13. Journal Entry 8 Company records cost of sales Debit Credit No employees yet. Cost of sales 3,000 No labor cost. Inventory 3,000 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 8, 2008 January 1, 2008 - January 8, 2008 Assets Revenue Cash in bank $58,000 Sales $4,000 Inventory 12,000 Equipment 20,000 Cost of goods sold 3,000 Total assets $90,000 Gross profit 1,000 Liabilities Line of credit $16,500 Operating expense Loan from shareholder 25,000 Rent 1,000 Total liabilities 41,500 Supplies 1,500 Total operating expense 2,500 Equity Capital stock 50,000 Income ($1,500) Retained earnings (1,500) Total equity 48,500 Liabilities + Equity $90,000 - 13 -
  14. 14. Journal Entry 9 Company sells more furniture for cash Debit Credit Sales 10,000 Cash in bank 10,000 Cost of sales 7,500 Inventory 7,500 Premier Furniture Premier Furniture Balance Sheet Income Statement As of January 9, 2008 January 1, 2008 - January 9, 2008 Assets Revenue Cash in bank $68,000 Sales 14,000 Inventory 4,500 Equipment 20,000 Cost of goods sold 10,500 Total assets $92,500 Gross profit 3,500 Liabilities Line of credit $16,500 Operating expense Loan from shareholder 25,000 Rent 1,000 Total liabilities 41,500 Supplies 1,500 Total operating expense 2,500 Equity Capital stock 50,000 Income $1,000 Retained earnings 1,000 Total equity 51,000 Liabilities + Equity $92,500 - 14 -
  15. 15. Premier Furniture Trial Balance / General Ledger January 1, 2008 - January 9, 2008 Account JE Memo Reciprocal Account Debit Credit Balance Cash in Bank 1 Contribute cash to start the company Capital stock $50,000 $50,000 2 Loan money to the company Loan from Shareholder 25,000 75,000 3 Pay cash for equipment purchases Equipment $20,000 55,000 5 Pay first month's rent Rent 1,000 54,000 7 Sell furniture to our first customer Gross Sales 4,000 58,000 9 Sell more furniture for cash Gross Sales 10,000 68,000 Inventory 4 Use line of credit to purchase lumber Line of Credit 15,000 15,000 8 Record cost of sales Cost of Goods Sold 3,000 12,000 9 Sell more furniture for cash Cost of Goods Sold 7,500 4,500 Equipment 3 Buy saws, lathes and hammers Cash in Bank 20,000 20,000 Line of Credit 4 Use line of credit to purchase lumber Inventory 15,000 15,000 6 Office supplies Supplies 1,500 16,500 Loan from Shareholder 2 Loan money to the company Cash in Bank 25,000 25,000 Capital Stock 1 Contribute cash to start the company Cash in Bank 50,000 50,000 Gross Sales 7 Sell furniture to our first customer Cash in Bank 4,000 4,000 9 Sell more furniture for cash Cash in Bank 10,000 14,000 Cost of Goods Sold 8 Record cost of sales Inventory 3,000 3,000 9 Sell more furniture for cash Inventory 7,500 10,500 Rent 5 Monthly rent Cash in Bank 1,000 1,000 Supplies 6 Office supplies Line of Credit 1,500 1,500 TOTAL $137,000 $137,000 - 15 -
  16. 16. Company Spends $3 Billion Cash on Supplies Capitalize or Expense Impact on the Balance Sheet and Income Statement Balance Sheets Capitalize Expense Assets Cash in bank - $3 billion - $3 billion Supplies + $3 billion no change Total assets no change - $3 billion Liabilities no change no change Equity no change - $3 billion Liabilities + Equity no change - $3 billion Income Statements Capitalize Expense Sales no change no change Cost of goods sold no change no change Gross profit no change no change Operating expense no change + $3 billion Income no change - $3 billion - 16 -

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