The Personnel, procedures, devices, and records used by an organization to develop accounting information and communicate that information to decision makers
Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities and with the results of their decisions.
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities.
Money Measurment Concept Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2009 transaction.
The Accrual Concept Businesses are required to record and report revenue at the time it is earned and realized by the business, not when the cash for the revenue is received by the business. This method is known as accrual basis accounting. The purpose of this principle is to actually show what work has been completed and not what is to be done in the future.
Disclosure Concept The accounting records of a business must be disclosed so that judgment about the financial status of a business can be easily made. However, the disclosure of accounting and financial information should not cause the business to accrue unreasonable expenses or cause erroneous opinions.
Matching Concept This principle allows for real time analysis of the expenses and revenues. Using this principle will show just how well the business has done financially and how effective it was. Somewhat like the Accrual Principle, expenses in this case can only be recorded and reported when revenue is to which such expenses are related was earned.
The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:
Balances of all asset accounts such cash, accounts receivable, etc.
Balances of all liability accounts such as accounts payable, notes, etc.
Capital stock balance
Retained earnings, obtained from the statement of retained earnings
Balance Sheet Format $12,000 Total Assets $ 1,200 Equipment and Fixtures (less Depreciation) Fixed assets $10,800 Total Current Assets $ 1,200 Rent Prepaid Expenses $ 5,500 Merchandise Inventory $ 1,600 Accounts Receivable $ 2,200 Cash in Bank $ 300 Cash On Hand Current Assets $$ Assets
$12,000 Total Liabilities and Net Worth $ 2,700 Net Worth* $ 9,300 Total Liabilities $ 5,500 Notes Payable, 1998 $ Long-term liabilities $ 3,800 Total Current Liabilities $ 500 Accrued Payroll Expenses $ 2,200 Notes Payable, Bank $ 1,100 Accounts Payable Current Liabilities $$ Liabilities
The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:
Capital gains or losses
Income Statement Format Operating Net Revenue Sale of goods, merchandise, or services Less Discounts and Allowances Expenses Cost of Goods Sold General and Administrative Expenses Selling Expenses Non-Operating Other Revenues or gains Sources other than primary business activities Other Expenses or Losses Sources other than the primary business activities Irregular Items Discontinued Operations Extraordinary items Changes in Accounting Principle
The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods:
Direct method: cash flow information is derived by directly subtracting cash disbursements from cash receipts.
Indirect method: cash flow information is derived by adding or subtracting non-cash items from net income.
Cash Flow Statement Format Cash flows from operating activities: Cash received from customers xxxxxxxx Deduct: Cash payments for merchandise: xxxxxx Cash payments for Op. Exp. xxxxxx Cash payments for interest xxxxxx Cash payments for income taxes xxxxxx xxxxxxxx Net cash flow from operating activities: xxxxxx
The Statement of Owner's Equity shows the change in owner's equity during a given time period. It lists the owner equity balance at the beginning of the period, additions and subtractions to the balance, and the ending balance. Additions come from owner investments and income; subtractions from owner withdrawals and losses.
Format $12,000.0 Joe Smith, capital, June 30, 2008 2,000.00 Withdrawals during the month 14,000.00 3,000.00 Net income 1,000.00 Investment during the month $10,000.0 Joe Smith, capital, June 1, 2008 Your Company Name Statement of Owner's Equity For Month Ended June 30, 2008
I t is relatively easy to understand the formula and how it works. The worth of a business's liabilities is the total amount of money or resources the business paid out in order to acquire its assets. The worth of a business's assets is the total amount of money or products in possession of the business owner. The accounting equation is represented: worth of assets - worth of liabilities = total equity. The equation must be in balance after every recorded transaction in the system.
After a transaction occurs and a source document is generated, the transaction is analyzed and entries are made in the general journal. After a transaction occurs and a source document is generated, the transaction is analyzed and entries are made in the general journal .
Format of a General Journal Entry Date Accounts Debit Credit mm/dd account to be debited xxxx.xx account to be credited xxxx.xx
Sometimes, more than two accounts are affected by a transaction so more than two lines are required. Such a journal entry is know as a compound journal entry and takes the following format:
Date Accounts Debit Credit mm/dd account to be debited xxxx.xx account to be credited xxxx.xx account to be credited xxxx.xx
Date Account Names & Explanation Debit Credit 9/1 Cash 7500 Capital 7500 Owner contributes $7500 in cash to capitalize the business. 9/8 Bike Parts 2500 Accounts Payable 2500 Purchased $2500 in bike parts on account, payable in 30 days.
9/17 Cash 400 Accounts Receivable 700 Revenue 1100 Repaired bikes for $1100; collected $400 cash; billed customers for the balance.
Ledger The entire group of accounts is kept together in an accounting record called a ledger. Cash Accounts Payable Capital Stock Accounts are individual records showing increases and decreases .
The Use of Accounts Increases are recorded on one side of the T-account, and decreases are recorded on the other side. Left or Debit Side Right or Credit Side Title of Account
Posting Journal Entries to the Ledger Accounts
The trial balance is the process of totalling the debits and credits in your chart of accounts, then making sure that the sum of all debits equals the sum of all credits -- that the two amounts balance.
10600 10600 1275 Expenses 1100 Revenue 7500 Capital 2000 Accounts Payable 2225 Parts Inventory 275 Accounts Receivable 6825 Cash Credits Debits Account Title
Adjusting entries are needed for : * recognizing revenue for the period * matching expenses with revenues they
Adjusting entries are required every time financial statements are prepared.
Adjusting Entries: Recognizing Revenue Adjusting Unearned Revenue Recording Accrued Revenue Revenues received in cash and recorded as liabilities Revenues earned but not yet recorded in books
Adjusting Unearned Revenue On Dec 1, 2003, Mr. Landlord receives $800 as advance payment toward rent. The rental term begins on December 1, 2003, with monthly rental of $400. Date Account Dr Cr Dec 01, 2003 Cash 800 Unearned Rent Revenue 800 Adjusting Entry : Dec 31, 2003 Unearned Revenue 400 Rent Revenue 400
Adjusting Accrued Revenue On Dec 1, 2003, Mr. Lender makes a loan of $8,000 to Mr. Borrower. The loan term is 3 months. The interest rate is 12% per year. Lender receives a note. * 8,000 * 12% * 1/12 = 80 Date Account Dr Cr Dec 01, 2003 Note Receivable 8,000 Cash 8,000 Adjusting Entry : Dec 31, 2003 Interest Receivable 80 Interest Revenue 80 (Accrue one month’s interest)
Adjusting Entries Matching Expenses Adjusting Prepayments for Expenses Recording Accrued Expense Prepayments made in cash and recorded as assets Expense incurred but not yet recorded in books
Adjusting PrePayments On Dec 1, 2003, Mr. Tenant pays $800 as advance payment toward rent. The rental term begins on December 1, 2003, with monthly rental of $400. Date Account Dr Cr Dec 01, 2003 Prepaid Rent 800 Cash 800 Adjusting Entry : Dec 31, 2003 Rent Expense 400 Prepaid Rent 400
Adjusting Accrued Expenses On Dec 1, 2003, Mr. Borrower takes a loan of $8,000 from Mr. Lender. The loan term is 3 months. The interest rate is 12% per year. Lender receives a note for the amount. *8,000 * 12% * 1/12 = 80 Date Account Dr Cr Dec 01, 2003 Cash 8,000 Note Payable 8,000 Adjusting Entry : Dec 31, 2003 Interest Expense 80 Interest Payable 80 (Accrue one month’s interest)
Addjusting Entries Supplies (1 of 2) Amber Company bought supplies costing $5,600 on January 1, 2004. On January 31, supplies on hand were $4,200. Record supplies expense for January, 2004. Amber debits all purchases of supplies to the appropriate asset account. Original entry: Supplies 5,600 Cash 5,600
Addjusting Entries depreciation Expense (1 of 2) Mabel Company has the following information: 1/1/2003: Truck purchased, $21,500 Salvage value end of four years, $1,500 Depreciation method: straight line Show necessary accounts and adjusting journal entries for 2003 and 2004. **($21,500 - $1,500)/4 = $5,000 per year
Adjusting Entries Deprecaiton Expense (2 of 2) Dep Exp 5,000 Acc Dep 5,000 Adjusting Entry 2003 & 2004 2003 Dep Expense Acc Deprecn Truck 21,500 5,000 5,000 2004 Dep Expense Acc Deprecn Truck 21,500 10,000 5,000 Book value = $11,500
Depreciation is the allocation of the tangible plant asset to expense in the periods in which services are received from the asset.
The basic purpose of depreciation is to achieve the matching principle. That is, to offset the revenue of an accounting period with the costs of the good and services being consumed in the effort to generate that revenue
Physical deterioration of plant asset results from use, as well as from exposure to sun , wind , and other climatic factors. When the plant asset is carefully maintained, it is not uncommon for the owner to claim that the asset as good as new . Such statement are not literally true . Although a good policy may greatly lengthen the useful life of the machine , every machine eventually reaches the point at which it must be discarded in brief the making of repair does not lessen the need for recognition of depreciation.
The term obsolescence means the process of becoming out of date or obsolete. An aeroplane , for example , may become obsolete even though it is in excellent physical condition; it become obsolete because better plans of superior designs and performance have became available. The usefulness of plant assets may also be reduced because the rapid growth of a company renders such assets inadequate. Inadequacy of a plant asset may necessitate replacement with the larger unit even though the asset is in good physical condition. Obsolescence and inadequacy are often closely associated ; both relate to the opportunity for economical and efficient use of an asset rather then to its physical condition.
Deprecation is a process of cost allocation , not a process of valuation. Accounting records do not attempt to show the current market values of plant assets .the market value of a building ,for example , may increase during some accounting periods with in the building useful life the recognition of deprecation expense continuous, how ever, without regard to such temporary increase in market value. Accountants recognize that the building will render useful services only for a limited no of years , and that the full cost of the building should be systematically allocated to expense during these years.
The Concept of Depreciation The portion of an asset’s utility that is used up must be expensed in the period used. Cash (credit) Fixed Asset (debit) On date when initial payment is made . . . The asset’s usefulness is partially consumed during the period. At end of period . . . Accumulated Depreciation (credit) Depreciation Expense (debit)
There are several alternative methods of computing depreciation
Straight line method
The simplest and most widely used method of computing depreciation is straight line method. Under this method equal portion of the assets cost is recognized as depreciation expense in each period of asset’s useful life.
Another form of accelerated depreciation is the sum-of-the-years-digits methods, sometimes called SYD. In this method, the depreciation rate is stated as a fraction, which get smaller every year. These “shrinking fractions” determine the percentage of the asset’s depreciable account charged to depreciable expense every year.
The most widely used form of accelerated depreciation is the fixed-percentage –of-declining-balance method. The method involves computing and accelerated depreciation rate which is a specified percentage of the straight-line depreciation rate. It is computed each year by applying this accelerated depreciation rate to the remaining book value