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Accounting

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Accounting 1

Accounting 1

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  • 1. Accounting Presentation
    • Group members
  • 2. The Accounting Information of System
    • The Personnel, procedures, devices, and records used by an organization to develop accounting information and communicate that information to decision makers
  • 3. 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.
  • 4. Types of Accounting Information
    • Financial
    • Providing information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers – investors and creditors.
  • 5.
    • Managerial
    • Providing information that is intended primarily for use by internal management in decision making required to run the business.
    • return of investment The repayment to an investor of the amount originally invested in another enterprise.
  • 6. Basic Functions of an Accounting System
    • Interpret and record business transactions.
    • Summarize and communicate information to decision makers.
    • Classify similar transactions into useful reports.
  • 7.
    • Information Users
    • Investors
    • Creditors
    • Managers
    • Owners
    • Customers
    • Employees
    • Regulatory agencies
    • -SEC
    • -IRS
    • -EPA
    • Decision Support
    • CVP analysis
    • Performance evaluation
    • Incremental analysis
    • Budgeting
    • Capital allocation
    • Earnings per share
    • Ratio analysis
    Information System
    • Cost & Revenue Determination
    • Job costing
    • Process costing
    • ABC
    • Sales
    • Assets & Liabilities
    • Plant and equipment
    • Loans & equity
    • Receivables, payables & cash
    • Cash Flows
    • From operations
    • From financing
    • From investing
  • 8.
    • Tax
    • Preparation of income tax returns and anticipating the tax effects of business transactions and structuring them in such a way as to minimize the income tax burden.
  • 9. Basic Accounting Principle
    • Business Entity Concept
    • 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.
  • 10.
    • 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.
  • 11.
    • The Cost Concept The widely used principle of accounting for assets at their original cost to the current owner.
    • Going Concern An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.
  • 12.
    • Materiality Concept The significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.
    • Consistency Concept
    • It means that the company uses the same accounting principles or rules from year to year.
  • 13.
    • 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.
  • 14.
    • Time-period Concept implies that the economic activities of an enterprise can be divided into artificial time periods and can be genarted on time like yearly
    • Conservatism Concept Assets and revenue should be stated at their lowest values on the other side liabilites and expenses should be stated at their highest value.
    • Cash Base Accounting Transactions are recorded when cash is received or paid out
  • 15.
    • 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.
  • 16.
    • Revenue Recognition Concept Requires companies to record when revenue is realized or realizable and earned, not when cash is received. This way of accounting is called accrual basis accounting
  • 17. Introduction to Financial Statements
    • The piece of information send to investors to analyze the condition of business
    • Balance Sheet
    • Describes where the enterprise stands at a specific date.
    • Income Statement
    • Describes results of company`s operations ( income and expenses and as a result profit n loss ) for a particular period of time.
    • Cash flow statement
    • Describes how cash position of a company changed over a particular period of time.
  • 18. Balance Sheet
    • 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
  • 19. 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 $$ Assets
  • 20. $12,000 Total Liabilities and Net Worth $ 2,700 Net Worth* $ 9,300 Total Liabilities $ 5,500       Notes Payable, 1998 $ Long-term liabilities $ 3,800 Total Current Liabilities $ 500       Accrued Payroll Expenses $ 2,200       Notes Payable, Bank $ 1,100       Accounts Payable   Current Liabilities $$ Liabilities
  • 21. Income Statement
    • 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:
    • Revenue
    • Expenses
    • Capital gains or losses
  • 22. 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
  • 23.  
  • 24. Cash Flow Statement
    • 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.
  • 25. 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
  • 26. Statement of Owner's Equity
    • 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.
  • 27. 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
  • 28. Double Entry System
    • Accounting information is based on the double entry system.
    • An account is an arrangement of transactions affecting a given asset, liability or other element.
    • Under this system, the two-sided effect of a transaction is recorded in the appropriate accounts.
    • The recording is done by means of a “ debit-credit ” convention (set of rules) applying to all accounts.
  • 29. Types of Accounts
    • Assets
    • Expense
    • Darwing
    • Revenue
    • Capital
    • Liability
  • 30. The system records the two-sided effect of transactions
    • Transaction Two-sided effect
    • Bought furniture for cash Decrease in one asset
    • Increase in another asset
    • Took a loan in cash Increase in an asset
    • Increase in a liability
  • 31. The Account And the Debit Credit Convention Asset Expense Debit Debit Revenue Liability Equity Credit Credit Credit Normal balance in account
  • 32.
    • Balance Increases
    • Debit entries in an asset account
    • Debit entries in an expense account
    • Credit entries in a liability account
    • Credit entries in Equity account
    • Credit entries in a revenue account
    • Balance Decreases
    • Credit entries in an asset account
    • Credit entries in an expense account
    • Debit entries in a liability account
    • Debit entries in Equity account
    • Debit entries in a revenue account
  • 33. The Accounting Equation
    • Assets = Liabilities + Owners’ Equity
    • 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.
  • 34.
    • For an example of the accounting equation let us consider ABC Cellular Phones. Last month the following transactions took place:
    • the owner invested $3,000 into his business
    • paid $500 for his bills for the month
    • received $1,000 from customer for purchases.
    • The equation would look like this:
    • assets ($3,000 + $1,000) - liabilities ($500) = $3,500 total equity.
  • 35. Accounting Cycle
    • Identify the transaction
    • Analyze the transaction
    • Record the transaction to a journal
    • Record the transaction to the general ledger
    • Perform a trial balance
    • Prepare adjustments.
    • Perform trial balance with adjustments.
    • Prepare financial statements
    • Close the accounts
    • Post closing trial balance
  • 36. Accounting Cycle Adjusting Journal Entries 7 6 5 4 2 8 Adjusted Trial Balance 3 Post-Closing Trial (optional) 9 Begin End Accounting year Originating journal entries Post to Ledger Unadjusted Trial Balance Financial Statements Closing Entries Start over
  • 37. General Journal
    • 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 .
  • 38. Format of a General Journal Entry Date Accounts Debit Credit mm/dd account to be debited xxxx.xx           account to be credited   xxxx.xx
  • 39. Compound Journal Entries
    • 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
  • 40. 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.    
  • 41. 9/17      Cash 400     Accounts Receivable 700           Revenue   1100   Repaired bikes for $1100; collected $400 cash; billed customers for the balance.  
  • 42. 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 .
  • 43. 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
  • 44. Posting Journal Entries to the Ledger Accounts
  • 45. Ledger Cash Account
  • 46. Trial Balance
    • 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.
  • 47. 10600 10600     1275 Expenses 1100   Revenue 7500   Capital 2000   Accounts Payable   2225 Parts Inventory   275 Accounts Receivable   6825 Cash    Credits     Debits Account Title
  • 48. Adjusting Journal Entries
    • Adjusting entries are needed for : * recognizing revenue for the period * matching expenses with revenues they
    • helped generate.
    • Adjusting entries are required every time financial statements are prepared.
  • 49. 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
  • 50. 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
  • 51. 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)
  • 52. 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
  • 53. 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
  • 54. 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)
  • 55. 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
  • 56. Addjusting Entries Supplies Expense (2 of 2) $4,200 Account Dr Cr Supplies Expense $1,400 Supplies $1,400 Pur: $5,600 End: ($4,200) Expense: $1,400 Supplies Supplies Expense $5,600 $1,400 $1,400
  • 57. 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
  • 58. 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
  • 59. Adjusting Entries
    • Thornton Company pays its employees on a weekly basis, the week after the work week.
    • It owed $3,400 in salaries for the last work week in December.
    • The payment was made on January 3 of the following year.
  • 60. Adjusting Entries
    • Dec 31 (current year): Dr Cr Salaries Expense $3,400 Salaries Payable $3,400
    • January 03 (following year): Salaries Payable $3,400 Cash $3,400
  • 61.
    • Closing entries are made to close all nominal accounts (revenue and expense accounts) for the year.
    • Real (or Permanent) accounts (balance sheet accounts) are not closed.
    • Dividend account is closed to Retained Earnings account.
    Closing Entries
  • 62. Closing Entries
    • The following closing entries are made (assuming the company had net income) :
    • Income Summary Account $ Expense Accounts (Individually) $
    • Revenue Accounts (Individually) $ Income Summary Account $
    • Income Summary Account $ Retained Earnings $
    • Retained Earnings Account $ Dividend Account $
  • 63. Scheme of closing entries Dividends Ret. Earnings Revenue Income Summary Expense 4 3 2 1
  • 64. Closing Entries Preiodic Inventory system
    • In a periodic inventory system, closing entries are made to record cost of goods sold and ending inventory.
    • In a perpetual inventory system, such entries are not required.
  • 65.
    • Intell Company has the following balances on December 31, 2003 (see table).
    • The company uses a periodic inventory system.
    • Inventory count on December 31, 2003 was $62,000.
    Purchases (gross) $400,000 Purchase Returns $27,000 Freight In $12,000 Inventory (1/1/2003) $46,000
  • 66. Account Dr Cr Cost of Goods Sold (plug figure) $ 369,000 Inventory (Ending balance) $ 62,000 Purchases Returns $ 27,000 Purchases (Gross) $ 400,000 Freight-in $ 12,000 Inventory (Beginning balance) $ 46,000
  • 67. Computation of Cost of Goods Sold (Periodic)
    • Beginning Inventory $46,000
    • Purchases $400,000
    • Purchase Returns 27,000
    • Net Purchases 373,000
    • Plus: Freight In 12,000
    • Cost of goods purchases 385,000
    • Cost of goods available 431,000
    • Less: Ending Inventory 62,000
    • Cost of Goods Sold $369,000
  • 68. Depreciation Defination
    • 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
  • 69. Causes of deprecation
    • There are two main causes of depreciation
    • Physical deterioration
    • 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.
  • 70.
    • Obsolescence
    • 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.
  • 71. Depreciation process
    • 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.
  • 72. 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)
  • 73. Accumulated depreciation
    • Accumulated depreciation is a contra asset account representing that portion of the assets cost that has already been allocated to expense
  • 74. Methods of computing depreciation
    • 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.
  • 75.
    • Unit-of-output method
    • For certain kind of assets the more equitable allocation of the cost can be obtain by dividing the cost by the estimated units of output rather then by the estimated years of the useful life
    • Accelerated deprecation methods
    • The term accelerated depreciation means recognition of relatively large amounts of depreciation early years of use and reduced amount in the later years.
  • 76.
    • Sum of years digits methods
    • 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.
  • 77.
    • Fixed-percentage-of-declining-balance method
    • 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
  • 78.
    • revenues
    • Increases in the enterprise’s assets as a result of profit‑oriented activities.
    • expenses
    • Past, present, or future reductions in cash required to generate revenues.
    • financial statement A declaration of information believed to be true
    • communicated in monetary terms.
  • 79.
    • Assets - Anything that a business owns that has monetary value.
    • c urrent Assets - Cash and other assets readily converted into cash. Includes accounts receivable, inventory, and prepaid expenses.
    • Fixed Assets - Also called long-term assets with a relatively long life that are used in the production of goods and services, rather than being for resale.
  • 80.
    • Liabilities - Debts of the business.
    • Current Liabilities - The debts of a company which are due and payable within the next 12 months.
    • Long-Term Liabilities - Debts of a company due after a period of 12 months or longer.
  • 81.
    • Net Worth - The business owner's equity in a company as represented by the difference between assets and liabilities.
    • Owners' Equity - See Net Worth.
    • Working Capital - Current Assets minus Current Liabilities.