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2• There are generally three types of
businesses: – Manufacturing Businesses– Merchandising Businesses
• Wholesale• Retail
– Service Businesses• Some services involve products
– E.g., restaurants– CD calls them combination businesses
3• We will focus on corporations
– 20% of US businesses
• There are other entities (Business forms)– Different financial statements– Examples:
• Sole proprietorships– 70% of US businesses
• Partnerships– 10% of US businesses
• Other entities as well
4• With Partnerships & Sole Proprietorships
– Owner(s) treated as doing business• Business debts are debts of the owners
– Unlimited Liability
• Corporations– Legal entities separate from their owners.
• Business debts are corporation's debts– not the owner's debts.
• Shareholders have limited liability
• Limited Liability– shareholders can only lose their investment – nothing
more
5
• How will corporation be financed?– Funds from You– Funds from Third Parties
• Debt vs. Equity– Debt - Advantages
» Owner keeps control of corporation– Debt – Disadvantages
» Owner has to repay» Owner has to pay interest
6
– Equity – Advantages• Owner doesn’t have to pay interest
– Dividends do not have to be paid
• Owner doesn’t have to repay
– Equity – Disadvantages• Owner dilutes control over corporation
7
• Once the business is created, the owner receives:– Operating profits / losses– Capital gains / losses when business sold
8
• Accounting– information system
• provides reports to stakeholders• Information on economic activities and
condition of a business
9
• A lot of people interested in how business is doing.– Business Stakeholder
• person or entity that has an interest in the economic performance of the business
• Stakeholders include– owners, – managers, – employees, – customers, – creditors, and – various government agencies
• All stakeholders use accounting data
10Stakeholder Interested In Reason
A. Owner Sales Is advertising effective?
ProfitCan I take home more money
each week?
CashCan I afford to buy more
equipment?
B. Investors/ Stockholders
ProfitIs my investment making
money?
DividendsWhat dividends are being
paid?
C. Bankers DebtsCan this business repay a
loan?
11
Stakeholder Interested In Reason
D. IRS ProfitWhat taxes does this
business owe?
E. Managers ExpensesAm I keeping expenses
within my budget?
SalesWill I be eligible for a
bonus this year?
F. Employees ProfitCan my company afford
raises?
Is my job secure?
12Stakeholder Interested In Reason
G. Customers Amount
spent on warranty
How dependable is this product?
Is the company going to be in business in the future?
H. Competitors Amount
spent on ads
How do I compare to my competitor?
• Competitors get valuable information from financial statements
• So, companies disclose as little detail as possible
13
• Accountants have to act ethically.– Not just a case of morals.– Ethical violation can also lead to civil or
criminal liability for the violation• Civil
– Malpractice– Lose license
• Criminal – Go to Jail
14
• Profession of accounting is varied.– Private accounting
• Accountants work for their clients – e.g., Controllers
– Public accounting• Accountants - independent of clients
– e.g., CPAs
15
• Financial accounting - preparation of general purpose financial statements– primarily for outsiders
• investors, • government regulators, and• creditors
– Done by internal accountants• then certified by the public accountants
16
• Managerial or management accounting– preparation of internal reports
• for the management of the company
• Tax accounting– Preparation of tax returns
• Either private or public accountants
17
• Financial statements prepared using GAAP– Generally Accepted Accounting Principles
(GAAP)– Set of rules that all accountants follow
• in preparing financial statements
18
• Didn’t always have GAAP.
• Basic rules developed during Renaissance
• Up to 1933 - free to use whatever rules you want
19
• With the 1929 crash, federal government passed:– The Securities Act of 1933 and – The Securities Exchange Act of 1934
• Most publicly traded corporations now must follow rules set by Securities Exchange Commission (SEC)– In preparing financial statements
20
• SEC allows accounting profession to establish GAAP– Now set by FASB
• Financial Accounting Standards Board (FASB)• There were prior organizations
– If the SEC isn't happy with GAAP, then• Can require different rules with governmental
filings and reports to shareholders
21
• GAAP reflects concepts/assumptions used in preparing financial statements.– Relevance
• Information is relevant if it will influence investment decisions
– Reliability (Credible) • Information should be materially accurate
22– Comparability
• Information is presented so decision makers can recognize similarities, differences, and trends over different time periods or between different companies.
– Follow same general rules
– Consistency • accounting procedure, once adopted, should
continue to be used. – Rules for changing accounting rules to follow.
23
– Business Entity Concept (Separate Entity Concept)
• Each business accounted for as an individual organization.
– Even though you are a sole proprietorship» (Not a separate legal entity), » Financial statements only cover the business
operations. » Do not include your personal assets and income.
24
– Cost Concept • Most transactions recorded at historical cost. • building recorded using purchase price, not
FMV
– Objectivity Concept• Accounting reports should be based upon
objective evidence.
– Conservatism• Accountants should value items
conservatively.
25
– Unit of Measure Concept• Financial statements prepared using domestic
currency of corporation
– Continuity Assumption (Going Concern Assumption)
• Assume company will not be going out of business.
• Example– Inventory valued at price paid
» Not liquidation value
26
• CD says Three General Purpose Financial Statements:– Balance Sheet– Income Statement– Statement of Cash Flows
• There is a fourth Corporate Statement– Statement of Retained Earnings
27
• Balance Sheet– prepared as of a given date– usually the end of reporting period.
• Corporations can use calendar year or fiscal year
– Fiscal year is 12-month period other than a calendar year
– reports the financial position of the company as of a given date.
28
• Balance Sheet reports:– Assets,– Liabilities, and– Net worth of the company.
• Balance Sheet usually uses original cost – Not FMV– Doesn’t show current value of the
company.
29
• Income Statement– reports results of company’s operations
for the reporting period. – Dated "For [Period] Ended [Date].“
• Example - "For the Year Ended December 31, 1998."
30• The Income Statement reports:
– revenues, – expenses and – net income
• This information given for the period in question
31
• Equity section of a corporate balance sheet– Divided into two parts.
• Paid In Capital– Also called “Contributed Capital”
– Shows equity contributed by shareholders
• Retained Earnings– Shows earnings that corporation earns and keeps
» Not paid as dividends
• Statement of Retained Earnings– explains how Retained Earnings changed from
last year to this year.
32
Statement of Retained Earnings
For the Year Ended __________________
Beginning Balance of Retained Earnings
XXXXX
Plus Net Income for the Year XXXXX
Less Dividends for the Year (XXXXX)
Ending Balance of Retained Earnings
XXXXX
33
• Accrual Method– Used by most publicly traded
corporations.– Revenue - when you earn it
• Not when you receive it
– Expenses when you owe them• Not when you pay them
• Accountants prefer accrual method– Match revenues with expenses that
generated them.
34
• Cash method– Revenue - reported when received– Expenses - reported when paid
• Accounts don’t like Cash method– Companies can manipulate their income.
35• Statement of Cash Flows
– Introduced around 1986– Reports cash inflows and outflows
• From operations– what it does for a living,
• From investing– purchases and sales of equipment, real estate and
other assets
• From financing – stock and debt transactions
• Statement of Cash Flows explains how cash changed during the year.
36Statement of Cash Flows
For the Year Ended _____________
Cash Flows From Operations (Details given line by line like an Income Statement):
XXXXX
Cash Flows From Investing (Details given line by line like an Income Statement):
XXXXX
Cash Flows From Financing (Details given line by line like an Income Statement):
(XXXXX)
Cash Flows For the Year: XXXXX
Plus Balance of Cash at Beginning of Year: XXXXX
Balance of Cash at End of Year XXXXX
37
• Notes to the Financial Statements– At end of financial statements– Notes convey great deal of important
information on: • What accounting rules were followed. • Additional details about figures appearing in
statements. • Additional information not appearing in
statements– E.g., lines of credit, bank covenants & contingent
liabilities
38
• Financial statements accompanied by letter from the CPAs preparing the statements. – Describes how the audit was conducted,– States CPA's opinion on whether financial
reports were prepared in accordance with GAAP
39
• BALANCE SHEET– Imagine that you want to report your
wealth (net worth).• Maybe you want to borrow money• Creditor wants to know you can pay loan back
loan.
– If you own a house you bought for $250,000.
• You could report that – You have this house, and– You have net worth of $250,000.
40
• Owning the house does not mean that you are worth $250,000.– If you borrowed the $250,000 purchase
price from your parents.• You are not worth $250,000.
– You have an asset worth $250,000 and– You have a liability for $250,000. – You have zero net worth.
41
• What if you have no assets or liabilities.– You have a zero net worth.
• But, you have a credit card & get a cash advance of $10,000.– Are you richer than before cash advance?
• You have $10,000 in cash• You have a $10,000 debt• You still have a zero net worth.
42
• In order to give full disclosure - report your – Assets, – Liabilities and – Net Worth
• Equity
43
• Balance Sheet provide this disclosure– Gives information regarding a firm's assets,
liabilities and equity.
• Firm's assets are paid for with either – Liabilities or– Equity.
• Because of this relationship:– Firm's assets = Firm’s liabilities + Firm’s equity.– This relationship is called “Balance Sheet
Equation”
44
Balance Sheet
Assets Liabilities
Owner's Equity
The Balance Sheet Equation is reflected in the Balance Sheet:
Balance Sheets different formats
Left-Right
Top-Bottom
45
• Accounts– Each asset, liability and equity item is represented
by an account– Flexibility in the names given to accounts.– Each account has two sides
• just like the Balance Sheet• Left-hand side is the debit side• Right-hand side is the credit side
– Example – firm has one asset account for Cash
46
Cash
Debits Credits
• Example – firm has one asset account for Cash
• Debits and credits are netted to give the balance in the account.
• Accounts are kept in the General Ledger of Accounts
47
• Balance Sheet – Summarizes the assets, liabilities and equity
accounts • If account is on the left-hand side of the
Balance Sheet– Asset– Account will normally (not always) have debit
balance. • If an account is on the right-hand side of the
Balance Sheet– Liabilities and equity– Account will normally have credit balance.
48
Cash
1000
100
1100
• When account has debit balance– E.g., asset– Increase - debit it some more
• Add to the debit balance. – Decrease - credit it
• Adding to the opposite side• Two sides netted• Thereby decreasing that balance.
49
Accounts Payable
1000
100
1100
• When account has a credit balance– E.g., a liability or equity account– Increase - credit it some more– Decrease - debit it
50• Order of accounts on Balance Sheet
follows convention.– Assets listed by how soon they will be
converted into cash.• Current Assets listed first
– Cash is the first line– Assets that will be used, consumed or collected
within one year or business cycle, whichever is longer
• Non-current Assets listed second– Used, consumed or collected after one year or
business cycle
51
– Liabilities listed by how soon they will be paid.
• Current Liabilities listed first– Will be paid within one year or business cycle
• Non-current Liabilities listed second– Will be paid after one year or business cycle
– Equity accounts are listed by their priority of payment upon liquidation.
– Business cycle• Time it takes to start and complete a
business transaction
52• Business transactions are recorded in
accounts.
• Changes to accounts summarized in the General Journal.– General Journal notes
• which accounts are credited and• which accounts are debited. These General
Journal entries take the following form:
53
D. Name of the Account Debited $ XXX
Cr. Name of the Account Credited $XXX
• General Journal entries take the following form:
55
• Our firm is a corporation.
• Equity in the corporation represented by capital stock.
• There are different types of stock.– Common Stock
• Residual Owners of Corporations• Get what’s left when creditors are paid
56
• When corporation sells stock – it increases its equity. – Cash (or other property) is given to the
corporation• assets (e.g., cash) have increased
– Cash did not come from debt.• Equity is thereby increased.
– The equity account here is Common Stock.
57
Balance Sheet
Cash UP Common Stock UP
$100,000 $100,000
• $100,000 of common stock is sold. – Two things happen with each transaction.– Here:
• Cash went up, and• Equity went up.
58• Cash
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Cash? (Debit or Credit)
• Common Stock. – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Common Stock? (Debit or
Credit)
59
• Cash– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Common Stock– Is an equity account– Equity is on the right side of Balance Sheet– Right Side means right (credit) balance– To increase a credit balance account – CREDIT IT
62
Balance Sheet
Cash Down
$5,000
Equipment Up
$5,000
• Purchase of Equipment for $5,000 cash – Two things happen with each transaction.– Here:
• Equipment went up, and• Cash went down.
63• Equipment
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Equipment? (Debit or Credit)
• Cash – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Cash? (Debit or Credit)
64
• Equipment– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Cash– Is an asset– Assets are on the left side of Balance Sheet– Left Side means left (debit) balance– To decrease a debit balance account – CREDIT IT
66
Balance Sheet
Assets Liabilities
Cash $95,000
Equipment $5,000 Equity
Common Stock $100,000
$100,000 $100,000
67
Balance Sheet
Equipment Up Notes Payable UP
$10,000 $10,000
• Purchase of Equipment in exchange for a promissory note for $10,000 – Two things happen with each transaction.– Here:
• Equipment went up, and• Notes Payable went up.
68• Equipment
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Equipment? (Debit or Credit)
• Notes Payable – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Notes Payable? (Debit or
Credit)
69
• Equipment– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Notes Payable– Is a liability– Liabilities are on the right side of Balance Sheet– Right Side means right (credit) balance– To increase a debit balance account – CREDIT IT
71
Balance Sheet
Assets Liabilities
Cash $95,000 Notes Payable $10,000
Equipment $15,000 Equity
Common Stock $100,000
$110,000 $110,000
72
Balance Sheet
Supplies Up Accounts Payable UP
$10,000 $10,000
• Purchase of Supplies for $10,000 on credit (no formal promissory note is given) – Two things happen with each transaction.– Here:
• Supplies went up, and• Accounts Payable went up.
73• Supplies
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Supplies? (Debit or Credit)
• Accounts Payable – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Accounts Payable? (Debit or
Credit)
74
• Supplies– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Accounts Payable– Is a liability– Liabilities are on the right side of Balance Sheet– Right Side means right (credit) balance– To increase a crebit balance account – CREDIT IT
76
Balance Sheet
Assets Liabilities
Cash $95,000 Accounts Payable $10,000
Supplies $10,000 Notes Payable $10,000
Equipment $15,000 Equity
Common Stock $100,000
$120,000 $120,000
77
• Purchase of Land and Building for $100,000. – When you pay one price for a bundle of assets
• Allocate the purchase price according to FMV.
– Assume:• Land is worth $10,000• Building is worth $90,000• Price $100,000 is paid:
– Cash ($20,000) and
– Promissory note ($80,000).
78
Balance Sheet
Cash Down Notes Payable UP
$20,000 $80,000
Land Up
$10,000
Buildings Up
$90,000
• Purchase of Land and Buildings for $100,000– Two things happen with each transaction.– Here:
• Land & Buildings went up, and• Cash went down & Notes Payable went up.
79• Cash
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Cash? (Debit or Credit)
• Land – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Land? (Debit or Credit)
80• Buildings
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Buildings? (Debit or Credit)
• Notes Payable – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Notes Payable? (Debit or
Credit)
81
• Cash– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To decrease a debit balance account – CREDIT IT
• Land– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
82
• Buildings– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Notes Payable– Is a liability– Liabilities are on the right side of Balance Sheet– Right Side means right (credit) balance– To increase a debit balance account – CREDIT IT
83
D. Land $10,000
Buildings $90,000
Cr. Cash $20,000
Notes Payable $80,000
Buildings
$90,000
Land
$10,000
84
D. Land $10,000
Buildings $90,000
Cr. Cash $20,000
Notes Payable $80,000
Notes Payable
$10,000
$80,000
Cash
$100,000 $5,000
$20,000
85
Balance Sheet
Assets Liabilities
Cash $75,000 Accounts Payable $10,000
Supplies $10,000 Notes Payable $90,000
Equipment $15,000
Land $10,000 Equity
Buildings $90,000 Common Stock $100,000
$200,000 $200,000
86
Balance Sheet
Cash Down Notes Payable Down
$6,000 $6,000
• Pay the principal of $6,000 on a promissory note – Two things happen with each transaction.– Here:
• Cash went down, and• Notes Payable went down.
87• Cash
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Cash? (Debit or Credit)
• Notes Payable – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Notes Payable? (Debit or
Credit)
88
• Cash– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To decrease a debit balance account – CREDIT IT
• Notes Payable– Is a liability– Liabilities are on the right side of Balance Sheet– Right Side means right (credit) balance– To decrease a credit balance account – DEBIT IT
89
D. Notes Payable $6,000
Cr. Cash $6,000
Notes Payable
$6,000 $10,000
$80,000
Cash
$100,000 $5,000
$20,000
$6,000
90
Balance Sheet
Assets Liabilities
Cash $69,000 Accounts Payable $10,000
Supplies $10,000 Notes Payable $84,000
Equipment $15,000
Land $10,000 Equity
Buildings $90,000 Common Stock $100,000
$194,000 $194,000
91
• Income Statement – Equity increased by:
• Contributions from its owners (e.g., the sale of stock)
– Contributed Capital.
• Firm generating profits from its operations– If the firm distributes those profits to stockholders –
dividends– If firm keeps profits - Retained Earnings.
92• Profits reflected in accounts
– Inflows reflected in revenue accounts– Outflows reflected in expense accounts.
• Revenues less expenses give you the firm's Net Income.
• Income Statement summarizes these revenue & expense accounts
93
• Revenues– CD defines as “the amount of inflowing assets
from the sale or providing of goods or services to customers.
94• Revenues
– Increase a firm's equity or net worth.
• Equity appears on the right-hand side of the Balance Sheet– It normally has a credit (right) balance– Increased with a credit– Decreased with a debit
• Because revenues increase equity– Revenues will normally have a credit (right) balance.
• Because expenses decrease equity– Expenses will normally have a debit (left) balance.
96
Balance Sheet
Accounts Receivable
Up Retained Earnings Up
$50,000 $50,000
• Our firm earns consulting commissions of $50,000. The client has not yet paid these commissions – Two things happen with each transaction.– Here:
• Consulting Revenue went up (Retained Earnings Up), and• Accounts Receivable went up.
97• Accounts Receivable
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Accounts Receivable?
(Debit or Credit)
• Consulting Revenue – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Consulting Revenue? (Debit
or Credit)
98
• Accounts Receivable– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To increase a debit balance account – DEBIT IT
• Consulting Revenue– Is a Revenue Account– Revenues increase Equity– Equity accounts are on the right side of Balance
Sheet– Right Side means right (credit) balance– To increase a credit balance account – CREDIT IT
99
D. Accounts Receivable $50,000
Cr. Consulting Revenue $50,000
Consulting Revenue
$50,000
Accounts Receivable
$50,000
100
Balance Sheet
Assets Liabilities
Cash $69,000 Accounts Payable $10,000
Accounts Rec. $50,000 Notes Payable $84,000
Supplies $10,000
Equipment $15,000 Equity
Land $10,000 Common Stock $100,000
Buildings $90,000 Retained Earnings $50,000
$244,000 $244,000
101
Balance Sheet
Cash Down Retained Earnings Down
$20,000 $20,000
• The firm pays salaries of $20,000 – Two things happen with each transaction.– Here:
• Salary Expense went up (Retained Earnings Down), and• Cash went down
102• Cash
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Cash? (Debit or Credit)
• Salary Expense – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Salary Expense? (Debit or
Credit)
103
• Cash– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To decrease a debit balance account – CREDIT IT
• Salary Expense– Is an Expense – Expenses decrease Equity– Equity accounts are on the right side of Balance
Sheet– Right Side means right (credit) balance– To decrease a credit balance account – DEBIT IT
104
D. Salary Expense $20,000
Cr. Cash $20,000
Salary Expense
$20,000
Cash
$100,000 $5,000
$20,000
$6,000
$20,000
105
Balance Sheet
Assets Liabilities
Cash $49,000 Accounts Payable $10,000
Accounts Rec. $50,000 Notes Payable $84,000
Supplies $10,000
Equipment $15,000 Equity
Land $10,000 Common Stock $100,000
Buildings $90,000 Retained Earnings $30,000
$224,000 $224,000
106
Balance Sheet
Supplies Down Retained Earnings Down
$3,000 $3,000
• The firm uses $3,000 of its supplies – Two things happen with each transaction.– Here:
• Supplies Expense went up (Retained Earnings Down), and• Supplies went down
107• Supplies
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you decrease Supplies? (Debit or Credit)
• Supplies Expense – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Supplies Expense? (Debit or
Credit)
108
• Supplies– Is an asset– Assets are on left side of Balance Sheet– Left Side means left (debit) balance– To decrease a debit balance account – CREDIT IT
• Supplies Expense– Is an Expense – Expenses decrease Equity– Equity accounts are on the right side of Balance
Sheet– Right Side means right (credit) balance– To decrease a credit balance account – DEBIT IT
110
Balance Sheet
Assets Liabilities
Cash $49,000 Accounts Payable $10,000
Accounts Rec. $50,000 Notes Payable $84,000
Supplies $7,000
Equipment $15,000 Equity
Land $10,000 Common Stock $100,000
Buildings $90,000 Retained Earnings $27,000
$221,000 $221,000
111
Balance Sheet
Rent Payable Up
$10,000
Retained Earnings Down
$3,000
• The firm owes one month’s rent – Two things happen with each transaction.– Here:
• Rent Expense went up (Retained Earnings Down), and• Rent Payable went up
112• Rent Payable
– What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Rent Payable? (Debit or
Credit)
• Rent Expense – What kind of account is it?– On what side of Balance Sheet is it located?– What kind of balance does this account normally
have? – How do you increase Rent Expense? (Debit or
Credit)
113
• Rent Payable– Is a liability– Liabilities are on right side of Balance Sheet– Right Side means right (credit) balance– To increase a credit balance account – CREDIT IT
• Rent Expense– Is an Expense – Expenses decrease Equity– Equity accounts are on the right side of Balance
Sheet– Right Side means right (credit) balance– To decrease a credit balance account – DEBIT IT
115
Balance Sheet
Assets Liabilities
Cash $49,000 Accounts Payable $10,000
Accounts Rec. $50,000 Rent Payable $5,000
Supplies $7,000 Notes Payable $84,000
Equipment $15,000 Equity
Land $10,000 Common Stock $100,000
Buildings $90,000 Retained Earnings $22,000
$221,000 $221,000
116
• Trial Balance – At the end of the accounting period– Done to help in locating errors– Total all accounts with debit balances– Total all accounts with credit balances– The totals should equal – A number of trial balances are conducted
during the accounting cycle.
117
Trial Balance
Cash $49,000 Accounts Payable $10,000
Accounts Rec. $50,000 Rent Payable $5,000
Supplies $7,000 Notes Payable $84,000
Equipment $15,000 Common Stock $100,000
Land $10,000 Consulting Rev. $50,000
Buildings $90,000
Salary Expense $20,000
Supplies Exp. $3,000
Rent Expense $5,000
$249,000 $249,000
118
• Closing Entries – Have to reflect the revenues and expenses
in Retained Earnings– Close revenue and expense accounts to
the Income Summary account. – Then close Income Summary to Retained
Earnings
119
D. Consulting Revenue $50,000
Cr. Income Summary $5,000
Income Summary
$50,000
Consulting Revenue
$50,000 $50,000
• Close Consulting Revenue to Income Summary
120
D. Income Summary $20,000
Cr. Salary Expense $20,000
Income Summary
$20,000 $50,000
Salary Expense
$20,000 $20,000
• Close Salary Expense to Income Summary
121
D. Income Summary $3,000
Cr. Supplies Expense $3,000
Income Summary
$20,000 $50,000
$3,000
Salary Expense
$3,000 $3,000
• Close Supplies Expense to Income Summary
122
D. Income Summary $5,000
Cr. Rent Expense $5,000
Income Summary
$20,000 $50,000
$3,000
$5,000
Rent Expense
$5,000 $5,000
• Close Rent Expense to Income Summary