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Chapter 1 and 2

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Definition of Accounting

The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information” (American Accounting Association)

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Bookkeeping & Accounting

• Bookkeeping is only part of accounting – recording & classifying events

• Accounting includes summarizing & interpreting

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Basic Functions of an Accounting System

Summarize and

communicate information to

decision makers.

Classify similar

transactions into useful

reports.

Interpret and record business

transactions.

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Branches of Accounting

• Financial Accounting• Cost Accounting• Managerial Accounting• Tax Accounting• Auditing• Accounting Systems

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Forms of Business Organization

• Sole Proprietorship• Partnership• Limited Liability Company (LLC)• Corporation

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Generally Accepted Accounting Principles (GAAP)

• Principles of Identity– Business Entity– Going Concern

Define the identity of an organization by setting it up as a unique entity that is separate from its owners as well as other entities, and that is presumed to operate indefinitely

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Generally Accepted Accounting Principles (GAAP) – continued

• Principles of Operation– Unit of Measurement– Objectivity- Cost

Define how the accounting systems works, i.e. how financial events are measured, recorded and repeated

– Consistency– Matching/Revenue

Recognition

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Generally Accepted Accounting Principles (GAAP) – continued

• Principles of Reporting– Conservatism– Materiality– Full Disclosure

Decide how financial events are reported by defining the margin that can affect business decisions, and cautioning against understating or overstating figures

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Accounting Methods

• Cash Basis Accounting Methods– Recognizes Accounting transaction at point of cash

inflow or outflow• Accrual Basis Accounting Methods

– Recognizes all revenue earned and records all expenses incurred for the period

– Requires adjusting entries

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Introduction to Financial Statements

Three primary financial

statements.Income Statement

Balance Sheet

Statement of Cash FlowsWe will use a corporation

to describe these statements.

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Financial Statements

• Balance Sheet– Outlines the fundamental accounting equation– Reports assets, liabilities, and stockholder’s equity of a

business enterprise at a specific date.• Income Statement

– Also called Profit & Loss Statement– Shows results of operation (revenues ad expenses

resulting in net income or net loss) for a period• Statement of Cash Flow

– Shows cash inflows and outflows for a period

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Relationships Among Financial Statements

Date at beginning of

period

Date at end of period

Balance Sheet

Balance Sheet

Time

Income Statement

Statement of Cash Flows

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Financial Statement Articulation

Cash 4,125$ Notes payable 13,000$ Accounts receivable 75 Accounts payable 150 Tools & equipment 2,650 Truck 15,000 Capital stock 8,000

Retained earnings 700 Total assets 21,850$ Total liabilities & equity 21,850$

Assets Liabilities

Owners' Equity

JJ's Lawn Care ServiceBalance SheetMay 31, 2005

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2005Cash flows from operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flows from investing activities: Purchase of lawn mower (2,500)$ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000 Increase in cash for month 4,125$ Cash balance, May 1, 2005 - Cash balance, May 31, 2005 4,125$

JJ's Lawn Care ServiceIncome Statement

For the Month Ended May 31, 2005

Sales Revenue 750$ Operating Expense: Gasoline Expense 50 Net Income 700$

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The Need for Adequate Disclosure

Notes to the financial

statements often provide facts

necessary for the proper

interpretation of the statements.

Notes to the financial

statements often provide facts

necessary for the proper

interpretation of the statements.

Income Statement

Balance Sheet

Statement of Cash Flows

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Vagabond Travel AgencyBalance Sheet

December 31, 2005Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

A Starting Point: Statement of Financial Position

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Vagabond Travel AgencyBalance Sheet

December 31, 2005Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Assets

Assets are economic resources

that are owned by the business and are expected to provide positive

future cash flows.

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Vagabond Travel AgencyBalance Sheet

December 31, 2005Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Liabilities

Liabilities are debts that

represent negative future cash flows

for the enterprise.

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Vagabond Travel AgencyBalance Sheet

December 31, 2005Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' Equity:Office equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

Owners’ Equity

Owners’ equity represents the

owners’ claims to the assets of the

business.

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Vagabond Travel AgencyBalance Sheet

December 31, 2005Assets Liabilities & Owners' Equity

Cash 22,500$ Liabilities:Notes receivable 10,000 Notes payable 41,000$ Accounts receivable 60,500 Accounts payable 36,000 Supplies 2,000 Salaries payable 3,000 Land 100,000 Total liabilities 80,000$ Building 90,000 Owners' EquityOffice equipment 15,000 Capital stock 150,000

Retained earnings 70,000 Total 300,000$ Total 300,000$

The Accounting Equation

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

Assets = Liabilities + Owners’ Equity

$300,000 = $80,000 + $220,000

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Recording Business Transactions

1. Invested $8,000 in his business in exchange for common stock.2. Purchased $500 of supplies for cash.3. Purchased $4,000 of equipment on account.4. Received $3,000 cash for consulting services.5. Paid salaries of $8006. Paid the first month’s rent of $200.7. Paid $1,000 owed to a creditor.8. The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder.

A. Review of Selected Transactions

Mr. Sam Doty opened and incorporated a hospitality consulting firm during themonth of September and provided you with the following data.

Instructions: Prepare the tabular summary for the transactions above.

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Recording Business Transactions(continued)Answer:

Summary of TransactionsMonth of September 2008

Assets = Liabilities + Stockholders’ Equity

Trans-action Cash +

Sup-plies +

Equip-ment =

Accounts Payable +

Common Stock

Retained Earnings

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Causes of changes on SE

must be indicated