1-1
1
Accounting in Action
Learning Objectives
1-2
1
Identify the activities and users associated with accounting.
2
Explain the building blocks of accounting: ethics, principles, and
assumptions.
3
State the accounting equation and define its components.
4
Analyze the effects of business transactions on the accounting
equation.
5
Describe the four financial statements and how they are
prepared.
Accounting in Action
What is
Accounting
• Activities
• Users
1-3
Building
Box of
Accounting
•Ethics
•GAAP
•Assumptions
Basic
Accounting
Equation
• Assets
• Liabilities
• Equity
Using Basic
Accounting
Equation
Transaction
Analysis
(Dr. & Cr.)
Financial
Statements
• Income
statement
• Owners’
Equity
Statement
• Balance
Sheet
• Cash Flow
Statement
LO 1
LEARNING
OBJECTIVE
1
Identify the activities and users
associated with accounting.
Accounting is “an information system that
identifies, records, and communicates the
economic events of an organization to the
interested users (decision-makers)
The purpose of accounting is to show you
how the business is doing
1-4
LO 1
Three Activities
Relevant to the
Organization
Will affect the
financials of the
company involved
1-5
LO 1
DO IT!
1
E1-1B Sophie Company performs the following accounting tasks
during the year.
1. ______Summarizing
economic events.
R
2. ______Selecting
economic activities relevant to the company.
I
C
3. ______Reporting
information in a standard format.
C
4. ______Preparing
accounting reports.
R
5. ______Measuring
events in dollars and cents.
6. ______Keeping
a systematic chronological diary of events.
R
C
7. ______Explaining
uses, meaning, and limitations of data.
R
8. ______Classifying
economic events.
C
9. ______Analyzing
and interpreting information.
Instructions
Categorize the accounting tasks performed by Sophie as relating to
either the identification (I), recording (R), or communication (C)
aspects of accounting.
1-6
LEARNING
LEARNING
OBJECTIVE
OBJECTIVE
1
Identify the activities and users
Detailed Steps of the Accounting Cycle
associated with accounting.
Identifying
Analyze
Recording and Summarizing
Journalize
Adjusting
Entries
Trail
Balance
Post
Adjusted
Trail
Balance
Financial
Statements
Communicating
Closing
Entries
1-7
Post
Closing
Trail
Balance
LO 1
Who Uses Accounting Data
Stakeholders
INTERNAL
USERS
1-8
LO 1
Who Uses Accounting Data
EXTERNAL
USERS
Stakeholders
External users are people outside the
business entity (organization) who use
accounting information
An investor is a
person that allocates
capital with the
expectation of a future
financial return (profit)
or to gain an advantage
(interest).
A creditor is an entity
(can either be a person,
organisation or a
government body) that is
owed money, as they
have provided goods or
services to another entity
Also:
Banks, Customers, Tax authorities,
1-9
LO 1
Major Purposes of Accounting Systems
Provide
information for
decision-making
purposes
Routine
Internal
Reporting
External
1-10
Nonroutine
LO 1
Internal Routine Reporting
⚫
This purpose covers information provided for
decisions that occur with some regularity:
1-11
⚫
Daily reports
⚫
Weekly reports
LO 1
Internal Non-routine Reporting
⚫
This purpose covers information for
decisions that occur irregularly or even
without precedent:
1-12
⚫
Outsourcing
⚫
Design of a special cost control tracking system
LO 1
External Reporting
⚫
This purpose covers information provided
to investors, government authorities, and
other outside parties on the organization’s
financial position, operations, and related
activities.
1-13
LO 1
Financial Accounting...
…. focuses on reporting to external parties.
⚫
It measures and records business
transactions.
⚫
It provides financial statements based on
generally accepted accounting principles.
1-14
LO 1
Management Accounting...
…… measures and reports financial
and non-financial information that
helps managers make decisions to
fulfill the goals of an organization.
1-15
LO 1
Cost Accounting...
…. provides information for both
management accounting and financial
accounting.
⚫
It measures and reports financial and nonfinancial data that relates to the cost of
acquiring or consuming resources by an
organization.
1-16
LO 1
DO IT!
2
E1-2B (b) The following questions could be asked by an internal
user or an external user.
I
1. ______What
price should we set for our product?
E
2. ______Did
the company earn a satisfactory income?
I
3. ______Should
we hire more employees?
4. ______How
does the company’s profitability compare to
E
other companies?
I
5. ______What
does it cost us to manufacture each unit
produced?
I
6. ______Which
product should we emphasize?
E
7. ______Will
the company be able to provide a return to its
stockholders?
Instructions
Identify each of the questions as being more likely asked by an
internal user (I) or an external user (E).
1-17
DO IT! 31
Basic Concepts
Indicate whether the following statements are true or false.
1. The three steps in the accounting process are identification,
recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and
company officers.
5. Managerial accounting activities focus on reports for internal users.
Solution: 1. True
1-18
2. False
3. False
4. False
5. True
LO 1
Ethics
⚫ Ethics are the standards of conduct by
which actions are judged as RIGHT or
WRONG.
⚫ If you cannot depend on the HONESTY of
the individuals you deal with, effective
communication and economic activity
would be impossible, and information
would have no credibility
1-19
LO 2
Generally Accepted Accounting Principles
Various users
need financial
information
Financial Statements
◆
◆
◆
◆
◆
The accounting profession
has developed standards
that are …….
1-20
Balance Sheet
Income Statement
Statement of Owner's Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
LO 2
Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) – Standards
that are generally accepted and universally practiced. These
standards indicate how to report economic events.
Standard-setting bodies:
1-21
►
Financial Accounting Standards
Board (FASB)
►
Securities and Exchange
Commission (SEC)
►
International Accounting
Standards Board (IASB)
LO 2
Measurement Principles
Historical Cost
Principle
Fair Value
(or cost principle) dictates
that companies record
assets at their cost
?
Principle
states that assets and liabilities
should be reported at fair value
(the price received to sell an
asset or settle a liability)
Selection of which principle to follow
generally relates to trade-offs between
relevance and faithful representation.
1-22
LO 2
Assumptions
An assumption is a thing that is accepted as true or as certain to
happen, without proof
Monetary Unit
Assumption
requires that companies
include in the accounting
records only transaction data
that can be expressed in terms
of money
Economic Entity
Assumption
requires that activities of the entity be
kept separate and distinct from the
activities of its owner and all other
economic entities
What are the forms of
ownership?
◆
◆
◆
1-23
Proprietorship
Partnership
Corporation
LO 2
Forms of Business Ownership
Proprietorship
◆
Owned by one
person
◆
Owned by two or
more persons
◆
Owner is often
manager/operator
◆
Often retail and
service-type
businesses
◆
1-24
Partnership
Owner receives
any profits, suffers
any losses, and is
personally liable
for all debts
◆
◆
Generally
unlimited
personal liability
Corporation
◆
Ownership
divided into
shares of stock
◆
Separate legal
entity organized
under state
corporation law
◆
Limited liability
Partnership
agreement
LO 2
Assumptions
Question
Combining the activities of Kellogg and General Mills
would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-25
LO 2
Assumptions
Question
A business organized as a separate legal entity under state
law having ownership divided into shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
1-26
LO 2
LEARNING
OBJECTIVE
3
Assets
State the accounting equation and define
its components.
=
Liabilities
+
Owner's
Equity
Basic Accounting Equation
1-27
◆
Provides the underlying framework for recording and
summarizing economic events.
◆
Assets are claimed by either creditors or owners.
◆
If a business is liquidated, claims of creditors must be paid
before ownership claims.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's
Equity
Assets
1-28
◆
Resources a business owns.
◆
Provide future services or benefits.
◆
Cash, Supplies, Equipment, etc.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's
Equity
Liabilities
1-29
◆
Claims against assets (debts and obligations).
◆
Creditors (party to whom money is owed).
◆
Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.
LO 3
Basic Accounting Equation
Assets
=
Liabilities
+
Owner's
Equity
Owner's Equity
1-30
◆
Ownership claim on total assets.
◆
Referred to as residual equity.
◆
Investment by owners and revenues (+)
◆
Drawings and expenses (-).
LO 3
Owner’s Equity
Increases in Owner’s Equity
◆
Investments by owner are the assets the owner puts into the
business.
◆
Revenues result from business activities entered into for the
purpose of earning income.
►
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
1-31
LO 3
Owner’s Equity
Illustration 1-6
Expanded accounting
equation
Decreases in Owner’s Equity
◆
Drawings An owner may withdraw cash or other assets for
personal use.
◆
Expenses are the cost of assets consumed or services used in
the process of earning revenue.
►
Common expenses are: salaries expense, rent expense,
utilities expense, tax expense, etc.
1-32
LO 3
DO IT!
4
Owner's Equity Effects
Classify the following items as investment by owner, owner’s
drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owner’s equity.
Classification
Effect on Equity
1. Rent Expense
Expense
Decrease
2. Service Revenue
Revenue
Increase
3. Drawings
Drawings
Decrease
Expense
Decrease
4. Salaries and Wages
Expense
1-33
LO 3
DO IT!
5
E1-5B Luther Cleaners has the following balance sheet
items.
L
1. -------Accounts payable
2. -------Accounts receivable
A
3. -------Cash
A
4. -------Notes payable
L
5. -------Equipment
A
6. -------Rent payable
L
7. -------Supplies
A
OE Owner’s capital
8. -------Instructions
Classify each item as an asset (A), liability (L), or owner’s
equity (OE).
1-34
LEARNING
OBJECTIVE
4
Analyze the effects of business transactions
on the accounting equation.
Transactions are a business’s economic events recorded
by accountants. Note that:
◆
May be external or internal.
◆
Not all activities represent transactions.
◆
Each transaction has a dual effect on the accounting
equation.
1-35
LO 4
Transaction Analysis
Illustration: Are the following events recorded in the accounting
records?
Event
Criterion
Purchase
computer
Discuss product
design with
potential customer
Pay rent
Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record
1-36
LO 4
Transaction Analysis
Each transaction has a dual effect on the accounting equation
Assets
Cash +
= Liabilities +
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
- Exp.
LO 4
1-37
Transaction Analysis
TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start
a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.
Assets
Transaction
1.
1-38
Cash +
+15,000
= Liabilities +
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
- Exp.
+15,000
LO 4
Transaction Analysis
TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start
a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.
Assets
Transaction
1.
1-39
Cash +
+15,000
= Liabilities +
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
- Exp.
+15,000
LO 4
TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-40
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
- Exp.
+15,000
5.
1-41
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.
purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-42
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.
purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-43
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-44
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-45
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-46
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-47
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-48
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
+7,000
+1,600
+1,600
+1,200
+1,200
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
- Exp.
+15,000
5.
1-49
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
1-50
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
1-51
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
1-52
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
$8,050 +
1-53
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
+2,000
-250
+3,500
-600
-900
-200
-250
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for services
(in Transaction 6).
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
1-54
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for services
(in Transaction 6).
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
1-55
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
LO 4
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
1-56
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$18,050
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
$18,050
LO 4
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050 +
1-57
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
$1,400
+ $1,600 +
$18,050
$7,000
=
$1,600 + $15,000 + $4,700 - $1,950 - $1,300
$18,050
LO 4
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Assets
Transaction
Cash +
1.
+15,000
2.
-7,000
- Exp.
+15,000
+7,000
+1,600
+1,600
+1,200
+1,200
5.
+250
6.
+1,500
7.
-1,700
8.
-250
9.
+600
10.
-1,300
$8,050
1-58
Owner's Equity
Accounts
Accounts
Owner's
Owner's
+ Supplies + Equipment =
+
+ Rev.
Receivable
Payable
Capital
Drawings
3.
4.
= Liabilities +
-250
+2,000
+3,500
-600
-900
-200
-250
-600
-1,300
+ $1,400
+ $1,600
$18,050
+ $7,000
=
$1,600
+$15,000 -$1,300
+$4,700
$18,050
+
$4,700 $1,300
-$1,950
- $1,950
LO 4
Summary of Transactions
1. Each transaction is analyzed in terms of its effect on:
a. The three components of the basic accounting
equation.
b. Specific of items within each component.
2. The two sides of the equation must always be equal.
1-59
LO 4
LEARNING
OBJECTIVE
5
Describe the four financial statements
and how they are prepared.
Companies prepare four financial statements :
Income
Statement
1-60
Owner’s
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
LO 5
Income Statement
Net income is needed to determine the
ending balance in owner’s equity.
Revenues
Expenses:
Salaries and Wages Ex.
Rent Ex.
Advertising Ex.
Utilities Ex.
Total Expenses
Net Income
1-61
To Owner’s
Equity
Statement
$4,700
$900
600
250
200
$1,950
$2,750
Reports the revenues and expenses
for a specific period of time.
SOFTBYTE
Income Statement
For the Month Ended September 30, 2017
LO 5
Income Statement ….
◆
Lists revenues first, followed
by expenses.
◆
Shows net income (or net
loss).
◆
Does not include investment
and withdrawal transactions
between the owner and the
business in measuring net
income.
1-62
LO 5
Income Statement
Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
1-63
LO 5
Owner’s Equity Statement
1-64
◆
Reports the changes in owner’s equity for a
specific period of time.
◆
The time period is the same as that covered by
the income statement.
LO 5
Financial Statements
Net income is needed to determine the
ending balance in owner’s equity.
SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017
Owner's Capital, Sept. 1
Add:
Investment
$15,000
Net Income
$2,750
Less: Drawings
Owner's Capital Sept.30
From Income
Statement
1-65
$0
$17,750
$17,750
1,300
$16,450
To Balance
Sheet
LO 5
Assets
Cash
?
Accounts Receivables
Supplies
Equipment
Total Assets
Liabilities and Owner's Equity
Liabilities
Accounts Payable
Owner's Equity
Owner's Capital
$8,050
1,400
1,600
7,000
$18,050
$1,600
$16,450
Total Liabilities and Owner's Equity $18,050
1-66
Reports the assets, liabilities, and
owner's equity at a specific date.
The ending balance in owner’s equity is
needed in preparing the balance sheet.
SOFTBYTE
Balance Sheet
September 30, 2017
From OE Statement
Balance Sheet ….
◆
Lists assets at the top,
followed by liabilities and
owner’s equity.
◆
Total assets must equal total
liabilities and owner's
equity.
◆
Is a snapshot of the
company’s financial
condition at a specific
moment in time (usually the
month-end or year-end).
1-67
LO 5
Financial Statements
Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
1-68
LO 5
Statement of Cash Flows
◆
Information on the cash receipts and
payments for a specific period of time.
◆
Answers the following:
►
Where did cash come from?
►
What was cash used for?
►
What was the change in the cash
balance?
1-69
LO 5
Financial Statements
Balance sheet and income
statement are needed to prepare
statement of cash flows.
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017
Cash flows from operating activities
Cash receipts from revenues
Cash payments for expenses
Net cash provided by operating activities
Cash flows from Investing activities
Purchase of Equipment
Cash flows from financing activities
Investment by Owners
Drawings by Owner
Net cash provided by financing activities
Net Increase in Cash
Cash at the beginning of the period
Cash at the end of the period
1-70
$3,300
-1,950
$1,350
-7,000
15,000
-1,300
13,700
$8,050
0
$8,050
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
$10,000
8,000
Utilities Expense
Accounts Receivable
9,000
7,000
Service Revenue
36,000
Salaries and Wages Expense
Rent Expense
11,000
Notes Payable
Accounts Payable
2,000
$ 4,000
Owner’s Drawings
16,500
5,000
a) Determine the total assets of at December 31, 2017.
b) Determine the net income reported for December 2017.
c) Determine the owner’s equity at December 31, 2017.
1-71
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(a) Determine the total assets of at December 31, 2017.
1-72
Cash
Accounts Receivables
Equipment
8,000
9,000
10,000
Total Assets
27,000
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(b) Determine the net income reported for December 2017.
Revenues
Service Revenues
Less: Expenses
Rent Ex.
Salaries and Wages Ex.
Utilities Ex.
Total Expenses
Net Income
1-73
36,000
11,000
7,000
4,000
22,000
14,000
LO 5
DO IT!
5
Financial Statement Items
Presented below is selected information related to Flanagan Company
at December 31, 2017. Flanagan reports financial information monthly.
Equipment
Cash
Service Revenue
Rent Expense
Accounts Payable
$10,000
8,000
36,000
11,000
2,000
Utilities Expense
Accounts Receivable
Salaries and Wages Expense
Notes Payable
Owner’s Drawings
$ 4,000
9,000
7,000
16,500
5,000
(c) Determine the owner’s equity at December 31, 2017.
Total Assets [as computed in (a)]
Less: Liabilities
Notes Payable
Accounts Payable
1-74
27,000
16,500
2,000
Total Liabilities
18,500
Owner’s Equity
8,500
LO 5
Assignment
Indicate whether each of the three statements
presented below is true or false.
1. The three steps in the accounting process are
identification, recording, and communication.
2. The two most common types of external
users are investors and company officers.
3. The cost principle dictates that companies
record assets at their cost. In later periods,
however, the market value of the asset must
be used if market value is higher than its cost.
1-75
Assignment
Transactions made by Virmari & Co., a public
accounting firm, for the month of August are shown
below. Prepare a tabular analysis which shows the
effects of these transactions on the expanded
accounting equation
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office
equipment on credit.
3. The company received $8,000 cash in exchange
for services performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal
use.
1-76
Assignment
Joan Robinson opens her own law office on July 1, 2020. During
the first month of operations, the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Provided legal services to clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and
telephone $100.
8. Joan withdraws $1,000 cash for personal use.
Instructions
a) Prepare a tabular summary of the transactions.
b) Prepare the income statement, owner’s equity statement, and
balance sheet at July 31 for Joan Robinson, Attorney.
1-77