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
 Interpret and
record business
transactions.
 Classify
similar
transactions into
useful reports.
 Summarize
and communicate
information to
decision makers.
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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
– Consistency
– Matching/Revenue
Recognition
Define how the accounting systems works, i.e. how
financial events are measured, recorded and repeated
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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
Balance Sheet
Income Statement
Statement of Cash Flows
Three primary
financial
statements.
We 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
Time
Balance
Sheet
Date at
end of
period
Balance
Sheet
Income Statement
Statement of Cash Flows
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Financial Statement Articulation
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2005
Cash flows from operating activities:
750
Cash received from revenue transactions $
(50)
Cash paid for expenses
$
Net cash provided by operating activities
Cash flows from investing activities:
(2,500)
$
Purchase of lawn mower
(2,000)
Purchase of truck
75
Collection for sale of repair parts
(150)
Payment for repair parts
Net cash used by investing activities
Cash flows from financing activities:
Investment by owners
$
Increase in cash for month
Cash balance, May 1, 2005
$
Cash balance, May 31, 2005
JJ's Lawn Care Service
Income Statement
For the Month Ended May 31, 2005
700
Sales Revenue
Operating Expense:
Gasoline Expense
Net Income
$
750
$
50
700
(4,575)
8,000
4,125
4,125
JJ's Lawn Care Service
Balance Sheet
May 31, 2005
Assets
Cash
Accounts receivable
Tools & equipment
Truck
$
Total assets
$
4,125
75
2,650
15,000
21,850
Liabilities
Notes payable
$
Accounts payable
Owners' Equity
Capital stock
Retained earnings
Total liabilities & equity $
13,000
150
8,000
700
21,850
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The Need for Adequate Disclosure
Balance Sheet
Income Statement
Statement of Cash Flows
Notes to the
financial
statements often
provide facts
necessary for the
proper
interpretation of
the statements.
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A Starting Point: Statement of Financial
Position
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
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
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Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
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 are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
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Liabilities
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
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 are
debts that
represent negative
future cash flows
for the enterprise.
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Owners’ Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
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
represents the
owners’ claims to
the assets of the
business.
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The Accounting Equation
Travel
Assets = Vagabond
Liabilities
+ Agency
Owners’ Equity
Balance Sheet
December 31, 2005
$300,000
$80,000 +Liabilities
$220,000
Assets=
& 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
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Recording Business Transactions
A. Review of Selected Transactions
Mr. Sam Doty opened and incorporated a hospitality consulting firm during the
month of September and provided you with the following data.
1.
2.
3.
4.
5.
6.
7.
8.
Invested $8,000 in his business in exchange for common stock.
Purchased $500 of supplies for cash.
Purchased $4,000 of equipment on account.
Received $3,000 cash for consulting services.
Paid salaries of $800
Paid the first month’s rent of $200.
Paid $1,000 owed to a creditor.
The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder.
Instructions: Prepare the tabular summary for the transactions above.
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Recording Business Transactions
(continued) Summary of Transactions
Answer:
Month of September 2008
Assets
Transaction
Cash
Causes of
changes on SE
must be indicated
+
Supplies
+
Equipment
=
Liabilities
=
Accounts
Payable
+
+
Stockholders’ Equity
Common
Stock
Retained
Earnings
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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