PPT LEC 1.ppt

1. 1-1 LO 1 Explain what accounting is. Purpose of accounting is to: 1. identify, 2. record, and 3. communicate the economic events of an organization to interested users. What is Accounting?

2. 1-2 Three Activities LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. What is Accounting?

3. 1-3 LO 2 Internal Users Illustration 1-2 Questions that internal users ask Who Uses Accounting Data

4. 1-4 LO 2 External Users Illustration 1-3 Questions that external users ask Who Uses Accounting Data

5. 1-5 Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Question LO 3 Understand why ethics is a fundamental business concept. Ethics in Financial Reporting

6. 1-6 Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) LO 4 Explain generally accepted accounting principles. Generally Accepted Accounting Principles

7. 1-7 Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. Standard-setting bodies: ► Securities and Exchange Commission (SEC) ► Financial Accounting Standards Board (FASB) ► International Accounting Standards Board (IASB) Generally Accepted Accounting Principles LO 4 Explain generally accepted accounting principles.

8. 1-8 Historical Cost Principle (or cost principle) dictates that companies record assets at their cost. Fair Value Principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Generally Accepted Accounting Principles Measurement Principles LO 4 Explain generally accepted accounting principles. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.

9. 1-9 Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles Assumptions 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.

10. 1-10 Proprietorship Partnership Corporation  Owned by two or more persons.  Often retail and service-type businesses  Generally unlimited personal liability  Partnership agreement  Ownership divided into shares of stock  Separate legal entity organized under state corporation law  Limited liability  Generally owned by one person.  Often small service-type businesses  Owner receives any profits, suffers any losses, and is personally liable for all debts. LO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership

11. 1-11 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. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles

12. 1-12 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. LO 5 Explain the monetary unit assumption and the economic entity assumption. Question Generally Accepted Accounting Principles

13. 1-13 Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims. Assets Liabilities Owner’s Equity = + LO 6 State the accounting equation, and define its components. The Basic Accounting Equation

14. 1-14 Assets Liabilities Owner’s Equity = +  Resources a business owns.  Provide future services or benefits.  Cash, Supplies, Equipment, etc. LO 6 State the accounting equation, and define its components. Assets The Basic Accounting Equation

15. 1-15  Claims against assets (debts and obligations).  Creditors - party to whom money is owed.  Accounts payable, Notes payable, etc. LO 6 State the accounting equation, and define its components. Liabilities The Basic Accounting Equation Assets Liabilities Owner’s Equity = +

16. 1-16  Ownership claim on total assets.  Referred to as residual equity.  Investment by owners and revenues (+)  Drawings and expenses (-). LO 6 State the accounting equation, and define its components. Owner’s Equity The Basic Accounting Equation Assets Liabilities Owner’s Equity = +

17. 1-17  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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Increases in Owner’s Equity

18. 1-18  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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Decreases in Owner’s Equity

19. 1-19 Transactions are a business’s economic events recorded by accountants.  May be external or internal.  Not all activities represent transactions.  Each transaction has a dual effect on the accounting equation. LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation

20. 1-20 Illustration: Are the following events recorded in the accounting records? Event Purchase computer Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Pay rent Record/ Don’t Record LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation Discuss guided trip options with customer

21. 1-21 Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business. LO 7 Transaction Analysis

22. 1-22 Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. LO 7 Transaction Analysis

23. 1-23 Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account. LO 7 Transaction Analysis

24. 1-24 Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided. LO 7 Transaction Analysis

25. 1-25 Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date. LO 7 Transaction Analysis

26. 1-26 Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 7 Transaction Analysis

27. 1-27 Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200. LO 7 Transaction Analysis

28. 1-28 Transaction (8): Softbyte pays its $250 Daily News bill in cash. LO 7 Transaction Analysis

29. 1-29 Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. LO 7 Transaction Analysis

30. 1-30 Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use. LO 7 Transaction Analysis Illustration 1-8 Tabular summary of Softbyte transactions

31. 1-31 Companies prepare four financial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement LO 8 Understand the four financial statements and how they are prepared. Financial Statements

32. 1-32 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. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question

33. 1-33 Net income is needed to determine the ending balance in owner’s equity. Illustration 1-9 Financial statements and their interrelationships Financial Statements LO 8

34. 1-34 The ending balance in owner’s equity is needed in preparing the balance sheet Financial Statements Illustration 1-9 LO 8

35. 1-35 The balance sheet and income statement are needed to prepare statement of cash flows. Financial Statements Illustration 1-9 LO 8

36. 1-36 LO 8 Understand the four financial statements and how they are prepared.  Reports the revenues and expenses for a specific period of time.  Lists revenues first, followed by expenses.  Shows net income (or net loss). Financial Statements Income Statement

37. 1-37 LO 8 Understand the four financial statements and how they are prepared.  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. Financial Statements Owner’s Equity Statement

38. 1-38 LO 8 Understand the four financial statements and how they are prepared.  Reports the assets, liabilities, and owner’s equity at a specific date.  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). Financial Statements Balance Sheet

39. 1-39 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. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question

40. 1-40 Account Name Debit / Dr. Credit / Cr.  Record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.  Debit = “Left”  Credit = “Right” Account An account can be illustrated in a T- account form. LO 1 Explain what an account is and how it helps in the recording process. The Account

41. 1-41 Double-entry system ► Each transaction must affect two or more accounts to keep the basic accounting equation in balance. ► Recording done by debiting at least one account and crediting another. ► DEBITS must equal CREDITS. LO 2 Define debits and credits and explain their use in recording business transactions. Debits and Credits The Account

42. 1-42 Account Name Debit / Dr. Credit / Cr. If Debit amounts are greater than Credit amounts, the account will have a debit balance. $10,000 Transaction #2 $3,000 $15,000 8,000 Transaction #3 Balance Transaction #1 Debits and Credits LO 2 Define debits and credits and explain their use in recording business transactions.

43. 1-43 Account Name Debit / Dr. Credit / Cr. $10,000 Transaction #2 $3,000 Balance Transaction #1 $1,000 8,000 Transaction #3 If Debit amounts are less than Credit amounts, the account will have a credit balance. Debits and Credits LO 2 Define debits and credits and explain their use in recording business transactions.

44. 1-44  Assets - Debits should exceed credits.  Liabilities – Credits should exceed debits.  Normal balance is on the increase side. Chapter 3-23 Assets Assets Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-24 Liabilities Liabilities Debit / Dr. Credit / Cr. Normal Balance Normal Balance Debits and Credits LO 2 Define debits and credits and explain their use in recording business transactions.

45. 1-45  Owner’s investments and revenues increase owner’s equity (credit).  Owner’s drawings and expenses decrease owner’s equity (debit). Chapter 3-25 Debit / Dr. Credit / Cr. Normal Balance Owner’s Capital Chapter 3-23 Owner’s Drawing Debit / Dr. Credit / Cr. Normal Balance Chapter 3-25 Debit / Dr. Credit / Cr. Normal Balance Owner’s Equity Debits and Credits LO 2 Helpful Hint Because revenues increase owner’s equity, a revenue account has the same debit/credit rules as the Owner’s Capital account. Expenses have the opposite effect.

46. 1-46 Chapter 3-27 Debit / Dr. Credit / Cr. Normal Balance Normal Balance Expense Expense Chapter 3-26 Debit / Dr. Credit / Cr. Normal Balance Normal Balance Revenue Revenue Debits and Credits LO 2 Define debits and credits and explain their use in recording business transactions.  The purpose of earning revenues is to benefit the owner(s).  The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital.  Expenses have the opposite effect: expenses decrease owner’s equity.

47. 1-47 Chapter 3-23 Assets Assets Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-27 Debit / Dr. Credit / Cr. Normal Balance Normal Balance Expense Expense Normal Balance Credit Normal Balance Debit Debits/Credits Rules Chapter 3-24 Liabilities Liabilities Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-25 Debit / Dr. Credit / Cr. Normal Balance Owner’s Equity LO 2 Chapter 3-26 Debit / Dr. Credit / Cr. Normal Balance Normal Balance Revenue Revenue

48. 1-48 Balance Sheet Income Statement = + - Asset Liability Equity Revenue Expense Debit Credit Debits/Credits Rules LO 2 Define debits and credits and explain their use in recording business transactions.

49. 1-49 Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities. Debits/Credits Rules Question LO 2 Define debits and credits and explain their use in recording business transactions.

50. 1-50 Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and equity. c. assets, liabilities, and owner’s drawing. d. assets, owner’s drawing, and expenses. Debits/Credits Rules Question LO 2 Define debits and credits and explain their use in recording business transactions.

51. 1-51 Illustration 2-11 Assets Liabilities = Basic Equation Expanded Basic Equation + Summary of Debits/Credits Rules Relationship among the assets, liabilities and owner’s equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. LO 2 Define debits and credits and explain their use in recording business transactions. Owner’s Equity

52. 1-52 Business documents, such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. LO 3 Identify the basic steps in the recording process. Illustration 2-12 Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts Steps in the Recording Process

53. 1-53  Book of original entry.  Transactions recorded in chronological order.  Contributions to the recording process: 1. Discloses the complete effects of a transaction. 2. Provides a chronological record of transactions. 3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared. LO 4 Explain what a journal is and how it helps in the recording process. The Journal Steps in the Recording Process

54. 1-54 Journalizing - Entering transaction data in the journal. LO 4 Explain what a journal is and how it helps in the recording process. Illustration: On September 1, Ray Neal invested $15,000 cash in the business, and Softbyte purchased computer equipment for $7,000 cash. Account Title Ref. Debit Credit Date Cash Owner’s Capital Sept. 1 15,000 15,000 General Journal Equipment Cash 7,000 7,000 Illustration 2-13 Steps in the Recording Process

55. 1-55 Simple and Compound Entries LO 4 Explain what a journal is and how it helps in the recording process. Illustration: On July 1, Butler Company purchases a delivery truck costing $14,000. It pays $8,000 cash now and agrees to pay the remaining $6,000 on account. Account Title Ref. Debit Credit Date Equipment Cash July 1 14,000 8,000 General Journal 6,000 Accounts payable Illustration 2-14 Steps in the Recording Process

56. 1-56  General Ledger contains the entire group of accounts maintained by a company. LO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-15 The Ledger Steps in the Recording Process

57. 1-57 LO 5 Explain what a ledger is and how it helps in the recording process. Illustration 2-16 Steps in the Recording Process Standard Form of Account

58. 1-58 Posting – process of transferring amounts from the journal to the ledger accounts. Illustration 2-17 LO 6 Explain what posting is and how it helps in the recording process. Steps

59. 1-59 Accounts and account numbers arranged in sequence in which they are presented in the financial statements. LO 6 Explain what posting is and how it helps in the recording process. Illustration 2-18 Chart of Accounts

60. 1-60 LO 6 Follow these steps: 1. Determine what type of account is involved. 2. Determine what items increased or decreased and by how much. 3. Translate the increases and decreases into debits and credits. Illustration 2-19 The Recording Process Illustrated

61. 1-61 The Recording Process Illustrated LO 6 Illustration 2-20

65. 1-65 The Recording Process Illustrated Illustration 2-24 LO 6

66. 1-66 The Recording Process Illustrated Illustration 2-25 LO 6

67. 1-67 LO 6 Illustration 2-26 The Recording Process Illustrated

70. 1-70 Summary of Journalizing and Posting LO 6 Illustration 2-29

71. 1-71 Illustration 2-30 LO 6

72. 1-72 LO 7 Prepare a trial balance and explain its purposes. Illustration 2-31 Trial Balance

73. 1-73 The trial balance may balance even when 1. a transaction is not journalized, 2. a correct journal entry is not posted, 3. a journal entry is posted twice, 4. incorrect accounts are used in journalizing or posting, or 5. offsetting errors are made in recording the amount of a transaction. LO 7 Prepare a trial balance and explain its purposes. Trial Balance Limitations of a Trial Balance

74. 1-74 A trial balance will not balance if: a. a correct journal entry is posted twice. b. the purchase of supplies on account is debited to Supplies and credited to Cash. c. a $100 cash drawing by the owner is debited to Owner’s Drawing for $1,000 and credited to Cash for $100. d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. LO 7 Prepare a trial balance and explain its purposes. Trial Balance Question

PPT LEC 1.ppt

PPT LEC 1.ppt

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