© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-1 2 Accounting Information...
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Transcript of © The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-1 2 Accounting Information...
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-1
2 Accounting Information System
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-2
Preparers
ASB
Auditors
Decision makers
GAAP
Financial Statements, Auditing and Users
FinancialStatements
AuditReport
FASB
GAAS
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-3
International Accounting PrinciplesDespite our growing global economy, countries
continue to maintain their unique set of acceptable accounting practices.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-4
Fundamental Principles of Accounting
Business Entity Principle
Business Entity Principle
Objectivity Principle
Objectivity Principle
Cost PrincipleCost Principle
Going-Concern Principle
Going-Concern Principle
Monetary Unit Principle
Monetary Unit Principle
A business is accounted for separately from its owner or owners.
A business is accounted for separately from its owner or owners.
Financial statement information is supported by independent, unbiased
evidence.
Financial statement information is supported by independent, unbiased
evidence.
Financial statements are based on actual costs incurred in business transactions.
Financial statements are based on actual costs incurred in business transactions.
A business continues operating instead of being closed or sold.
A business continues operating instead of being closed or sold.
Express transactions and events in monetary units.
Express transactions and events in monetary units.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-5
Source documents
Recording & posting
Trial balanceReporting
Transaction or event
Analysis
The Accounting Process
Exh.2.2
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-6
External Transactions occur between the
organization and an outside party.
Internal Transactions occur within the
organization.
Transactions and Events
Exchanges of economic consideration between two parties.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-7
Sales Invoices
Bank Statement
Purchase Orders
Checks
Source Documents
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-8
Detailed record of increases and decreases in
specific assets, liabilities, equities,
revenues, or expenses.
Separate accounts are maintained for each item of importance.
Detailed record of increases and decreases in
specific assets, liabilities, equities,
revenues, or expenses.
Separate accounts are maintained for each item of importance.
The Account
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-9
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Common Stock
Common Stock
Retained EarningsRetained Earnings
RevenuesRevenues ExpensesExpenses
Expanded Accounting Equation
+ ++ –
Exh.2.4
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-10
LandLand
EquipmentEquipmentBuildingsBuildings
CashCash
Prepaid Expenses
Prepaid Expenses
Office Supplies
Office Supplies
Store Supplies
Store Supplies
Prepaid Insurance
Prepaid Insurance
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
ASSETSASSETS
Asset Accounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-11
Accrued Liabilities
Accrued Liabilities
Unearned Revenues
Unearned Revenues
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
LIABILITIESLIABILITIES
LiabilityAccounts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-12
EquitiesEquities
RevenuesRevenues
Common Stock
Common Stock DividendsDividends
ExpensesExpenses
Equity Accounts
Retained Earnings
Retained Earnings
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-13
Analyze the transaction and its source.
Identify the impact of the transaction on account balances. Also identify the financial
statements that are impacted by the transaction.
Analyzing Transactions
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-14
Buck Johnson forms a building consulting
business. It is set up as a corporation called
Build-Up, Inc..
Analyze the following transactions.
Transaction Analysis
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-15
The accounts involved are:
(1) Cash (asset)
(2) Owner’s Equity (equity)
Buck Johnson invests $50,000 in the company in exchange for common stock.
Transaction Analysis
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-16
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction AnalysisBuild-Up, Inc. purchased supplies
paying $4,800 cash.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-17
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction AnalysisBuild-Up, Inc. purchased equipment
for $30,000 cash.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-18
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction AnalysisBuild-Up, Inc. purchased additional
supplies of $9,400 on account.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-19
Transaction AnalysisBuild-Up, Inc. purchased additional
supplies of $9,400 on account.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-20
Transaction AnalysisThe balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenues and expenses.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-21
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction AnalysisRendered consulting services
receiving $9,800 cash.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-22
Transaction AnalysisRendered consulting services
receiving $9,800 cash.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-23
The accounts involved are:
(1) Cash (asset)
(2) Rent Expense (equity)
Transaction AnalysisPaid $2,800 rent to the landlord of the
building where the business is located.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-24
Transaction AnalysisPaid $2,800 rent to the landlord of the
building where the business is located.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-25
The accounts involved are:
(1) Cash (asset)
(2) Salary Expense (equity)
Transaction AnalysisPaid Salaries of $2,300.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-26
Transaction AnalysisPaid Salaries of $2,300.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-27
Account Name
(Left Side) Debit
(Right Side) Credit
Used as a simple tool for illustrating the balance in a
given account.
Chart of Accounts & the T-Account
Typically, a company keeps a
listing of all the accounts is uses. This list is called the Chart of Accounts.
Typically, a company keeps a
listing of all the accounts is uses. This list is called the Chart of Accounts.
Exh.2.8
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-28
Balance of an AccountAn account balance is the difference between the
increases and decreases in an account.
Exh.2.9
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-29
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Debit Credit Debit Credit Debit Credit
ASSETS
+ -
LIABILITIES
- +
EQUITIES
- +
Double-Entry Accounting
Exh.2.10
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-30
RevenuesRevenues ExpensesExpensesRetained EarningsRetained Earnings
DividendsDividends_ + _
Debit Credit
Ret. Earnings
- +Debit Credit
Dividends
+ -Debit Credit
Expenses
+ -Debit Credit
Revenues
- +
Double-Entry Accounting - Detail of Effects on Equity
Exh.2.11
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-31
Step 1: Examine source documents.
Remember these two steps?Now let’s look at some
additional steps.
Steps in Processing Transactions
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Step 2: Analyze transactions.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-32
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Record the journal information in a
ledger.
Step 3: Record transactions in a
journal.
Step 5: Prepare a trial balance.
Steps in Processing Transactions
Step 1: Examine source documents.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Step 2: Analyze transactions.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-33
Transaction Date
Transaction Date
Titles of Affected Accounts
Titles of Affected Accounts
Dollar amount of debits and credits
Dollar amount of debits and credits
Transaction explanation
Transaction explanation
General Journal for FastForward
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-34
T-accounts are useful illustrations, but balance column ledger accounts are used in practice.
Balance Column Ledger
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-35
Balance Column LedgerNote the the t-account tool is derived from the
debit and credit columns of the ledger.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-36
The last line in the balance column shows the current balance in the account.
The last line in the balance column shows the current balance in the account.
Exh. 2.16
Balance Column Ledger
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-37
1 Identify the account.
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-38
2 Enter the date.
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-39
3Enter the amount.
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-40
4Enter the journal reference.
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-41
5
Compute the balance.
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-42
Enter the ledger reference. 6
Posting Journal Entries - Example
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-43
A Trial Balance is a listing of all
accounts and their
balances at a point in
time.
A Trial Balance is a listing of all
accounts and their
balances at a point in
time.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-44
Income Statement
Inflows of assets in exchange for products and
services provided to customers.
Inflows of assets in exchange for products and
services provided to customers.
Outflows or the using up of assets
that result from providing
products and services to customers.
Outflows or the using up of assets
that result from providing
products and services to customers.
Exh.2.19
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-45
Statement of Retained EarningsBeginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on
the Income Statement.
Beginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on
the Income Statement.
Exh.2.19
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-46
Exh.2.19
Balance SheetAssets are economic resources owned by a
business. They are expected to provide future benefits to the business.
Assets are economic resources owned by a business. They are expected to provide
future benefits to the business.
Liabilities are obligations of the business. They
are claims against the
assets of the business.
Liabilities are obligations of the business. They
are claims against the
assets of the business.
Equity is the owner’s claim on the assets of the business. It is the residual interest in
the assets after deducting liabilities.
Equity is the owner’s claim on the assets of the business. It is the residual interest in
the assets after deducting liabilities.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-47
Describesthe
sources and usesof cash
for areportingperiod.
Describesthe
sources and usesof cash
for areportingperiod.
Exh.2.19
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-48
Generally, dollar signs ($) are not used in the journals
or ledgers.
Generally, dollar signs ($) are not used in the journals
or ledgers.
RoundingRoundingRound numbers in financial
statements to the nearest dollar.
Round numbers in financial statements to the nearest
dollar.
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Formatting Conventions
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-49
Describes the relationship between net income for the period and average equity.
Helps an owner judge the compnay’s profitability compared to other business or personal opportunities.
Using the Information - Return on Equity
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 2-50
End of Chapter 2
Now, was that debits to the left or credits
to the left?I sure wish I had paid
more attention in class!