What is accounting?

AccountingThe systematic recording, reporting, and analysis of financial transactions of a

business.

AccountingIt is the language of the

business

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Accounting

• Identifying• Recording• Communicating

Financial information to decision makers

Financial ReportsBalance SheetIncome StatementStatement of Cash FlowsStatement of Owner Equity

Balance SheetRepresents a financial

situation at a single point in time

A = L + E

Income StatementSummary of revenue and

expenses

Revenue – Expenses = Net income

Statement of Cash Flows

Cash received and cash paid during a period.

Cash beginning balance + Cash received - Cash paid__________ Cash ending balance

Statement of Owner Equity

Explains the change in owners equity between two balances sheets

Changes due to :•Net income•Additional investment•Withdrawal

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Decision Makers

• Individuals• Businesses• Investors• Creditors• Taxing Authorities

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Types of Business Organizations

• Proprietorships• Partnerships• Corporations

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GAAP

• Generally Accepted Accounting Principles– Accounting guidelines that govern how

accountants measure, process, and communicate financial information

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GAAP

• Primary objective of financial accounting – provide information that is useful for making investment and lending decisions

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Entity Concept

• Accounting Entity – organization that stands apart as a separate economic unit

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• Accounting information is based on the most reliable data available– Verifiable– Free from bias– Individuals would arrive at similar conclusions

using same data

Reliability (Objectivity) Principle

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Cost Principle

• Acquired assets and services should be recorded at their actual cost (historical cost)

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Going Concern Concept

• Assumes that the entity will remain in operation for the foreseeable future

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Stable-Monetary-Unit Concept

• Assumes that the peso’s purchasing power is stable

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Assets

• Economic resources, expected to benefit the business in the future– Cash– Accounts receivable– Merchandise inventory– Furniture– Land

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Claims to the Assets

• Liabilities – economic obligations payable to an individual or organization outside the business– Accounts payable– Notes payable– Salary payable

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Claims to the Assets

• Owner’s Equity (capital) – claim of business owner to the assets of the business

• R, Capital• C, Capital• O, Capital• A, Capital

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EconomicResources

Claims toEconomicResources

The Accounting Equation

Assets = Liabilities + Owner’s Equity

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Transactions that AffectOwner’s Equity

OWNER’S EQUITY

INCREASESOWNER’S EQUITY

DECREASES

Owner Investments

Revenues Expenses

Owner Withdrawals

Owner’s Equity

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Revenues

• Amounts earned by delivering goods or services to customers– Sales revenue– Service revenue– Interest revenue– Dividend revenue

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Expenses

• Decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers– Salary expense– Rent expense– Utilities expense– Interest expense– Cost of goods sold

Analyzing business transactions

TransactionAn event that affects the

financial position of a particular entity and can be recorded reliably

Double-entry system Every transaction affects at

least two accounts

AccountAn account is an individual

accounting record of increases and decreases in a specific asset, liability, or owner’s equity item

Accrual basis accounting

• Revenue is recorded when earned regardless of when cash is received.

• Expenses are recorded when incurred regardless of when cash is paid.

How to analyze transactions?

• Ask the three questions.1. What are the accounts affected?2.What type of account? 3.Did the accounts increase or decrease?

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Does the account increase or decrease?(1) Cash (asset)(2) Owner’s Equity (equity)

July 6: Lange invested $45,000 in the business by opening a bank account in the name of M. Lange, M.D.

Analyze this:

What accounts are involved?

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(1) Cash (asset)(2) Land (asset)

Analyze this:July 9: Paid $35,000 cash for land

Does the account increase or decrease?What accounts are involved?

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(1) Medical Supplies (asset)(2) Accounts Payable (liability)

Analyze this:July 12: Purchased medical supplies for $2,000 on account

Does the account increase or decrease?What accounts are involved?

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Does the account increase or decrease?(1) Cash (asset) (2) Revenues (equity)

Analyze This:July 15-31: During the rest of the month, Lange treated patients and earned service revenue of $7,000, receiving cash

What accounts are involved?

When the owner completes work, her interest in

the assets increases

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Does the account increase or decrease?(1) Cash (asset)(2) Expense (equity)

Analyze This:

July 15-31: Paid cash expenses

What accounts are involved?

When an expense is incurred, owner’s

equity decreases

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Does the account increase or decrease?(1) Cash (asset)(2) Medical Supplies (asset)

Analyze This:

July 28: Sold supplies to another physician for the cost of those supplies

What accounts are involved?

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Does the account increase or decrease?(1) Cash (asset)(2) Accounts Payable (liability)

Analyze This:

July 31: Paid $1,500 on account

What accounts are involved?

AccountAn account is an individual

accounting record of increases and decreases in a specific asset, liability, or owner’s equity item

Debits and CreditsThe term debit indicates

the left side of an account, and credit indicates the right side.