Introduction to the Accounting Environment and Accounting Equation Chapter 1 1.
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Transcript of Introduction to the Accounting Environment and Accounting Equation Chapter 1 1.
Introduction to the Accounting
Environment and Accounting
Equation
Chapter
11
Learning OutcomesLearning Outcomes
Understand the importance of financial information in business
Understand the basic concepts and purpose of financial accounting
Understand the objective and characteristics of financial statements
Identify the users of financial statements and their information needs
Identify the differences and changes between assets, liabilities and capital
ACCOUNTINGACCOUNTING
Definition: an information system that provides report to stakeholders about the economic activities and condition of a business.
So, accounting is the process of:
- Identifying
- Measuring
- Communicating economic information to
permit informed judgments and decisions by users of the information
IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of AccountingImportance of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
Identifying Business Activities
Recording Business Activities
Communicating
Business Activities
Accounting ActivitiesAccounting Activities
Users of Accounting InformationUsers of Accounting Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
Tutorial 1: Basic Accounting ConceptsTutorial 1: Basic Accounting Concepts
1) Business Entity
2) Going Concern
3) Historical Cost
4) Objectivity
5) Consistency
6) Conservatism
7) Accounting Period
8) Accrual Concept
9) Matching Principle
10) Types of Business Units
The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Transaction Analysis EquationTransaction Analysis Equation
Let’s discuss the
components of the
equation
Categories of a Classified Balance SheetAssets Liabilities and Equity
Current Assets Current LiabilitiesNoncurrent Assets Noncurrent Liabilities
Long-Term Investments EquityPlant AssetsIntangible Assets
Current items are those expected to come due (both collected and owed) within the longer of one year or
the company’s normal operating cycle.
Balance SheetBalance Sheet
• Statement that lists all the assets, owner’s equity and liabilities at a particular date.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Current assets are expected to be sold, collected, or used within one year or the company’s operating
cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Long-term investments are expected to be held for the longer of one year or the operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Plant assets are tangible long-lived assets used to produce or sell
products and services.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Intangible assets are long-term resources used to produce or sell
products and services and that lack physical form.
Current liabilities are obligations due within the longer of one year or the
company’s operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
Long-term liabilities are obligations not due within the longer of one year
or the company’s operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
Equity is the owner’s claim on the assets.
Snowboarding ComponentsBalance Sheet
January 31, 2005
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
1. J. Scott, the owner, contributed $20,000 cash to start the business.
Example of Transaction AnalysisExample of Transaction Analysis
Continue…Continue…
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
(1) 20,000$ 20,000$
20,000$ -$ -$ -$ -$ 20,000$
20,000$ = 20,000$
J. Scott, the owner, contributed $20,000 cash to start the business.
The accounts involved are:
(1) Cash (asset)
(2) Supplies-Ali (asset)
Continue…Continue…
2. Purchased supplies (Ali) paying $1,000 cash.
Continue…Continue…
Purchased supplies paying $1,000 cash.
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
(1) 20,000$ 20,000$ (2) (1,000) 1,000$
19,000$ 1,000$ -$ -$ -$ 20,000$
20,000$ = 20,000$
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Continue…Continue…
3. Purchased equipment for $15,000 cash.
Continue…Continue…
Purchased equipment for $15,000 cash.
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
(1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$
4,000$ 1,000$ 15,000$ -$ -$ 20,000$
20,000$ = 20,000$
The accounts involved are:
(1) Supplies-Purchases (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Continue…Continue…
4. Purchased Supplies on credit of $200 and Equipment of $1,000 also in
credit.
Continue…Continue…
Purchased Supplies of $200 and Equipment of $1,000 on account.
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
(1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$ (4) 200 1,000 1,200$
4,000$ 1,200$ 16,000$ 1,200$ -$ 20,000$
21,200$ = 21,200$
The accounts involved are:
(1) Cash (asset)
(2) Notes payable-Loan (liability)
Continue…Continue…
5. Borrowed $4,000 from 1st American Bank.
Continue…Continue…
Borrowed $4,000 from 1st American Bank.
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
(1) 20,000$ 20,000$ (2) (1,000) 1,000$ (3) (15,000) 15,000$ (4) 200 1,000 1,200$ (5) 4,000 4,000$
8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
25,200$ = 25,200$
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$
25,200$ = 25,200$
Continue…Continue…
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenue, expenses and withdrawals.
The accounts involved are:
(1) Cash (asset)
(2) Revenues-I/S (equity)
Continue…Continue…
6. Rendered consulting services (buss. xtvt) receiving $3,000 cash.
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital Revenue
Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (6) 3,000 3,000$
11,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$
28,200$ = 28,200$
Equity
Continue…Continue…
Rendered consulting services receiving $3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Continue…Continue…
7. Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account actually increases.
But, equity actually decreases because expenses reduce equity.
Continue…Continue…
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital Revenue Expenses
Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (6) 3,000 3,000$ (7) (800) (800)$
10,200$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ 3,000$ (800)$
27,400$ = 27,400$
Equity
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Continue…Continue…
8. J. Scott withdrew $500 from the business for personal use.
Remember that the balance in the J. Scott, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
Continue…Continue…
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
J. Scott, Capital
J. Scott, Withdrawal Revenue Expenses
Bal. 8,000$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (6) 3,000 3,000$ (7) (800) (800)$ (8) (500) (500)$
9,700$ 1,200$ 16,000$ 1,200$ 4,000$ 20,000$ (500)$ 3,000$ (800)$
26,900$ = 26,900$
Equity
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
Tutorial 2: Write the accounting equation and the balance sheet Tutorial 2: Write the accounting equation and the balance sheet
Apr. 1 Karen commenced business by depositing cash $25000 in the bank as capital
4 A motor vehicle was purchased and paid with company cheque, $20 000 10 Furniture $4 500 was purchased on credit from
Home Style Pte Ltd. 18 Karen withdrew cash $1000 from the business account to pay for his private expenditure 25 A cheque $2500 was paid to Home Style Pte Ltd., as
part of the payment for amount owing 30 Karen paid Home Style Pte Ltd. For the balance of
the amount owing with his personal cheque
End of Chapter 1End of Chapter 1