INTRODUCTORY ACOUNTING
CHAPTER 1 & 2 reviewACCOUNTING
-The Language of Business
• Define accounting• Understand the functions of financial
statements• Identify common account titles• Be familiar with reports of CPA and
management• identify the accounting process and cycle,• Understand the double entry system,• understand the effects of transactions on the
accounting equation,• Be familiar with the rules of debit and credit
Objectives
Accounting
• An information system that• measures,• processes,• communicates information• For the purpose of
• making economic decisions
Identifying Business Activities
Recording Business Activities
Communicatin
g Business Activities
Accounting ActivitiesC 1
1-4
IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of Accounting
AccountingAccounting
is a
system that
information
that is
about an organization’s business activities.
about an organization’s business activities.
C1
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The operating cycle of a merchandising company ordinarily is longer than that of a service company.
Operating CyclesOperating Cycles
LO 1 Identify the differences between service and merchandising companies.
© 2007 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 10e by Slater
Steps in Accounting Cycle
Transaction Journalize Post
Worksheet Financial Statements
Journalize & Post Adjusting
Entries
Journalize & Post Closing Entries
Post-Closing Trial Balance
Reversing entry
An Overview…GeneralJournal
SpecialJournals
Ledger Accounts
Trial Balance
Prepare Simple Financial Statements
Adjustments
FINANCIAL
STATEMENTS
• BALANCE SHEET• INCOME STATEMENT• OWNER’S EQUITY STATEMENT• CASH FLOW STATEMENT
Purpose of financial statements
• Provide information about• Financial position• Results of operation• Movement of cash in the enterprise
Elements of Financial Statements
• Balance Sheet- assets, • liabilities • Owner’s equity• Income Statement- income, • expenses• Cash Flow Statement-all elements of• Balance sheet and • Income Statement
Balance Sheet-A quantitative summary of a company’s financial
condition at a specific point in time, including assets, liabilities and owner’s
equity for a given time.
AssetsLiabilities + Equity
Balance Sheet
LiabilitiesLiabilities EquityEquityAssetsAssets = +
A1
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• Provides a financial summary of the firm’s operating results during a specified period.
• Measures all your revenue source vs. business expenses for a given time period.
• An accounting of revenue, expenses and new profit for a given period.
A. Income Statement
Income
/Sales
- Expenses
INCOME STATEMENT
Profit
CASH FLOW STATEMENT
• Measures changes in financial position. Summarizes the cash receipts and cash disbursements for the accounting period.
• Cash inflows (receipts) less cash outflows (payments)
Cash Receipts less
Cash Disbursements =
Net Cash inflow (Outflow)
Cash Receipts less
Cash Disbursements =
Net Cash inflow (Outflow)
Test IDirections: Shade the letter of the best answer.Which Financial Statements contain information to answer the following questions? Shade letter A-if found in the Income Statement andB- if found in the Balance Sheet 1. Did the company make money for the period?2. Did it incur a loss for the period?3. How much does the company own?4. To buy all its properties, did it borrow money or did the money come from the stock holders?5. How much cash does the company have at the end of the period?6. How much did it spend on salaries for the period?
7. How much did it sell for the period?8. How much tax did it pay for the period?9. Are its debts greater than the investments of the owners?10. Is the company heavily indebted?11. How big are the investments of the owners?12. How much interest on bank borrowings did the company pay for the period?13. What properties does it own?14. Is the company big in terms of sales?15. Is the company big in terms of what it owns?17. Can the company pay its maturing debts?18. As of the end of the period, how much does the company owe?19. How much is the total investments of the owner?
LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
prepaymentsprepayments
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
AssetsA1
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Current Assets
• These are the assets in a business that can be converted in cash in one year or less.
Example: Cash, stocks and other liquid investments, accounts receivable, inventory and prepaid expenses.
• Cash – includes money and any other negotiable instrument that are payable in money and acceptable by the bank for deposit and immediate credit.
CURRENT ASSETS
Marketable Securities· Also called “Temporary
Investments.”· Must be marketable (i.e., able to
readily sell).· E.g., commercial paper, treasury
bills, publicly traded stocks and bonds issued by companies.
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Trade and Other Receivables• Accounts receivables.
–Called trade receivables for nonfinancial institutions. Amount collectible from customers
–Notes Receivable-promissory note issued by customer
– Interest Receivable-interest collectible on promissory note issued by the client. 5-24
Accounts Receivable
Amounts owed to the company.
Arise from credit sales to customers.
Not all customers will pay in full.
Trade and Other Receivables
Trade and Other
Receivables
· Other receivables.· E.g., advances or loans to employees for various reasons (Shown separately e.g. Due from Employees).
· Accrued Income-income already earned but not yet received.
CURRENT ASSETS
• Inventories-unsold goods at the end of the period.
Prepaid Expenses-supplies or services bought the benefits of which shall be received in the future.
Until now, we have also assumed that all accounts receivable will be collected.
However, because of various circumstances, some customers will not be able to keep their
promises to pay.
Contra-Asset Account-
Allowance for Bad Debts
Uncollectible Accounts
CONTRA-ASSET ACCOUNTS
• Allowance for bad debts—losses due to uncollectible accounts. This is deducted from accounts receivable .
• Accumulated Depreciation- the expired cost of the property, plant and equipment as a result of usage and passage of time. This is deducted from the cost of the related account.
These are the tangible assets of a business that won’t be converted to cash within a year during the normal course of operation.
Example: Land, buildings, leasehold improvements, equipment, machinery and vehicles.
Non-current Assets
NON-CURRENT ASSETS
• Long-term investments-intended to be held for a long period of time.
• Property, Plant and Equipment-for use in the production of goods and services expected to be used for more than one period.
• Examples: Land, Building, furniture and fixtures• Intangible assets-non-physical assets• Examples: franchises, patents, copyrights,
trademarks, goodwill
Mortgage Payable
Mortgage Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
LiabilitiesA1
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Salaries payable
Unearned Income
Unearned Income
LIABILITIES
• Liabilities are classified and presented based on their maturity. Obligations presently due for payment are listed first.
• Classified into:• Current Liabilities• Non-current Liabilities
• These are the obligations of the business that are due within one year.
• Example: Notes payable on lines of credit or other short-term loans, current maturities of long-term debt, accounts payable to trade creditors, accrued expenses and taxes, and amounts due to stockholders.
Current Liabilities
LIABILITIES-Current
• Accounts payable-debts arising from purchase of asset or service on account.
• Notes Payable-debts evidenced by a promissory note
• Loans Payable- borrowed from • financial institutions payable within
twelve months• Utilities payable-services from PLDT,
Meralco, Maynilad etc.
LIABILITIES-Current
• Unearned Revenues—advance payments received before goods or services are delivered to the customer.
• Accrued Liabilities- expenses already incurred but not yet paid.
• Examples: salaries payable, utilities payable, interest payable
NON-CURRENT LIABILITIES
• Mortgage Payable-debts secured by a collateral
• Bonds Payable-certificates of indebtedness with specific terms of payment and interest rate.
Owner’sclaim on
assets
Owner’sclaim on
assets
withdrawalswithdrawals
Contributed Capital
Contributed Capital Earnings Earnings
EquityA1
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• Capital - represents the total amount invested by the owners plus the accumulated profit of the business.
• Drawing-withdrawals made by the owner.
• Income Summary-temporary account that shows the income or loss for the period.
Owner’s Equity
• Provides a financial summary of the firm’s operating results during a specified period.
• Measures all your revenue source vs. business expenses for a given time period.
• An accounting of revenue, expenses and new profit for a given period.
Income Statement
Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and plumbing services
Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and plumbing services
Netincome
Netincome
EqualsExpensesExpenses
MinusRevenuesRevenues
Service Companies
What is revenue?
Revenue (in business) is the income that a company receives from its normal business activities, usually from the sale of goods and services to customers .
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Service Income• Revenues earned by the business in
performing services for a customer.
Examples:
• Medical services by a doctor• Dental services by a dentist• Services by a lawyer• Services by an accountant
• Cost of Sales or cost of Services• The direct cost of the products sold
or the services rendered
Expenses
• Salaries• Utilities• Supplies• Insurance• Transportation• Depreciation• Bad debts• interest
Independent Auditor’s Report
• It states the division of responsibility between the external auditor and the company.
• Auditor-expresses an opinion on the fair presentation of financial statements
• Company-responsible for the preparation of the financial statements
Statement of Management’s
Responsibilities • Acknowledges responsibility• 1. F/S in conformance with GAAP• 2. amounts are based on best estimates• 3. a system of internal controls• 4. material disclosures were made• a. deficiencies in the design of internal
control• b. weaknesses in internal controls• c. fraud
• Philippine regulatory bodies • Philippine Regulation Commission
(PRC)-• Board of Accountancy (BOA), the
Securities and Exchange Commission (SEC)
• Bureau of Internal Revenue (BIR)• --Philippine Financial Reporting
Standard (PFRS) is now in use.•
STEPS IN THE ACCOUNTING PROCESS: 1.
ANALYZING DETERMINING EFFECTS OF TRANSACTIONS ON THE
BUSINESS Source DocumentsInvoice from
supplier
Billings to customers
Employee earnings records
Step 2 : RECORDING
• Inputting of information in books/journals
STEP 3: CLASSIFYING
• Sorting like transactions into account titles
STEP 4: SUMMARIZING
• Grouping the accounts
STEP 5: REPORTING
• Preparation of Financial Statements
STEP 6: INTERPRETING
• Computation of relationship of figures.
What is an Account ?
An account is a brief and systematic record of
transactions which are
similar in nature.
LEDGER BOOK
Account Account
DEBIT CREDIT
Dr Cr NAME OF ACCOUNT
‘T’ Account
Left side
Right side
DEBIT CREDIT
Dr Cr ASSETS ACCOUNT
‘T’ format
DEBIT CREDIT
Dr Cr LIABILITY ACCOUNT
‘T’ format
DEBIT CREDIT
Dr Cr OWNER’S EQUITY ACCOUNT
‘T’ format
DOUBLE - ENTRY ACCOUNTING SYSTEM
Every business transaction will involve two parties
Each party must give up something (out) in order to receive something
in return. (in)
When the business sells its goods for cash, it will give up its goods to its customer and will receive cash in return.
Cash IN
Goods OUT
Example:
FirmFirm’s goods
When a business buys goods with cash, it will give up its cash to its suppliers and will receive goods in return.
Goods IN
Cash OUT
Example:
FirmSupplier’s goods
When a business purchases a motor vehicle, it will give up its cash to the seller and will receive motor vehicle in return.
Example:
Motor Vehicle IN
Cash OUT
FirmMotor Vehicle
When a debtor pays to the firm, the firm’s cash will increase and the firm’s debtors will decrease.
Example:
FirmDebtor
Cash
increases
Debtors decreases
When the firm pays to the creditors, the firm’s cash will decrease and the firm’s creditors will decrease.
Example:
FirmCreditors
Creditors decreases
Cash
decreases
Hence,
For every business transaction, two accounts will be involved.
One account will have a debit entry and another account will have a
credit entry.
Examples :a) John began business with cash in hand Php500,000.
Cash P500,000 Capital P500,000
b) The firm took a bank loan of P800,000.
Cash P800,000 Bank Loan
P800,000
Motor Vehicle P700,000 Cash
P700,000
A = L + OE
c) Purchase d a motor vehicle from
ABC Trading for P700,000.
Examples : A = L + OE
e) Received P35,000 in check from a debtor.
Debtors P35,000 Cash at Bank
P35,000
d) Paid P50,000 to Creditor, Peter.
Cash P50,000 Creditors P50,000
Examples : A = L + OE
f) Paid part of bank loan for P150,00.
Cash P150,000 Bank Loan P150,000
g) Purchased office equipment from
Lee Trading on credit for P7,000. Office Equipment P7,000 CreditorsP7,000 (Lee Trading)
Seatwork/Homework
• Do exercise
• Thank you for your patience and your
admirable desire to learn!
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