Accounting Review for Managerial Accounting Students Complete this review prior to starting Managerial Accounting

Accounting as an Information System OBJECTIVE 1 1.Identify business goals. 2.Explain the difference between financial accounting and managerial accounting. 3.Identify the three basic forms of business organization.

Business Goals Profitability A business must take in enough money to pay all the costs of doing business, with enough left over as profit for the owners to want to stay in the business. Liquidity A business must have enough cash available to pay debts when they are due.

Financial and Management Accounting Accounting’s role of assisting decision makers by measuring, processing, and communicating information is usually divided into two categories: Management accounting. Financial accounting. The two may be distinguished by the principal users of their information.

Management Accounting Is oriented toward the needs of internal decision makers. Provides managers and employees with information regarding how they have done in the past and what they can expect in the future.

Financial Accounting Is oriented toward the needs of external decision makers. Provides information in the form of financial statements to evaluate how well the business has achieved its goals. Financial statements report directly on the goals of profitability and liquidity. Financial statements are used extensively both inside and outside a business to evaluate the business’s success.

Forms of Business Organization Sole Proprietorship. Partnership. Corporation.

Q. How do sole proprietorships, partnerships, and corporations differ? A sole proprietorship is a business owned by one individual. A partnership is similar in most respects to a proprietorship except that more than one owner is involved. A corporation is an economic unit that is legally separate from its owners.

The Accounting Equation OBJECTIVE 2 Explain the accounting equation.

The Accounting Equation Assets = Liabilities + Owner’s Equity.

Assets Assets are economic resources owned by a business that are expected to benefit future operations.

Liabilities Liabilities are present obligations of a business to pay cash, transfer assets, or provide services to other entities in the future.

Owner’s Equity also called Stockholder’s Equity the claims by the owner to the assets of the business. the residual equity that remains after deducting liabilities from assets. Owner’s Equity = Assets - Liabilities.

Four Types of Transactions That Affect Owner’s Equity

Net Income / Loss Revenues > Expenses Net Income Net Loss

Communication Through Financial Statements OBJECTIVE 3 Explain financial statements.

The Importance of Financial Statements Financial statements are the primary means of communicating important accounting information to users. Financial statements they show the business in financial terms.

The Income Statement Summarizes revenues earned and expenses incurred over a period of time. It shows whether or not a business achieved its profitability goal.

Shannon Realty Income Statement For the Month Ended December 31, 20xx Revenues Commissions Earned $3,500 Expenses Equipment Rental Expense $1,000 Wages Expense 400 Utilities Expense 300 Total Expenses $1,700 Net Income $1,800 Trace to the Statement of Owner’s Equity

The Statement of Owner’s Equity Shows the change in the owner’s capital over a period of time.

Shannon Realty Statement of Owner’s Equity For the Month Ended December 31, 20xx John Shannon, Capital, 12/1/xx $ 0 Add: Investments by John Shannon $50,000 1,800 5 1,800 Net Income for the Month Subtotal $ 5 1,800 Less Withdrawals by John Shannon 600 John Shannon, Capital, 12/31/xx $ 5 1,200

The Balance Sheet Shows financial position at a point in time. Presents a view of the business as the holder of resources, or assets, that are equal to the claims against those assets.

Shannon Realty Balance Sheet December 31, 20xx Assets Cash $15,300 Accounts Receivable 1,000 Supplies 500 Land 10,000 Building 25,000 Total Assets $51,800

Shannon Realty Balance Sheet December 31, 20xx (continued…) Liabilities Accounts Payable $600 Owner’s Equity John Shannon, Capital $51,200 Total Liabilities and Owner’s Equity $51,800

Accounts and the Chart of Accounts Objective 4 Explain classification. Describe the chart of accounts and recognize commonly used accounts.

The Classification Issue Classification is assigning all the transactions in which a business engages to appropriate categories or accounts. Proper classification depends on: Correctly analyzing the effect of each transaction on the business. Maintaining a system of accounts that reflects that effect.

Accounts Businesspeople need to be able to retrieve transaction data quickly and in usable form. A filing system consisting of accounts is used to sort out or classify all the transactions that occur in a business. Accounts are the basic storage unit for accounting data and are used to accumulate amounts from similar transactions.

An accounting system has a separate account for each asset, liability, and each component of stockholders’ equity, including revenues and expenses. A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts. The group of company accounts is known as the general ledger or simply ledger. The general ledger may be manual or computer-based.

Equity Accounts Revenue and expense accounts are separated from other owner’s equity accounts.

Relationships of Owner’s Equity Accounts

The Double-Entry System: The Basic Method of Accounting Objective 5 Define double-entry system and state the rules for double entry.

Features of the Double-Entry System Principle of duality. Each transaction must be recorded with at least one debit and one credit so that monetary value of debits and credits are equal. The whole system is always in balance. All accounting systems are based on the principle of duality.

Analyzing and Processing Transactions Every transaction affects at least two accounts. Total debits must equal total credits. Assets = Liabilities + Owner’s Equity. Assets = Liabilities + OE Debit for increases (+) Credit decreases (-)

Application of Debit/Credit Rules to OE Assets = Liabilities + Capital - Withdrawals + Revenues - Expenses Debit is commonly abbreviated Dr. Credit is commonly abbreviated Cr.

Recording and Posting Transactions Objective 6 Recording transactions in the general journal.

Recording and Posting Transactions Transactions are recorded in the General Journal and posted to the General Ledger.

Steps in Analyzing and Processing Transactions Analyze the transaction to determine its effect on assets, liabilities, and OE. Supported by a source document. Apply the rules of double entry. Dr. increases an asset. Cr. increases a liability. Etc.

Steps in Analyzing and Processing Transactions (continued) Record the entry. Enter in chronological order in a journal. Enter the date/debit account/debit amount on one line. Enter the credit account/credit amount indented on the next line. Dr. Cr. June 1 Cash 100,000 Notes Payable 100,000 This form is called journal form.

Procedure for Recording a Journal Entry Record the date For subsequent entries, only show date changes. Write the accounts to be debited and credited, followed by an explanation. Use exact account names. Start debit accounts on the left. Indent credit accounts. Note: a transaction can have more than one debit or credit entry (a compound entry).

The General Journal Also called “the book of original entry.” Journal entries are made in chronological order. A separate journal entry is made for each transaction (journalizing). Later, the debit and credit portions of the entry are transferred to the general ledger.