Accounting Concepts and Procedures Chapter 1 Accounting Concepts and Procedures © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 1 Defining and listing the functions of accounting LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting Language of business Provides information to… Managers Owners Investors Governmental agencies LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Business Organizations Sole proprietorship – one owner Partnership – at least two owners Corporation – owned by stockholders LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Business Classifications Service - businesses where actual services are provided for clients, i.e. consulting firms Merchandising - businesses that either make their own products or sell products made by another supplier, i.e. J.C. Penney Manufacturing - Companies that make their own products, i.e. Ford Motor Co. LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting is a process Analyze Record Classify Interpret Report Summarize Communicate LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

GAAP Generally Accepted Accounting Principles – Procedures and guidelines that must be followed during the accounting process Used to ensure everyone prepares and interprets financial reports the same way LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

The Capital Account Capital - the owner’s investment in a company Does not always mean cash Includes any assets the owner has put into the business LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Assets Assets - properties of value owned by the business Examples include cash, supplies, accounts receivable, equipment Often assets are financed LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Liabilities Liabilities - Obligations that come due in the future. Result in increasing the financial rights or claims of creditors to assets. Examples include accounts payable Companies that are owed money are called creditors. They have a claim to assets. LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 2 Recording transactions in the basic accounting equation LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting Equation Assets = Equities Properties (resources) of value owned by a firm Financial claims against the assets LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting Equation Assets = Liabilities + Owner’s Equity Rights of creditors Rights of owner The accounting equation must always balance. If assets = $10,000 and liabilities were equal to $6,000, Owner’s Equity would be $4,000. If you have any 2 of the 3, you can solve for the 3rd. LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting Equation 3 ways the accounting equation can be stated are as follows: Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity Assets – Owner’s Equity = Liabilities LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Shift in Assets Indicates that the make-up of assets has changed, but the total of assets remains the same. Example: If a company buys a piece of equipment with cash, equipment would increase and cash would decrease. The total of assets would not change LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-1 Assets = Liabilities + Owner’s Equity a. $19,000 ? $4,000 $6,000 $9,000 c. $10,000 $15,000 $15,000 $6,000 LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-2 Assets = Liabilities + Owner’s Equity a. b. c. +$120,000 Equipment + $600 Cash - $600 + $900 +$900 LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Balance Sheet Reports financial position of a company as of a particular date Presents ending balances in assets, liabilities, and owner’s equity Assets must be equivalent to the sum of liabilities and owner’s capital account balance LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-3 Assets - Liabilities = Owner’s Equity Range Co. Cleaners Balance Sheet November 30, 200X Assets Cash $50,000 Equipment 7,000 Liabilities & Owner’s Equity Liabilities Accounts payable $14,000 Owner’s Equity B. Range, capital Assets - Liabilities = Owner’s Equity $57,000 - $14,000 = ?? 43,000 Total liabilities & owner’s equity Total Assets $57,000 $57,000 LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 3 Seeing how revenue, expenses, and withdrawals expand the basic accounting equation LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Revenue Amount earned by performing services for customers or selling goods to customers Increases owner’s equity Recorded when earned LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Expense Cost incurred in running a business by consuming goods or services in producing revenue Decreases owner’s equity Recorded when incurred LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Net Income/Net Loss Revenues – Expenses If revenues > expenses = net income If expenses > revenues = net loss LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Withdrawals Money or other assets an owner withdraws from a business for personal use Decreases owner’s equity Not an expense LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Expanded Accounting Equation The expanded accounting equation lists the individual accounts that fall under each classification. All assets are added together. Liabilities + Owner’s Equity is expanded to Liabilities + Capital – Withdrawals + Revenue - Expenses LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-4 Assets = $67,000 Equities = $67,000 LO-3 a. $60,000 b. $7,000 $7,000 $60,000 $7,000 $7,000 $60,000 Assets = $67,000 Equities = $67,000 LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-4 Assets = $80,800 Equities = $80,800 LO-3 $60,000 $7,000 - $200 -$200 $59,800 $7,000 $7,000 $60,000 - $200 d. $14,000 $14,000 $73,800 $7,000 $7,000 $60,000 - $200 $14,000 Assets = $80,800 Equities = $80,800 LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-4 Assets = $106,800 Equities = $106,800 LO-3 $73,800 $7,000 $60,000 - $200 $14,000 e. $30,000 $30,000 $73,800 $7,000 $7,000 $60,000 - $200 $30,000 $44,000 -$4,000 f. -$ 4,000 $69,800 $30,000 $7,000 $7,000 $60,000 - $200 $44,000 -$4,000 Assets = $106,800 Equities = $106,800 LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-4 Assets = $105,300 Equities = $105,300 LO-3 $69,800 $30,000 $7,000 $7,000 $60,000 -$200 $44,000 - $4,000 g. - 1,500 - 1,500 $68,300 $30,000 $7,000 $7,000 $60,000 -$200 $44,000 - $5,500 Assets = $105,300 Equities = $105,300 LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Withdrawals Let’s assume the owner withdrew $100 for personal use. $68,300 $60,000 $7,000 - $5,500 $30,000 $44,000 -$ 100 -$100 $68,200 $30,000 $7,000 $7,000 $60,000 -$300 $44,000 - $5,500 LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 4 Preparing an income statement, a statement of owner’s equity, and a balance sheet LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Financial Statements Financial Statements MUST be done in the correct order Income Statement Statement of Owner’s Equity Balance Sheet LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Income Statement Shows business results Revenues Expenses Net income/loss Covers a certain period of time LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Statement of Owner’s Equity Reports changes to owner’s equity for a certain period of time Beginning capital balance +Owner investment +Net Income -Owner withdrawals -Net loss . Ending capital balance LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-5 French Realty Income Statement For Month Ended June 30, 200X Revenue Professional fees $2,900 Operating Expenses: Salaries Expense $500 Utilities Expense 360 Rent Expense 500 Total Operating Expenses 1,360 Net Income $1,540 Net Income LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-5 French Realty Statement of Owner’s Equity For Month Ended June 30, 200X S. French, Capital, June 1, 200X $8,000 Net Income for June $1,540 Less Withdrawals for June 40 Increase in Capital 1,500 S. French, Capital, June 30, 200X $9,500 LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Exercise 1-5 French Realty Balance Sheet June 30, 200X Assets Cash $3,310 Accounts Receivable 1,490 Office Equipment 6,700 Total Assets $11,500 Liabilities & Owner’s Equity Liabilities Accounts Payable $2,000 Owner’s Equity S. French, Capital 9,500 Total Liabilities & Owners’ Equity $11,500 LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

What Goes on Each Statement? Income Statement Statement of Owner’s Equity Balance Sheet Capital (beg) Revenues Assets Net Income Expenses Liabilities Withdrawals Net Income Capital (end) Capital (end) LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

End of Chapter 1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater