1 © Copyrright Doug Hillman 1997 The System of Accounting

2 © Copyrright Doug Hillman 1997 The Entity Concept Any organizational unit

3 © Copyrright Doug Hillman 1997 The Entity Concept Any organizational unit for which we want

4 © Copyrright Doug Hillman 1997 The Entity Concept Any organizational unit for which we want financial information

5 © Copyrright Doug Hillman 1997 Assets l Anything of value held by an organization l Assets have

6 © Copyrright Doug Hillman 1997 Assets l Anything of value held by an organization l Assets have » Potential usefulness

7 © Copyrright Doug Hillman 1997 Assets l Anything of value held by an organization l Assets have » Potential usefulness » Future usefulness

8 © Copyrright Doug Hillman 1997 Assets l Anything of value held by an organization l Assets have » Potential usefulness » Future usefulness » Economic Value

9 © Copyrright Doug Hillman 1997 Equities l Claims against the total assets of an organization l Liabilities » Claims of nonowners l Owner's Equity » Claims of owners

10 © Copyrright Doug Hillman 1997 Revenues l Inflows of assets that result from performing services or selling goods l Revenues are realized when » the service is performed or

11 © Copyrright Doug Hillman 1997 Revenues l Inflows of assets that result from performing services or selling goods l Revenues are realized when » the service is performed or » the goods are delivered

12 © Copyrright Doug Hillman 1997 Expenses l Outflows of assets or incurrence of liabilities while earning revenues l A business incurrs expenses to earn revenues

13 © Copyrright Doug Hillman 1997 The Accounting Equation l Things of Value = Claims l Assets = Equities l Assets = Liabilities + Owner's Equity

14 © Copyrright Doug Hillman 1997 The Account Account Title

15 © Copyrright Doug Hillman 1997 The Account Left side Account Title

16 © Copyrright Doug Hillman 1997 The Account Left side Right side Account Title

17 © Copyrright Doug Hillman 1997 The Account Left side Right side the debit side Account Title

18 © Copyrright Doug Hillman 1997 The Account Left side Right side the debit side the credit side Account Title

19 © Copyrright Doug Hillman 1997 Summary of the Debit/Credit Rules l Assets

20 © Copyrright Doug Hillman 1997 Summary of the Debit/Credit Rules l Assets » Appear on the left (debit) side of the equation

21 © Copyrright Doug Hillman 1997 Summary of the Debit/Credit Rules l Assets » Appear on the left (debit) side of the equation » Therefore we: – Increase them with debits – Decrease them with credits

22 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Liabilities

23 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Liabilities » Appear on the right (credit) side of the equation

24 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Liabilities » Appear on the right (credit) side of the equation » Therefore we: – Increase them with credits – Decrease them with debits

25 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Owners' Equity

26 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Owners' Equity » Appear on the right (credit) side of the equation

27 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Owners' Equity » Appear on the right (credit) side of the equation » Therefore: – Increase them with credits – Decrease them with debits

28 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Issuances of common stock

29 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Issuances of common stock » Causes increase in owners' equity

30 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Issuances of common stock » Causes increase in owners' equity » Recorded by regular owners' equity rules – Increased with credits – Decreased with debits

31 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Dividends

32 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Dividends » Cause decreases in owners' equity

33 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Dividends » Cause decreases in owners' equity » Recorded opposite as regular owners' equity – Increased with debits – Decreased with credits

34 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Revenues

35 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Revenues » Cause increases in owners' equity

36 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Revenues » Cause increases in owners' equity » Recorded by regular owners' equity rules – Increased with credits – Decreased with debits

37 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Expenses

38 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Expenses » Cause decreases in owners' equity

39 © Copyrright Doug Hillman 1997 Summary of Debit/Credit Rules l Changes in owners' equity l Expenses » Cause decreases in owners' equity » Recorded opposite as regular owners' equity – Increase with debits – Decreased with credits

40 © Copyrright Doug Hillman 1997 Records in the Accounting System l Journal » Book of original entry » Chronological record of events l Ledger » Book of final entry » Categorical record of events

41 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date

42 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date » Debit account

43 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date » Debit account » Debit amount

44 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date » Debit account » Debit amount » Credit account

45 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date » Debit account » Debit amount » Credit account » Credit amount

46 © Copyrright Doug Hillman 1997 Journal Entries l What information do we need to record? » Date » Debit account » Debit amount » Credit account » Credit amount » Supplementary information

47 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1

48 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1Cash

49 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1Cash25,000

50 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1Cash25,000 Common Stock

51 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1Cash25,000 Common Stock25,000

52 © Copyrright Doug Hillman 1997 Journal Entry Dec. 1Cash25,000 Common Stock25,000 Issuance of common stock

53 © Copyrright Doug Hillman 1997 Posting Process of transferring

54 © Copyrright Doug Hillman 1997 Posting Process of transferring the amounts in the journal

55 © Copyrright Doug Hillman 1997 Posting Process of transferring the amounts in the journal to the ledger

56 © Copyrright Doug Hillman 1997 Posting Process l Locate the ledger account for the debit account l Enter the date, journal page number, and debit amount in the ledger l Enter the ledger account number in the journal entry

57 © Copyrright Doug Hillman 1997 Posting Process l Locate the ledger account for the credit account l Enter the date, journal page number, and credit amount in the ledger l Enter the ledger account number in the journal

58 © Copyrright Doug Hillman 1997 Trial Balance l A test of the accuracy of journalizing and posting process l Preparation

59 © Copyrright Doug Hillman 1997 Trial Balance l A test of the accuracy of journalizing and posting process l Preparation » List each ledger account and place the ending account balance in the proper column

60 © Copyrright Doug Hillman 1997 Trial Balance l A test of the accuracy of journalizing and posting process l Preparation » List each ledger account and place the ending account balance in the proper column » Total the debit and credit columns

61 © Copyrright Doug Hillman 1997 Trial Balance l A test of the accuracy of journalizing and posting process l Preparation » List each ledger account and place the ending account balance in the proper column » Total the debit and credit columns » Compare the totals

62 © Copyrright Doug Hillman 1997 Financial Statements l Prepared from the information contained in the trial balance l Four primary statements

63 © Copyrright Doug Hillman 1997 Financial Statements l Prepared from the information contained in the trial balance l Four primary statements » Income Statement

64 © Copyrright Doug Hillman 1997 Financial Statements l Prepared from the information contained in the trial balance l Four primary statements » Income Statement » Statement of Owner's Equity

65 © Copyrright Doug Hillman 1997 Financial Statements l Prepared from the information contained in the trial balance l Four primary statements » Income Statement » Statement of Owner's Equity » Balance Sheet

66 © Copyrright Doug Hillman 1997 Financial Statements l Prepared from the information contained in the trial balance l Four primary statements » Income Statement » Statement of Owner's Equity » Balance Sheet » Statement of Cash Flows

67 © Copyrright Doug Hillman 1997 Financial Statements l Title

68 © Copyrright Doug Hillman 1997 Income statement l Title » Company name

69 © Copyrright Doug Hillman 1997 Income statement l Title » Company name » Statement name

70 © Copyrright Doug Hillman 1997 Income statement l Title » Company name » Statement name » For the period ending date or date

71 © Copyrright Doug Hillman 1997 Income statement l Title - For the period ending date l List revenues and subtotal l List expenses and subtotal l Subtract expenses from revenues

72 © Copyrright Doug Hillman 1997 Statement of Owners' Equity l Title » For the period ending date l List the beginning balance in common stock l Add issuances of common stock l Subtotal ending common stock

73 © Copyrright Doug Hillman 1997 Statement of Owner's Equity l List beginning balance in retained earnings l Add net income l Deduct dividends l Subtotal ending retained earnings l Total common stock and retained earnings

74 © Copyrright Doug Hillman 1997 Balance Sheet l Title » Date l Assets

75 © Copyrright Doug Hillman 1997 Balance Sheet l Title » Date l Assets » First list and subtotal current assets

76 © Copyrright Doug Hillman 1997 Balance Sheet l Title » Date l Assets » First list and subtotal current assets » Then list and subtotal property, plant, and equipment

77 © Copyrright Doug Hillman 1997 Balance Sheet l Title » Date l Assets » First list and subtotal current assets » Then list and subtotal property, plant, and equipment » Determine total assets

78 © Copyrright Doug Hillman 1997 Balance Sheet l Liabilities

79 © Copyrright Doug Hillman 1997 Balance Sheet l Liabilities » First list and subtotal current liabilities

80 © Copyrright Doug Hillman 1997 Balance Sheet l Liabilities » First list and subtotal current liabilities » Then list and subtotal long-term liabilities

81 © Copyrright Doug Hillman 1997 Balance Sheet l Liabilities » First list and subtotal current liabilities » Then list and subtotal long-term liabilities l Total all liabilities

82 © Copyrright Doug Hillman 1997 Balance Sheet l Owners’ Equity

83 © Copyrright Doug Hillman 1997 Balance Sheet l Owners’ Equity »Enter ending common stock and retained earnings from Statement of Owners’ Equity

84 © Copyrright Doug Hillman 1997 Balance Sheet l Owners’ Equity »Enter ending common stock and retained earnings from Statement of Owners’ Equity l Total liabilities and owners' equity

85 © Copyrright Doug Hillman 1997 Statement of Cash Flows l Title » For the period ending l Three sections

86 © Copyrright Doug Hillman 1997 Statement of Cash Flows l Title » For the period ending l Three sections » Cash Flows from Operating Activities

87 © Copyrright Doug Hillman 1997 Statement of Cash Flows l Title » For the period ending l Three sections » Cash Flows from Operating Activities » Cash Flows from Investing Activities

88 © Copyrright Doug Hillman 1997 Statement of Cash Flows l Title » For the period ending l Three sections » Cash Flows from Operating Activities » Cash Flows from Investing Activities » Cash Flows from Financing Activities