HFT 2401 Chapter 1 Introduction to Accounting

Accounting A Means to an End  Provides answers to questions  How much cash do we have  What was our payroll cost  When did we buy a piece of equipment & at what cost  What is our food cost  What is our revenue  What are our expenses  What did we keep (net income)

American Accounting Association defines accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of that information”

The Accounting Process  1) Observe events in order to identify the events that are of a financial nature – monetary terms  2) Requires the recording, classifying, and summarizing these events.  3) Produces various financial statements for internal & external users.  4) Communication

Bookkeeping vs. Accounting  Bookkeeping – records & classifies transactions  Accounting – summarizes and interprets

Branches of Accounting  Financial Accounting – Revenues, expenses, assets & liabilities  Cost Accounting – Record, classify, allocate & report current & prospective costs. Used mainly in manufacturing  Managerial Accounting – Analyzes & provides information to management to enhance controls

Branches of Accounting  Tax Accounting – Prepare & file tax returns  Auditing – Reviews and evaluates documents, records and control systems  Accounting Systems – Information systems

Organizations that Influence Accounting  AICPA  FASB  SEC  IRS  HFTP

Forms of Business Organizations  Sole Proprietorship  Partnerships  Limited Partnerships  Limited Liability Companies (LLC)  Corporations

Sole Proprietorship  Easiest to organize / dissolve  Legally not a separate business – liability issues  It is separate for accounting purposes, however  Owner not paid a salary or wage - withdrawals

Partnerships  Two or more people joined together in a non- corporate manner for conducting business. Can use a written or oral agreement

Partnerships  Advantages Greater financial strength Does not pay taxes Shares liability Greater management strength  Disadvantages Partners are taxed on profits regardless of cash distribution Limits decision making process Unlimited legal liability

Limited Partnerships  Offers liability protection to limited partners General Partner(s) – responsible for debts of the partnership Limited Partner(s) – may not actively participate in the day to day operations of the business Agreement must be written Limited partners liability is limited to the amount of their investment

Corporations  A legal entity created by a state or other political authority  Characteristics An exclusive name Continued existence independent of stockholders Paid in capital represented by shares of stock Overall control vested in its directors

Corporations  Advantages Shareholders liability limited to amount of investment Owners are taxed on distributed profits (dividends) Employee equity participation (ESOP) Lower tax rates Corporation continues on in perpetuity  Disadvantages Double taxation Ownership control

Other Forms Of Business Organization  S-Corp Eliminates double taxation Limited to 75 shareholders Only one class of stock Shareholders pay taxes  Limited Liability Company (LLC) May have unlimited number of owners May have a single owner Not restricted to one class of stock

Principles of Accounting  Cost  Business Entity  Continuity of the Business Unit  Unit of Measurement  Objective Evidence  Full Disclosure  Consistency  Matching  Conservatism  Materiality

States that when a transaction is recorded, the transaction price (cost) establishes the accounting value. Cost Principle

Statements are based on the concept that each business maintains its own accounts, & that these accounts are separate from other interests of the owners. Business Entity

The assumption that the business will continue indefinitely Continuity of the Business Unit

Unit of Measurement  All transactions are expressed in monetary terms

Accounting records are based on objective evidence ( invoices, checks, cash register receipts) Objective Evidence

Financial statements must provide all information pertinent to interpretation of the financial statements. Full Disclosure

The same accounting method from time period to time period. Consistency

Match revenues with expenses Cash versus accrual. Matching

Recognize expenses as soon as possible, but delay recognition of revenues until they are sure. Also, Value Inventory, Investments, PPE at the lower of Original Cost or Current Market Value. Conservatism

Events or information must be accounted for if they make a difference to the readers of the financial statements. Materiality

Overview of Financial Statements  Balance Sheet  Income Statement  Statement of Cash Flows

Fundamentals of Accounting  Balance Sheet Assets (Things Owned) = Liabilities ( Obligations ) + Equity ( Residual Claims on Assets )

Fundamentals of Accounting  Income Statement Revenues - Expenses = Net Income (Loss) Temporary Accounts are Netted and Closed to Equity (retained earnings)

Fundamental Equation  Assets = Liabilities + Owners Equity  Assets = Liabilities + Permanent OE + Temporary OE  Assets = Liabilities + Permanent OE + Revenue - Expenses

Cash vs Accrual  Cash Basis Accounting Recognize revenue or expense when cash received or disbursed  Accrual Basis Accounting Recognize revenue when earned Recognize expense when incurred

Assets  Resources owned by a business Common characteristic – the capacity to provide future benefit or service Use for the purpose production, consumption and exchange of goods or services Future economic benefits results in cash inflows

Liabilities  Claims against assets Creditors Existing debts and obligations  Accounts payable  Notes payable  Wages payable  Sales, Real Estate and Income Taxes payable

Equity  Claims of the owners on the assets Corporations  Paid in capital  Retained earnings  Revenues  Expenses  Dividends Revenues > Expenses = Net Income Revenues < Expenses = (Net Loss)

Transactions  Transactions defined: economic events of the enterprise recorded  Each transaction may be internal or external  Each transaction must identify the specific items affected and the net change on each item  Each transaction has a dual effect on the accounting equation  The two sides of the accounting equation must always equal

Effects of Transactions on the Accounting Equation  Increase in an asset Decrease in another asset Increase in a liability Increase in owners equity  Increase in a liability Increase in an asset Decrease in another liability Decrease in owners equity  Increase in owners equity Increase in an asset Decrease in liability

Homework Assignment  Problem 1  Problem 4  Problem 5  Problem 9  Problem 12