Basic Accounting Concepts Chapter 2. Basic Rules of an Accounting System A transaction is an economic event that can affect one, two or more items in.

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Presentation transcript:

Basic Accounting Concepts Chapter 2

Basic Rules of an Accounting System A transaction is an economic event that can affect one, two or more items in the financial statements. Rules determine: WHAT transactions are to be recorded WHAT transactions are to be recorded WHEN transactions are to be recorded WHEN transactions are to be recorded HOW transactions are to be recorded HOW transactions are to be recorded AMOUNT of the transaction to be recorded AMOUNT of the transaction to be recorded

Framework of an Accounting System Assets = Liabilities + Stockholders’ Equity The Accounting Equation

By expanding the accounting equation, transactions can be analyzed, summarized, and recorded within the integrated financial statement framework. Integrated Financial Statement Framework Impact of transaction on cash Impact of transaction on Income Statement

Illustrative Problem Chris Woods established an insurance agency on July 1, 2011, and completed the following transactions during July: a.Opened a business bank account in the name of Woods Insurance Inc., with a deposit of $40,000 in exchange for capital stock. b.Borrowed $30,000 by issuing a note payable. c.Received cash from fees earned, $28,000. d.Paid rent on office and equipment for the month, $3,000. e.Paid automobile expense for the month, $1,800, and miscellaneous expense,$900. f.Paid office salaries, $4,200. g.Paid interest on the note payable, $100. h.Purchased land as a future building site, $55,000. i.Paid dividends, $2,000.

1.Indicate the effect of each transaction and the balances after each transaction, using the integrated financial statement framework. 2.Prepare an income statement and retained earnings statement for July. 3.Prepare a balance sheet as of July 31, Prepare a statement of cash flows for July. InstructionsInstructions

The assets and liabilities (in millions) of Walt Disney Company as of September 30, 2000, were as follows: Assets$45,027 Liabilities$20,927 a.Determine the stockholders’ equity of Walt Disney as of September 30, b.If assets decreased by $1,328 and stockholders’ equity decreased by $1,428, what was the increase or decrease in liabilities for the year ending September 30, 2001? c.What were the total assets, liabilities, and stockholders’ equity as of September 30, 2001? d.Based on your answer to (c), does the accounting equation balance?

For Kroger Co., indicate whether the following transactions (1) increase, (2) decrease, or (3) have no effect on stockholders’ equity. a.Paid creditors. b.Made cash sale to customers. c.Paid interest expense. d.Purchased store equipment. e.Paid dividends. f.Purchased merchandise. g.Sold store equipment at a loss. h.Paid store rent. i.Paid taxes. j.Received interest income.

Loss? The income statement of a corporation for the month of April indicates a net income of $42,000. During the same period, $50,000 in cash dividends were paid. Would it be correct to say that the business incurred a net loss of $8,000 during the month? Discuss.