Discuss Accounting Concepts of Assets 1. Asset -- a resource that has a potential future economic benefit. 2. Asset Valuation -- the monetary amount assigned to an asset. 3. Asset Classification -- assets are grouped into like categories. 1. Asset -- a resource that has a potential future economic benefit. 2. Asset Valuation -- the monetary amount assigned to an asset. 3. Asset Classification -- assets are grouped into like categories.

Asset Recognition  Recognize a resource as an asset only if: 1. The firm has acquired rights to its use in the future as a result of a past transaction or exchange, and 2. The firm can measure or quantify the future benefits with a reasonable degree of precision.  All assets are future benefits but not all future benefits are recognized as assets.  Recognize a resource as an asset only if: 1. The firm has acquired rights to its use in the future as a result of a past transaction or exchange, and 2. The firm can measure or quantify the future benefits with a reasonable degree of precision.  All assets are future benefits but not all future benefits are recognized as assets.

Asset Valuation  Valuation -- the assignment of a monetary amount to an asset  Several methods of assignment: 1. Acquisition or historical cost 2. Current replacement cost 3. Net realizable value 4. Present value of future net cash flows  Valuation -- the assignment of a monetary amount to an asset  Several methods of assignment: 1. Acquisition or historical cost 2. Current replacement cost 3. Net realizable value 4. Present value of future net cash flows

Historical Cost Current Replacement Cost Current Net Realizable Value The amount of cash a firm would currently receive if it sold an asset The amount of cash paid in acquiring an asset The discounted value of future cash flows generated by an asset Present Value of Future Net Cash Flows Assets might appear at the current cost of replacing it. Terms Match

Review Asset Classification  Similar assets are grouped together in financial statements into classes.  Examples of common classes of assets: –Current assets –Investments –Property, plant and equipment –Intangible assets  Similar assets are grouped together in financial statements into classes.  Examples of common classes of assets: –Current assets –Investments –Property, plant and equipment –Intangible assets

Discuss Accounting Concepts of Liabilities 1.Liability -- arises when a firm receives benefits or services and in exchange promises to pay for these at a definite future time 2. Liability Valuation -- the monetary amount assigned to the liability 3. Liability Classification -- liabilities are grouped into like categories 1.Liability -- arises when a firm receives benefits or services and in exchange promises to pay for these at a definite future time 2. Liability Valuation -- the monetary amount assigned to the liability 3. Liability Classification -- liabilities are grouped into like categories

Going Concern Reliability Plant or Fixed Assets Ability of a measure to faithfully represent what it purports to measure Tangible long-lived asset a firm uses in its operations Accounting assumes a firm will remain in operation long enough to carry out all of its current plans. Intangibles Items such as patents, franchises and goodwill Terms Match

Review Liability Recognition  Recognize an obligation as a liability when: 1. The firm has received benefits, and 2. In exchange, promised to pay the provider, and 3. The payment will occur at a definite future time.  All liabilities are obligations but not all obligations are recognized as liabilities.  Recognize an obligation as a liability when: 1. The firm has received benefits, and 2. In exchange, promised to pay the provider, and 3. The payment will occur at a definite future time.  All liabilities are obligations but not all obligations are recognized as liabilities.

What is liability valuation?  Valuation -- assignment of a monetary amount to a liability.  Two main methods of assignment: 1. Liabilities due within a year or less are generally valued at amount of the cash payment. 2. Liabilities due after one year are generally valued at the net present value of the future cash payments.  Valuation -- assignment of a monetary amount to a liability.  Two main methods of assignment: 1. Liabilities due within a year or less are generally valued at amount of the cash payment. 2. Liabilities due after one year are generally valued at the net present value of the future cash payments.

Explain Liability Classification  Similar liabilities are grouped together in the financial statements into classes:  Examples of common classes of liabilities: –Current liabilities –Long-term debt –Other long-term liabilities  Similar liabilities are grouped together in the financial statements into classes:  Examples of common classes of liabilities: –Current liabilities –Long-term debt –Other long-term liabilities

Shareholders’ Equity  Shareholders’ equity -- residual interest in the firm, all assets above those required to satisfy the liabilities.  Shareholders’ equity is equal to total assets less total liabilities.  The valuation of assets and liabilities determines the valuation of shareholders’ equity.  Shareholders’ equity -- residual interest in the firm, all assets above those required to satisfy the liabilities.  Shareholders’ equity is equal to total assets less total liabilities.  The valuation of assets and liabilities determines the valuation of shareholders’ equity.

Review Classifications of Shareholders’ Equity  Shareholders’ equity is divided into: 1. Contributed Capital -- original investment by owners 2. Retained Earnings -- amount of earnings left in the firm after the payment of dividends to the owners  Shareholders’ equity is divided into: 1. Contributed Capital -- original investment by owners 2. Retained Earnings -- amount of earnings left in the firm after the payment of dividends to the owners

Discuss Contributed Capital  Contributed Capital is divided into: 1. A par or stated value of the shares which has a legal definition, and 2. The remaining amount called Additional Paid-In Capital (A.P.I.C.).  This distinction is made for legal reasons and may have no relationship to market value of the shares.  Contributed Capital is divided into: 1. A par or stated value of the shares which has a legal definition, and 2. The remaining amount called Additional Paid-In Capital (A.P.I.C.).  This distinction is made for legal reasons and may have no relationship to market value of the shares.

What are Retained Earnings?  Retained earnings -- net accumulation of earnings of the firm since its beginning  Increased by net income  Reduced by losses, and by the payment of dividends to the shareholders or owners  Retained earnings -- net accumulation of earnings of the firm since its beginning  Increased by net income  Reduced by losses, and by the payment of dividends to the shareholders or owners

Retained Earnings  For any accounting period: Beginning Retained Earnings Beginning Retained Earnings + net income (or less net losses) - dividends declared during the period = Ending Retained Earnings.  For any accounting period: Beginning Retained Earnings Beginning Retained Earnings + net income (or less net losses) - dividends declared during the period = Ending Retained Earnings.

Dual-Entry Recording Framework  Every economic event has two sides, a give and a take.  Accountants record both sides economic events as a transaction.  The two sides of a transaction must balance so that the basic accounting equation remains in balance.  Every economic event has two sides, a give and a take.  Accountants record both sides economic events as a transaction.  The two sides of a transaction must balance so that the basic accounting equation remains in balance.

Dual Effect of a Transaction  Recall the basic accounting equation Assets = Liabilities + Owners’ Equity  Any transaction will effect one or more on the three classes of accounts.  Remember that the transaction must balance, and  That the basic equation must balance.  Remember the basic rule of math, you can do whatever you want to an equation as long as you do it to both sides of the equal sign.  Recall the basic accounting equation Assets = Liabilities + Owners’ Equity  Any transaction will effect one or more on the three classes of accounts.  Remember that the transaction must balance, and  That the basic equation must balance.  Remember the basic rule of math, you can do whatever you want to an equation as long as you do it to both sides of the equal sign.

Dual Effect of a Event Principal Financial Statements Individual Transactions and Events Accounting Systems for Accumulating Information about Transactions and Events

Effect on the Equation  There are four general combinations: 1. Increase an asset and a liability or owners’ equity by the same amount, 2. Decrease an asset and a liability or owners’ equity by the same amount, 3. Increase an asset and decrease another by the same amount, and 4. Increase a liability or owners’ equity and decrease another liability or owners’ equity by the same amount.  There are four general combinations: 1. Increase an asset and a liability or owners’ equity by the same amount, 2. Decrease an asset and a liability or owners’ equity by the same amount, 3. Increase an asset and decrease another by the same amount, and 4. Increase a liability or owners’ equity and decrease another liability or owners’ equity by the same amount.

Transaction Assets = Liability + Equity Transaction Assets = Liability + Equity 1. Issue 10,000 shares for $10,000 (par = $10). $10,000 (par = $10). 2. Purchase equipment for $60,000 cash. $60,000 cash. 3. Purchase inventory for $15,000 on account. $15,000 on account. 4. Pay supplier $8,000 cash of the $15,000 owned. of the $15,000 owned. 5. Issue 700 shares of stock to supplier for balance due. to supplier for balance due. 6. Pay for one year insurance policy, $600 in cash. policy, $600 in cash. 7. Customer pays $3,000 for merchandise to be delivered merchandise to be delivered in the future. in the future. Transaction Assets = Liability + Equity Transaction Assets = Liability + Equity 1. Issue 10,000 shares for $10,000 (par = $10). $10,000 (par = $10). 2. Purchase equipment for $60,000 cash. $60,000 cash. 3. Purchase inventory for $15,000 on account. $15,000 on account. 4. Pay supplier $8,000 cash of the $15,000 owned. of the $15,000 owned. 5. Issue 700 shares of stock to supplier for balance due. to supplier for balance due. 6. Pay for one year insurance policy, $600 in cash. policy, $600 in cash. 7. Customer pays $3,000 for merchandise to be delivered merchandise to be delivered in the future. in the future. Complete Chart for Miller Corp.

Transaction Assets = Liability + Equity Transaction Assets = Liability + Equity 1. Issue 10,000 shares for $10,000 (par = $10). $10,000 (par = $10). 2. Purchase equipment for $60,000 cash. $60,000 cash. 3. Purchase inventory for $15,000 on account. $15,000 on account. 4. Pay supplier $8,000 cash of the $15,000 owned. of the $15,000 owned. 5. Issue 700 shares of stock to supplier for balance due. to supplier for balance due. 6. Pay for one year insurance policy, $600 in cash. policy, $600 in cash. 7. Customer pays $3,000 for merchandise to be delivered merchandise to be delivered in the future. in the future. Transaction Assets = Liability + Equity Transaction Assets = Liability + Equity 1. Issue 10,000 shares for $10,000 (par = $10). $10,000 (par = $10). 2. Purchase equipment for $60,000 cash. $60,000 cash. 3. Purchase inventory for $15,000 on account. $15,000 on account. 4. Pay supplier $8,000 cash of the $15,000 owned. of the $15,000 owned. 5. Issue 700 shares of stock to supplier for balance due. to supplier for balance due. 6. Pay for one year insurance policy, $600 in cash. policy, $600 in cash. 7. Customer pays $3,000 for merchandise to be delivered merchandise to be delivered in the future. in the future. Complete Chart for Miller Corp. +$100,000 +$60,000 -$60,000 +$15,000 -$8,000 -$8,000 -$7,000 +$7,000 +$600 -$600 +$3,000 +$3,000

Debits and Credits  Increases do not always equal other increases, nor do they always equal decreases.  Accountants use the definitions of debit and credit to describe the requirement to balance the two sides of a transaction and to keep the basic equation in balance.  Increases do not always equal other increases, nor do they always equal decreases.  Accountants use the definitions of debit and credit to describe the requirement to balance the two sides of a transaction and to keep the basic equation in balance.

Debits and Credits  Debits are defined as increases to asset accounts (the right side of the basic equation) or decreases to liabilities or owners’ equity (the left side).  Credits are defined as increases to to liabilities or owners’ equity (the left side of the basic equation) or decreases to asset accounts (the right side).  Debits = Credits for all transactions and for the basic equation at any time.  Debits are defined as increases to asset accounts (the right side of the basic equation) or decreases to liabilities or owners’ equity (the left side).  Credits are defined as increases to to liabilities or owners’ equity (the left side of the basic equation) or decreases to asset accounts (the right side).  Debits = Credits for all transactions and for the basic equation at any time.

Journal Entries  Accountants recognize an economic transaction by recording a journal entry.  A journal entry shows both sides of the transaction with the name of the accounts and their respective debit or credit.  For example, transaction 1 from the Miller Corporation Example would be:  Accountants recognize an economic transaction by recording a journal entry.  A journal entry shows both sides of the transaction with the name of the accounts and their respective debit or credit.  For example, transaction 1 from the Miller Corporation Example would be: Jan 1 Cash 100,000 Common Stock 100,000

The Ledger  The journal entry records both sides to a transaction, but  The Ledger summarizes changes to individual accounts which may be one side of several transactions.  Accountants often use a shorthand notation for the ledger called a T- Account.  The journal entry records both sides to a transaction, but  The Ledger summarizes changes to individual accounts which may be one side of several transactions.  Accountants often use a shorthand notation for the ledger called a T- Account.

T-Accounts  A T-Account summarizes debits and credits to a specific account, for example cash.