Basics of Accounting

Accounting has 3 main activities 1. Identifying  select events that are evidence of economic activity 2. Recording  provide a chronological diary of measured events in an orderly & systematic manner 3. Communicating  preparation & distribution of accounting reports and financial statements; as well as analyzing and interpreting data

Who uses Accounting info?  Internal managers, production supervisors, financial directors, & company officers; usually referred to as Managerial Accounting  External investors, creditors, government, regulatory agencies, customers, etc.; usually referred to as Financial Accounting

What’s the difference between Bookkeeping and Accounting?  Bookkeeping is a part of the Recording activity of Accounting, but Accounting involves much more

GAAP (Generally Accepted Accounting Principles)  Cost Principle cost is the value exchanged at the time of acquisition; this is used for all accounting purposes until object is sold  Monetary Unit Assumption only transactions that can be expressed in terms of money are included in accounting records  Economic Entity Assumption economic events can be identified with a particular unit of accountability; and the business entity is separate from the owners and other entities

Basic Accounting Equation Assets = Liabilities + Owner’s Equity

Assets  Resources that are owned by the business  Includes: Cash Equipment Supplies buildings, etc

Liabilities  Existing debts and obligations (Amounts you owe to others)  Includes accounts payable notes payable, etc

Equity  Owner’s claim to assets  Called retained earnings and paid in capital  Retained Earnings is determined by 3 items: 1. Revenue-gross increase in Equity from activities entered into for the purpose of earning income 2. Expenses-Decreases in Equity from operating the business 3. Dividends-distribution of cash or other assets to owners (only in corporations)

Financial Statements  Income Statement  Statement of Retained Earnings  Balance Sheet  Statement of Cash Flows

Income Statement  Presents revenue and expenses contributing to Net Income (Loss) for a period of time  Statement dated For the Month (Year) Ended ….

Sales (Revenue)$ Operating expenses: Rent expense $ Wages expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses NetSolutions Income Statement For the Month Ended November 30, Net income$ To the statement of owner’s equity

Statement of Retained Earnings  Summarizes changes in Retained Earnings through Income, Loss, & Dividends  Also stated for a period of time

Chris Clark, capital, November 1, 2005$ 0 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Investment on November 1$ Net income for November $ Less withdrawals Increase in owner’s equity Chris Clark, capital, November 30, 2005$ From the income statement To the balance sheet

Balance Sheet  Reports Assets, Liabilities, & Stockholder’s Equity on a Specific Date

Assets Liabilities NetSolutions Balance Sheet November 30, 2005 Cash$ Accounts Payable$ Supplies Owner’s Equity Land Chris Clark, cap Total liabilities and Total assets$ owner’s equity$ From the statement of owner’s equity

Statement of Cash Flows  Summarizes information concerning cash inflows and outflows for a period of time  Reports the following: 1. Cash effects of company operations 2. Cash effects of investing transactions 3. Cash effects of financing transactions 4. Net increase or decrease in cash 5. Cash on hand at the end of the period

Cash flows from operating activities: Cash received from customers$ Deduct cash payments for expenses and payments to creditors Net cash flow from operating activities Cash flows from investing activities: Cash payment for acquisition of land( Cash flows from financing activities: Cash received as owner’s investment$ Deduct cash withdrawal by owner Net cash flow from financing activities Net cash flow and Nov. 30, 2005 cash bal.$ NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Should match Cash on the balance sheet )

The Recording Process

Basic Recording ____________________ Debits | Credits |  Always this way for all accounts  Debits always equal credits if you debit something, you have to credit something else called the double entry system

Assets  Debits increase Assets  Credits Decrease Assets  The normal balance is on the debit side  Anything on the wrong side is a negative amount

Liabilities  Credits increase liabilities  Debits decrease liabilities  Normal balance is on the credit side  Debit balance means a negative amount

Owners Equity  Owner’s Equity has a normal credit balance  Owner’s Drawing has a DEBIT balance (reduces Owner’s Equity)  Revenues have a CREDIT balance  Expenses have a DEBIT balance

Recording terms  General journal standard journal for recording entries Has a space for date, acct. title & explanation, ref #, debit, & credit  Journalizing entering data into the journal about a transaction  Ledger contains all the accounts for a company has 3 (or 4) columns for each account: Debit, Credit, and Bal.

Recording terms  Posting process of transferring journal entries to ledger accounts  Reference # in journal is the account # it was posted to in ledger is the page of the journal it came from  Chart of Accounts Listing of Accounts and Account #’s to identify location (like a table of contents or index)

Trial Balance  List of accounts and balances at a given time  Proves mathematical equality of debits & credits  Also used to uncover errors in journalizing and posting  Useful in preparing financial statements