1. 1 Basic Accounting Richard Mross (208) 939-4717 revised 02/19/2008

2. 2 Traditional Accounting System Business Transactions Accounting System Documents

3. 3 Accounting System Business Transactions Sales Purchase/Expense Change in Value Guesses Other Events Accounting System Lists Transactions Actions Documents Income Statement Balance Sheet List Reports Transaction Reports Budgets Projections Invoices Checks

4. 4 Primary Accounting Reports The information results of an accounting system Balance Sheet – What you have and owe Assets – Liabilities = Equity and Liabilities + Equity = Assets Income Statement – How much you make Sales - Expenses = Income

5. 5 Reports Income Statement Balance Sheet

6. 6 Asset Equity Liability

7. 7 Income Statement Profit Expense Revenue

8. 8 Account The basic unit of accounting an Account or General Ledger Account. It is a unit of information that represents business records. There are five types of accounts: Asset Liability Equity Revenue Expense A business can have anywhere from a dozen to several thousand accounts, with each one being one of the five types.

9. 9 Accounting Accounting is the process of recording business activities that make changes to accounts. These include: Sales of products Revenue from services earned Buying products and/or services Incurring other expenses Depreciation of fixed assets Closing books for the year When any of these and other business activities are recorded, accounts change in value. The unit of measure is currency, in most cases, the dollar.

10. 10 Double Entry Accounting For any business transaction that happens, two or more accounts are affected. There is a give and take of equal dollar amounts. This is called Double Entry Accounting. There are two types of actions done to accounts to bring the values up or down. The actions are called Debit and Credit. Whether an account grows or shrinks when it is debited or credited depends on the account. A debit to an asset account makes it bigger but a debit to a liability account makes it smaller. The opposite applies when crediting. Crediting an asset makes it smaller and crediting a liability makes it bigger. A debit to a revenue account makes it smaller and debit to an expense makes it bigger. A credit to a revenue account makes it bigger and credit to expense makes it smaller. For equity, it gets bigger when it is credited and smaller when it is debited. A record entry that has debits and credits is called a Journal Entry.

11. 11 Debits and Credits Balance Sheet Asset Profit Expense Revenue Equity Liability Income Statement To make an account go up (get bigger) DebitCredit Debit Credit

12. 12 Debits and Credits To make an account go down (get smaller) Balance Sheet Asset Profit Expense Revenue Equity Liability Income Statement CreditDebit Credit Debit

13. 13 Bob’s Hotdog Stand To explain accounting and how business transactions impact financial statements, we will trace through the business transactions of a simple hot dog stand. For simplicity, we will not include all the different taxes and interest associated with business for the first sets of transactions.

14. 14 Bobs Hotdog Stand (B.H.S.) Asset Cash on hand Cash in bank Accounts Receivable Inventory Hot Dog Stand Accumulated Depreciation* Profit/Loss No account here Expense Cost of Good Sold Electricity Depreciation Expense Revenue Sales Equity Bobs Equity Liability Accounts Payable Notes Payable *Contra-Asset

15. 15 Chart of Accounts (General Ledger) 1000 Cash on hand 1020 Cash in bank 1100 Accounts Receivable 1200 Inventory 1400 Hot Dog Stand 1410 Accumulated Depreciation* 2000 Accounts Payable 2400 Notes Payable 3000 Bobs Equity 4000 Sales 5000 Cost of Good Sold 6200 Electricity 6500 Depreciation Expense Asset Liability Equity Revenue Expense *Contra-Asset Balance Sheet Accounts Income Statement Accounts

16. 16 Trial Balance 1000 Cash on hand0.00 1020 Cash in bank 0.00 1100 Accounts Receivable 0.00 1200 Inventory0.00 1400 Hot Dog Stand0.00 1410 Accumulated Depreciation*0.00 2000 Accounts Payable0.00 2400 Notes Payable0.00 3000 Bobs Equity0.00 4000 Sales0.00 5000 Cost of Good Sold0.00 6200 Electricity0.00 6500 Depreciation Expense0.00 Total 0.00 *Contra-Asset

17. 17 On December 1, Bob takes $10,000 out of his personal checking account and puts it into a newly created a business checking account, B.H.S. Company. What General Ledger accounts are affected and how? DebitAccountDateCreditEvent General Journal

18. 18 DebitAccountDate 10,000 Credit 12/01Cash in bank 10,00012/01Bobs Equity Event 1000 Cash on hand 0 1020 Cash in bank10,000 1100 Accounts Receivable 0 1200 Inventory 0 1400 Hot Dog Stand 0 1410 Accumulated Depreciation* 0 2000 Accounts Payable 0 2400 Notes Payable 0 3000 Bobs Equity10,000 4000 Sales 0 5000 Cost of Good Sold 0 6200 Electricity 0 6500 Depreciation Expense 0 BHS Company Trial Balance

19. 19 Bobs Hotdog Stand (B.H.S.) December 1 Asset 10,000 Profit/Loss 0 Expense 0 Revenue 0 Equity 10,000 Liability 0 *Contra-Asset

20. 20 On December 2, Bob is busy. He wrote a check for a hotdog stand for $6,000. He buys 100 hot dogs for $1 each on credit. He also withdrew $200 cash from bank. DebitAccountDateCreditEvent General Journal

21. 21 DebitAccountDate 60001400 Credit 12/02Wrote check for hot dog stand 1020600012/02 Event General Journal 100120012/02Bought 100 hot dogs on credit 200010012/02 200100012/02Withdrew $200 cash from bank 102020012/02 1000 - Cash On Hand 2000 – Accounts Payable 1400 – Hot Dog Stand 1200 - Inventory 1020 - Cash In Bank 3000 – BHS Equity 10,000 T Account Debit Credit

22. 22 1000 - Cash On Hand 2000 – Accounts Payable 1400 – Hot Dog Stand 1200 - Inventory 1020 - Cash In Bank 3000 – BHS Equity 10,000 200 3,800 200 6000 100 6000

23. 23 1000 Cash on hand 200 1020 Cash in bank 3,800 1100 Accounts Receivable 0 1200 Inventory 100 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation 0 2000 Accounts Payable (100) 2400 Notes Payable 0 3000 Bobs Equity(10,000) 4000 Sales 0 5000 Cost of Good Sold 0 6200 Electricity 0 6500Depreciation Expense 0 Total 0 BHS Trial Balance, December 2

24. 24 Bobs Hotdog Stand (B.H.S.) December 2 Asset Cash on Hand 200 Cash in Bank 3,800 Inventory 100 Hot Dog Stand 6,000 Profit/Loss 0 Expense 0 Revenue 0 Equity 10,000 Liability Acct Payable 100 *Contra-Asset

25. 25 On December 3, Bob gets busy. He sells 50 of them for $2 each. Bob pays the hot dog vendor for the inventory with a check. DebitAccountDateCreditEvent General Journal

26. 26 DebitAccountDate 1001000 Credit 12/03Sold 50 hotdogs for cash Event General Journal 500012/03Cost of hot dog inventory in the sales50 100200012/03He pays vendor for hot dogs with check 102010012/03 1000 - Cash On Hand 2000 – Accounts Payable 1200 – Inventory 4000 – Sales 400010012/03 12005012/03 5000 – Cost of Goods sold 100 200 1020 - Cash In Bank 10,000 3,800 200 6000

27. 27 1000 - Cash On Hand 2000 – Accounts Payable 1200 – Inventory 4000 – Sales 5000 – Cost of Goods sold 100 200 1020 - Cash In Bank 10,000 3,700 100 6000 100 50 200 300 0

28. 28 1000 Cash on hand 300 1020 Cash in bank 3,700 1100 Accounts Receivable 0 1200 Inventory 50 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation 0 2000 Accounts Payable 0 2400 Notes Payable 0 3000 Bobs Equity(10,000) 4000 Sales (100) 5000 Cost of Good Sold 50 6100 Office Supplies Expense 0 6200 Electricity 0 6300 Insurance Expense 0 6500 Depreciation Expense 0 Total 0 BHS Trial Balance - December 3

29. 29 Bobs Hotdog Stand (B.H.S.) December 3 Asset Cash on Hand 300 Cash in Bank 3,700 Inventory 50 Hot Dog Stand 6,000 Profit/Loss 50 Expense 50 Revenue 100 Equity 10,000 Liability Acct Payable 0 *Contra-Asset

30. 30 On Dec. 4, Bob was scheduled to work at a wedding. The wedding host told Bob not to charge customers but to bill him. That day, Bob sold 40 hot dogs and sent the bill to the host. DebitAccountDateCreditEvent General Journal

31. 31 DebitAccountDate 801000 Credit 12/04Sold 40 hotdogs on account Event General Journal 500012/04Cost of hot dog inventory in the sales40 40008012/04 12004012/04 1200 – Inventory 4000 – Sales 5000 – Cost of Goods sold 100 50 1100 – Accounts Receivable

32. 32 1200 – Inventory 4000 – Sales 5000 – Cost of Goods sold 100 50 10 50 1100 – Accounts Receivable 80 40 90 180

33. 33 Bob did not work any more for the whole month of December. He recognizes depreciation for the stand. The stand has a book life of 5 years and Bob uses straight line depreciation. DebitAccountDateCredit 12/31 Event General Journal

34. 34 DebitAccountDateCreditEvent General Journal 1410 – Accumulated Depreciation 6500 – Depreciation Expense 650012/31Bob recognized depreciation on stand100 141010012/31

35. 35 1000 Cash on hand 300 1100 Accounts Receivable 80 1200 Inventory 10 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation (100) 2000 Accounts Payable 0 2400 Notes Payable 0 3000 Bobs Equity(10,000) 4000 Sales (180) 5000 Cost of Good Sold 90 6200 Electricity 0 6500Depreciation Expense 100 Total 0 BHS Trial Balance December 31 1410 – Accumulated Depreciation 6500 – Depreciation Expense 100

36. 36 On January 2 of the next year, Bob gets his electric bill for December for $20. What accounts are affected? DebitAccountDateCredit 01/02 Event General Journal

37. 37 DebitAccountDateCreditEvent 620001/02Bob gets $20 electric bill for December20 6200 – Electricity 20002001/02 2000 – Accounts Payable 100 0

38. 38 1000 Cash on hand 300 1020 Cash in bank 3,700 1100 Accounts Receivable 80 1200 Inventory 10 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation (100) 2000 Accounts Payable (20) 2400 Notes Payable 0 3000 Bobs Equity(10,000) 4000 Sales (180) 5000 Cost of Good Sold 90 6200 Electricity 20 6500 Depreciation Expense 100 BHS Trial Balance January 2 before year end close

39. 39 B.H.S. 12/31/2007 Asset Cash on hand 300 Accounts Receivable 80 Cash in bank 3700 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total9,990 Profit/Loss Profit/Loss (30) Expense Cost of Good Sold90 Electricity 20 Depreciation Expense 100 Revenue Sales 180 Equity Bobs Equity 10,000 Total 10,020 Liability Accounts Payable20 Notes Payable 0 Total 20 *Contra-Asset Balance Sheet Income Statement

40. 40 On January 3, Bob closes his books for the previous year. Enter the journal entries to close all of the revenue and expense accounts into equity for the year of 2008. DebitAccountDateCredit 01/03 Event General Journal

41. 41 DebitAccountDateCreditEvent 400012/31Closes books for the year180 650010012/02 5000 – Cost of Goods Sold 3000 – BHS Equity 6500 – Depreciation Expense 50009012/02 4000 – Sales 90 180 300012/0230 100 10000 62002012/02 6200 – Electricity Expense 20

42. 42 5000 – Cost of Goods Sold 3000 – BHS Equity 6500 – Depreciation Expense 4000 – Sales 90 180 100 10000 6200 – Electricity Expense 20 100 20 180 90 30 Sales Revenue180 Total Revenue180 Cost of Goods Sold90 Depreciation Expense100 Electricity Expense20 Total Expense210 Total to go to equity(30)

43. 43 1000 Start Cash on hand 300 1020 Cash in bank 3,700 1100 Accounts Receivable 80 1200 Inventory 10 1400 Hot Dog Stand 6,000 1410 Accumulated Depreciation 100 2000 Accounts Payable 20 2400 Notes Payable 0 3000 Bobs Equity 9,970 4000 Sales 00 5000 Cost of Good Sold 00 6200 Electricity 00 6500 Depreciation Expense 00 Total 0 BHS Trial Balance 01/03/2008 (after year end close)

44. 44 B.H.S. 1/3/2008 Asset Cash on hand 300 Cash in bank 3700 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,990 Profit/Loss Profit/Loss 00 Expense Cost of Good Sold00 Electricity 0 Depreciation Expense 000 Revenue Sales0 Equity Bobs Equity 9,970 Liability Accounts Payable20 Notes Payable 0 Total 20 *Contra-Asset BHS Balance Sheet for year end 2007Income Statement for 2007

45. 45 On January 5, Bob gets his bank statement for December 2007. He needs to do a bank rec. National Bank of America - Bank Statement BHS Company Starting Balance: 12/01/20060.00 Deposits: deposit12/01/2007 $10,000 Withdraws and Checks: Withdraw12/01/2007$200 Check #112/03/2007$6,000 Bank charges: Bank Fee12/31/2007$10 New Balance:12/31/2007$3,790

46. 46 Here is the reconciliation BHS Bank Reconciliation for 12/07 Book Balance (from account 1020 in general ledger) 12/31/2007$3,700 Bank fee adjustment$10 Balance$3,690 Bank Statement Balance 12/31/2007$3,790 Outstanding check (Check 2 to Hotdog world ) adjustment$100 Balance$3,690

47. 47 Based on the reconciliation, Bob needs to add another expense, bank fee, item to his chart of accounts and enter the bank fee expense into his books. Since the bank expense happened in December, Bob has to do a prior period adjustment. This means that after making bank expense journal entry, he needs to make a closing journal entry for last years books which will change his pre-closing reports DebitAccountDate 106100 Credit 01/07Bank Charge Expense 102010Cash Event General Journal 1020Close Books Bank Expense10 300010Close Books Equity

48. 48 B.H.S. 12/31/2007 Restated 01/08/2008 Asset Cash on hand 300 Accounts Receivable 80 Cash in bank 3690 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total9,980 Profit/Loss Profit/Loss (40) Expense Cost of Good Sold90 Electricity20 Bank Charge 10 Depreciation Expense 100 Revenue Sales 180 Equity Bobs Equity 10,000 Total 10,020 Liability Accounts Payable20 Notes Payable 0 Total 20 *Contra-Asset Balance Sheet Income Statement

49. 49 Restated 2008 Balance Sheet Asset Cash on hand 300 Cash in bank 3690 Inventory 10 Hot Dog Stand 6000 Accumulated Depreciation* (100) Total 9,980 Equity Bobs Equity 9,960 Liability Accounts Payable20 Notes Payable 0 Total 20 BHS Balance Sheet for year end 2007