1. How do you keep records? Do you engage in any personal accounting for yourself? Probably, all of you do at some level if you have a checking account, although I have friends who tear checks out, stuff them in their pocket, write them, and never ponder recording that check information anywhere. Do you do that? Do you engage in any personal accounting for yourself? Probably, all of you do at some level if you have a checking account, although I have friends who tear checks out, stuff them in their pocket, write them, and never ponder recording that check information anywhere. Do you do that?

2. Personal records Assuming that you keep track of you cash in you checking account, what do record when you write a check? You would have to deduct the amount of the check to keep a balance. Do you record the name of the person you wrote the check to. WHY? Have you ever really looked back to see who a check was written to? Maybe. Assuming that you keep track of you cash in you checking account, what do record when you write a check? You would have to deduct the amount of the check to keep a balance. Do you record the name of the person you wrote the check to. WHY? Have you ever really looked back to see who a check was written to? Maybe.

3. Personal records You know, some people are hard core – they record the payee, the amount, calculate a balance, AND THEN, on the next line, write down what the check was for. You know, some people are hard core – they record the payee, the amount, calculate a balance, AND THEN, on the next line, write down what the check was for. For example For example Balance$400.00 Schnucks$50.00$350.00 »For beer and pretzels for Sam’s party

4. No accounting rules Unless you are experiencing cash flow problems, and you are trying to figure out ways to budget your cash better, individuals typically have no real need for this type of detail in their records. Unless you are experiencing cash flow problems, and you are trying to figure out ways to budget your cash better, individuals typically have no real need for this type of detail in their records. Bottom line is – you keep your records any way that pleases you. Bottom line is – you keep your records any way that pleases you.

5. Business Records Subject to accounting rules When you keep records for a business, which is constantly making business decisions, we must keep detailed records to make available the mass amount of information necessary in a complex record environment. When you keep records for a business, which is constantly making business decisions, we must keep detailed records to make available the mass amount of information necessary in a complex record environment. We take an approach similar to the hard core check book people. We take an approach similar to the hard core check book people.

6. Double entry accounting As individuals (checking accounts), we primarily keep tract of one thing – do we have enough money in the bank to write this check? (Basically, “single entry” accounting – keeping track of cash. As individuals (checking accounts), we primarily keep tract of one thing – do we have enough money in the bank to write this check? (Basically, “single entry” accounting – keeping track of cash. In a formal accounting system, we use an approach referred to as “double entry” which means basically, “everytime we record a transaction – two items will change” (at least two) In a formal accounting system, we use an approach referred to as “double entry” which means basically, “everytime we record a transaction – two items will change” (at least two)

7. Perspective to address accounting transactions Everyone assume that this is your business as we discuss the transactions. Everyone assume that this is your business as we discuss the transactions. The business is a lawn care business – we spray yards with fertilizer. The business is a lawn care business – we spray yards with fertilizer. The following entries are the same from the last ppt presentation. The transactions are analyzed in terms of what definition the item meets in the major account classifications. The following entries are the same from the last ppt presentation. The transactions are analyzed in terms of what definition the item meets in the major account classifications.

8. On January 1, 2002, the owner established a business checking account by depositing $100,000 cash into the checking account. On January 1, 2002, the owner established a business checking account by depositing $100,000 cash into the checking account. On January 1, 2002, the owner borrowed $200,000 cash from the bank and deposited it into the business checking account. On January 1, 2002, the owner borrowed $200,000 cash from the bank and deposited it into the business checking account. On January 1, 2002, the owner purchased land for $25,000 – making a down payment of $5,000 and owing the balance due evidenced by signing a promissory note in the amount of $20,000. On January 1, 2002, the owner purchased land for $25,000 – making a down payment of $5,000 and owing the balance due evidenced by signing a promissory note in the amount of $20,000. On January 31, 2002, the company wrote a check for $500 for supplies used by the company. On January 31, 2002, the company wrote a check for $500 for supplies used by the company. On January 31, the company received $700 for the completion of services rendered. On January 31, the company received $700 for the completion of services rendered. On January 31, 2002, the owner withdrew $100 cash from the business checking account for personal use. On January 31, 2002, the owner withdrew $100 cash from the business checking account for personal use.

9. Transaction #1 the owner invests personal assets Cash obviously meets the definition of an asset (probable future economic benefit) an item of value, the company has more cash – its ASSETS increase Cash obviously meets the definition of an asset (probable future economic benefit) an item of value, the company has more cash – its ASSETS increase When the owner invests his/her own money into the business, it would not effect the debts of the business, the owner would have the claim for that asset, therefore CAPITAL would increase When the owner invests his/her own money into the business, it would not effect the debts of the business, the owner would have the claim for that asset, therefore CAPITAL would increase

10. Transaction #2 the owner borrowed cash As in transaction 1, the company has more cash, therefore increase ASSETS As in transaction 1, the company has more cash, therefore increase ASSETS But this time, when the assets increase, it is because of the creditor invested the asset into the business (the definition of a liability) which increases LIABILITIES But this time, when the assets increase, it is because of the creditor invested the asset into the business (the definition of a liability) which increases LIABILITIES

11. Transaction #3 purchased land on credit making a downpayment The company has more land – land meets definition of asset, ASSETS increase The company has more land – land meets definition of asset, ASSETS increase The company has less cash – ASSETS decrease The company has less cash – ASSETS decrease The company has more debt – LIABILITIES increase The company has more debt – LIABILITIES increase By the way, three items changed as a result of this transaction and the entry is referred to as a compound entry. By the way, three items changed as a result of this transaction and the entry is referred to as a compound entry.

12. Transaction #4 paid for supplies used to operate business Less cash, ASSETS decrease Less cash, ASSETS decrease Think about it, no other assets have changed, and this would not affect the amount the company owes the bank, so we are only left with a decrease in CAPITAL to keep our accounting equation intact. I know it’s a drag, but if the value of my business goes down (other than a transaction affecting liabilities) my claim against the assets has to go down. By the way, this is classified more specifically as an expense (price paid for goods and services used to operate a business). Think about it, no other assets have changed, and this would not affect the amount the company owes the bank, so we are only left with a decrease in CAPITAL to keep our accounting equation intact. I know it’s a drag, but if the value of my business goes down (other than a transaction affecting liabilities) my claim against the assets has to go down. By the way, this is classified more specifically as an expense (price paid for goods and services used to operate a business).

13. Transaction #5 receive money for services rendered More cash – ASSETS increase More cash – ASSETS increase This is what its all about, the company earns some revenue (price received for goods and services rendered to customers). If the value of the business goes up (again, not from a liability transaction) my claim has to go up – increase CAPITAL. This is what its all about, the company earns some revenue (price received for goods and services rendered to customers). If the value of the business goes up (again, not from a liability transaction) my claim has to go up – increase CAPITAL.

14. Transaction #6 withdraw funds for personal use Isn’t this what it’s all about – having a business that earns a profit that pays for the things we do in life Isn’t this what it’s all about – having a business that earns a profit that pays for the things we do in life The amount of cash in the business does go down, so ASSETS decrease The amount of cash in the business does go down, so ASSETS decrease This is the owner exercising his claim to the assets, and once he has done so, his claim would necessarily decrease, therefore decrease CAPITAL This is the owner exercising his claim to the assets, and once he has done so, his claim would necessarily decrease, therefore decrease CAPITAL

15. DATE ASSETS = LIABILITIES + CAPITAL 1/1+100,000 0+100,000 1/1+200,000+200,000 0 total+300,000+200,000+100,000 1/1+25,000 - 5,000 +20,000 0 total+320,000+220,000+100,000 1/31-500-500 total319,500220,00099,500 1/31+700+700 total320,200220,000100,200 1/31total -100 -100320,100 0220,000 100,100

16. Evaluation First of all, we are “doing accounting” First of all, we are “doing accounting” Why? Why? We are recording economic information about a business entity – the definition of accounting We are recording economic information about a business entity – the definition of accounting But what about the format? But what about the format?

17. Accounting Equation Format This format focuses on the relationship between the major account classifications, obviously. This format focuses on the relationship between the major account classifications, obviously. This format does disclose at a glance the total assets, liabilities and capital of the company. This format does disclose at a glance the total assets, liabilities and capital of the company. This format’s lack of detail is probably insufficient, in most cases, for the information needs to make business decisions. This format’s lack of detail is probably insufficient, in most cases, for the information needs to make business decisions. An example of the shortcoming of this format would be the question “How much cash does the business currently have?” This format does not provide this basic, necessary information. An example of the shortcoming of this format would be the question “How much cash does the business currently have?” This format does not provide this basic, necessary information. Lets adjust the format to provide the more detailed information required in a business decision-making setting. Lets adjust the format to provide the more detailed information required in a business decision-making setting.

18. ACCOUNTING FORMAT Maintain the umbrella of the accounting equation Maintain the umbrella of the accounting equation Shift the format to focus on the individual economic items of interest to the business Shift the format to focus on the individual economic items of interest to the business Spend a little more time in setting up the format, but will spend the exact same amount of time recording the transactions that will result in detailed information being presented. Spend a little more time in setting up the format, but will spend the exact same amount of time recording the transactions that will result in detailed information being presented. Examine the format on the next slide and then enter the transactions using this format. Examine the format on the next slide and then enter the transactions using this format.

19. CashLand Note Payable CapitalDrawingRevenueExpense ASSETS=LIABILITIES + CAPITAL

20. ASSIGNMENT PREPARE A FORM LIKE THE ONE ON THE PREVIOUS PAGE AND ENTER THE TRANSACTIONS INTO THE FORM PREPARE A FORM LIKE THE ONE ON THE PREVIOUS PAGE AND ENTER THE TRANSACTIONS INTO THE FORM