1. Basics of Accounting

2. 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

3. 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

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

5. 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

6. Basic Accounting Equation Assets = Liabilities + Owner’s Equity

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

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

9. 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)

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

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

12. Sales (Revenue)$7 500 00 Operating expenses: Rent expense $2 125 00 Wages expense 800 00 Supplies expense 450 00 Utilities expense 275 00 Miscellaneous expense Total operating expenses 4 450 00 NetSolutions Income Statement For the Month Ended November 30, 2005 800 00 Net income$3 050 00 To the statement of owner’s equity

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

14. Chris Clark, capital, November 1, 2005$ 0 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Investment on November 1$25 000 00 Net income for November3 050 00 $28 050 00 Less withdrawals 2 000 00 Increase in owner’s equity26 050 00 Chris Clark, capital, November 30, 2005$26 050 00 From the income statement To the balance sheet

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

16. Assets Liabilities NetSolutions Balance Sheet November 30, 2005 Cash$ 5 900 00Accounts Payable$ 400 00 Supplies550 00 Owner’s Equity Land20 000 00Chris Clark, cap.26 050 00 Total liabilities and Total assets$26 450 00 owner’s equity$26 450 00 From the statement of owner’s equity

17. 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

18. Cash flows from operating activities: Cash received from customers$ 7 500 00 Deduct cash payments for expenses and payments to creditors4 600 00 Net cash flow from operating activities2 900 00 Cash flows from investing activities: Cash payment for acquisition of land(20 000 00 Cash flows from financing activities: Cash received as owner’s investment$25 000 00 Deduct cash withdrawal by owner2 000 00 Net cash flow from financing activities23 000 00 Net cash flow and Nov. 30, 2005 cash bal.$ 5 900 00 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Should match Cash on the balance sheet )

19. The Recording Process

20. 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

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

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

23. 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

24. 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.

25. 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)

26. 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