accouting in action · topic 3 the basic accounting equation assets = liabilities + owner's...
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Chapter 1
ACCOUTING IN ACTION
Content In This Chapter :
1. What Is Accounting.
2. The Building Blocks Of Accounting
3. The Basic Accounting Equation
4. Using The Accounting Equation
5. Financial Statement.
TOPIC 1 What Is The Accounting?
What Is The Accounting?
An information system that measures, processes, and communicates financial information about an
identifiable economic entity.
What are the purposes of Accounting?
The purposes of accounting are to identify, record, and communicate economic events of an organization to
interested users. So accounting is important in our society and it is vital to our economic system as every
organization and person in our society use accounting information and not for profit organization must use
accounting information to operate efficiency.
What Is The Accounting Activities?
1- Identification: select economic events relevant to its business (transactions)
2- Recording “book-keeping”: means recording, classifying, and summarizing
3- Communication: put the financial information in the hand of the interested users by accounting reports.
Analyses: use of ratios, percentages & charts to highlight significant financial trends and relationships
Interpretations: involves the uses meaning and limitations of reported data
Who use Accounting Data?
TOPIC 2 Building blocks of accounting
What Are Ethics That Must Be In Financial Reporting?
What Is Generally Accepted Accounting Principles?
Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative
support that the accounting profession recognizes as guide for financial reporting purposes.
Noted Some important abbreviations:
1- Financial Accounting Standard Board “FASB” : Primary Accounting Setting Body In The U.S.
2- International Financial Reporting Standards “IFRS”
3- International Accounting Standard Board “IASB”
4- Securities And Exchange Commission “SEC” :U.S. Government Agency That Oversees Financial Markets
5- Internal Revenue Service "IRS" مصلحه الضرائب
Note:
GAAP Are The Rules
The FASB Makes The Rules.
The SEC Enforces The Rules.
What Are Accounting Principles?
What Are Accounting Assumptions?
What Are Forms Of Business?
.
Proprietorship Partnership Corporation
Owned by two or
more persons.
Often retail and
service-type
businesses
Generally
unlimited
personal liability
Partnership
agreement
Ownership divided
into shares of
stock
Separate legal
entity organized
under state
corporation law
Limited liability
Generally owned
by one person.
Often small
service-type
businesses
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
TOPIC 3 The Basic Accounting Equation
Assets = Liabilities + Owner's Equity
Assets :
o Resources A Business Owns.
o Provide Future Services Or Benefits.
o Cash, Supplies, Equipment, Account Receivable, Notes Receivable, Truck, Car, Building,
Equip, Furniture, Land And Inventory Etc.
Liabilities:
o Claims Against Assets (Debts And Obligations).
o Creditors - Party To Whom Money Is Owed.
o Accounts Payable, Notes Payable, Salaries Payable, Tax Payable Etc.
Owners' Equity :
o Ownership Claim on Total Assets.
o Referred To As Residual Equity.
o Investment By Owners And Revenues (+)
o Drawings and Expenses (-).
Revenues: Result From Business Activities Entered Into For The Purpose Of Earning Income.
Expenses: Are The Cost Of Assets Consumed Or Services Used In The Process Of Earning
Revenue.
Transactions Are A Business’s Economic Events Recorded By Accountants.
o May Be External Or Internal.
o Not All Activities Represent Transactions.
o Each Transaction Has A Dual Effect On The Accounting Equation.
TOPIC 4 Using The Accounting Equation
Comprehensive Example 1:
Mohamed Company Making The Following Transaction During The Month Of May:
1- The company sell land with $5000 cash
2- The company sell supplies for $6000 on account (on credit) (billing) (postpone)
3- The company receive the balance due on transaction 2
4- The company sell equipment with $7000 , that $3000 cash and the remaining on credit
5- The company receive the balance due on transaction 4
6- The company sell building with $4000 on notes receivable
7- The company receive the balance due on transaction 6
8- The company sell equipment with $7000 , that $3000 cash and the remaining on notes receivable
9- The company receive the balance due on transaction 8
10- The company purchase land with $8000 cash
11- The company purchase supplies for $9000 on account (on credit) (billing) (postpone)
12- The company paid the balance due on transaction 11
13- The company purchase equipment with $8000 , that $2000 cash and the remaining on credit
14- The company paid the balance due on transaction 13
15- The company purchase building with $5000 on notes payable
16- The company paid the balance due on transaction 15
17- The company purchase equipment with $8000 , that $2000 cash and the remaining on notes payable .
18- The company paid the balance due on transaction 17
19- The company provided repair service for client on $5000 cash
20- The company provided advertising service for $6000 on credit
21- The company receive the balance due on transaction 20
22- The company completed newspaper service for client $5000 on notes receivable
23- The company receive the balance due on transaction22
24- The company provided advertising service for client for $6000 that $2000 cash
25- The company receive the balance due on transaction24
26- The company receive cleaning service with $2000 cash
27- The company receive utility service for $5000 on credit
28- The company paid the balance due on transaction 27
29- The company receive maintenance service for $8000 , that $3000 cash and the remaining on credit
30- The company paid the balance due in transaction 29
31- The company receive advertising service for client for $6000 that $2000 cash and remaining notes
payable.
32- The company paid the balance due on transaction31
33- The owner invest $3000 cash in the company
34- The owner invest $4000 cash and equipment $5000 for the company
35- The owner withdraw $3000 cash for his personal use
Required:
Show Effects Of The Transactions On The Accounts Of The Accounting Equation By Recording
Increase And Decrease In The Appropriate Columns.
Note:
ANSWERS
Assets Liabilities Owner's equity
cash land Supplies A/R Equip Building N/R A/P N/P Capital drawing Reven
ue
Ex
1. + 5000 - 5000
2. - 6000 +6000
3. +6000 - 6000
4. +3000 +4000 -7000
5. +4000 -4000
6. -4000 +4000
7. +4000 -4000
8. +3000 -7000 +4000
9. +4000 -4000
10. -8000 +8000
11. +9000 +9000
12. -9000 -9000
13. -2000 +8000 +6000
14. -6000 -6000
15. +5000 +5000
16. -5000 -5000
17. -2000 +8000 +6000
18. -6000 -6000
19. +5000 +5000
20. +6000 +6000
21. +6000 -6000
22. +5000 +5000
23. +5000 -5000
24. +2000 +4000 +6000
Assets Liabilities Owner's equity
cash land Supplies A/R Equip Building N/R A/P N/P Capital drawing Reven
ue
Ex
25. +4000 -4000
26. -2000 -2000
27. +5000 -5000
28. -5000 -5000
29. -3000 +5000 -8000
30. -5000 -5000
31. -2000 +4000 -6000
32. -4000 -4000
33. +3000 +3000
34. +4000 +5000 +9000
35. -3000 -3000
Comprehensive Example 2:
Holden Graham Started The Graham CO; Anew Business That Began Operations On May 1,
The Graham Co, Completed The Following Transactions During Its First Month Of Operations.
May 1. H. Graham invested $43000 cash in the company
1. The company rented a furnished office and paid $2200 cash for May's rent
3 the company purchased $1940 of office equipment on credit
5 the company paid $750 cash for this month's cleaning services
8 the company provided consulting services for a client and immediately collected $5800 cash
12 the company provided $2800 of consulting service for a client on credit
15 the company paid $850 cash for an assistant's salary for the first half of this month
20 the company received $2800 cash payment for the service provided on May 12
22 the company provided $4000 of consulting service on credit
25 the company received $4000 cash payment for the service provided on May 22
26 the company paid $1940 cash for the office equipment purchased on May 3
27 the company purchased $85 of advertising in this month's local paper on credit, cash payment is
due June 1
28 the company paid $850 cash for an assistant's salary for the second half of this month
30 the company paid $400 cash for this month's telephone bill
30 the company paid $260 cash for this month's utilities
31 Graham withdraw $2000 cash from the company for personal use
Required:
1. Arrange The Following Assets ,Liability And Equity As Cash , Account Receivable , Office
Equipment , Account Payable , H Graham Capital And Withdraw , Revenue And Expenses
2. Show Effects Of The Transactions On The Accounts Of The Accounting Equation By Recording
Increase And Decrease In The Appropriate Columns.
Assets liabilities
Owner's equity
Cash + A /R + Office
Equip
= A/P +
Owner's
capital
- Withdraw + Revenue - expense
s
May1 +43000 +43000
1 -2200 -2200
3 +1940 +1940
5 -750 -750
8 +5800 +5800
12 +2800 +2800
15 -850 -850
20 +2800 -2800
22 +4000 +4000
25 +4000 -4000
26 -1940 -1940
27 +85 -85
28 -850 -850
30 -400 -400
30 -260 -260
31 -2000 -2000
Bal +46350 0 +1940 +85 +43000 -2000 +12600 -5395
Bal $48290 = $48290
Topic 5 Financial Statement
There Are 4 Financial Statements:
1. Income Statement : Presents Revenue And Expenses & Resulting Net Income And Net Loss For A
Specific Period Of Time
2. Owner's Equity Statement: Summarized The Changes In Owner's Equity For Specific Period Of
Time
3. Balance Sheet: Report Assets , Liabilities , Owner's Equity At A Specific Date
4. Statement Of Cash Flows: Summarizes Information About The Cash Inflows (Receipts) And
Outflows (Payments For A Specific Period Of Time
Example : Prepare Financial Statement For Example1
Answers
Income Statement
Revenue
Consulting Service (5800 +2800+4000) $12600
Less
Expenses
Rent Expenses $ 2200
Cleaning Service 750
Salary Expense (850+850) 1700
Advertising 85
Telephone Bill 400
Utilities 260
total expenses $5395
Owner's Equity Statement
Owner's Capital , 1 May 0
Add
Investment By Owner 43000
Net Income 7205
Less
Drawing 2000
Owner's Capital , 31 May 48205
Net Income $ 7205
Balance Sheet
ASSETS LIABILITIES
Cash $46350 Account Payable $85
Account Receivable 0 OWNER'S EQUITY
Equip 1940 HOLDEN GRHAM Capital 48205
Total Assets $48290 Total Liabilities And Equity $48290
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