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) $7 500 00

Operating expenses:

Rent expense

$2 125 00Wages expense

800 00

Supplies expense

450 00Utilities expense

275 00Miscellaneous expense

Total operating expenses 4 450 00

NetSolutionsIncome Statement

For the Month Ended November 30, 2005

800 00

Net income $3 050 00To the statement To the statement of owner’s equityof owner’s equityTo the statement To the statement of owner’s equityof 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

NetSolutionsStatement of Owner’s Equity

For the Month Ended November 30, 2005

Investment on November 1 $25 000 00Net income for November 3 050 00

$28 050 00Less withdrawals 2 000 00Increase in owner’s equity 26 050 00Chris Clark, capital, November 30, 2005 $26 050 00

From the income From the income statementstatement

From the income From the income statementstatement

To the To the balance sheetbalance sheet

To the To the balance sheetbalance sheet

Balance Sheet Reports Assets, Liabilities, & Stockholder’s

Equity on a Specific Date

Assets Liabilities

NetSolutionsBalance Sheet

November 30, 2005

Cash $ 5 900 00 Accounts Payable $ 400 00

Supplies 550 00 Owner’s Equity

Land 20 000 00 Chris Clark, cap. 26 050 00

Total liabilities and

Total assets $26 450 00 owner’s equity $26 450 00

From the From the statement of statement of

owner’s equityowner’s equity

From the From the statement of statement of

owner’s equityowner’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 operations2. Cash effects of investing transactions3. Cash effects of financing transactions4. Net increase or decrease in cash5. Cash on hand at the end of the period

Cash flows from operating activities:Cash received from customers $ 7 500 00Deduct cash payments for expenses and payments to creditors 4 600 00Net cash flow from operating activities 2 900 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 owner 2 000 00Net cash flow from financing activities 23 000 00

Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00

NetSolutionsStatement of Cash Flows

For the Month Ended November 30, 2005

Should match Should match CashCash on the balance sheet on the balance sheetShould match Should match CashCash on the balance sheet on the balance sheet

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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