Accounting 1A Class Notes Chapter 1 Introduction to Accounting and Business

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1 Types of Business Service Business - Lawyer, Consultant, Doctor Merchandiser Best Buy, Wal-Mart Manufacturer - Mattel, Coca Cola Purpose of Accounting Provide Financial Information for decision making to: External Users - Investors and Creditors (Financial Accounting) Internal Users - Management (Managerial Accounting) Regulators - IRS & SEC Guided by Generally Accepted Accounting Principles (USA) GAAP Professional Ethics- Fraud Triangle Careers In Accounting Public Accounting a) Tax, Audit, Consulting Services CPA Private Accounting a) Bookkeeper / Accounting Clerk b) Supervisor / Manager / Director c) Controller d) CFO / VP of Finance Government and Not For Profit a) City County State Federal b) Colleges c) Charitable Organizations Page 1

2 All accounting is based on one simple formula ASSETS = LIABILITIES + OWNERS EQUITY (Owned) (owed) 3 WAYS A COMPANY GETS ASSETS 1. Contributed 2. Borrowed 3. Earned Accounting keeps track of where your funds came from (Contributed, Borrowed or Earned) And Where your funds went. (Asset Purchases, Expenses) ASSETS = items OWNED by a business that will provide FUTURE BENEFIT Examples: Money, merchandise, furniture, fixtures, machinery, buildings, land LIABILITIES = DEBTS or obligations of a business OWED to others that can be paid with cash, goods, or services. Examples: Accounts Payable, Notes Payable OWNERS EQUITY (a.k.a. NET WORTH or CAPITAL) = Represents the amount by which the businesses ASSETS EXCEED their LIABILITIES. It TRACKS that which was: CONTRIBUTED TO and DRAWN FROM the business by owners Added to or subtracted from the business through historical EARNINGS/LOSS ACTIVITY In BUSA100, you used proprietorships as the form of business, in this class we use corporations. The major difference between the two for our purposes is in the Owner s Equity section. Expanding the Accounting Equation REVENUE = Amount the business charges customers for the products or services it sells. Revenues increase Assets and OE EXPENSES = Amount expended as a result of the efforts made to produce revenues. Expenses will either decrease assets or increase in liabilities. Expenses always reduce OE. (expenses do not always reduce cash - rent expense/rent payable) NET INCOME = REVENUE Greater Than EXPENSES (increases OE) NET LOSS = REVENUE Less Than EXPENSES (decreases OE) Page 2

3 Net Income or Loss is always determined OVER A DEFINED SPAN OF TIME Example: Net Income for the 12 months ended December 31, DIVIDENDS & WITHDRAWALS (a.k.a. DRAWING) = Reduction in OE as a result of cash or other assets being distributed to the owners for their personal use. (the opposite of Owner Investment) ASSETS = LIABILITIES + STOCKHOLDERS EQUITY ITEMS OWNED AMOUNTS OWED OWNERS INVESTMENT + RETAINED EARNINGS Cash, Trucks Accts Payable Capital Stock Net Income Revenue - recognized when earned. Regardless if customer pays now or later. Expense - recognized when incurred, even if cash has not been paid Less: Dividends Indicate whether each of the following is identified with (1) an asset, (2) a liability, or (3) stockholders' equity: a) accounts payable b) cash c) fees earned d) land e) supplies f) wages expense Analyzing Business Transactions 1. What Happened 2. Which Accounts Are Affected 3. How is the Accounting Equation kept in balance Examples: 1. Owner contributes a building valued at $90,000 and Cash of $10,000 to the business 2. Bought a PC for $5, Financed a truck through the bank for $20, Made his first Truck payment to the bank for $ The Owner Withdrew $1,000 from the business for personal use Page 3

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6 Financial Statements After transactions have been recorded and summarized, reports are prepared for users. The. accounting reports providing this information are called financial statements The primary financial statements of a corporation are the: - Income statement - Retained earnings statement - Balance sheet - Statement of cash flows Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or retained earnings statement (RE): a. Service Revenue g. Accounts Receivable b. Utilities Expense h. Common Stock c. Cash i. Equipment d. Accounts Payable j. Advertising Expense e. Supplies k. Dividends f. Salaries and Wages Expense l. Notes Payable Page 6

7 On October 1, Ebony Ernst organized Ernst Consulting; on October 3, the owner contributed $84,000 in assets in exchange for its common stock to launch the business. On October 31, the company s records show the following items and amounts. Use this information to prepare an October income statement, retained earnings statement, and balance sheet for the business. Income Statement Expenses: Total expenses Net income Retained Earnings Statement Retained earnings, Retained earnings, Page 7

8 Balance Sheet Assets Liabilities Stockholders' Equity Total assets Total stockholders' equity Total liabilities and stockholders' equity Page 8

9 Rivera Roofing Company, owned by Reyna Rivera, began operations in July and completed these transactions during that first month of operations. July 1 Reyna Rivera invested $80,000 cash in the company in exchange for its common stock. 2 The company rented office space and paid $700 cash for the July rent. 3 The company purchased roofing equipment for $5,000 by paying $1,000 cash and agreeing to pay the $4,000 balance in 30 days. 6 The company purchased office supplies for $600 cash. 8 The company completed work for a customer and immediately collected $7,600 cash for the work. 10 The company purchased $2,300 of office equipment on credit. 15 The company completed work for a customer on credit in the amount of $8, The company purchased $3,100 of office supplies on credit. 23 The company paid $2,300 cash for the office equipment purchased on July The company billed a customer $5,000 for work completed; the balance is due in 30 days. 28 The company received $8,200 cash for the work completed on July The company paid an assistant s salary of $1,560 cash for this month. 31 The company paid $295 cash for this month s utility bill. 31 The company paid $1,800 cash in dividends to the owner (sole shareholder). 1. Use additions and subtractions within the table to show the dollar effects of each transaction on individual items of the accounting equation. Show new balances after each transaction. 2. Prepare an income statement for the month ended July Prepare a retained earnings statement for the month ended July Prepare a balance sheet as of July What item appears on both the income statement and retained earnings statement Page 9

10 Assets = Liabilities + Equity Date Cash + Accounts Receivable + Office Supplies + Office Equipment + Roofing Equipment = Accounts Payable + Common Stock - Dividends + Revenues - Expenses Page 10

11 Income Statement Expenses: Total expenses Net income Retained Earnings Statement Retained earnings, Retained earnings, Balance Sheet Assets Liabilities Stockholders' Equity Total assets Total stockholders' equity Total liabilities and stockholders' equity Page 11