* collects and processes transaction data and disseminates the information to interested parties. * Helps management answer such questions as:
* How much and what kind of debt is outstanding?
* Were sales higher this period than last?
* What assets do we have?
* What were our cash inflows and outflows?
* Did we make a profit last period?
Basic Terminology (see Textbook for definitions)
* Real Account
* Nominal Account
* Trial Balance
* Adjusting Entries
* Financial Statements
* Closing Entries
2. Debits and Credits
* An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. * Double-entry accounting system (two-sided effect).
* Recording done by debiting at least one account and crediting another. * DEBITS must equal CREDITS.
AED = LRC
After eating dinner, lets read comics (AED=LRC)
ASSETS = LIABILITIES + EQUITY
3. Financial Statements and Ownership Structure
Net Income (Loss)
Retained Earnings Statement (for corporations)*:
Beginning Retained Earnings
+ Net Income
Ending Retained Earnings
*May be included within a Statement of Stockholders’ Equity which shows the changes in all Equity accounts
Assets = Liabilities and Stockholders’ Equity**
Proprietorship or Partnership| | Corporation|
* Capital Account * Drawings Account| | * Common Stock * Additional Paid-in Capital (APIC) * Retained Earnings|
** Stockholders’ Equity accounts depend upon the ownership structure of the entity
4. The Accounting Cycle
a. Analyze transactions
b. Record in journal
c. Post to ledger (T-accts)
d. Trial Balance
f. Adjusted Trial Balance
g. Prepare Financial Statements
h. Closing entries
i. Post-closing Trial Balance
Transactions and Events
* What to Record? FASB states, “transactions and other events and circumstances that affect a business enterprise.”
* Types of Events:
* External – between a business and its environment.
* Internal – event occurring entirely within a business. Review Transactions and Events: External (E), Internal (I) or Not Recorded (NR)? 1.| A supplier of a company‘s raw material is paid an amount owed on account.| | 2.| A customer pays its open account.| |
3.| A new chief executive officer is hired.| |
4.| The biweekly payroll is paid.| |
5.| Raw materials are entered into production.| |
6.| A new advertising agency is hired.| |
7.| The accountant determines the federal income taxes owed based on the income earned.| |
Real vs. Nominal Accounts
A “real” or “permanent” account is a balance sheet account. A “nominal” or “temporary” account is an income statement account. Some common accounts you will see and where they belong follow:
Recording Transactions Example:
Adjusted Trial Balance
February 28, 2011
| Debit| Credit|
Cash| $120,000| |
Accounts Receivable – net| 48,000| |
Inventory| 37,000| |
Equipment| 50,000| |
Accumulated Depreciation – Equipment| | $ 21,750|
Land| 42,000| |
Building| 250,000| |
Accumulated Depreciation – Building| | 127,000|
Accounts Payable| | 9,000|
Common Stock| | 10,000|
Additional Paid-in-Capital – Common Stock| | 50,000|
Retained Earnings – 1/1/2011| | 306,500|
Revenues| | 225,000|
Cost of Goods Sold| 165,000| |
Rent Expense| 10,000| |
Depreciation Expense| 3,750| |
Other Operating Expenses| 23,500| ________ | | $749,250| $749,250|
| | |
The following transactions occurred during...