Overview of Financial Accounting Principles (Part I) 1. Accounting in Action What is accounting? * Accounting consists of three basic activities: it identifies, records, and communicates the economic events of an organization to interested users. Q. Business (economic) vs. Accounting Events?=> whether affects the accounting equation. That is, an event which affects the accounting equation is an accounting event. Generally, an accounting system only journalizes accounting events. * GAAPs and IFRS: SEC indicated that it will allow some U.S. companies to adopt IFRS as early as 2009. The SEC also laid out a roadmap by which all U.S. companies will be required to switch to IFRS by 2016.
The Accounting Equation * Assets = Liabilities + Stockholders’ Equity = Liabilities + Common Stock + Retained Earnings (ending) = Liabilities + C/S + R/E(beginning) + change of R/E = Liabilities + C/S + R/E(beginning) + Revenue – Expenses - Dividends * Assets have the capacity to provide future services or benefits. Liabilities are claims against assets. Stockholders’ equity (residual equity) is equal to total assets minus total liabilities.
Financial Statements * Four financial statements: 1. An income statement presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. 2. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. 3. A balance sheet reports the assets, liabilities, and stockholders’ equity of a company at a specific date. 4. A statement of cash flows summarizes information concerning the cash inflows and outflows for a specific period of time. 2. The Recording Process The Account * An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. * * Because the format of an account resembles the letter T, we refer to it as a T account. The terms debit and credit are directional signals: Debit indicates left, and credit indicates
right. * For each transaction, debits must equal credits in the accounts. The equality of debits and credits provides the basis for the double-entry system of recording transactions. Assets = Liabilities + C/S + R/E(beginning) + Revenue – Expenses - Dividends Assets + Expenses + Dividends = Liabilities + C/S + R/E + Revenue Debit (increase) Credit (increase)
Steps in the Recording Process * Three basic steps in the recording process: 1. Analyze each transaction for its effects on the accounts 2. Enter the transaction information in a journal 3. Transfer the journal information to the appropriate accounts in the ledger * * The journal is referred to as the book of original entry. A general journal has spaces for dates, account titles and explanations, references, and two amount columns. . The entire group of accounts maintained by a company is the ledger. A general ledger contains all the asset, liability, and stockholders’ equity accounts. Transferring journal entries to the ledger accounts is called posting.
The Recording Process Illustrated * Transaction 1: Investment by Stockholders ($10,000) Cash 10,000 Common Stock 10,000 Transaction 2: Purchase of Equipment for Cash ($4,000) Equipment 4,000 Cash 4,000
Or Use Notes Payable Equipment Notes Payable *
Transaction 3: Purchase of Supplies on Credit ($200) Supplies 200 Accounts Payable 200 Transaction 4: Services Provided for Cash ($1,200)
Cash Service Revenue *
Transaction 5: Purchase of Advertising on Credit ($300) Adv. Exp. 300 Accounts Payable 300 Transaction 6: Services Rendered for Cash ($1,200) and Credit ($1,600) Cash 1,200 Accounts Receivable 1,600 Service Revenue 2,800 Transaction 7: Pay Cash for expenses (Rent $500, Salaries $1,000, Utilities $800) Rent exp. 500 Salaries exp. 1,000 Utilities exp. 800 Cash 2,300 Transaction 8: Pay Cash for A/P ($300, adv.) Accounts Payable 300 Cash 300 Transaction 9:...
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