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Beginning accounting, accounting principles, Financial statements, income statement, balance sheet, Cash flow, accounting equation, T accounts, assets, liability, equity, debits, credits, normal balance, internal users, external users, Owners equity, business structures, partnerships, corporations, revenue recognition, accrual, cash, adjusting entries, operating circle, perpetual inventory, periodic inventory, lifo, fifo, inventory josecintron.com, advance business consulting, jose cintron,MBA, mba4help.com. Beginning accounting, accounting principles, Financial statements, income statement, balance sheet, Cash flow, accounting equation, T accounts, assets, liability, equity, debits, credits, normal balance, internal users, external users, Owners equity, business structures, partnerships, corporations, revenue recognition, accrual, cash, adjusting entries, operating circle, perpetual inventory, periodic inventory, lifo, fifo, inventory josecintron.com, advance business consulting, jose cintron,MBA, mba4help.com.
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Accounting Accounting is the art of recording, summarizing, reporting, and analyzing financial transactions.
Accountancy is the process of communicating financial information about a business entity to users such as shareholders, owners, partners and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user. (wiki)
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AccountantsAccountants use the work done by bookkeepers to produce and analyze financial reports. Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business managerial, financial reporting, projection, analysis, and tax reporting.
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Accounting
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Accounting equationhttp://www.youtube.com/watch?v=G6vS1edTsV8&feature=BFp&list=WL39082B4CE0E12CA1&index=4
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Assets=liabilities+equity
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Assets=Liabilities+Equity
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Accounting T-accounts
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Debits and Credits
Increases with DebitsThe Debit side of an account represents increases in asset accounts, expense accounts, and Drawing.
Increases with CreditsThe Credit side of an account
represents increases in liability accounts, revenue accounts,
and Capital.
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Natural Balance
Assets, Liabilities, Equities, Revenues, or Expenses. These account types all have natural balances that are debits or credits.
The natural balances of each account type are:Assets: DebitLiabilities: CreditEquities: CreditRevenues: CreditExpenses: Debit
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Normal Balance
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Internal vs. External
Internal User of Accounting
OwnersManagersEmployees
External User of Accounting
InvestorsCreditorsGovernment
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Internal Users
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External Users
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Financial Statements
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Business Activities
Financing ActivitiesInvesting Activities Operating Activities
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Business Activities
Financing Activities
Financing activities are transactions that are involved with financing the company and/or individual customer financing. Any transaction like a loan or anything bought on credit would be this type. Any monies paid on principle or interest paid would be considered a financing activity and would go in that section of the Statement of Cash Flows. Dividends paid to shareholders or the repurchase of stock would also be considered a financing activity.
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Business Activities
Investing Activities
Investing transactions are those that are not part of daily operation of the company and are used solely for investing purposes. Small term investments would be considered obviously, but any loans made to customers or other entities would also be considered an investing transaction. Dividends and interest earned on investments would also qualify under the investing category for Statement of Cash Flows. Purchases of long term investments such as land, equipment or property will also be viewed as an investment.
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Business Activities
Operating Activities
Operating activities are all the different activities a company will do in their day-to-day business practices involved with running the company. This would be anything from paying bills, employees and utilities expenses. Product cost and delivery cost are also operating activities, expenditures made to keep the company running. Sales and income from operations are also put in the operating section.
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GAAP and FASBGAAP- generally accepted accounting principles: a collection of rules and procedures and conventions that define accepted accounting practice; includes broad guidelines as well as detailed procedures.
FASB- Financial Accounting Standards Board: designated private sector organization in the U.S. that establishes financial accounting and reporting standards.
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Financial Statements
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Income Statement
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Balance Sheet
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Classified Balance Sheet
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Cash Flow Statement
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Owner’s Equity Statement
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Business StructuresSOLE PROPRIETORSHIP
• Business owned by one person • legal existence of proprietorship is extension of proprietor • may have any number of employees• Unlimited liability• Single taxation
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Business StructuresPARTNERSHIP
• Business owned by at least two people • legal existence of partnership is extension of partners • may have any number of employees • Pay single taxation • Must be in writing for more than one year• Owners are fully liable- Unlimited liability
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Business StructuresCORPORATION
• an entity created by a state stature• exists separately from and independently of the owners • may have one of more owners • owners are called shareholders or stockholders • ownership evidenced by stock certificate• Limited Liability by owners
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Liquidity Measurement Ratios
http://www.investopedia.com/university/ratios/#axzz1iG6kyceX
Liquidity Measurement Ratios•- Current Ratio•- Quick Ratio•- Cash Ratio•- Cash Conversion Cycle
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Ratio to Assess Liquidity
A company’s liquidity refers to home much cash a company has and how easily the company’s current assets can be converted into cash. This is crucial because companies must have cash or high liquid assets to pay debts, Shareholders, investors, and executives. Company may have to sell more stock to raise capital/funds to pay their bills.
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Quick and Current Ratio
Quick Ratio= Current Assets - inventory Current liabilities
Current Ratio= Current Assets (including inventory) Current Liabilities
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Matching PrincipleAccountants follow a simple rule in recognizing expenses: “Let the expenses follow the revenues.” That is, expense recognition is tied to revenue recognition.
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Revenue Recognition Principle
The revenue recognition principle states that, under the accrual basis of accounting, you should only record revenue when an entity has substantially completed a revenue generation process; thus, you record revenue when it has been earned.
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Accrual vs. Cash
In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, using accrual basis accounting, you record both revenues and expenses when they occur. Use for all medium and larges businesses.
In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced). Mostly use by small businesses like mom and dad.
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Accrual vs Cash Under the accrual basis, companies record transactions that change a company's financial statements in the periods in which the events occur. recognize revenues when earned and recognizing expenses when incurred (rather than when paid). Follow GAAP
Under cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash.
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Accrual vs. Cash
Companies pay for some types of expenses after the services have been performed. Examples are employee salaries and commissions. Pioneer last paid salaries on October 26; the next payday is November 9. As the calendar
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Why adjusting entries
A company must make adjusting entries every time it prepares financial statements.
It analyzes each account in the trial balance to determine whether it is complete and up-to-date.
Adjusting entries are needed to enable financial statements to conform to GAAP
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Adjusting Entries
1.
Some events are not recorded daily because it is not efficient to do so. For example, companies do not record the daily use of supplies or the earning of wages by employees.
2.
Some costs are not recorded during the accounting period because they expire with the passage of time rather than as a result of daily transactions. Examples are rent, insurance, and charges related to the use of equipment.
3.
Some items may be unrecorded. An example is a utility bill that the company will not receive until the next accounting period
The trial balance—the first summarization of the transactiondata may not contain up to date and complete data for the following reasons:
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Adjusting entries are classified as either deferrals or accruals
Deferrals are either prepaid expenses or unearned revenues. Companies make adjustments for deferrals to record the portion of the deferral that represents the expense incurred or the revenue earned in the current period.
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Operating circleThe operating cycle of a merchandising company ordinarily is longer than that of a service company
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Merchandising Operations*
Merchandising companies that purchase and sell directly to consumers are called retailers. Merchandising companies that sell to retailers are known as wholesalers
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Costs for a merchandisingThe flow of costs for a merchandising company is as follows: Beginning inventory is added to the cost of goods purchased to arrive at cost of goods available for sale. Cost of goods available for sale is assigned to the cost of goods sold (goods sold this period) and ending inventory (goods to be sold in the future). Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic inventory system.
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Single step income statement
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Prepare a multiple-step income statement
Debit Credit Cash 14,500 Accumulated Depreciation 18,000 Accounts Receivable 11,100 Notes Payable 25,000 Merchandise Inventory 29,000 Accounts Payable 10,600 Prepaid Insurance 2,500 Larry Falcetto, Capital 81,000 Store Equipment 95,000 Sales 536,800 Larry Falcetto, Drawing 12,000 Interest Revenue 2,500 Sales Returns and Allowances 11,700 673,900 Cost of Goods Sold 363,400 Advertising Expense 19,600 Salaries Expense 56,000 Utilities Expense 18,000 Rent Expense 24,000 Depreciation Expense 9,000 Insurance Expense 4,500 Interest Expense 3,600 673,900
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Income Statement Solution Income Statement For the Year Ended December 31, 2010 Sales revenues Sales $536,800 Less: Sales returns and allowances $11,700 Net sales 525,100 Cost of goods sold 363,400 Gross profit 161,700 Operating expenses Salaries expense 56,000 Rent expense 24,000 Utilities expense 18,000 Advertising expense 19,600 Depreciation expense 9,000 Insurance expense 4,500 Total operating expenses 131,100 Income from operations 30,600 Other revenues and gains Interest revenue 2,500 Other expenses and losses Interest expense 3,600 -1,100 Net income $ 29,500
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Perpetual Inventory
In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. These records continuously—perpetually—show the inventory that should be on hand for every item
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Periodic InventoryIn a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they determine the cost of goods sold only at the end of the accounting period—that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand.
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Tax implication on inventory method
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Cost of goods sold
*Amount charged to cost of goods sold depend on the inventory system.
There are three assumed cost flow methods: 1. First-in, first-out (FIFO) 2. Last-in, first-out (LIFO) 3. Average-cost
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Last in first out (Lifo)
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First in first out (Fifo)
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Determine the cost of goods sold
The accounting records of AGM show the following data. Beginning inventory 4,000 units at $ 3 Purchases 6,000 units at $ 4 Sales 7,000 units at $12
Determine the cost of goods available for sale, ending inventory units, and cost of goods sold during the period under:(a) the FIFO method, (b) the LIFO method, (c) the average-cost method.
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SolutionCost of goods available for sale = (4,000 × $3) + (6,000 × $4) = $36,000
Ending inventory = 10,000 - 7,000 = 3,000 units
(a) FIFO: $36,000 - (3,000 × $4) = $24,000 (b) LIFO: $36,000 - (3,000 × $3) = 27,000 (c) Average cost unit: [(4,000 @ $3) + (6,000 @ $4)] ÷ 10,000 = $3.60
Average-cost: $36,000 - (3,000 × $3.60) = $25,200
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It is up to you!
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