Fundamentals of Fundamentals of Financial Accounting Financial Accounting
BA-603BA-603
Nature and Functions of Nature and Functions of AccountingAccounting
Describe the nature and types Describe the nature and types of business organizationsof business organizations
Types of Business OrganizationsTypes of Business Organizations
Service companies - provide services Service companies - provide services to customersto customers
Merchandise or retail companies - Merchandise or retail companies - sell products sell products
Manufacturing companies - make Manufacturing companies - make their own productstheir own products
Types of Business OwnershipTypes of Business Ownership
ProprietorshipsProprietorships PartnershipsPartnerships CorporationsCorporations
Role of accounting in Role of accounting in business organizationsbusiness organizations
Organization AccountabilityOrganization Accountability
Legal obligation to manage the Legal obligation to manage the resources of an organization resources of an organization responsiblyresponsibly
Stakeholders – investors, creditors, Stakeholders – investors, creditors, suppliers, employees, customers suppliers, employees, customers and government agencies.and government agencies.
Business ActivitiesBusiness Activities
OperatingOperating InvestingInvesting FinancingFinancing
AccountingAccounting
Financial vs. Managerial Financial vs. Managerial AccountingAccounting
Financial Accounting - for those Financial Accounting - for those outside of the companyoutside of the company• Reports are called Financial StatementsReports are called Financial Statements• Prepared according to GAAPPrepared according to GAAP
Managerial AccountingManagerial Accounting• Helps managers plan, control, and make Helps managers plan, control, and make
decisions decisions
GAAP GAAP
Generally Accepted Accounting Generally Accepted Accounting Principles - established rules, Principles - established rules, principles, and conceptsprinciples, and concepts
Formulated by Financial Accounting Formulated by Financial Accounting Standards Board (FASB)Standards Board (FASB)
GAAPGAAP
Primary objective of financial Primary objective of financial accounting – provide information that accounting – provide information that is useful for making investment and is useful for making investment and taking decisionstaking decisions
Entity ConceptEntity Concept
Accounting Entity – organization that Accounting Entity – organization that stands apart as a separate economic stands apart as a separate economic unit.unit.
Accounting information is based on Accounting information is based on the most reliable data availablethe most reliable data available• VerifiableVerifiable• Free from biasFree from bias• Individuals would arrive at similar Individuals would arrive at similar
conclusions using same dataconclusions using same data
Reliability (Objectivity) Reliability (Objectivity) PrinciplePrinciple
Cost PrincipleCost Principle
Acquired assets and services should Acquired assets and services should be recorded at their actual cost be recorded at their actual cost (historical cost)(historical cost)
Going Concern ConceptGoing Concern Concept
Assumes that the entity will remain Assumes that the entity will remain in operation for the foreseeable in operation for the foreseeable futurefuture
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a.a. An organization that stands as a An organization that stands as a separate economic unit must not separate economic unit must not have its financial affairs confused have its financial affairs confused with that of other entities.with that of other entities.
____ 1. Cost principle____ 1. Cost principle
____ 2. Entity concept____ 2. Entity concept
____ 3. Going-concern concept____ 3. Going-concern concept
____ 4. Reliability principle____ 4. Reliability principle
a.
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b.b. Data must be verifiable.Data must be verifiable.
c.c. The entity will remain in operation The entity will remain in operation for the foreseeable future.for the foreseeable future.
____ 1. Cost principle____ 1. Cost principle
____ 2. Entity concept____ 2. Entity concept
____ 3. Going-concern concept____ 3. Going-concern concept
____ 4. Reliability principle____ 4. Reliability principle
a.
b.c.
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d.d. Acquired assets and services Acquired assets and services should be recorded at their actual should be recorded at their actual cost. cost.
____ 1. Cost principle____ 1. Cost principle
____ 2. Entity concept____ 2. Entity concept
____ 3. Going-concern concept____ 3. Going-concern concept
____ 4. Reliability principle____ 4. Reliability principle
a.
b.
c.
d.
Use the accounting equation Use the accounting equation to analyze business to analyze business
transactionstransactions
AssetsAssets
Economic resources, expected to Economic resources, expected to benefit the business in the futurebenefit the business in the future• CashCash• Accounts receivableAccounts receivable• Merchandise inventoryMerchandise inventory• FurnitureFurniture• LandLand
Liabilities Liabilities
Liabilities – economic obligations Liabilities – economic obligations payable to an individual or payable to an individual or organization outside the organization outside the businessbusiness• Accounts payableAccounts payable• Notes payableNotes payable• Salary payableSalary payable
Owner’s EquityOwner’s Equity
Owner’s Equity (capital) – claim of Owner’s Equity (capital) – claim of business owner to the assets of the business owner to the assets of the business business
EconomicResources
Claims toEconomicResources
The Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
RevenuesRevenues
Amounts earned by delivering goods Amounts earned by delivering goods or services to customersor services to customers• Sales revenueSales revenue• Service revenueService revenue• Interest revenueInterest revenue• Dividend revenueDividend revenue
ExpensesExpenses
Decrease in owner’s equity - occurs Decrease in owner’s equity - occurs from using resources in the course of from using resources in the course of delivering goods or services to delivering goods or services to customerscustomers• Salary expenseSalary expense• Rent expenseRent expense• Utilities expenseUtilities expense• Interest expenseInterest expense
Net Income (Loss)Net Income (Loss)
Revenues – ExpensesRevenues – Expenses
Components ofComponents ofOwner’s EquityOwner’s Equity
Beginning Balance of
Owner’s Equity
Owner Investments
+
Revenues
Expenses
-
=
Net Income(Net Loss)
+ Owner Withdrawals
-Ending
Balance of Owner’s Equity
=
TransactionTransaction
An event that affects the financial An event that affects the financial position of a particular entity and can position of a particular entity and can be recorded reliablybe recorded reliably
S1-4S1-4
a. Debts that are owed to creditorsa. Debts that are owed to creditorsb. Economic resources that are b. Economic resources that are
expected to be of benefit in the expected to be of benefit in the futurefuture
c.c. Claims of the owner of the businessClaims of the owner of the business
_____ 1. Assets_____ 1. Assets_____ 2. Liabilities_____ 2. Liabilities_____ 3. Owner’s equity_____ 3. Owner’s equity
a.b.
c.
S1-9S1-9
____ 1. Utilities Expense____ 1. Utilities Expense
____ 2. Accounts Receivable____ 2. Accounts Receivable
____ 3. Gay Gillen, Capital____ 3. Gay Gillen, Capital
____ 4. Office Supplies____ 4. Office Supplies
____ 5. Lease Expense, Computer____ 5. Lease Expense, Computer
____ 6. Salary Expense ____ 6. Salary Expense
a.Assets b. Liabilities c. Owner’s Equity d. Revenues e. Expenses
a
a
e
e
e
c
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____ 7. Cash____ 7. Cash
____ 8. Rent Expense, Office____ 8. Rent Expense, Office
____ 9. Service Revenue ____ 9. Service Revenue
____ 10. Accounts Payable ____ 10. Accounts Payable
____ 11. Land____ 11. Land
a.Assets b. Liabilities c. Owner’s Equity d. Revenues e. Expenses
a
ed
a
b
Exercise 1-14Exercise 1-14
Assets Liabilities Owner’s Equity
Gemstone $ ? $61,800 $21,000
Sampson Hardware 72,000 ? 34,000
Lundy Plumbing 102,700 79,800 ?
$82,800
38,000
22,900
(1) Cash ((1) Cash (assetasset))
(2) Owner’s Equity ((2) Owner’s Equity (equityequity))
Does the account increase or decrease?
July 6: Hobt invested $60,000 in the business by opening a bank account in the name of K. Hobt, D.D.S.
Analyze this:Analyze this:
What accounts are involved?
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
60,000 Investment
Assets = $60,000 Liabilities & Owner’s Equity = $60,000
60,0006
(1) Cash ((1) Cash (assetasset))
(2) Land ((2) Land (assetasset))
Analyze this:Analyze this:
July 9: The business paid $55,000 cash for land. Ken plans to build an office building on the land.
Does the account increase or decrease?What accounts are involved?
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
60,000 Investment
55,000
Assets = $60,000 Liabilities & Owner’s Equity = $60,000
60,0006
-55,0009
60,00055,0005,000Bal
(1) Dental Supplies ((1) Dental Supplies (assetasset))
(2) Accounts Payable ((2) Accounts Payable (liabilityliability))
Analyze this:Analyze this:
July 12: The business purchased dental supplies for $2,000 on account.
Does the account increase or decrease?What accounts are involved?
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
2,000
Assets = $62,000 Liabilities & Owner’s Equity = $62,000
2,00012
60,00055,000 5,000Bal 2,0002,000
60,00055,0005,000Bal
Does the account increase or decrease?
(1) Cash ((1) Cash (assetasset) )
(2) Revenues ((2) Revenues (equityequity) )
Analyze This:Analyze This:
July 15: The business treated patients and earned service revenue of $7,000, receiving cash.
What accounts are involved?
When the owner completes work,
his interest in the assets increases
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
Assets = $69,000 Liabilities & Owner’s Equity = $69,000
7,000 15 7,000 Revenue
67,00055,00012,000Bal 2,0002,000
60,00055,000 5,000Bal 2,0002,000
Does the account increase or decrease?
(1) Cash ((1) Cash (assetasset))
(2) Expense ((2) Expense (equityequity))
Analyze This:Analyze This:
July 17: The business paid office rent, $1,000.
What accounts are involved?
When an expense is incurred, owner’s equity decreases
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
Assets = $68,000 Liabilities & Owner’s Equity = $68,000
-1,000 17 -1,000 Rent Exp
66,00055,00011,000Bal 2,0002,000
67,00055,00012,000Bal 2,0002,000
Does the account increase or decrease?
(1) Cash ((1) Cash (assetasset))
(2) Medical Supplies ((2) Medical Supplies (assetasset))
Analyze This:Analyze This:
July 28: The business sold supplies to another dentist for the cost of those supplies, $500.
What accounts are involved?
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
Assets = $68,000 Liabilities & Owner’s Equity = $68,000
500 28 -500
66,00055,00011,500Bal 2,0001,500
66,00055,00011,000Bal 2,0002,000
Does the account increase or decrease?
(1) Cash ((1) Cash (assetasset))
(2) Accounts Payable ((2) Accounts Payable (liabilityliability))
Analyze This:Analyze This:
July 31: The business paid $1,500 on account related to the July 12 purchase.
What accounts are involved?
Date Assets Liabilities Owner’s Equity
July Cash DentalSupplies
Land Accounts Payable
K. Hobt, Capital
Type of Transaction
Exercise 1-18Exercise 1-18
Assets = $66,500 Liabilities & Owner’s Equity = $66,500
-1,500 31 -1,500
66,00055,00010,000Bal 5001,500
66,00055,00011,500Bal 2,0001,500
Accounting for Business Accounting for Business TransactionsTransactions
The equation always stays in balanceThe equation always stays in balance Each transaction affects at least two Each transaction affects at least two
accounts, sometimes moreaccounts, sometimes more Some transactions affect only one Some transactions affect only one
side of the equation; some affect side of the equation; some affect both sidesboth sides
Financial StatementsFinancial Statements
Income statementIncome statement Statement of owner’s equityStatement of owner’s equity Balance sheetBalance sheet Statement of cash flowsStatement of cash flows
Income StatementIncome Statement
Summary of an entity’s revenues, Summary of an entity’s revenues, expenses, and net income or net loss expenses, and net income or net loss for a specific periodfor a specific period
Revenues - ExpensesRevenues - Expenses• Net Income: Revenues > ExpensesNet Income: Revenues > Expenses• Net Loss: Expenses > RevenuesNet Loss: Expenses > Revenues
Statement of Owner’s EquityStatement of Owner’s Equity
Summary of changes in an entity’s Summary of changes in an entity’s owner’s equity during a specific owner’s equity during a specific periodperiod
Beginning owner’s equityBeginning owner’s equity+ Owner’s investments+ Owner’s investments+ Net income+ Net income- Net loss- Net loss- Owner’s withdrawals- Owner’s withdrawalsEnding owner’s equityEnding owner’s equity
Balance SheetBalance Sheet
Reports the entity’s assets, liabilities, Reports the entity’s assets, liabilities, and owner’s equity as of a specific and owner’s equity as of a specific datedate
Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity
Statement of Cash FlowsStatement of Cash Flows
Reports cash receipts and cash Reports cash receipts and cash payments during a periodpayments during a period• OperatingOperating• InvestingInvesting• FinancingFinancing
S1-10S1-10
Income Statement (IS) Income Statement (IS) Balance Sheet (BS)Balance Sheet (BS)Statement of Owner’s Equity (OE)Statement of Owner’s Equity (OE)
_____1. Accounts Receivable_____1. Accounts Receivable_____2. Notes Payable_____2. Notes Payable_____3. Advertising Expense_____3. Advertising Expense_____4. Service Revenue_____4. Service Revenue_____5. J. P., Capital, June 1_____5. J. P., Capital, June 1_____6. Office Supplies_____6. Office Supplies
IS
BS
OE
BS
IS
BS
GUJJAR CorporationsGUJJAR CorporationsIncome StatementIncome Statement
For the Month Ended July 31, 2007For the Month Ended July 31, 2007
Revenue:Revenue:
Fees earnedFees earned$7,000$7,000
Expenses:Expenses:
Rent expenseRent expense1,0001,000
Net incomeNet income$6,000$6,000
Notice the proper
heading
Double underline for your
final answer
K. Hobt, capital, July 1, 2007 $ 0Add: Investment by owner 60,000Net income for the month 6,000
Subtotal $66,000 Less: Withdrawals by owner 0K. Hobt, capital, July 31, 2007 $66,000
GUJJAR CORPORATIONSGUJJAR CORPORATIONSStatement of Owner’s EquityStatement of Owner’s Equity
For the Month Ended July 31, 2007For the Month Ended July 31, 2007Dates are important to the reader of the financial
reports
From incomestatement
Details, DetailsDetails, Details
Note the headings for both of these Note the headings for both of these statementsstatements
Name of companyName of company
Name of financial statementName of financial statement
For the period ended …….For the period ended ……. Both statements report activity over Both statements report activity over
a period of timea period of time Final sums are double-underlinedFinal sums are double-underlined
Details, DetailsDetails, Details
Negative amounts are presented in Negative amounts are presented in parenthesesparentheses
Net income is computed first Net income is computed first because you need that number to because you need that number to complete the ending balance in complete the ending balance in owner’s equityowner’s equity
When preparing a financial When preparing a financial statement, clearly label each line in statement, clearly label each line in the statementthe statement
Details, detailsDetails, details
If you are using columnar paper, If you are using columnar paper, always start your number columns in always start your number columns in the far right-hand columnthe far right-hand column
Numbers that are added or Numbers that are added or subtracted from each other should subtracted from each other should be in the same column be in the same column
GUJJAR CORPORATIONS GUJJAR CORPORATIONS Balance SheetBalance SheetJuly 31, 2007July 31, 2007
AssetsAssetsCashCash
$10,000$10,000Medical suppliesMedical supplies
1,5001,500LandLand
55,000 55,000
Total assetsTotal assets
$ 66,500$ 66,500
LiabilitiesLiabilitiesAccounts payableAccounts payable
$500$500Owner’s equity,Owner’s equity,M. Lange, capitalM. Lange, capital
66,00066,000Total liabilities and Total liabilities and
owner’s equityowner’s equity
$ 66,500$ 66,500
From statement ofowner’s equity
Notice the proper
heading
Details, DetailsDetails, Details
Note - heading for the balance sheet Note - heading for the balance sheet is different from other statementsis different from other statements
Name of companyName of company
Name of financial statementName of financial statement
DateDate This statement reports what the This statement reports what the
company owns and who has claims to company owns and who has claims to the assets at a specific point in timethe assets at a specific point in time
Cash $2,000
Accounts receivable 6,900
Supplies 600
Equipment 15,500
Total Assets $25,000
Hawkins Graphic DesignBalance Sheet
November 30, 2009
Liabilities
Accounts payable $2,500
Note payable 8,000
Total liabilities $10,500
Owner’s Equity
A. Samuel, capital 14,500
Total liabilities and owner’s equity $25,000
Assets
Exercise 1-20Exercise 1-20
Exercise 1-20Exercise 1-20
1.1. What type of business organization What type of business organization is Hawkins’ Graphic Design? is Hawkins’ Graphic Design? You can tell what type of You can tell what type of organization a company is by organization a company is by examining the owner’s equity examining the owner’s equity section of the balance sheet. Since section of the balance sheet. Since there is one owner capital account, there is one owner capital account, it is a sole proprietorshipit is a sole proprietorship
3.3. What does the balance sheet What does the balance sheet report? report? Financial positionFinancial position
Exercise 1-21Exercise 1-21
Office FurnitureOffice Furniture
Utilities ExpenseUtilities Expense
Accounts PayableAccounts Payable
T. Sullivan, CapitalT. Sullivan, Capital
Service RevenueService Revenue
Accounts ReceivableAccounts Receivable
Supplies ExpenseSupplies Expense
Asset
Asset
Expense
Expense
Liability
Owner’s Equity
Revenue
Exercise 1-21Exercise 1-21
Note PayableNote Payable
Rent ExpenseRent Expense
CashCash
Office SuppliesOffice Supplies
Salary ExpenseSalary Expense
Salaries PayableSalaries Payable
Property Tax ExpenseProperty Tax Expense
Asset
Asset
Expense
Expense
Expense
Liability
Liability
Exercise 1-21Exercise 1-21SYED, Architect
Income StatementYear Ended December 31, 2009
Service revenue $161,200Expenses:
Salary expense $60,000
Rent expense 24,000
Utilities expense 6,800
Supplies expense 4,000
Property tax expense 1,200
Total expenses 96,000
Net income $65,200
Exercise 1-21Exercise 1-21SYED, Architect
Statement of Owner’s EquityYear Ended December 31, 2009
Sullivan, capital, January 1, 2009Sullivan, capital, January 1, 2009 $ 0 $ 0
Add: Net incomeAdd: Net income 65,20065,200
Investment by ownerInvestment by owner 15,00015,000
SubtotalSubtotal $80,200$80,200
Less: Owner withdrawalLess: Owner withdrawal ??
Sullivan, capital, December 31, 2009Sullivan, capital, December 31, 2009 $27,100$27,100 53,100
Explain the role of ethics in Explain the role of ethics in accounting and businessaccounting and business
EthicsEthics
The principles of right behavior that The principles of right behavior that guide decision-makingguide decision-making• ResponsibilityResponsibility• FairnessFairness• TrustworthinessTrustworthiness• RespectRespect• CaringCaring• CitizenshipCitizenship
EthicsEthics
AuditAudit• Examination of company’s financial Examination of company’s financial
situationsituation• Performed by independent accountants Performed by independent accountants
(CPAs)(CPAs)
Standards of Professional ConductStandards of Professional Conduct
AICPA – Code of Professional Conduct AICPA – Code of Professional Conduct for Accountantsfor Accountants
IMA – Standards of Ethical ConductIMA – Standards of Ethical Conduct
THANK YOUTHANK YOUfor bearing me so longfor bearing me so long