Georgia Perimeter College Linda Mullins

Assistant Professor of Accounting

Why accounting?
Types of Businesses Sole Proprietorship Partnership Corporation Financial Statements External Users

Stockholders, vendors, banks, Security Exchange Commission Management

Internal Users

Accounting Language: Asset

Resources owned by a business. Examples:
Cash and cash equivalents included short-term investments Receivables (Accounts, Notes, Trade, Interest, etc.) Inventory Supplies Prepaid Assets (also called Prepaid Expenses) These assets will always be listed first and in this exact order, known as order of liquidity. Look at the first letter of each, which forms the acronym CRISP.

Assets (continued)

Stock Investments Equipment Land/Property Buildings Accumulated Depreciation

A contra asset

Trademarks Patents Copyrights Goodwill

Accounting Language: Liability

The amounts owed to creditors (vendors, banks,

employees, etc.) Most liabilities end in Payable with an adjective that describes who is owed.
Accounts Payable (vendors), Notes Payable (vendor or bank),

Salaries Payable (employees), Taxes Payable (governmental agency), Mortgage Payable (bank), Interest Payable (holder of notes or bonds payable), Dividends Payable (stockholders), Bonds Payable (bondholders). Unearned Revenue

Cash received before completion of a service or delivery of a product.

Accounting Language: Stockholders Equity

The stockholders claim on total assets. Examples: Common Stock (stock that has been sold by

the corporation), Retained Earnings (the total earnings of a corporation since it started), Dividends (the amount of capitial distribution to the stockholders) How do you figure Retained Earnings?
Beginning Retained Earnings + Net Income (or Net

Loss) Dividends = Ending Retained Earnings

Balance Sheet
Assets, Liabilities, and Stockholders Equity accounts ONLY are on the balance sheet. One exceptionDividends are never on the balance sheet. As expected with the name of this statement, it must BALANCE. Meaning that ASSETS = LIABILITIES + STOCKHOLDERS EQUITY. Example One: If assets total $400,000 and stockholders equity is $250,000, what is the amount of liabilities? 400000 = ? + 250000 Liabilities would equal $150,000. Example Two: At the beginning of the year, assets and liabilities were $500,000 and $200,000, respectively. During the year, assets increased by $50,000 and

liabilities decreased by $20,000. What is the ending balance for stockholders equity?
Start at the beginning! Find beginning stockholders equity. (500000-

200000=300000) Just because it is not given does not mean it is zero! What happened to stockholders equity during the year? Set up the balance sheet equation of the changes during the year. +50000 = -20000 + ? In order to balance, stockholders equity would have increased by 70000. Ending stockholders equity = 300000 + 70000 = $370,000

Accounting Language: Revenue

The sale of a product or service during a given financial

period. Most revenues end in Revenue with an adjective that describes the type of service or product sold.
Landscaping Revenue, Ticket Revenue, Sales Revenue,

etc. Remember that Unearned Revenue is the odd ball. It is a LIABILITY. It is easily distinguished because of the word UNEARNED.

Accounting Language: Expense

The cost involved to produce revenue. Most expenses end in Expense with an adjective that

describes the type of service or product cost.

Rent Expense, Depreciation Expense, Repair Expense,

Salaries/Wages Expense, Utility Expense, etc. Remember that Prepaid Expenses is an asset, not an expense.

Income Statement
ONLY revenue and expense accounts! Calculates the net income or net loss for a certain

period of time, normally a month or year. Revenues > Expenses -> Net Income Revenues < Expenses -> Net Loss Net income (net loss) is part of the calculation for ending Retained Earnings. Therefore the order of preparation of financial statements is: (1) Income Statement, (2) Retained Earnings Statement, and (3) Balance Sheet.

Lets Practice!
These items are taken from

the financial statements of Glenaire Inc. Prepare the annual financial statements as of December 31, 20xx. This is Glenaires first year in business. This fact is easy to see since the beginning Retained Earnings is zero. Remember to start with the income statement first. Pick out the accounts that are revenue and expenses. Next do a Retained Earnings Statement to get ENDING Retained Earnings. Complete a Balance Sheet

Prepaid Insurance Equipment Salaries Expense Utilities Expense Accounts Payable Accounts Receivable Cash Salaries Payable Common Stock Insurance Expense Retained Earnings Dividends Service Revenue Repair Expense Advertising Expense

$1,800 8,400 36,000 2,100 10,200 5,500 5,300 2,000 5,900 4,300 0 3,600 53,000 2,900 1,200

Glenaire Inc. Income Statement For the Year Ended December 31, 20XX
Revenue:

Service Revenue Expenses: Salaries Expense

Insurance Expense Repair Expense Utilities Expense Advertising Expense Total Expenses: Net Income

$53,000 $36,000
4,300 2,900 2,100 1,200 46,500 $6,500

Carry Net Income forward to the Retained Earnings Statement!

Glenaire Inc. Retained Earnings Statement For the Year Ended December 31, 20XX
Retained Earnings, 1/1/20xx $0

Add: Net Income Subtotal Less: Dividends

Retained Earnings, 12/31/20xx

6,500 6,500 3,600

$3,900

Carry Retained Earnings, 12/31/20xx to the Balance Sheet.

Glenaire Inc. Balance Sheet December 31, 20XX

Assets: Cash Accounts Receivable Prepaid Insurance Equipment Total Assets: Liabilities and Stockholders Equity: Liabilities: Accounts Payable Salaries Payable Total Liabilities Stockholders Equity: Common Stock Retained Earnings Total Stockholders Equity
Total Liabilities and Stockholders Equity

$5,300 5,500 1,800 8,400

$21,000

$10,200 2,000
$12,200 5,900 3,900 9,800 $21,000

REMEMBER ASSETS = LIABILITIES + STOCKHOLDERS EQUITY ALWAYS!!!

 If you have any questions, please post to the discussion

board, send an email in iCollege, or invite me to chat. Do your ungraded homework first before attempting your graded homework.