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Devotional Introduction Video Discussion of Fundamentals Basic Accounting Problem Grade on Neatness Bring Back Problem on Wednesday Note: Use a Pencil & Take Good Notes
Terms
Assets: Tangible and Non-tangible resources of a business that have future value. Usually sub-classified as follows:
Land (Fixed, but never depreciated) Intangible Assets: Patents, Trademarks, Copyrights
Cost of a building (sales price = Asset amount) $500,000 Less: What you still owe on the building (Liability) $450,000 Equals: Your equity in the building (Capital) or your net worth in the building. $50,000
Assets = Liability + Owners Equity (Balance Sheet Equation) (Resources you have) =(What you owe on them) + (the principle you have paid on them.)
Capital
Common Stock (what owners paid in) Preferred Stock (what owners paid in) Retained Earnings (profits that the business keeps in the business)
Corporation:
Example (Simplified)
John Does Business or Personal Records Balance Sheet September 10, 2003 Assets: Current: Cash at Home Cash Deposits in Bank Fixed: Wardrobe Equipment Car
Total Assets:
$500 $2000
$8,600
Liabilities: Current: Credit Card Payable Long Term: Note Payable (on Car) Total Liabilities Capital, John Doe: Total Liabilities & Owners Equity:
Other Terms
Temporary Accounts are used in addition to balance sheet accounts to record changes in owners equity each reporting period.
Expenses Decrease in owners equity during the period by using up an asset or a portion of an asset. (or creating additional liabilities) Revenue Increase in owners equity during the period by performing a service or selling an asset. Drawing or Dividends Decrease in owners equity due to personal withdrawals by the owner(s).
Used for marking progress by comparing months and years Used by financial institutions for determining the progress and status of a company or individuals financial health. Used by the IRS for determining taxes
$2500
$2000 $ 500
How do individuals or businesses keep track for all their assets, liabilities, capital, expenses, revenues. Etc.?
The Accounting Process or otherwise known as the Accounting Cycle. (also called the Audit Trail of business. Based on universally accepted accounting principles. (Generally accepted accounting principles) Double Entry Bookkeeping Accrual Accounting vs. Cash Accounting Bookkeeping part of accounting.
Accounting Cycle Start with financial transactions (you will need to know these steps!)
Check, receipts, invoices, deposit slips, etc. Decide what accounts they represent Chronological record of transactions Book of original entry checks and balances Two or more accounts entered at cost
Accounting Cycle
#3 Post from the journal to the individual ledger accounts. (to keep a running balance of each account)
Accounting Cycle #4
Adjust the necessary accounts to bring them up to date.
Requires internal transactions Requires journal entries & posting as well Example: Maybe some of your Supplies valued at $500 when you bought them have been usedyou need to bring their value up to date and expense what has been used. Example: Depreciation of Equipment
Accounting Cycle #5
#5 At the end of the period or at any time (with computers) balance all of the accounts in a trial balance. (Checks and balance step to see if all of your journal entries and posting was correct.)
The trail balance is a list of all of your accounts with balances. The total of the debit balances must equal the total of the credit balances.
Make Financial Statements - Required #7 Close out all the temporary accounts to zero, so that you can start a new period/cycle.
The Balance Sheet and Debits and Credits Balance Sheet Equation
A = L + OE
Debits and Credits are terms used to increase or decrease various accounts and show balances. All Accounts have either a debit or credit balance. Assets/Expenses/Withdrawals have debit balances
Increased by debiting and decreased by crediting
Assets Cash
Debit + 100 75
Liabilities A/P
Debit Credit +
O.E. Capital
Debit + Credit 100
Credit 50
Each Transaction in finance has a debit and a credit. The debit amount must always equal the credit amount. (Checks & Balances) Example: Invested 100 Cash in my business. Example: Paid $50 for Advertising Expense. Example: Earned $75 for performing services At the end of the day: (Assets = 125) = (Liabilities = 0) + (OE = 125) and debits = 225 and credits = 225 (Double balance, double witness)
3. Accounting is called the _____________________________________ of business. 4-7. Name these two statements (The Trial Balance is not a Statement) used in accounting which are used by managers to make financial decisions (the ones completed in your accounting project) What type of accounts are on each statement? First Statement Prepared_____________________________________________________________ Types of accounts found on this statement._______________________________________________ Last Statement Prepared___________________________________________________________ Two accounts found on this statement?__________________________________________________ 8-12. Give the verbs and nouns of the Six first steps in the accounting cycle: (fill in the blanks) Verb Noun 1.) _________________________________ _________________________________ 2.) _________________________________ _________________________________ 3.) _________________________________ _________________________________ 4.) ____Adjust _______________________ ____Internal Accounts_______________ 5.) _________________________________ _________________________________ 6.) _________________________________ _________________________________
14. If the accountant wanted to know what type of transaction happened on a specific day he would go to the: ______________________________________________________
15. The report that determines the net profit or loss of a business for a specific period of time is called the: ______________________________________________________ Credit Debit Matching 16. ______Increase to Assets when recorded in the journal are: 17._______Increase to Liabilities when recorded in the journal are: 18. _______Increase to Expenses when recorded in the journal are: 19._______Asset accounts carry what kind of balances: 20._______Revenue accounts carry what kind of balance:
27-30. Format the April Income Statement for Ace company that has these accounts: (You may not need to use all of the accounts): Cash: $100, A/P $50, Service Revenue: $500, Sales Revenue: $1000, Cost of Goods Sold Expense: $400, Advertising Expense: $100, Misc. Expense: $300, Wages Expense $200, A/R: $300.
Entries
PR
DR
CR Pg1
$1000
1/1
Cash 101 $1000 Capital 301 Started business with personal investment.
J1
$1000
$1000
2nd Transaction
Acquire a Loan of $5,000 to buy equipment and materials to start a cleaning business. Assets = Liabilities + OE Cash Loan Payable Capital $6,000 $5,000 $1,000 ($1,000 + $5,000) $6000 = $6000
Journal Entry
Date Explanation
PR
DR
$5000
CR
$5000
1/2
Posting
Cash (101)
PR J1
DR
Journal Entry
Date
PR Dr
Equipment Cash
120
101
Cr___
$3000
1/3
$3000
101
PR J1 J1 J1 Dr 1000 5000 Cr Bal___ 1000 6000 3000
3000
Equipment
120
PR J1 Dr 3000 Cr Bal__ 3000
Date 1/3
Assets
Expenses
Revenues
Liabilities
Capital
Drawing
9. Format a balance sheet and income statement. 10. What do the following terms mean? ROI, Liquidity, Profit, Goodwill
Journal Entry
Date PR 1/3 Advertising Expense 601 Cash 101 Purchased ad for business Dr 200 Cr 200
Postings
Advertising Expense
601
PR J2 Dr 200 Cr Bal______ 200
Date 1/4
Cash
101
PR J1 J1 J1 J2 Dr Cr 1000 5000 3000 200 Bal___ 1000 6000 3000 2800
Journal Entry
Date PR Dr 1/5 Cash 101 100 A/R 110 300 Revenue 401 Performed services and received down payment. Bal due: 1/31 Cr
400
Postings
Cash Date 1/1 1/2 1/3 1/4 1/5 PR J1 J1 J1 J2 J2 Dr 1000 5000 Cr 101 Bal___ 1000 6000 3000 2800 2900
Accounts Receivable
110
PR J2 Dr 300 Cr Bal___ 300
Date 1/5
Service Revenue
401
PR J2 Dr Cr 400 Bal___ 400
Date 1/5
Transaction #6 #7#8#9&10
Hired my little brother to help me and paid him $100 in wages Worked all day on second cleaning job and was paid $500 Had to spend $300 on cleaning supplies to be used during the next two months. Took $200 out of my business to take my wife on a mini moon. Allocated 50% use of my truck to my business. Book price of truck = $6000
Journal Entries
Date 1/6 Wages Expense Cash 1/7 Cash Service Revenue 1/8 Cleaning Supplies Cash 1/9 Drawing Cash 1/10 Truck Capital PR
620 101 101 401 130 101 320 101 150 301
Postings
Wages Expense Date 1/6 PR J2 Dr 100 Cr 620 Bal 100
Cash Date 1/1 1/2 1/3 1/4 1/5 1/6 1/7 1/8 1/9
PR J1 J1 J1 J2 J2 J2 J2 J2 J2
Dr 1000 5000
Cr
300 200
101 Bal___ 1000 6000 3000 2800 2900 2800 3300 3000 2800
Posting Cont.
Service Revenue
401
PR J2 J2 Dr Cr 400 500 Bal___ 400 900
Cleaning Supplies
130
PR J2 Dr 300 Cr Bal_____ 300
Date 1/8
Anderson, Drawing
320
PR Dr Cr Bal______
Date
1/9
J2
200
200
150
PR J2 Dr 3000 Cr Bal_____ 3000 301 $1000 $4000
Date 1/10
J1 J2
$1000 $3000
Adjustments at the end of the month Internal Transactions Step #4 in the Accounting Cycle
Adjusted the cleaning supplies to show that 33% had been used up. Adjusted the truck account to show that one month had been used up.
Truck was expected to last for two more years $3000/24months = $125 use per month
Dr 100
Cr__
100
Inventory showed that only $200 in supplies remained at the end of the month.
650
151
125
125
PR
J2
Dr
100
621 Cr
Bal
100
1/31
Adjustment
Cleaning Supplies
130
PR J2 Dr 300 Cr 100 J2 Bal_____ 300 200
Adjustment
Dr
125
650 Cr
Bal
125
1/31
Adjustment
J2
Truck Date
150
PR
J2 Adjustment
Dr
3000
Cr
125
Bal_____
3000 2875
1/10 1/31
Debit
$2800 300 200 3000 2875
Credit
Cash Accounts Receivable Cleaning Supplies Equipment Truck Loan Payable Anderson, Capital Anderson, Drawing Service Revenue Advertising Expense Wages Expense Cleaning Supplies Expense Depreciation Expense/Truck Total Balance
$9,900
$9,900
Revenue: Service Revenue: Expenses: Advertising Expense: Wages Expense: Cleaning Supplies Expense: Depreciation Expense: Total Expenses: Net Income (Loss)
$375
Return on Cash Investment $375/1000 = 37.5% Return on Total Investment $375/4000 = 9.4% What is our Income Statement Missing???????
Balance Sheet
Anderson Cleaning Balance Sheet January 31, 2204
Assets:
Cash Accounts Receivable Cleaning Supplies Equipment Truck Less Accum. Depr. Total Assets:
Liabilities
$5,000 4,175
Owners Equity
$9,175 ______
8 Steps Reviewed
1. 2. 3. 4. 5. 6.
7. 8.
Owners Equity
Two ways to increase this account:
Deposit Slips, Invoices, Sales Slips, Contracts, memos, packing slips, electronic memos, etc.
Source documents are usually kept on file (three years) as backup for tax and company audits.
Step #2 - Enter source document data in a chronological journal. (Data Entry on the Computer)
The Journal is called the book of original entry, and is on the computer in most companies.
It gives the date of the transaction. It gives a record of the accounts debited and credited in the transaction. (the accounts increased or decreased) It gives the post reference number of the ledger accounts involved. (after the transaction has been posted to the ledger accounts)
Step #3 Post (transfer) transaction data from the journal to the individual ledger accounts.
The Ledger Accounts are individual records of all the assets, liabilities, and owners equity accounts. Each Ledger Account is updated daily and keeps a ongoing record of activity in the account and balance of the account. All data that goes into the ledger accounts must first be put into the journal and then posted from the journal to the ledger account on the day the information is journalized.
Step #4 Adjustments
Adjustments are the internal transactions of a company that a good accountant will make to set in order each account. They must be journalized first and then posted to the ledger. Adjustments are usually made at the end of an accounting period. Examples: Depreciation, Use of pre-paid rent or insurance, interest earned or expensed, use of supplies and materials, unearned revenues earned during the period.
#6 Prepare your Financial Statement Income Statement, Statement of OE, & Balance Sheet
This is the main product of the accounting system that outsiders/investors/creditors etc. will look at to see the financial health of your business. These statements and how to read them and create profitability ratios from their numbers should become second nature to a business owner, or anyone interested in finance. This knowledge is essential.
All Expense Accounts All Revenue Accounts All Drawing or Dividend accounts.
Transfer the net increases or decreases of these temporary accounts into the permanent owners equity account of capital or retained earnings. This makes it possible for the company to start a new set of reports to compare with the old etc.
#8 Analyze Data
A list of the accounts you start the new accounting period with. A check to see if Debits = Credits with these continuing accounts. If total DEBITS DO NOT EQUAL total CREDITS a mistake has been made and needs correction.
Final Quiz
1. Define:
Final Quiz:
3. What is the first accounting book called that is used to record transactions chronologically? 4. For any and all transactions Debits must always equal _______________? 5. If I wanted to know what balance I had in cash what record/book would I turn to? 6. Cash carries what kind of a balance?
Quiz:
7. The use of a fixed asset over a period of time is called what? 8. What is ROI and what two figures in accounting do you use to determine it? 9. The accounting cycle is also known as the _______________ _____________?
Cash, Accounts Payable, Accounts Receivable, Equipment, Advertising Expense, Depreciation Expense, Service Revenue, Capital
Mondays Assignment
1. Using the Balance Sheet Format, prepare your own personalized or family Balance Sheet Report listing at least seven accounts. (Make it neat (with heading) and type it up) 2. Using the income statement format, complete a cash flow personalized income statement showing all the revenue (money) you received in January, and the expenses (money) you spent. The bottom line would be your net profit or net loss for January. Show at least seven items in this report. Examples of Revenue: (money from parents) (money from pell grant) (money from savings) (money earned from work) (money borrowed from roommates) (money received from loans) etc. Examples of expenses: (money paid for tuition) (money paid for books) (food) (entertainment) (utilities) (phone) etc. Both Reports need to have headings and both need to be in the format for balance sheet and income statement that we have learned in class. Both Need to be typed.
Monday
Turn in your neat & complete accounting problem with three statements. Be prepared for a quiz on the basics of accounting.
Know the 8 steps of the accounting cycle. Know the financial report formats for the income statement and balance sheet.and the format of a ledger account. Also debits & credits.
Turn in your personal balance sheets and income statements for January.