2 Chapter 2: Basic Accounting Concepts Objectives1. Describe the basic elements of a financial accounting system.2. Analyze, record, and summarize transactions for a corporation’s first period of operations.3. Prepare financial statements for a corporation’s first period of operations.4. Analyze, record, and summarize transactions for a corporation’s second period of operations.5. Prepare financial statements for a corporation’s second period of operations.
3 Types of classifications of accounts: A=AssetsL=LiabilitiesI=Income (revenue)C=Capital (Stockholder’s Equity)E=ExpenseA=DebitL=CreditI=CreditC=CreditE=Debit
4 Accounting Transactions A transaction is an economic event that under generally accepted accounting principles (GAAP) affects an element of the financial statements and must be recorded.Can you think of an example of an accounting transaction?
5 Financial Statement Framework Look at Exhibit 1 on page 47 of your book.Assets = Liabilities + Stockholders’ EquityNotice that Stockholders’ Equity has two components: capital stock and retained earnings.On the income statement, we take revenues and subtract expenses which gives us net income. Net income becomes a component of retained earnings.
6 Recording Transactions When analyzing atransaction, think about how the transaction impacts the accounting equation:Assets = Liabilities + Stockholders’ EquityThe equation must always remain in balance.
7 Terminology Reminder Assets: resources owned by a business. What are some examples of assets?
8 Exercise 2-10, page 67-68For this exercise, we will be reviewing some transactions for Juniper Delivery Service. The requirements ask us to indicate the effect of the transaction on the accounting equation. We will also take it one step further by analyzing how the transaction impacts our financial statement framework.
9 Exercise 2-10, page 67-68, #11. Received cash from issuance of capital stock, $50,000What impact would this transaction have on our accounting equation?
10 E2-10, Transaction 11. Received cash from issuance of capital stock, $50,000Answer: Increase in an asset, increase in stockholders’ equity
11 E2-10, Transaction 22. Received cash for providing delivery services, $18,000.How would this transaction impact our accounting equation?
13 E2-10, Transaction 3 3. Paid advertising expense, $1,000. What impact does this have on our accounting equation?***Hint: Anytime you see that we “paid” something, that tells you that cash went out the door meaning that the cash account would decrease.
15 E2-10, Transaction 44. Billed customers for delivery services, $35,000.How does this transaction impact our accounting equation?***Hint: If we “billed” the customer, then we have not received the cash yet. Instead, we have “accounts receivable” for those customers.
17 E2-10, Transaction 5 5. Purchased supplies for cash, $2,100. What is the impact of this transaction?
18 E2-10, Transaction 5Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)
19 E2-10, Transaction 6 6. Paid creditors, $2,000. What is the impact of this transaction?***Hint: Creditors are people or companies that we owe money. By paying a creditor, we would be decreasing the amount that we owe.
23 E2-10, Transaction 88. Received cash from customers on account, $16,700.How does this transaction impact our accounting equation?***Hint: The term, “customers on account,” refers to our accounts receivable. If we receive cash from our customers on account, this means that our customers are paying off the receivables.
24 E2-10, Transaction 8Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)
25 E2-10, Transaction 99. Determined that the cost of supplies on hand was $1,200; therefore, $900 of supplies had been used during the month.What is the impact of this transaction?***Hint: When we initially purchase supplies, we will record them as an asset. We will then move into the expense account as we use the supplies.
27 E2-10, Transaction 10 10. Paid dividends, $1,500. How does this transaction impact our accounting equation?***Hint: Dividends represent a distribution of earnings, and therefore, they will decrease the retained earnings account.
29 Financial Statements, Problem 2-3 Since we have some extra time, let’s work through Problem 2-3 on page 72 of your textbook. We are told that the following amounts were taken from the accounting records of Caravan Services, Inc. as of March 31, The company began operations on April 1, So, this is the end of their first year of operations.We are then asked to prepare an 1) income statement, 2) retained earnings statement, 3) balance sheet, and 4) statement of cash flows.
30 Requirement 1, Income Statement Let’s begin with the income statement.What are some account balances that we will need to include on the income statement?
32 Requirement 2, Retained Earnings Statement How should we prepare our Retained Earnings statement?
33 Retained Earnings Statement ***Note: If this were the second or third year of operations, then we would have to start with our beginning retained earnings. However, since this was our first year of operations, we do not have any beginning retained earnings.
34 Balance SheetWhich accounts will we need to include on our balance sheet?***Hint: Remember the accounting equation: Assets = Liabilities + Stockholders’ Equity