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4-1 Accounts CHAPTER 4. 4-2 Accounts All the business transactions should be sorted out and classified. To record the transactions in the accounts can.

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Presentation on theme: "4-1 Accounts CHAPTER 4. 4-2 Accounts All the business transactions should be sorted out and classified. To record the transactions in the accounts can."— Presentation transcript:

1 4-1 Accounts CHAPTER 4

2 4-2 Accounts All the business transactions should be sorted out and classified. To record the transactions in the accounts can make financial statements and other reports prepared quickly and easily.

3 4-3 An account is the basic storage unit for accounting data. Accounts An accounting system has separate accounts for each asset, each liability, and each component of owner’s equity, including revenues and expenses.

4 4-4 Accounts Different types of businesses will have different accounts. Manufacturing business Accounts for its various manufacturing costs to report the cost of goods sold A retailer Accounts for the purchase of its stock merchandise

5 4-5 Accounts To be able to find an account in the ledger easily and to identify accounts, an accountant often numbers them. In most cases, a three-digit system is used in a business.

6 4-6 In a three-digit system, the first digit refers to the major financial statement classifications. Accounts 1 Assets 2 Liability 3 Owner’s equity 4Revenues 5Expenses

7 4-7 Accounts Now, let’s look at an example of George Ross Photocopy Company …

8 4-8 Assets Cash (at Bank) Notes Receivable Accounts Receivable Photocopy Fees Receivable Photocopy Supplies Office Supplies Prepaid Rent Prepaid Insurance Land Building Accumulated depreciation, Building Photocopy Equipment Liabilities Notes Payable Accounts Payable Unearned Photocopy Fees Wages Payable Mortgage Payable Owner’s Equity George Ross, Capital George Ross, Withdrawals Income Summary Revenues Photocopy Fees Earned Chart of Accounts for George Ross Photocopy

9 4-9 Accumulated depreciation, Photocopy Equipment Office Equipment Accumulated Depreciation, Office Equipment Expenses Office Salary Expense Utility Expense Telephone Expense Rent Expense Insurance Expense Photocopy Supplies Expense Office Supplies Expense Depreciation Expense, Buildings Depreciation Expense, Photocopy Equipment Depreciation Expense, Office Equipment Chart of Accounts for George Ross Photocopy

10 4-10 Commonly Used Accounts The designation of accounts must reflect the nature of the company’s business and the needs of its management. In accounting, some important accounts are used widely and commonly in each company.

11 4-11 Commonly Used Accounts Asset Accounts Liability Accounts Owner’s Equity Accounts

12 4-12 Asset Accounts Asset accounts

13 4-13 Asset Accounts Current AssetsLong-term Assets Cash Notes Receivable Accounts Receivable Prepaid Expenses Physical substance Intangible assets

14 4-14 Current Assets Cash “Cash” is the account used to record increases and decreases in cash. The increase of cash is recorded by debit to Cash and the decrease is recorded by a credit to Cash.

15 4-15 Cash What is Cash? Cash consists of money or any medium of exchange that a bank will accept at face value for deposit, and money in a bank or banks. The cash account also includes cash on hand such as that in a cash register or a safe.

16 4-16 Current Assets Notes Receivable Often the debtor signs a promissory note, which serves as evidence of the debt. Notes Receivable Accounts Receivable More formal than

17 4-17 Notes Receivable A promissory note is a written promise to pay a definite sum of money at a fixed future date. When the company receives the note, the notes receivable will be debited. The collection of notes will be recorded by the credit to notes receivable. Interest-bearing notesNon-interest-bearing notes

18 4-18 Current Assets Accounts Receivable Companies often sell goods and services to customers on the basis of the customers’ promises to pay in the future. These sales are called credit sales, or sales on account, and the promises to pay are known as accounts receivable.

19 4-19 Accounts Receivable The increase of Accounts Receivable is debited to Accounts Receivable and the decrease is credited to Accounts Receivable. Credit sales increase Accounts Receivable. The collections of the credit sales decrease Accounts Receivable.

20 4-20 Current Assets Prepaid Expenses The payment of the goods or services is often made before they are received or used. These prepaid expenses are considered as assets before they are used up or expired. E.g. Prepaid Insurance Office Supplies

21 4-21 Long-term Assets Long-term assets are acquired for use in the operation of the business with a useful life of more than one year and are not resold to customers. Physical substance Intangible assets

22 4-22 Long-term Assets Land Physical substance Buildings Equipment DebitCredit Purchase Sale Purchase Sale Building and equipments owned by a company must be depreciated due to the wear and tear.

23 4-23 Long-term Assets Equipment Office Equipment account Store Equipment account Trucks and Automobiles account Machinery and Equipment account …

24 4-24 Long-term Assets l computer software l patents l Copyrights l Trademark l brand name l Franchises l motion picture films l customer lists l mortgage servicing rights l Licenses l import quotas l customer and supplier relationships. Intangible assets

25 4-25 Long-term Assets Intangible assets IAS defines an intangible asset as identifiable non-monetary asset without physical substance. An intangible asset is identifiable when it is capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or as part of a package.

26 4-26 Long-term Assets The cost of intangible assets should be allocated to the accounting periods that they benefit. Such allocation is called amortization. Intangible assets

27 4-27 Liability Accounts Liability accounts

28 4-28 Short-term Liabilities Long-Term Liabilities Liability Accounts Notes Payable Accounts Payable Other Short-Term Liabilities

29 4-29 Short-term Liabilities Notes Payable Notes Receivable It is used to record increases and decreases in promissory note amounts owed to creditors. Credited?Debited?

30 4-30 Short-term Liabilities It usually arises as the result of the purchase of merchandise, services, supplies, or equipment on credit. Accounts Payable Accounts Receivable Credited?Debited?

31 4-31 Short-term Liabilities Other Short-Term Liabilities The current portion of long-term liability Wages Payable Taxes Payable Rent Payable Interest Payable Customers Advances (Unearned Revenues)

32 4-32 Long-term Liabilities Liabilities that will not be due during the next year or during the normal operating cycle are listed as long-term liabilities. Notes due in more than one year Long-term liabilities: Bonds Property mortgages

33 4-33 Owner’s Equity Accounts Owner’s Equity accounts

34 4-34 Owner’s Equity Accounts The resources invested by the owners in a business are called owner’s equity. Capital Account Withdrawals Account Revenues Accounts Expense Accounts

35 4-35 Owner’s Equity Accounts Arises Owner’s investment and the net income DecreaseOwner’s withdrawals

36 4-36 When someone invests in his or her own company, the amount of the investment is recorded in a capital account. Capital Account For instance: when George Ross invested his personal resources in his firm, he recorded the amount in the owner’s equity account titled George Ross, Capital.

37 4-37 Withdrawals Account For example, an account called George Ross, Withdrawals would be used to record the amount that is taken by George Ross out of his company. When the owner of a sole proprietorship use part of the assets of the business to pay personal living expenses it should be recorded in the withdrawals account.

38 4-38 Revenues and Expense Accounts Accounts Revenues increase owner’s equity, and expenses decrease owner’s equity. The more the revenues, the more the owner’s equity is increased. The more the expenses, the more the owner’s equity is decreased.

39 4-39 Revenues Accounts l Sales Revenue l Service Revenue l Photocopy Fees Earned l…l…

40 4-40 Expense Accounts l Wages Expense l Taxes Expense l Interest Expense l Supplies Expense l…l…

41 4-41 WE ARE SAILING RIGHT ALONG!!


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