1. C HAPTER 2 Basics of Financial Accounting Accounting and Finance for Entrepreneurs EBD-301 Dr. David P EchevarriaAll Rights Reserved1

2. Financial Accounting The systematic recording of transactions that affect the financial aspects of the business –Using account balances to prepare financial statements Income Statement (Profit & Loss) Balance Sheet –The Fundamental Relationship Assets = Liabilities + Owner’s Equity + Revenues - Expenses Dr. David P EchevarriaAll Rights Reserved2

3. Financial Accounting Two Observations –Profits (Losses) = Revenues – Expenses Profits increase the cash account Losses decrease the cash account –Reinvested Profits increase the owner’s equity account (Retained Earnings) Owners reinvest a portion of their profits to grow the business. Losses will be charged against the equity account. Dr. David P EchevarriaAll Rights Reserved3

4. Financial Accounting Double-Entry Accounting always requires –A Debit entry and –A Credit entry –  Debits =  Credits [  = sum or total] Result: Books are self-balancing –Assets ~ carry debit balances –Liabilities and Equity ~ carry credit balances –Expenses ~ carry debit balances –Revenues ~ carry credit balances Dr. David P EchevarriaAll Rights Reserved4

5. T-Account Model Every transaction will result in at least one debit entry and one credit entry –Example #1: Cash Sale Debit the Cash account Credit the Revenue account –Example #2: Pay a Bill Debit an Expense account Credit Cash account Dr. David P EchevarriaAll Rights Reserved5

6. T-Account Model Assets: Cash, Receivables, Inventory Liabilities: Payables, Loans Owner’s Equity: Capital, Retained Earnings Revenues: may distinguish between cash and credit sales Expenses: all deductible business expenses Dr. David P EchevarriaAll Rights Reserved6

7. T-Accounts Dr. David P EchevarriaAll Rights Reserved7

8. ZipPrint Company Record an investment by the owner of $50,000 in initial capital –Debit Cash (deposit in bank account) –Credit Owner’s Capital (acknowledge investment) Dr. David P EchevarriaAll Rights Reserved8

9. ZipPrint Company Received a $25,000 loan from the SBA and deposited the check. –Debit Cash –Credit Loan [payable] –Total Debits = $75,000, Total Credits = $75,000 Dr. David P EchevarriaAll Rights Reserved9

10. ZipPrint Company Sign Lease and pay first and last months rent: $1,650 per month times 2 = $3,300 –Debit Rent Expense –Credit Cash Dr. David P EchevarriaAll Rights Reserved10

11. ZipPrint Company Acquire Laser Printers (industrial type that can print double sided and collate output) –Will purchase a small Mono Printer ($8,000) –Will Lease a Color Printer ($22,000): creates a Lease Liability* Dr. David P EchevarriaAll Rights Reserved11

12. ZipPrint Company * Contract details on the leased laser printer  The 5-year capital lease for the laser color printer will be amortized monthly at the rate of $451.36. At the end of the 5 th year, ZipPrint will own the color printer  The Lease Liability recorded in the books represents the present value of the 60 monthly payments capitalized at 8.5%.  This is a lease-to-own contract and is another way top finance asset acquisitions. Dr. David P EchevarriaAll Rights Reserved12

13. ZipPrint Company Leasehold Improvements –ZipPrint has leased new space which must be finished to provide a proper store front, work and storage space, a toilet/washroom facility. –The work will be contracted out and will cost $30,000 to paid in three installments Dr. David P EchevarriaAll Rights Reserved13

14. ZipPrint Company Purchase on umbrella insurance policy; fire, theft, liability –Annual premium = $2,000 Policy will be amortized (written off as expense) at the rate of $500.00 per quarter Dr. David P EchevarriaAll Rights Reserved14

15. ZipPrint Company Insurance Policy requires that the business have a 24/7 monitored security system to qualify for a discount. –ADT System installed Upfront cost of $800 (miscellaneous expense) Monthly fee of $49.00 (due the 1 st of every month) Dr. David P EchevarriaAll Rights Reserved15

16. ZipPrint Company Buying some signage –$2,000 to William’s Sign Company (misc. exp.) Dr. David P EchevarriaAll Rights Reserved16

17. ZipPrint Company Buy a pallet of copier paper –$1,400 to local Staples Dr. David P EchevarriaAll Rights Reserved17

18. ZipPrint Company Acquire miscellaneous furnishings for cash: –countertops, desks, chairs and small tables, filing cabinets, cash register and credit card reader, and a workstation PC. –Will record as Other Assets Dr. David P EchevarriaAll Rights Reserved18

19. ZipPrint Company All of the previous transactions were recorded in the General Journal. –The G.J. is the book of original entry Contains all the transactions in chronological order –The transactions will be then recorded in the appropriate [General] Ledger. –The Ledgers are organized by numbered accounts. Dr. David P EchevarriaAll Rights Reserved19

20. ZipPrint Company Chart of Accounts Dr. David P EchevarriaAll Rights Reserved20

21. ZipPrint Company General Journal Entries for June,20xx Dr. David P EchevarriaAll Rights Reserved21

22. ZipPrint Company Cash Account # 110: June, 20xx Entries Dr. David P EchevarriaAll Rights Reserved22 Post-Ref” column refers to the page of the General Journal from which this entry was made. Note that they were all from page # 1

23. ZipPrint Company Account Balances: Month ending June, 20xx Asset Accounts Liability Accounts Equity Accounts Dr. David P EchevarriaAll Rights Reserved23

24. ZipPrint Company Account Balances: Month ending June, 20xx Revenue and Expenses Accounts –During the month of June, ZipPrint had no Revenues due to the time spent organizing the store and acquiring assets and miscellaneous items. Dr. David P EchevarriaAll Rights Reserved24

25. ZipPrint Company Preparing the Trial Balance Dr. David P EchevarriaAll Rights Reserved25

26. ZipPrint Company The Trial Balance contained on the previous slide indicates that we have made the accounting entries correctly: the footings match – Debits ($97,800) = Credits ($97,800). Since there are no adjustments, the Adjusted Trial Balance is unchanged. The Income Statement is comprised of three entries: Zero revenues and $6,100 in expenses. Net Income is a negative $6,100. The Balance Sheet will reflect the $6,100 loss in the Retained Earnings account. Dr. David P EchevarriaAll Rights Reserved26

27. C HAPTER S UMMARY Keeping accurate records are a must for every business. Accurate records are a must when preparing tax returns Good accounting systems allow the owner manager to analyze business performance Double-entry accounting requires more effort but assists in keeping accurate records. Dr. David P EchevarriaAll Rights Reserved27

28. Homework The following transactions were incurred by Aloe Products, LLC. Use simple T-accounts to make the required entries: Debits = Credits 1. Aloe purchase $3,000 of merchandise and paid cash. 2. Aloe purchased packaging equipment for $12,500 in cash. 3. Aloe paid a supplier $2,500 for merchandise bought on credit. 4. Aloe paid the telephone company $245.00 for last month’s service. 5. Aloe paid the rent on office and warehouse; $2,650. 6. Aloe sold $4,200 merchandise for cash (cost $2,800) 7. Aloe sold $2,000 of merchandise on credit (cost $1,300) 8. Aloe paid $7,400 in salaries and wages. 9. Aloe borrowed $10,000 from the bank (a 6-month note) 10. Aloes owners invested $20,000 to support additional product lines. Dr. David P EchevarriaAll Rights Reserved28