AC113 Seminar Unit 3 – Chapter 2

Chapter 2: Basic Accounting Concepts Objectives 1. 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.

Types of classifications of accounts: A=Assets L=Liabilities I=Income (revenue) C=Capital (Stockholder’s Equity) E=Expense A=Debit L=Credit I=Credit C=Credit E=Debit

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?

Financial Statement Framework Look at Exhibit 1 on page 47 of your book. Assets = Liabilities + Stockholders’ Equity Notice 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.

Recording Transactions When analyzing a transaction, think about how the transaction impacts the accounting equation: Assets = Liabilities + Stockholders’ Equity The equation must always remain in balance.

Terminology Reminder Assets: resources owned by a business. What are some examples of assets?

Exercise 2-10, page 67-68 For 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.

Exercise 2-10, page 67-68, #1 1. Received cash from issuance of capital stock, $50,000 What impact would this transaction have on our accounting equation?

E2-10, Transaction 1 1. Received cash from issuance of capital stock, $50,000 Answer: Increase in an asset, increase in stockholders’ equity

E2-10, Transaction 2 2. Received cash for providing delivery services, $18,000. How would this transaction impact our accounting equation?

E2-10, Transaction 2 Answer: Increase our assets and increase our stockholders’ equity

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.

E2-10, Transaction 3 Answer: Decrease assets, decrease stockholders’ equity

E2-10, Transaction 4 4. 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.

E2-10, Transaction 4 Answer: Increase our assets and increase our stockholders’ equity

E2-10, Transaction 5 5. Purchased supplies for cash, $2,100. What is the impact of this transaction?

E2-10, Transaction 5 Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)

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.

E2-10, Transaction 6 Answer: Decrease assets, decrease liabilities

E2-10, Transaction 7 Paid rent for May, $2,000. What impact does this have on our accounting equation?

E2-10, Transaction 7 Answer: Decrease assets, decrease stockholders’ equity

E2-10, Transaction 8 8. 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.

E2-10, Transaction 8 Answer: Increase in one asset, decrease in another asset (meaning total assets would be unchanged)

E2-10, Transaction 9 9. 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.

E2-10, Transaction 9 Answer: Decrease assets, decrease stockholders’ equity

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.

E2-10, Transaction 10 Answer: Decrease assets, decrease stockholders’ equity

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, 2009. The company began operations on April 1, 2008. 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.

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?

Income Statement

Requirement 2, Retained Earnings Statement How should we prepare our Retained Earnings statement?

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.

Balance Sheet Which accounts will we need to include on our balance sheet? ***Hint: Remember the accounting equation: Assets = Liabilities + Stockholders’ Equity

Balance Sheet

Statement of Cash Flows

Questions? Questions??????