Basic Rules of an Accounting System The Matching Principle: Accruals and Deferrals

Basic Rules of an Accounting System A transaction is an economic event that can affect one, two or more items in the financial statements. Rules determine: WHAT transactions are to be recorded WHEN transactions are to be recorded HOW transactions are to be recorded AMOUNT of the transaction to be recorded

Framework of an Accounting System Assets = Liabilities + Equity The Accounting Equation

By expanding the accounting equation, transactions can be analyzed, summarized, and recorded within the integrated financial statement framework. Integrated Financial Statement Framework: Template Impact of transaction on cash Impact of transaction on income statement

Controls of an Accounting System Ending Cash on Balance Sheet = Ending Cash on Statement of Cash Flows Net Income on Income Statement = Net Effects of Revenues/Expenses on Retained Earnings THE ACCOUNTING EQUATION MUSTBALANCE

Dr. Landry invests $6,000 to start a practice Integrated Financial Statement Framework: Starting Family Health Care, P.C.

Family Health Care, P.C. borrows $10,000 from First National Bank Integrated Financial Statement Framework: Borrowing Money

Integrated Financial Statement Framework: Buying Land Family Health Care, P.C. pays $12,000 in cash to purchase a parcel of land.

Family Health Care, P.C. earns fees of $5,000 and receives those fees in cash. Integrated Financial Statement Framework: Earning of Fees

Integrated Financial Statement Framework: Paying of Expenses Family Health Care, P.C. pays $2,900 in cash for various expenses of doing business.

Integrated Financial Statement Framework: Paying of Dividends Family Health Care, P.C. pays dividends of $1,500 to their only stockholder, Dr. Lee Landry.

Integrated Financial Statements: Family Health Care, P.C.

Observations from Family Health that apply to all companies …

Preparation of Financial Statements This exhibit lists Family Health’s transactions in the order they occurred; it does not group and summarize the transactions in a meaningful manner. Balance Sheet components Statement of Cash Flow components Income Statement components

Retained Earnings Statement

Balance Sheet

Statement of Cash Flows

Integrated Financial Statements

Learning Objective 5 Prepare financial statements for a corporation’s second period of operations

Summary of October Transactions

Income Statement

Retained Earnings Statement

Balance Sheet

Statement of Cash Flows

Sample Problem The following information was taken from Bill Hahn, Inc.s financial records at year end December 31, 2010: Sales revenue$20,000 Cash 9,000 Retained earnings 10,000 Selling and administrative expenses 3,000 Accounts payable 5,000 Land 16,000 Common stock 7,000 Operating expenses 4,000 Dividends 4,000 Net income 1,000 Accounts receivable 3,000 Notes payable 8,000 Common stock issued 2,000 Inventory 2,000 Retained earnings, January 1, ,000 Cost of sales 12,000 Identify which items belong on the income statement, balance sheet, and retained earnings statement.

Sample Problem The following information was taken from Bill Hahn, Inc.s financial records at year end December 31, 2010: Sales revenue$20,000 Cash 9,000 Retained earnings 10,000 Selling and administrative expenses 3,000 Accounts payable 5,000 Land 16,000 Common stock 7,000 Operating expenses 4,000 Dividends 4,000 Net income 1,000 Accounts receivable 3,000 Notes payable 8,000 Common stock issued 2,000 Inventory 2,000 Retained earnings, January 1, ,000 Cost of sales 12,000 1.Prepare an Income Statement 2.Prepare a Balance Sheet 3.Prepare a Retained Earnings Statement

Bill Hahn, Inc. Income Statement For the Year Ended December 31, 2010 Revenue $ 20,000 Expenses: Cost of Sales 12,000 Selling and Administrative 3,000 Operating 4,000 Net Income $ 1,000

Bill Hahn, Inc. Retained Earnings Statement For the Year Ended December 31, 2010 Beginning Retained Earnings $ 13,000 Add: Net Income 1,000 Deduct: Dividends (4,000) Ending Retained Earnings $ 10,000

Bill Hahn, Inc. Balance Sheet As of December 31, 2010 Assets: Cash $ 9,000 Accounts Receivable 3,000 Inventory 2,000 Land 16,000 Total Assets 30,000 Liabilities and Stockholders' Equity: Liabilities: Accounts Payable $ 5,000 Loan Payable 8,000 13,000 Stockholders' Equity: Common Stock $ 7,000 Retained Earnings 10,000 Total Stockholders's Equity 17,000 Total Liabilities and Stockholders' Equity $ 30,000