Accounting and Financial Statements Module 2

SAP 2007 / SAP University Alliances Introductory Accounting Objectives Discuss goals and uses of accounting in a business.Describe forms of business organizations.Identify the users of accounting informationDiscuss how technology is changing accounting.Identify and explain the content and reporting aims of financial statements.Identify, explain, and apply accounting principles.Explain and interpret the accounting equation.Illustrate how business transactions affect the accounting equation.Prepare financial statements from business transactions.Run an SAP demonstration.Practice viewing financial statements in SAP.

SAP 2007 / SAP University Alliances Introductory Accounting What is Accounting? Accounting is an information system that: identifies measures records communicates relevant, reliable, consistent and comparable information about an organization’s economic activities.

SAP 2007 / SAP University Alliances Introductory Accounting Forms of Organization Sole ProprietorshipPartnershipCorporation

SAP 2007 / SAP University Alliances Introductory Accounting Sole Proprietorship One ownerSeparate entity for accounting purposesNot a separate legal entity from the ownerUnlimited liabilityLimited lifeOwner taxed on profits

SAP 2007 / SAP University Alliances Introductory Accounting Partnership Two or more ownersSeparate entity for accounting purposesNot a separate legal entity from the ownersUnlimited liabilityLimited lifeOwners taxed on profits

SAP 2007 / SAP University Alliances Introductory Accounting Corporation One or more ownersSeparate entity for accounting purposesSeparate legal entity from the owner(s)Limited liabilityUnlimited lifeCorporation taxed on profits

SAP 2007 / SAP University Alliances Introductory Accounting Non-Business Organizations Not-for-profit and government organizations No identifiable owner Examples: schools, charities, libraries, hospitals, police, shelters

SAP 2007 / SAP University Alliances Introductory Accounting Users of Accounting Information Internal Owners Managers External Bankers and other creditors Investors and potential investors Unions External auditors Tax Agencies

SAP 2007 / SAP University Alliances Introductory Accounting Accounting and Technology Impact of technology on accounting: Instant access to information Decreased cost, effort, and time Computer skills essential Increased job opportunities

SAP 2007 / SAP University Alliances Introductory Accounting Communicating Through Financial Statements Accounting provides useful information that helps users make decisions. This information is often provided in the form of financial statements. The major statements are the: Income statement Statement of owner’s equity Balance sheet Statement of cash flows

SAP 2007 / SAP University Alliances Introductory Accounting Income Statement The income statement reports: Revenues of the organization Expenses (costs incurred in earning the revenues) Net income or loss The income statement covers a period of time.

SAP 2007 / SAP University Alliances Introductory Accounting Inflows of assets in exchange for products and services provided to customers. Income Statement

SAP 2007 / SAP University Alliances Introductory Accounting Income Statement Costs incurred or the using up of assets from generating revenue

SAP 2007 / SAP University Alliances Introductory Accounting Income Statement Total revenues less total expenses results in Net Income or Net Loss

SAP 2007 / SAP University Alliances Introductory Accounting Statement of Owner’s Equity Reports on changes in equity over a period of time. Equity is affected by: Owner investments and withdrawals Net income or net losses Linked to the income statement

SAP 2007 / SAP University Alliances Introductory Accounting Statement of Owner’s Equity Covers a period of time. From the Income statement.

SAP 2007 / SAP University Alliances Introductory Accounting Balance Sheet The balance sheet reports the: Assets Liabilities Owner’s equity of an organization at a point in time.Linked to the Statement of Owner’s Equity.

SAP 2007 / SAP University Alliances Introductory Accounting Balance Sheet Properties or economic resources owned by a business

SAP 2007 / SAP University Alliances Introductory Accounting Balance Sheet Debts or Obligations of the business

SAP 2007 / SAP University Alliances Introductory Accounting Balance Sheet Owner’s claim on the assets of a business From the Statement Of Owner’s Equity

SAP 2007 / SAP University Alliances Introductory Accounting Cash Flow Statement Reports the sources and uses of cash for a period of time. Organized by the company’s major activities: Operating Investing Financing

SAP 2007 / SAP University Alliances Introductory Accounting From the balance sheet Cash Flow Statement

SAP 2007 / SAP University Alliances Introductory Accounting Generally Accepted Accounting Principles (GAAP) Rules that make up acceptable accounting practices. GAAP were developed to make information in financial statements: Relevant Reliable Consistent Comparable

SAP 2007 / SAP University Alliances Introductory Accounting Business Entity Principle Every business is to be accounted for separately from its owner or owners.

SAP 2007 / SAP University Alliances Introductory Accounting Cost Principle All transactions are recorded based on the actual cash amount received or paid. In absence of cash, the cash equivalent amount of the exchange is recorded.

SAP 2007 / SAP University Alliances Introductory Accounting Objectivity Principle Financial statement information must be supported by independent, unbiased, and verifiable evidence.

SAP 2007 / SAP University Alliances Introductory Accounting Going-Concern Principle Financial statements reflect the assumption that the business will continue operating instead of being closed or sold.

SAP 2007 / SAP University Alliances Introductory Accounting Monetary Unit Principle Transactions are expressed using units of money as the common denominator. Adjustments are not made for changes in exchange rates or inflation.

SAP 2007 / SAP University Alliances Introductory Accounting Revenue Recognition Principle Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged.

SAP 2007 / SAP University Alliances Introductory Accounting The Accounting Equation The accounting equation must remain in balance after each transaction. Liabilities Equity Assets =+

SAP 2007 / SAP University Alliances Introductory Accounting For each transaction we need to determine: Which accounts are being affected. If the accounts are increasing or decreasing as a result of the transaction Transactions

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 1 John Rich invests $9,500 cash in the business. Cash increases by $9,500. Owner’s capital increases by $9,500.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 2 Purchased supplies for $3,000 cash. Supplies increase by $3,000. Cash decreases by $3,000.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 3 Purchased $7,050 of Furniture and $1,400 of supplies on credit. (A/P for supplies and Notes Payable for the furniture.) Supplies increase by $1,400. Furniture increases by $7,050. Accounts Payable increases by $1,400. Notes payable increases by $7,050.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 4 Services rendered for $2,700 cash. Cash increases $2,700. Owner’s equity increases $2,700.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 5 Payment of $1,200 rent expense in cash. Cash decreases $1,200. Owner’s equity decreases $1,200.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 6 Payment of $900 salaries expense in cash. Cash decreases $900. Owner’s equity decreases $900.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 7 Service contract signed for February and March. No economic exchange has taken place. All accounts remain unaffected.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 8 Services revenue of $1,700 and rental revenues of $300 rendered for credit. Accounts receivable increases $2,000. Owner’s capital increases $2,000.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 9 Receipt of $2,000 cash on account. Cash increases $2,000. Accounts receivable decreases $2,000.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 10 Payment of $450 accounts payable. Cash decreases $450. Accounts payable decreases $450.

SAP 2007 / SAP University Alliances Introductory Accounting Transaction 11 Withdrawal of $1,200 cash by owner. Cash decreases $1,200. Owner’s capital decreases $1,200.

SAP 2007 / SAP University Alliances Introductory Accounting Financial statements are now prepared to reflect the transactions we have recorded. Financial Statements

SAP 2007 / SAP University Alliances Introductory Accounting Income Statement

SAP 2007 / SAP University Alliances Introductory Accounting Statement of Owner’s Equity

SAP 2007 / SAP University Alliances Introductory Accounting Balance Sheet