What is accounting? Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof

Who are the users of Accounting information? Management. Users with direct financial interest (investors and creditors). Users with an indirect financial interests (tax authorities, Regulatory Agencies and others)

Conceptual frame work Basic Principals: Matching Principal. Continuity. Historical Cost. Revenue recognition. Full Disclosures. Going Concern. Periodicity. Accrual Accounting Economic Entity. Monetary Unit.

accountant goals Is to provide (report) the required financial information timely to the users (Internal users/ external users). The financial information Assets. All asset accounts have a debit nature Liabilities. All liability accounts have a credit nature Owners Equity. All equity accounts have a credit nature Revenue. All revenue accounts have a credit nature Expenses. All expense accounts have a debit nature

Accounting Terms Assets An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise Items of value owned and controlled by the Business Buildings Cash Vehicles – equipment

Assets are resources owned by a business. They are used in carrying out such activities as production, consumption and exchange.

Accounting Terms Liabilities Amounts owed by the Business to people or Organizations : Loans- Creditors/Accounts Payable Liabilities are claims against assets. They are existing debts and obligations.

Creditors (Accounts Payable) people or organizations other than the owner to whom the Business owes money. Usually because of goods or services received which remain unpaid Creditors are a liability to the business

Owner’s Equity: Capital or Investments by Owners - Amounts owed by the Business to the owner (money and other items contributed to the business by the owner from his or her resources ie. CAPITAL)

Investments (assets) increase owner’s equity Drawings decrease the owner’s equity Revenues increase the owner’s equity Expenses decrease owner’s equity

Owner’s Equity is equal to total assets minus total liabilities. Owner’s Equity represents the ownership claim on total assets.

Working Capital Working Capital Financing Decisions Investment Decisions Financing Decisions

Revenue: Revenue: Gross inflow of economic benefits resulting from an enterprise's ordinary activities is considered "revenue" provided those inflows result in increases in equity. Revenue. The IASC's framework defines "Income" to include both revenue and gains.

Revenues Revenue for a given period equals: 4/25/2017 Revenues Revenue for a given period equals: Cash + Receivables from goods and services provided. Liabilities are generally not affected by revenues. A bank loan increases liabilities but is not revenue. A collection of accounts receivable increases cash but is not revenue. Owner investments increase Owner’s Equity but are not revenues.

Expenses: If revenues are increases in owner’s equity resulting from selling goods, or rendering services. Expenses: are decreases in owner’s equity resulting from the costs of selling goods, rendering services or performing other business activities. Expenses:

Expenses Expenses are the costs of doing business. 4/25/2017 Expenses Expenses are the costs of doing business. Not all cash payments are expenses. Prepaid expenses are recorded as assets. As they expire, they become expenses. Purchase of plant assets (e.g. equipment) is not an expense. Owner withdrawals are not expenses. Payment on a liability is not an expense.

Net income = revenues - expenses Is the net increase in the owner’s equity that results from the operations of a company and is accumulated in the owner’s equity capital account. Net income = revenues - expenses

Merchandising Income Statement as an example 4/25/2017 Merchandising Income Statement as an example Income statement consists of three major parts. 1. Net sales. 2. Cost of goods sold. 3. Operating expenses. Gross margin represents net sales minus cost of goods sold.

The Components of Income Statements for Service and Merchandising Companies.

4/25/2017 Net Sales Net Sales consists of gross sales less sales returns and allowances. Gross sales is the total cash and credit sales occurring during the period. Sales Returns and Allowances is a contra-revenue account used to accumulate cash refunds, credits on account, and allowances to customers for defective merchandise.

4/25/2017 Cost of Goods Sold Cost of goods sold (COGS) is the amount a merchant paid for the merchandise sold during the period.

4/25/2017 Gross Margin Gross margin, or gross profit, is the difference between net sales and cost of goods sold. To be successful a firm must have gross margin sufficient enough to pay operating expenses and provide an adequate income.

4/25/2017 Operating Expenses Operating expenses represent the expenses other than cost of goods sold that are incurred in running a business. Operating expenses are classified as either: 1. Selling expenses. 2. General and administrative expenses.

4/25/2017 Operating Expenses Selling expenses include the costs of storing goods and preparing them for sale, displaying, advertising, and otherwise promoting sales and delivering goods to the buyer (freight out expense). General and Administrative expenses include expenses for accounting, personnel, credit and collections, and any other expenses that apply to overall operation.

4/25/2017 Net Income Net income is the final figure or “bottom line” of the income statement. Net income is what remains after operating expenses are deducted from gross margin. Net income represents the amount of business earnings that accrue to the owners during a period of time.

Overview of the Accounting Cycle 4/25/2017 Overview of the Accounting Cycle

Overview of the Accounting Cycle 4/25/2017 Overview of the Accounting Cycle

Basic Accounting Equation Basic Equation Assets = Liabilities + Owner’s Equity Expanded Basic Equation The equation must be in balance after every transaction. For every Debit there must be a Credit.

Basic Accounting Equation Assets Liabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc.

Basic Accounting Equation Assets Liabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.

Basic Accounting Equation Assets Liabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. Owner’s Equity Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership).

Owner’s Equity Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

Owner’s Equity Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.

Transaction Problem Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop. Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment

Transaction Problem 2. Purchased equipment for $5,000 cash. + + = + Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000

Transaction Problem 3. Paid $400 cash for May office rent. + + = + Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense

Transaction Problem 4. Received $5,100 from customers for repair service. Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue

Transaction Problem 5. Withdrew $1,000 cash for personal use. + + = + Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings

Transaction Problem 6. Paid part-time employee salaries of $2,000. + + Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense

Transaction Problem 7. Incurred $250 of advertising costs, on account. Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense

Transaction Problem 8. Provided $750 of repair services on account. + Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue

Transaction Problem 9. Collected $120 cash for services previously billed. Liabilities Equity Assets Accounts Receivable Accounts Payable Barone, Capital Cash + + Equipment = + 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue 9. +120 -120 6,820 + 630 + 5,000 = 250 + 12,200

Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Owner’s Equity Statement Balance Sheet Statement of Cash Flows

Financial Statements Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues.

Financial Statements Review Question Net income will result during a time period when: assets exceed liabilities. assets exceed revenues. expenses exceed revenues. revenues exceed expenses.

Owner’s Equity Statement Financial Statements Owner’s Equity Statement Income Statement Net income is needed to determine the ending balance in owner’s equity.

Owner’s Equity Statement Financial Statements Owner’s Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period.

Owners’ Equity Statement Financial Statements Owners’ Equity Statement Balance Sheet The ending balance in owner’s equity is needed in preparing the balance sheet

Financial Statements Balance Sheet Reports the assets, liabilities, and owner’s equity at a specific date. Assets listed at the top, followed by liabilities and owner’s equity. Total assets must equal total liabilities and owner’s equity.

Statement of Cash Flows Financial Statements Statement of Cash Flows Balance Sheet

Statement of Cash Flows Financial Statements Statement of Cash Flows Information for a specific period of time. Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance?

Financial Statements Review Question Which of the following financial statements is prepared as of a specific date? Balance sheet. Income statement. Owner's equity statement. Statement of cash flows.