© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Accounting Information System

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-2 Preparers ASB Auditors Decision makers GAAP Financial Statements, Auditing and Users Financial Statements Audit Report FASB GAAS

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-3 International Accounting Principles Despite our growing global economy, countries continue to maintain their unique set of acceptable accounting practices.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-4 Fundamental Principles of Accounting Business Entity Principle Objectivity Principle Cost Principle Going-Concern Principle Monetary Unit Principle A business is accounted for separately from its owner or owners. Financial statement information is supported by independent, unbiased evidence. Financial statements are based on actual costs incurred in business transactions. A business continues operating instead of being closed or sold. Express transactions and events in monetary units.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-5 Source documents Recording & posting Trial balance Reporting Transaction or event Analysis The Accounting Process Exh. 2.2

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-6 External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Transactions and Events Exchanges of economic consideration between two parties.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-7 Sales Invoices Bank Statement Purchase Orders Checks Source Documents

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-8 Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each item of importance. Detailed record of increases and decreases in specific assets, liabilities, equities, revenues, or expenses. Separate accounts are maintained for each item of importance. The Account

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-9 Liabilities Equity Assets =+ Common Stock Retained Earnings Revenues Expenses Expanded Accounting Equation +++– Exh. 2.4

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-10 Land Equipment Buildings Cash Prepaid Expenses Office Supplies Store Supplies Prepaid Insurance Notes Receivable Accounts Receivable ASSETS Asset Accounts

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-11 Accrued Liabilities Unearned Revenues Notes Payable Accounts Payable LIABILITIES LiabilityAccounts

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-12 Equities Revenues Common Stock Dividends Expenses Equity Accounts Retained Earnings

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-13  Analyze the transaction and its source.  Identify the impact of the transaction on account balances. Also identify the financial statements that are impacted by the transaction. Analyzing Transactions

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-14 Buck Johnson forms a building consulting business. It is set up as a corporation called Build-Up, Inc.. Analyze the following transactions. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-15 The accounts involved are: (1) Cash (asset) (2) Owner’s Equity (equity) Buck Johnson invests $50,000 in the company in exchange for common stock. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-16 The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Build-Up, Inc. purchased supplies paying $4,800 cash.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-17 The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Build-Up, Inc. purchased equipment for $30,000 cash.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-18 The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Transaction Analysis Build-Up, Inc. purchased additional supplies of $9,400 on account.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-19 Transaction Analysis Build-Up, Inc. purchased additional supplies of $9,400 on account.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-20 Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenues and expenses.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-21 The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Rendered consulting services receiving $9,800 cash.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-22 Transaction Analysis Rendered consulting services receiving $9,800 cash.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-23 The accounts involved are: (1) Cash (asset) (2) Rent Expense (equity) Transaction Analysis Paid $2,800 rent to the landlord of the building where the business is located.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-24 Transaction Analysis Paid $2,800 rent to the landlord of the building where the business is located.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-25 The accounts involved are: (1) Cash (asset) (2) Salary Expense (equity) Transaction Analysis Paid Salaries of $2,300.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-26 Transaction Analysis Paid Salaries of $2,300.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-27 Account Name (Left Side) Debit (Right Side) Credit Used as a simple tool for illustrating the balance in a given account. Chart of Accounts & the T-Account Typically, a company keeps a listing of all the accounts is uses. This list is called the Chart of Accounts. Exh. 2.8

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-28 Balance of an Account An account balance is the difference between the increases and decreases in an account. Exh. 2.9

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-29 Liabilities Equity Assets =+ Debit Credit ASSETS + - LIABILITIES - + EQUITIES - + Double-Entry Accounting Exh. 2.10

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-30 Revenues Expenses Retained Earnings Dividends _ + _ Debit Credit Ret. Earnings - + Debit Credit Dividends + - Debit Credit Expenses + - Debit Credit Revenues - + Double-Entry Accounting - Detail of Effects on Equity Exh. 2.11

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-31 Step 1: Examine source documents. Remember these two steps? Now let’s look at some additional steps. Steps in Processing Transactions Liabilities Equity Assets =+ Step 2: Analyze transactions.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-32 Step 4: Record the journal information in a ledger. Step 3: Record transactions in a journal. Step 5: Prepare a trial balance. Steps in Processing Transactions Step 1: Examine source documents. Liabilities Equity Assets =+ Step 2: Analyze transactions.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-33  Transaction Date  Titles of Affected Accounts  Dollar amount of debits and credits  Transaction explanation General Journal for FastForward

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-34 T-accounts are useful illustrations, but balance column ledger accounts are used in practice. Balance Column Ledger

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-35 Balance Column Ledger Note the the t-account tool is derived from the debit and credit columns of the ledger.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-36 The last line in the balance column shows the current balance in the account. Exh Balance Column Ledger

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Identify the account. Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Enter the date. Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Enter the amount. Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Enter the journal reference. Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Compute the balance. Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-42 Enter the ledger reference. 6 Posting Journal Entries - Example

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-43 A Trial Balance is a listing of all accounts and their balances at a point in time.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-44 Income Statement Inflows of assets in exchange for products and services provided to customers. Outflows or the using up of assets that result from providing products and services to customers. Outflows or the using up of assets that result from providing products and services to customers. Exh. 2.19

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-45 Statement of Retained Earnings Beginning of period Retained Earnings is adjusted for dividends paid and net income (or loss) as reported on the Income Statement. Exh. 2.19

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-46 Exh Balance Sheet Assets are economic resources owned by a business. They are expected to provide future benefits to the business. Liabilities are obligations of the business. They are claims against the assets of the business. Equity is the owner’s claim on the assets of the business. It is the residual interest in the assets after deducting liabilities.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-47 Describes the sources and uses of cash for a reporting period. Describes the sources and uses of cash for a reporting period. Exh. 2.19

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-48 Generally, dollar signs ($) are not used in the journals or ledgers. Rounding Round numbers in financial statements to the nearest dollar. Formatting Conventions

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-49  Describes the relationship between net income for the period and average equity.  Helps an owner judge the compnay’s profitability compared to other business or personal opportunities. Using the Information - Return on Equity

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 2-50 End of Chapter 2 Now, was that debits to the left or credits to the left? I sure wish I had paid more attention in class!