Chapter 2 Basic Accounting Concepts. Learning Objectives After studying this chapter, you should be able to…  Describe the basic elements of a financial.

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Presentation transcript:

Chapter 2 Basic Accounting Concepts

Learning Objectives After studying this chapter, you should be able to…  Describe the basic elements of a financial accounting system.  Analyze, record, and summarize transactions for a corporation’s first period of operations.  Prepare financial statements for a corporation’s first period of operations.  Analyze, record, and summarize transactions for a corporation’s second period of operations.  Prepare financial statements for a corporation’s second period of operations.

Learning Objective 1 Describe the basic elements of a financial accounting system

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

Learning Objective 2 Analyze, record, and summarize transactions for a corporation’s first period of operations

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 …

Learning Objective 3 Prepare financial statements for a corporation’s first period of operations

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 4 Analyze, record, and summarize transactions for a corporation's second period of operations

Summary of October Transactions

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

End of Chapter 2