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U NIT 2 T HE B ASIC A CCOUNTING C YCLE In Unit 1 we learned about the different accounting careers and three forms of business organizations. In Unit 2.

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Presentation on theme: "U NIT 2 T HE B ASIC A CCOUNTING C YCLE In Unit 1 we learned about the different accounting careers and three forms of business organizations. In Unit 2."— Presentation transcript:

1 U NIT 2 T HE B ASIC A CCOUNTING C YCLE In Unit 1 we learned about the different accounting careers and three forms of business organizations. In Unit 2 we will analyze transactions and prepare financial records for a business

2 E FFECTIVE R EADING S KILLS Needed even in accounting Without these skills accountants wouldn’t be able to analyze important financial documents, make important financial recommendations or stay up- to-date on current events and changes in laws that affect the accounting field.

3 C HAPTER 3: B USINESS T RANSACTIONS AND THE A CCOUNTING E QUATION Big Idea To understand the financial condition of any business, you must first understand the accounting equation. Main Idea Any item of property has at least one financial claim against it. Accounts are used to analyze business transactions. Owner’s equity is changed by revenues, expenses and withdrawals.

4 R EAL W ORLD C ONNECTION Hulu lets you watch TV shows, clips and movies online— anytime Can use Hulu to embed video on your blog or Web page, or just email a clip to your friends Hulu was founded in 2007 and have become very successful Within the first year it was oneof the top five online video sites in the US Hulu employs about 150 people, which is a much smaller staff that companies that generate similar revenues, and so is able to keep its payroll costs to a minimum. Lower operating cost is a big advantage in business because it helps increase profitability Hulu’s main assets are virtual in the world of streaming online video, but producing its “product” requires technological equipment and real space in which staff develops Hulu’s innovative media distribution

5 3-1 P ROPERTY AND F INANCIAL C LAIMS We will look at basic accounting and concepts and terminology UPS (United Parcel Service), a corporation the provides global delivery services, uses accounting reports to communicate with its managers, employees and investors Financial reports identify the property used in the business such as airplanes, trucks and computers. They also show how the property was obtained, either from loans or from funds provided by investors

6 W HAT IS P ROPERTY ? It is anything of value that a person or business owns and therefore controls You have a legal right to that property Businesses own property Financial claim: a legal right to property One of the purposes of accounting is to provide financial information about property and financial claims to that property When you buy property with cash you acquire all the financial claims to that property and the time of the purchase

7 E XAMPLE For example, if you pay $600 for a mountain bike then you own that bike. Had you rented it for the weekend then you would pay less but only have it for a limited amount of time Since you paid cash, you have ownership and a financial claim of $600 Property (Cost)=Financial Claims Bike=Your Claim to the Bike $600=

8 B UYING O N C REDIT CREDIT - when you buy something and agree to pay for it later CREDITOR - the business or person selling the item on credit, can be any person/business you owe money to When buying on credit, you do not have the only financial claim to the property. You share the financial claim with the creditor

9 E XAMPLE – B UYING ON C REDIT If you purchase the bike by paying cash for $100 of it and sign agreement to pay the remaining $500 over the next 5 months then you share the financial claim Two or more people/businesses can have financial claims to the same property, although only the owner has control of the property If you don’t make payments the property can exercise its legal claim and take it back Property (Cost)=Financial Claims Bike=Creditor’s Financial Claim Owner’s Financial Claim $600=$500$100

10 A SSETS ASSETS: property or items of value owned by a business There are a variety of assets a business can have: Cash Office Equipment Manufacturing Equipment Buildings The accounting term for the financial claims to assets is EQUITIES

11 E XAMPLE Zip Delivery Service purchases a delivery truck for $10,000 and puts a cash down payment of $3,000 and a local bank loans the remaining $7,000 Both Zip Delivery and the bank have financial claim to the truck Property (Cost)=Financial Claims Truck=Creditor’s Financial Claim Owner’s Financial Claim $10,000=$7,000$3,000

12 Zip’s financial claim increases as the loan is repaid Once the loan is paid in full Zip will have total financial claim and the bank will have none Property (Cost)=Financial Claims Truck=Creditor’s Financial Claim Owner’s Financial Claim $10,000=$3,500$6,500 Property (Cost)=Financial Claims Truck=Creditor’s Financial Claim Owner’s Financial Claim $10,000=$0$10,000

13 A CCOUNTING E QUATION In accounting there are separate terms for owner’s claims and creditor’s claims Owner’s Equity is the owner’s claims to the assets of a business Liabilities is the creditor’s claims to the assets of a business Accounting Equation:

14 3-2 T RANSACTIONS T HAT A FFECT O WNER ’ S I NVESTMENT, C ASH, A ND C REDIT Business transaction – an economic event that causes a change – either increase or decrease – in assets, liabilities or owner’s equity When a business buys a computer with cash, its cash decreases, but its computer equipment increases Account – a subdivision under assets, liabilities, or owner’s equity

15 A CCOUNTS Each business sets up its accounts to meet its needs The number of accounts needed varies Every account must be classified as an asset, liability or owner’s equity Accounts Receivable: the total amount of money owed to a business, an asset Accounts Payable: the total amount of money owed to creditors, a liability Assets=Liabilities+Owner’s Equity Cash Accounts Receivable Computer Equipment Office Equipment Delivery Equipment Accounts PayableCapital

16 T RANSACTIONS AND THE A CCOUNTING E QUATION Analyzing a business transaction 1. Identify the accounts affected 2. Classify the account affected 3. Determine the amount of increase or decrease for each account affected 4. Make sure the accounting equation remains in balance Every business transaction causes a change in assets, liabilities or owner’s equity Analyzing each transaction to see how it affects the accounting equation keeps everything in balance

17 T YPES OF T RANSACTIONS Investments by the owner – money or property paid out in order to produce profit Cash transactions – any asset purchased for cash Credit transactions – any asset purchased on account Revenue transactions Expense transactions Withdrawals by the owner

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25 3-3 T RANSACTIONS T HAT A FFECT R EVENUE, E XPENSE, AND W ITHDRAWALS BY THE O WNER UPS has thousands of shareholders who expect a return on their investment in the business. The most common way for a business to provide a return is by selling goods or providing services. UPS earns revenue by providing a global delivery service. To provide the delivery service, UPS incurs expenses like salaries, transportation, and insurance.

26 W HAT ARE R EVENUES AND E XPENSES ? Revenue is income earned from the sale of good or services Revenue increases owner’s equity because it increase the assets of the business To generate revenue most businesses must incur expenses by buying goods, materials and services Expense is the cost of products or services used to operate a business Expenses include: rent, utilities, advertising Expenses decrease owner’s equity because they decrease the assets of the business or increase liabilities

27 E FFECTS OF R EVENUE AND E XPENSES Revenue increase assets and increase owner’s equity Expenses decrease assets and decrease owner’s equity OR increase liabilities and decrease owner’s equity

28 T HINK A BOUT I T …. What is the difference between revenue and investments by the owner?

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31 W HAT IS A W ITHDRAWAL ? Withdrawal: the owner takes cash or other assets from the business for personal use A withdrawal decreases both assets and owner’s equity Not the same as an expense

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33 R EVIEW Describe the relationship between property and financial claims:

34 R EVIEW List and define each part of the accounting equation:

35 R EVIEW Use the following steps to analyze a business transaction:


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